<PAGE>   1
 
   
   AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 13, 1996
    
 
                                                      REGISTRATION NO. 333-12723
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
   
                                AMENDMENT NO. 4
    
                                       TO
 
                                    FORM S-3
                             REGISTRATION STATEMENT
                                     UNDER
                           THE SECURITIES ACT OF 1933
                            ------------------------
 
                            UROHEALTH SYSTEMS, INC.
             (Exact name of registrant as specified in its charter)
 
<TABLE>
<S>                                       <C>                                       <C>
                 DELAWARE                                                                           98-0122944
       (State or other jurisdiction                                                    (I.R.S. Employer Identification No.)
    of incorporation or organization)
</TABLE>
 
                            ------------------------
 
                            5 CIVIC PLAZA, SUITE 100
                        NEWPORT BEACH, CALIFORNIA 92660
                                 (714) 668-5858
  (Address, including zip code, and telephone number, including area code, of
                   registrant's principal executive offices)
                            ------------------------
 
                               CHARLES A. LAVERTY
                            CHIEF EXECUTIVE OFFICER
                            UROHEALTH SYSTEMS, INC.
                            5 CIVIC PLAZA, SUITE 100
                        NEWPORT BEACH, CALIFORNIA 92660
                                 (714) 668-5858
 (Name, address, including zip code, and telephone number, including area code,
                             of agent for service)
                            ------------------------
 
                                   Copies to:
 
   
<TABLE>
<S>                                                <C>
           ROBERT M. MATTSON, JR., ESQ.                         NICHOLAS P. SAGGESE, ESQ.
              MORRISON & FOERSTER LLP                             SKADDEN, ARPS, SLATE,
             19900 MACARTHUR BOULEVARD                             MEAGHER & FLOM LLP
             IRVINE, CALIFORNIA 92612                              300 S. GRAND AVENUE
                  (714) 251-7500                              LOS ANGELES, CALIFORNIA 90071
                                                                     (213) 657-5000
</TABLE>
    
 
                            ------------------------
 
     APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after the effective date of this Registration
Statement.
 
     If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box.  [ ]
 
     If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box.  [ ]
 
     If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.  [ ]  ________________
 
     If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.  [ ]  ________________
 
     If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.  [ ]
 
                            ------------------------
 
     THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>   2
 
     INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
     REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
     SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
     MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
     BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
     THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
     SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
     UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
     OF ANY SUCH STATE.
 
   
                 SUBJECT TO COMPLETION, DATED NOVEMBER 12, 1996
    
 
PROSPECTUS
   
                                2,500,000 SHARES
    
 
                            UROHEALTH SYSTEMS, INC.
                                  COMMON STOCK
                         ------------------------------
 
   
     All of the 2,500,000 shares of Common Stock offered hereby are being sold
by UROHEALTH Systems, Inc. ("UROHEALTH" or the "Company").
    
 
   
     The Common Stock of the Company is listed on the American Stock Exchange
under the symbol "URO." On November 12, 1996, the last reported sale price of
the Common Stock was $8.56 per share. See "Price Range of Common Stock and
Dividends."
    
 
      SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
WHICH SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
                         ------------------------------
 
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
  EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
    SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
     PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
        REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
 
   
<TABLE>
<S>                                         <C>               <C>               <C>
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
                                                                UNDERWRITING
                                                PRICE TO       DISCOUNTS AND      PROCEEDS TO
                                                 PUBLIC        COMMISSIONS(1)      COMPANY(2)
------------------------------------------------------------------------------------------------
Per Share.................................         $                 $                 $
------------------------------------------------------------------------------------------------
Total(3)..................................         $                 $                 $
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
</TABLE>
    
 
   
(1) The Company has agreed to indemnify the several Underwriters against certain
    liabilities, including liabilities under the Securities Act of 1933, as
    amended. See "Underwriting."
    
 
(2) Before deducting expenses payable by the Company estimated to be
    $          .
 
   
(3) The Company has granted the several Underwriters a 30-day option to purchase
    in the aggregate up to 375,000 additional shares of Common Stock on the same
    terms and conditions as set forth above solely to cover over-allotments, if
    any. If all such additional shares are purchased by the Underwriters, the
    total Price to Public would be $          , the total Underwriting Discounts
    and Commissions would be $          and the total Proceeds to Company would
    be $          . See "Underwriting."
    
                         ------------------------------
 
     The shares of Common Stock are offered subject to prior sale, when, as and
if delivered to and accepted by the Underwriters, and subject to the approval of
certain legal matters by counsel and to certain other conditions. The
Underwriters reserve the right to withdraw, cancel or modify said offer and to
reject orders in whole or in part. It is expected that delivery of the Common
Stock will be made against payment therefor on or about             , 1996 at
the offices of Bear, Stearns & Co. Inc., 245 Park Avenue, New York, New York
10167.
                         ------------------------------
 
BEAR, STEARNS & CO. INC.
 
                            NEEDHAM & COMPANY, INC.
 
                                                              PIPER JAFFRAY INC.
 
                                            , 1996
<PAGE>   3
 
[COMPANY LOGO]
 
UROHEALTH is a developer, manufacturer and distributor of products for minimally
invasive and general surgery, urology and gynecology.
 
                             [PICTURES AND ARTWORK]
 
<TABLE>
<S>                                           <C>
             Reflex(R) AEC35(TM)                               EndoView(TM)
        Articulating Cutter & Stapler                     Video Endoscopy System
                                         Esteem(TM)
                                   Vacuum Erection System
                 RigiScan(R)                                    RelaX(TM)
         Impotence Diagnostic Monitor                   Female Incontinence System
                                                        (Investigational device --
                                                           not FDA approved for
                                                            sale in the U.S.)
</TABLE>
 
                            ------------------------
 
     IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE AMERICAN STOCK EXCHANGE OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>   4
 
                               PROSPECTUS SUMMARY
 
     The following summary is qualified in its entirety by the detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus or incorporated in this Prospectus by reference.
Unless otherwise indicated, the information in this Prospectus assumes that the
Underwriters' over-allotment option will not be exercised. See "Underwriting."
Except for the historical information contained herein, the discussion in this
Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed herein. As used in this Prospectus and unless otherwise required by
the context, the terms "UROHEALTH" and the "Company" mean UROHEALTH Systems,
Inc. and its direct and indirect subsidiaries. During 1996, the Company changed
its fiscal year end from June 30 to March 31.
 
                                  THE COMPANY
 
     UROHEALTH is a developer, manufacturer and distributor of products for the
minimally invasive and general surgery, urology and gynecology markets (the
"Target Markets"). In October 1994, under the leadership of new management, the
Company adopted and began to implement a strategic plan which took advantage of
consolidation opportunities in the highly fragmented medical products industry.
Management's strategy was to position the Company to benefit from the
competitive advantages and operating efficiencies inherent in an infrastructure
which combines an experienced management team and sophisticated manufacturing
facilities with a large direct sales force. As an important component of its
strategy, the Company began to acquire and develop a broad offering of products
for healthcare professionals and their patients suffering from impotence,
incontinence and other gynecological and urological problems, or other
conditions requiring minimally invasive and general surgery. At the same time,
the Company integrated the acquired product lines and companies into its
operations.
 
     Since October 1994, the Company has acquired seven medical product
companies as well as two product lines as part of its strategy. As a result, the
Company believes that it has developed well-established and integrated urology
and minimally invasive and general surgery platforms and that it is
well-positioned further to acquire and develop new product lines to enable it to
become a leader in each of its Target Markets. The Company believes that it has
in place the infrastructure to enable it to integrate the operations of acquired
companies with those of its own to achieve operating and marketing efficiencies.
As a result of its strategy, the Company has increased sales from $4.3 million
for the year ended June 30, 1994 (prior to giving effect to its acquisitions) to
$59.7 million (on a pro forma basis) for the nine months ended March 31, 1996.
 
     The Company's strategy is to: (i) offer a broad range of products to its
growing Target Markets; (ii) leverage its 140-person direct sales force to
increase sales of its existing, newly acquired and recently developed minimally
invasive and general surgery, urology and gynecology products; (iii) capitalize
on efficiencies and synergies by consolidating manufacturing of existing and
acquired products into the Company's manufacturing operations in Costa Mesa,
California and Richland, Michigan; (iv) continue to acquire and develop
additional innovative products and product lines which are complementary to the
Company's existing products; and (v) develop and expand an international sales
and marketing presence to capitalize on opportunities it identifies in selected
developed countries.
 
     The Company believes that its acquisition and product development strategy
has been successful in building a broad selection of medical products and
combining companies and product lines that can capitalize on the manufacturing
and distribution capabilities of UROHEALTH. In the urology market, the Company
acquired Dacomed Corporation ("Dacomed") which offered a line of high-quality
products designed to diagnose and treat male impotence, but which lacked
manufacturing and marketing expertise and an effective distribution channel. The
Company then acquired Osbon Medical Systems Ltd. ("Osbon") which was the market
leader in vacuum erection devices for the treatment of male impotence primarily
on the strength of Osbon's sales force. The Company relocated Dacomed
manufacturing operations to its Costa Mesa, California manufacturing facility
and began to market and sell the Dacomed products through the Osbon distribution
channel. As a result of the combination, the Dacomed products were marketed
through an established
 
                                        3
<PAGE>   5
 
distribution channel and the Osbon sales force had a broader product line to
offer their customers. As a result of such acquisitions and improvements in the
marketing of existing products, the Company now offers a broad line of products
designed for the treatment of urological disorders, including the leading vacuum
erection systems, a penile prosthesis and diagnostic equipment.
 
     To expand its presence in the market for minimally invasive and general
surgery products, the Company acquired Advanced Surgical, Inc. ("Advanced")
which had a pipeline of potential products but had limited manufacturing and
distribution capabilities and was experiencing significant liquidity and capital
constraints as a result of its substantial research and development program.
Advanced's commercially viable products were integrated into UROHEALTH's
manufacturing and distribution infrastructure. In June 1996, the Company
acquired product lines of O.R. Concepts, Inc. ("O.R. Concepts"). In August 1996,
UROHEALTH acquired Richard-Allan Medical Systems, Inc. ("Richard-Allan"), an
established company with a broad array of minimally invasive surgery products.
In August 1996, the Company also acquired a line of minimally invasive surgery
products from X-Med, Inc. ("X-Med"). The integration of these acquisitions has
resulted in sophisticated manufacturing operations, an established distribution
channel and a comprehensive product line for both open and minimally invasive
surgeries.
 
     The Company believes that the medical products industry is highly
fragmented and that there are opportunities to acquire additional product lines
or companies in complementary lines of business. The Company is continuously
exploring these opportunities and management currently believes that future
growth, will, in significant part, be through acquisitions.
 
                              RECENT DEVELOPMENTS
 
     ACQUISITIONS.  In July 1995, the Company acquired Dacomed and Allstate
Medical Products, Inc. ("Allstate") and, in December 1995, acquired Osbon and
Advanced. More recently, UROHEALTH completed the acquisitions of Endoscopic
Imaging Systems, Inc. (May 1996), The Intermed Group, Inc. ("Intermed") (June
1996) and Richard-Allan (August 1996) and the minimally invasive surgery product
lines of O.R. Concepts (June 1996) and X-Med (August 1996).
 
     SALE OF CONVERTIBLE SUBORDINATED DEBENTURES.  In May and July 1996, the
Company sold a total of $50.0 million of 8.75% convertible subordinated
debentures (the "Debentures") to a group of investors led by Apollo Advisors and
Chase Venture Capital Associates. The Debentures are convertible into 4,545,454
shares of Common Stock at $11.00 per share, are subordinate to all future senior
borrowings, have voting rights on all matters on an "as converted" basis and
mature in May 2006.
 
                                  RISK FACTORS
 
     The Common Stock offered hereby involves a high degree of risk. Prospective
investors should carefully consider the factors set forth under "Risk Factors"
in addition to the other information contained in this Prospectus.
 
                                        4
<PAGE>   6
 
                                  THE OFFERING
 
   
<TABLE>
<S>                                  <C>
Common Stock offered by the
  Company..........................  2,500,000 shares
Common Stock to be outstanding
  after the Offering...............  18,996,205 shares(1)
Use of proceeds by the Company.....  To repay $5.0 million of the Company's term credit
                                     facility, to reduce amounts outstanding under the
                                     Company's revolving credit facility by $10.0 million and
                                     for general corporate purposes, which may include future
                                     acquisitions. See "Use of Proceeds."
American Stock Exchange Symbol.....  URO
</TABLE>
    
 
---------------
(1) Does not include 4,496,000 shares of Common Stock issuable upon exercise of
    employee and consultant options with a weighted average exercise price of
    $10.16 per share, 4,470,000 shares issuable upon exercise of warrants issued
    in connection with financing transactions and bank lines of credit with a
    weighted average exercise price of $10.70 per share and 4,545,454 shares
    issuable upon conversion of the Debentures with a conversion price of $11.00
    per share.
 
             SUMMARY CONDENSED CONSOLIDATED SELECTED FINANCIAL DATA
 
     The following unaudited summary condensed consolidated selected financial
data presents selected operations data for the six months ended September 30,
1996, and pro forma operations financial information for the six months ended
September 30, 1996. The pro forma financial information has been prepared to
give effect to the acquisitions of Richard-Allan and Intermed and the
acquisition of certain assets of O.R. Concepts, as if such acquisitions were
consummated on July 1, 1995. See "Pro Forma Financial Information," "Selected
Consolidated Financial Data" and the Consolidated Financial Statements.
Substantially all of the Company's current revenues are attributable to
businesses and product lines it acquired since July 1995. Historically, the
Company has experienced significant net losses. See "Risk Factors -- Operating
Losses; No Assurance of Profitability; Liquidity" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations." As a result of
the acquisitions the Company has made and the restructuring plans it has
implemented, management believes that the Company's more recent historical
financial performance is most reflective of its current operations. The summary
pro forma financial information does not purport to be indicative of the results
that would have occurred if the transactions described above had been
consummated on the date indicated, or which may be obtained in the future. The
quarterly operating results presented below are not necessarily indicative of
the results that may be expected for the year ended March 31, 1997.
 
<TABLE>
<CAPTION>
                                                                     ACTUAL             PRO FORMA
                                                                   SIX MONTHS           SIX MONTHS
                                                                     ENDED                ENDED
                                                               SEPTEMBER 30, 1996   SEPTEMBER 30, 1996
                                                               ------------------   ------------------
                                                                           (IN THOUSANDS)
<S>                                                            <C>                  <C>
Net sales....................................................       $ 38,280             $ 47,592
Gross profit.................................................         25,998               30,006
Income (loss) from operations................................        (24,251)             (27,209)
Income (loss) before extraordinary item......................        (26,448)             (30,537)
                                                                                    ==============
Extraordinary item...........................................         (2,973)
Net income (loss)............................................        (29,421)
                                                               ==============
</TABLE>
 
                                        5
<PAGE>   7
 
                                  RISK FACTORS
 
     Prospective investors should carefully consider the factors set forth under
"Risk Factors" in addition to the other information contained in this
Prospectus.
 
     Operating Losses; No Assurance of Profitability; Liquidity.  The Company
has only recently recorded its first quarterly operating income. The Company
reported net losses for its fiscal years ended June 30, 1994 and 1995 and for
the nine months ended March 31, 1996 of $20.1 million, $18.5 million, and $18.0
million, respectively. In addition, the Company reported a net loss of $29.4
million for the six months ended September 30, 1996. There can be no assurance
that the Company will be profitable in any future period. The Company has
historically experienced negative cash flow from operations. The net cash used
in operating activities by the Company for its fiscal years ended June 30, 1994
and 1995 and for the nine months ended March 31, 1996 was $11.7 million, $8.2
million and $12.5 million, respectively. There can be no assurance that its
operating activities will generate sufficient cash flow to meet the Company's
needs in any future period. Except for the Company's $15.0 million revolving
credit facility, which was fully utilized at November 4, 1996, the Company has
no other financing commitments currently available to it. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Consolidated Financial Statements.
 
   
     The Company is highly leveraged. The Company had as of September 30, 1996
approximately $91.5 million in outstanding long-term debt of which $5.0 million
of its outstanding $21.5 million term credit facility will be repaid and $10.0
million of its outstanding $15.0 million revolving credit facility will be
reduced from the proceeds of this offering. The Company's stockholders' equity
as of September 30, 1996 on a pro forma basis as adjusted for this offering will
be approximately $24.0 million. The Company will be obligated to make debt
service and principal payments on such debt in future periods, including
estimated interest and principal payments over the next 12 months of
approximately $6.7 million (based on current borrowing levels, after giving
effect to the repayment of a portion of outstanding indebtedness with a portion
of the proceeds from this offering). The Company's ability to service such debt
will be dependent on its operating cash flow and such obligations could
significantly strain the Company's liquidity and adversely affect the Company's
ability to raise additional financing. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Consolidated Financial
Statements.
    
 
     Future Operating Results Dependent on Products.  The future operating
results of the Company will be dependent upon its ability to increase sales of
its existing medical products and their continued acceptance by the medical
community and third-party payors as useful and cost-effective. Historically, the
Company has been highly dependent on the sale of vacuum erection devices for the
treatment of male impotence. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The market for medical products
is characterized by rapid technological change and product obsolescence. The
Company's future operating results will also be dependent, therefore, upon the
Company's ability to develop or acquire new products that are competitive in the
markets it serves. Product acceptance will depend upon many factors, including
the continued demonstration of the utility and cost-effectiveness of the
Company's products, the maintenance of regulatory clearance in the United States
and elsewhere and the continued availability of third-party reimbursement.
Failure of one or more of the Company's products to continue to be accepted by
the medical community or its inability to develop new products could have a
material adverse effect on the Company. Substantially all of the Company's
medical product sales are derived from medical products of companies that the
Company acquired. There can be no assurance that the Company's medical products
will be successfully marketed, that future products will be brought to market in
a timely manner or that existing products will generate significant sales, the
failure of any of which could have a material adverse effect on the Company's
business, operating results or financial condition.
 
     Uncertainty Regarding Integration.  The Company believes that it has
integrated all of the material sales, marketing, manufacturing and financial
operations of Osbon, Advanced and Allstate with those of the Company, and it
expects to complete the integration of Richard-Allan, which was acquired on
August 14, 1996, during 1996. No assurance can be given that difficulties will
not be encountered in integrating the operations of Richard-Allan with those of
the Company or that the benefits expected from such integration
 
                                        6
<PAGE>   8
 
will be realized. In addition, the Company will be subject to the risks that
such recently acquired operations and future acquisitions will not perform as
expected and that the earnings from such operations will not be sufficient to
support the capital expenditures needed to develop such operations in conformity
with the Company's strategy. Any delays or unexpected costs incurred in
connection with such integration could have a material adverse effect on the
Company's business, operating results or financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
 
     Management of Growth.  Central to the Company's strategy is to identify and
acquire businesses and product lines. Although the Company currently has no
definitive agreements with respect to any such acquisitions, the Company
actively seeks acquisition opportunities in the ordinary course of its business
and from time to time enters into discussions and letters of intent with respect
to possible acquisitions, certain of which could be material. The Company made
four significant acquisitions of medical products companies during 1995 and
acquired three additional companies and two product lines during the first eight
months of 1996. As a result of those acquisitions, the Company has experienced
rapid growth. The Company expects to continue to acquire additional products and
companies in the future. The Company's growth has placed, and is expected to
continue to place significant demands on its financial and management resources.
There can be no assurance that the Company will be able to implement or sustain
its acquisition strategy or that its strategy will ultimately prove profitable
to the Company. In addition, the Company will likely be required to issue
additional shares of Common Stock, incur additional debt or to use a portion of
its cash balances, including the net proceeds of this offering, to make such
future acquisitions. Issuances of stock in any such future acquisitions could be
dilutive to future earnings per share.
 
     Reliance on Patents and Proprietary Rights.  The success and future revenue
growth of the Company will depend, in part, on its ability to operate without
infringing on the rights of others both in the United States and abroad. The
Company holds certain patent rights with respect to some of its medical products
and has filed, and expects in the future to file, additional patent
applications. The Company believes that some measure of patent protection with
respect to its products will be required to allow it to compete with large
medical products companies. There can be no assurance that the Company will
continue to develop or acquire products or processes that are patentable or that
patents applied for will be issued or that any patents issued to or licensed by
the Company will not be challenged, invalidated or circumvented, or that the
rights granted thereunder will provide it with competitive advantages. In
addition, the Company could incur substantial costs in defending its proprietary
rights. Although the Company believes that its patents are valid, there can be
no assurance that the validity of any patent will be upheld if challenged.
Further, there can be no assurances as to the breadth and degree of protection
of these rights or that other companies will not independently develop products
similar to the Company's products that will not infringe on its rights but will
compete directly with its products. In addition, the laws of some foreign
countries may not protect the Company's proprietary rights to the same extent as
the laws of the United States.
 
     The patents or proprietary rights of others may have an adverse effect on
the ability of the Company to do business in the future. The Company may be
required to obtain licenses to patents or proprietary rights of other parties in
order to produce and sell certain of their products. No assurance can be given
that the Company's technology can be developed and commercialized without a
license to such patents or proprietary rights or that any licenses required
under any such patent or proprietary rights would be made available on terms
acceptable to the Company, if at all. If the Company does not obtain or maintain
such licenses, it could encounter delays in product introductions while it
attempts to design around or contest the validity of such patents, or the
Company could find that the development, manufacture or sale of products
requiring such licenses could be foreclosed, any of which could have a material
adverse effect on the Company. Furthermore there can be no assurance that
competitors or potential competitors will not independently develop similar or
alternative products to those of the Company, duplicate any of the Company's
products or technologies, or design around the patented technologies developed
by the Company or its licensors, any of which could have a material adverse
effect on the Company's business, results of operations or financial condition.
 
     The Company also relies on trade secret law and confidentiality agreements
with its employees, consultants and contractors to protect its unpatented
proprietary technology and know-how. There can be no assurance that such
confidentiality agreements will not be breached, that the Company would have
adequate
 
                                        7
<PAGE>   9
 
remedy for such breach, or that the Company's trade secrets will not otherwise
become known through independent discovery by competitors. Moreover, in the
absence of patent protection, the Company's business may be adversely affected
by competitors who independently develop substantially equivalent technology.
See "Business."
 
     Regulatory Matters.  Most of the Company's medical products are subject to
regulation by the Food and Drug Administration ("FDA") and comparable agencies
in foreign countries. The process of receiving governmental approval may take a
number of years and the expenditure of substantial resources. The Federal Food,
Drug and Cosmetic Act, the Public Health Services Act and other federal statutes
and regulations govern or influence the testing, manufacture, safety, labeling,
storage, recordkeeping, approval, advertising and promotion of such products.
Noncompliance with applicable requirements can result in fines, recall or
seizure of products, total or partial suspension of production, refusal of the
government to approve product license applications or to allow the Company to
enter into supply contracts, and criminal prosecution. The FDA also has the
authority to revoke product licenses and establishment licenses previously
granted. Failure to comply with present or future regulatory requirements, or
new information reflecting on the safety or effectiveness of an approved
product, can lead the FDA to withdraw its approval to market a product. The
Company incurs substantial costs in complying with regulatory requirements.
 
     The FDA requires that a manufacturer introducing a new medical device or a
new indication for use of an existing medical device obtain either a 510(k)
premarket notification clearance or a premarket approval ("PMA") prior to the
market introduction. The 510(k) premarket notification clearance process is
significantly quicker and less costly than the PMA process. Substantially all of
the Company's FDA marketing clearances have been obtained through the FDA's
510(k) process; however, certain other products will require PMAs, including the
Company's Relax(TM) product. The PMA process is significantly more complex and
time consuming than the 510(k) notification process. The PMA process may take
several years or longer and require the submission of extensive supporting data
and clinical information. The Company believes that it is in material compliance
with the FDA's 510(k) requirements for new and modified devices. The FDA has
announced a program to review approvals (510(k)s and PMAs) for certain devices.
There can be no assurance that upon any such review the FDA will agree with the
Company's determination regarding its 510(k)s. If the FDA were to disallow a
510(k) marketing clearance for any device, the Company could be required to file
appropriate applications, either 510(k) or PMA, with the FDA or to take the
products in question off the market. If the FDA were to require suspension of
the sale of one or more of the products pending receipt of 510(k) clearance or
if the FDA were to refuse to grant 510(k) clearance, the Company's business,
results of operations and financial condition could be materially and adversely
affected. There can be no assurance that the Company will obtain timely
regulatory approval for its future products, or that existing approvals will not
be withdrawn. Moreover, regulatory approvals, if granted, may include
significant limitations on the indicated uses for which a product may be
marketed. There have been a number of proposals over the last several years
that, if implemented, could have the effect of reducing, or curtailing increases
in, Medicare and Medicaid reimbursement for medical products, and there has been
increasing pressure from private payors to limit increases in healthcare costs.
These proposals, if adopted, and increased pricing pressure from private payors
could have a material adverse effect on the Company's business, results of
operations or financial condition. See "Business -- Government Regulation."
 
     Competition.  The markets in which the Company operates are very
competitive and are characterized by rapidly evolving technology and product
obsolescence. The Company believes that its ability to develop and commercialize
new products and product enhancements is and will be critical to its continued
growth. There are a substantial number of medical products companies and such
companies could develop or offer products which would compete with those
products which the Company currently markets or intends to market. Some of these
companies have marketing and distribution capabilities, and many of them have
capital resources and research and development staffs substantially greater than
those of the Company. Moreover, it is reasonable to expect additional entrants
into the field. Any of these companies could introduce competing products, which
could cause a decline in sales or loss of market acceptance of existing or
future products of the Company. In addition, increased competitive pressure
could lead to intensified price-based competition that could materially
adversely affect the Company's business, results of operations or financial
condition. There can be
 
                                        8
<PAGE>   10
 
no assurance that the Company will be able to compete successfully in the
future. See "Business -- Competition."
 
     Dependence on Management.  The success of the Company will depend on its
ability to attract and retain highly qualified personnel. In particular, the
loss of Charles A. Laverty, the Company's Chief Executive Officer, could have
material adverse effect on the Company's business if a suitable replacement
could not be found. UROHEALTH has an employment agreement with Mr. Laverty that
provides for a three-year term expiring on April 1, 1999. The agreement
automatically renews for additional three-year terms if not terminated by either
party by prior notice. Mr. Laverty has agreed that for a period of 18 months
after termination of his employment that he will not compete with the Company.
The Company has "key person" insurance on the life of Mr. Laverty, however,
there can be no assurance that such insurance would be sufficient to compensate
the Company for his absence. There can be no assurance that the Company will be
successful in attracting or retaining key personnel. See "Management."
 
   
     Warrants and Options; Potential Dilution and Adverse Impact on Additional
Financing.  As of November 12, 1996, the Company had outstanding options to
employees and consultants to purchase an aggregate of 4,496,000 shares of Common
Stock at a weighted average exercised price of $10.16 per share and 4,470,000
outstanding warrants issued in connection with financing transactions and bank
lines of credit at a weighted average exercise price of $10.70 per share. In
addition, in May and July 1996, the Company issued $50.0 million of the
Company's 8.75% Convertible Subordinated Debentures due 2006 (the "Debentures")
which are convertible into Common Stock of the Company at a conversion price of
$11.00 per share. The holders of the Debentures would be entitled to receive
4,545,454 shares of Common Stock if such holders elected to convert all of the
Debentures into Common Stock. To the extent that the outstanding options and
warrants are exercised, or convertible securities are converted, dilution of the
interests of the Company's stockholders may occur. The existence of such
warrants, options and convertible securities may adversely affect the terms on
which the Company can obtain additional financing, and the holders of such
warrants, options and convertible securities can be expected to exercise them at
a time when the Company would, in all likelihood, be able to obtain additional
capital by an offering of its unissued capital stock on terms more favorable to
the Company than those provided by such warrants, options and convertible
securities.
    
 
     Limitation on Use of Tax Net Operating Loss Carryovers.  As of March 31,
1996, the Company had accumulated net operating loss carryovers for U.S. federal
and state income tax purposes of approximately $42.0 million and $30.0 million,
respectively. These loss carryovers would expire, if not previously utilized
against income of the Company, in various years through 2011. The future income
tax benefit of these losses has not been given recognition in the Consolidated
Financial Statements. Under Section 382 of the United States Internal Revenue
Code of 1986, as amended (the "Code"), and corresponding provisions of state tax
law, certain "ownership changes" with respect to the stock of a corporation
having unused net operating loss carryovers (a "loss corporation"), or with
respect to the stock of its parent corporation, may result in annual limitations
on utilizations of such loss carryovers against future income of the loss
corporation. In connection with the acquisition of Osbon, an ownership change
occurred for purposes of Section 382 of the Code, thereby subjecting the Company
to annual limitations on its ability to offset its existing loss carryovers
against its future income. In connection with this offering an additional
ownership change may occur. The Company believes this additional ownership
change will not reduce the December 29, 1995 Section 382 limitation. Therefore,
the impact of this offering on the Company's Section 382 limitation as a result
of the December 29, 1995 ownership change, should be immaterial.
 
     Rights Agreements; Anti-takeover Effects.  The Company has adopted a
Preferred Share Purchase Rights Plan, pursuant to a Rights Agreement dated as of
May 20, 1993 (the "Rights Agreement"). The Rights Agreement provides for the
type of plan commonly called a "poison pill." The Rights Agreement is intended
to prevent abusive hostile takeover attempts. However, the Rights Agreement
could have the effect of deterring or preventing an acquisition of UROHEALTH
even if a majority of the Company's stockholders would be in favor of such
acquisition, and could also have the effect of making it more difficult for a
person or group to gain control of the Company or to change existing management.
See "Description of Capital Stock -- Preferred Stock."
 
                                        9
<PAGE>   11
 
     Products Liability Exposure.  The medical products manufactured by the
Company have from time to time become the subject of products liability
litigation initiated by the patients using the products. In addition, as
additional UROHEALTH products enter the market, UROHEALTH will be subject to an
increased risk of products liability claims. While the Company believes that its
products have been manufactured in accordance with industry standards, and
believes it has maintained adequate products liability insurance coverage, any
adverse claim or adverse publicity resulting from a claim could have a material
adverse effect on the Company's business, results of operations or financial
condition.
 
   
     Shares Eligible for Future Sale; Negative Effect on Market Price .  Upon
consummation of this offering and without regard to options and warrants to
purchase, or securities convertible into, UROHEALTH stock, approximately
18,996,205 shares of UROHEALTH Common Stock will be outstanding. Of this amount,
the 2,500,000 shares of Common Stock offered hereby and 10,650,144 shares of
Common Stock outstanding, as of November 4, 1996, will be freely tradeable. The
remaining 5,846,061 shares of Common Stock are "restricted securities" (the
"Restricted Shares") under the Securities Act of 1933, as amended (the "Act").
None of the Restricted Shares can currently be sold pursuant to Rule 144 under
the Act. Of the Restricted Shares 936,267 are subject to rights granted by the
Company to the holders of those shares to register those shares under the Act.
The Company and certain stockholders owning in the aggregate approximately 8.4
million shares of Common Stock have agreed not to sell, or to offer to sell,
such shares in the market for a period of 120 days after the date of this
Prospectus. In addition, certain other stockholders owning in the aggregate
approximately 1.4 million shares of Common Stock will not be able to dispose of
any shares during the 90-day period after consummation of this offering. See
"Underwriting." Sales of substantial amounts of shares in the public market
could adversely affect the market price of UROHEALTH Common Stock and adversely
affect UROHEALTH's ability to raise additional capital in the capital markets at
a time and price favorable to UROHEALTH.
    
 
     Volatility of Stock Price.  The market price of the UROHEALTH Common Stock
is subject to significant fluctuations in response to variations in quarterly
operating results, general trends in the market for healthcare products, and
other factors. In addition, broad market fluctuations as well as general
economic or political conditions such as healthcare reform may adversely affect
the market price of the UROHEALTH Common Stock, regardless of the Company's
actual operating performance. The market price of the Company's Common Stock has
historically been very volatile. See "Market Price of Common Stock and
Dividends."
 
     Potential Tax Liability.  In connection with the redomestication of the
Company from Canada to the State of Delaware in July 1995, the Company has filed
a final Canadian tax return reporting the "deemed sale" of assets of Davstar
Industries Ltd. (the Canadian parent company). The Company anticipates that the
Canadian tax authorities will review the tax status of the former entity,
Davstar Industries Ltd., as a result of its redomestication from Canada to the
United States and believes that all or at least a significant amount of any
potential Canadian tax liability arising from the redomestication would be
offset against the Company's Canadian loss carryforwards. However, the Canadian
tax authorities could attempt to assign a greater value to the Company than used
in the Company's estimates, which could result in some amount of Canadian tax
that cannot be presently determined being assessed in a future period. No
provision for any liability that may result from the ultimate resolution of this
tax matter has been included in the accompanying consolidated financial
statements.
 
     Absence of Dividends.  The Company has never paid any cash dividends and
does not anticipate paying cash dividends in the foreseeable future. In
addition, the Company is restricted in its ability to pay dividends under
outstanding credit facilities and preferred stock of a subsidiary of the
Company. See "Price Range of Common Stock and Dividends."
 
                                       10
<PAGE>   12
 
                                USE OF PROCEEDS
 
   
     The net proceeds from the sale of the 2,500,000 shares of Common Stock
offered hereby, after deducting estimated underwriting discounts and commissions
and estimated expenses, are estimated to be $19.6 million ($22.5 million if the
underwriters' over-allotment option is exercised in full). The Company intends
to use $5.0 million of the net proceeds to reduce outstanding indebtedness under
its $21.5 million term loan facility, $10.0 million to reduce outstanding
indebtedness under its $15.0 million revolving credit facility and the balance
of the net proceeds for general corporate purposes, including the possible
acquisition of companies in the same or complementary lines of business. The
indebtedness to be repaid has a final maturity of September 30, 2001 and had an
interest rate of approximately 8.75% as of September 30, 1996. Pending such
uses, the net proceeds will be invested in investment-grade, short-term,
interest-bearing securities. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
    
 
   
     The Company is engaged in ongoing evaluations of and discussions with third
parties regarding potential acquisitions and has from time to time considered,
and may in the future consider, proposals with respect to potential
acquisitions. The Company currently has no definitive agreements with respect to
any such acquisitions.
    
 
                                       11
<PAGE>   13
 
                                 CAPITALIZATION
 
     The following table sets forth the Company's capitalization (i) at
September 30, 1996; and (ii) as adjusted to reflect the issuance of the
2,500,000 shares of Common Stock to be sold by the Company in this offering and
the application of the estimated net proceeds thereof. See "Use of Proceeds."
 
   
<TABLE>
<CAPTION>
                                                                         SEPTEMBER 30, 1996
                                                                     ---------------------------
                                                                      ACTUAL      AS ADJUSTED(1)
                                                                     --------     --------------
                                                                           (IN THOUSANDS)
<S>                                                                  <C>          <C>
Total debt.........................................................  $ 91,483        $ 76,483
                                                                       ======          ======
Stockholders' equity:
  Common Stock, $.001 par value; 50,000,000 shares authorized;
     16,495,205 shares of common stock issued and outstanding,
     and 18,995,205 shares as adjusted.............................        16              19
  Additional paid-in capital.......................................    93,177         112,774
  Warrants.........................................................     5,217           5,217
  Deficit..........................................................   (93,892)        (93,892)
  Foreign currency translation.....................................       (82)            (82)
                                                                       ------          ------
     Total common stockholders' equity.............................  $  4,436        $ 24,036
                                                                       ======          ======
Total capitalization...............................................  $ 95,919        $100,519
                                                                       ======          ======
</TABLE>
    
 
---------------
(1) Excludes shares issuable, if any, upon exercise of the underwriters'
    overallotment option. Also excludes 4,496,000 shares of Common Stock
    issuable upon exercise of employee and consultant options with a weighted
    average exercise price of $10.16 per share, 4,470,000 shares issuable upon
    exercise of warrants issued in connection with financing transactions and
    bank lines of credit with a weighted average exercise price of $10.70 per
    share and 4,545,454 shares issuable upon conversion of the Debentures with a
    conversion price of $11.00 per share.
 
                                       12
<PAGE>   14
 
                   PRICE RANGE OF COMMON STOCK AND DIVIDENDS
 
     UROHEALTH's Common Stock is traded on the American Stock Exchange ("AMEX")
under the symbol "URO." The following table sets forth the high and low closing
sales prices per share for the periods indicated, as reported by AMEX. The
information in the table has been adjusted to give effect to the one-for-three
reverse stock split on December 29, 1995. For current price information,
stockholders are encouraged to consult publicly available sources.
 
   
<TABLE>
<CAPTION>
                                                                     HIGH       LOW
                                                                     ----       ---
        <S>                                                          <C>        <C>
        FISCAL 1995:
          First quarter............................................  $14 1/4    $ 9 /16
          Second quarter...........................................  $12 3/4    $ 5  /16
          Third quarter............................................  $11 5/8    $ 47/8
          Fourth quarter...........................................  $10 11/16  $ 81/4
        FISCAL 1996:
          First quarter............................................  $13 1/2    $ 9
          Second quarter...........................................  $12        $ 6  /16
          Third quarter............................................  $13 1/8    $ 63/4
        FISCAL 1997:
          First quarter............................................  $15 7/8    $121/8
          Second quarter...........................................  $14 7/8    $105/8
          Third quarter (through November 12, 1996)................  $13 1/8    $ 8 /16
</TABLE>
    
 
     The Company has never paid cash dividends on its Common Stock and does not
anticipate that it will do so in the foreseeable future. The present policy of
the Company is to retain earnings, if any, to finance the anticipated growth of
its business. In addition, the Company is restricted from paying cash dividends
under the terms of its existing credit facility and is similarly limited under
the terms of outstanding preferred stock of a subsidiary. See "Description of
Capital Stock."
 
                                       13
<PAGE>   15
 
                        PRO FORMA FINANCIAL INFORMATION
 
     The following unaudited pro forma condensed combined statements of
operations are presented to reflect the acquisition of Richard-Allan, on August
14, 1996, the acquisition of Intermed, effective on June 1, 1996, and the
acquisition of certain assets of O.R. Concepts effective June 5, 1996
(collectively the "Acquisitions"). These transactions were accounted for as
purchases.
 
     The unaudited pro forma condensed combined statements of operations and
accompanying notes should be read in conjunction with the respective historical
audited consolidated financial statements of UROHEALTH contained herein and the
audited consolidated financial statements of Richard-Allan incorporated by
reference herein from the Company's Form 8-K/A filed with the Securities and
Exchange Commission on September 26, 1996.
 
     The unaudited pro forma combined data are based on the consolidated
financial statements of UROHEALTH, Richard-Allan, Intermed and O.R. Concepts
giving effect to the transactions under the assumptions and adjustments outlined
in the accompanying Notes to Unaudited Pro Forma Condensed Combined Statements
of Operations. The unaudited pro forma combined data do not include any amounts
for X-Med prior to the acquisition of this product line in August 1996, since
reliable operational data for such periods is unavailable.
 
     The pro forma adjustments are based upon available information and upon
certain assumptions that UROHEALTH management believes are reasonable given the
circumstances. The unaudited pro forma condensed combined results of operations
for the six month period ended September 30, 1996 include the unaudited results
of operations of Richard-Allan, Intermed and O.R. Concepts for such period. The
unaudited pro forma condensed combined results of operations for the nine month
fiscal period ended March 31, 1996 include the audited results of operations of
Richard-Allan, and the unaudited results of operations of Intermed and O.R.
Concepts for such period. The unaudited pro forma condensed combined results of
operations are provided for comparative purposes only and are not necessarily
indicative of the results that would have been obtained had the Acquisitions
occurred on the dates indicated or that may be achieved in the future.
 
     Shares used in the computation of earnings per common share give effect to
the applicable exchange ratios for the Richard-Allan and Intermed acquisitions
for the six months ended September 30, 1996 and the nine months ended March 31,
1996, presented in the unaudited pro forma condensed combined statement of
operations.
 
                                       14
<PAGE>   16
 
                            UROHEALTH SYSTEMS, INC.
 
         UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
                  FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1996
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                  O.R.
                                                                CONCEPTS
                                                    RICHARD-      AND       PRO FORMA         TOTAL
                                        UROHEALTH    ALLAN      INTERMED   ADJUSTMENTS      PRO FORMA
                                        ---------   --------    --------   -----------      ---------
<S>                                     <C>         <C>         <C>        <C>              <C>
Net sales.............................. $ 38,280    $  8,427    $    885     $    --        $  47,592
Cost of sales..........................   12,282       4,320         984          --           17,586
                                         -------     -------      ------     -------          -------
Gross profit...........................   25,998       4,107         (99)         --           30,006
Operating expenses:
  Selling, general and
     administrative....................   19,795       4,950         982         440(b)        26,167
  Research and development.............      954         594          --          --            1,548
  Write-off of purchased research and
     development.......................   25,500          --          --          --           25,500
  Restructuring charge.................    4,000          --          --          --            4,000
                                         -------     -------      ------     -------          -------
Total operating expenses                  50,249       5,544         982         440           57,215
                                         -------     -------      ------     -------          -------
Income (loss) from operations..........  (24,251 )    (1,437)     (1,081)       (440)         (27,209)
Other income (expense):
  Minority interest....................      (36 )        --          --          --              (36)
  Interest income......................      147          --          --          --              147
  Interest expense.....................   (2,685 )      (136)         (2)     (1,116)(a)       (3,939)
  Other................................       --          --         (11)         --              (11)
                                         -------     -------      ------     -------          -------
Income (loss) before taxes and
  extraordinary item...................  (26,825 )    (1,573)     (1,094)     (1,556)         (31,048)
Income tax expense (benefit)...........     (377 )      (134)         --          --(c)          (511)
                                         -------     -------      ------     -------          -------
Income (loss) before extraordinary
  item................................. $(26,448 )  $ (1,439)   $ (1,094)    $(1,556)       $ (30,537)
                                         =======     =======      ======     =======          =======
Loss per share:
  Loss before extraordinary item....... $(26,448 )                                          $ (30,537)
  Dividends and accretion on redeemable
     convertible preferred stock.......     (398 )                                               (398)
                                         -------                                              -------
  Loss before extraordinary item
     attributable to common
     stockholders...................... $(26,846 )                                          $ (30,935)
                                         =======                                              =======
  Loss per share before extraordinary
     item attributable to common
     stockholders...................... $  (1.86 )                                          $   (1.93)
Weighted average number of common
  shares used to compute loss per
  share(d).............................   14,436                                               16,035
                                         =======                                              =======
</TABLE>
 
                             See accompanying notes
 
                                       15
<PAGE>   17
 
                            UROHEALTH SYSTEMS, INC.
 
         UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
 
                    FOR THE NINE MONTHS ENDED MARCH 31, 1996
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                  O.R.
                                                                CONCEPTS
                                                    RICHARD-      AND       PRO FORMA         TOTAL
                                        UROHEALTH    ALLAN      INTERMED   ADJUSTMENTS      PRO FORMA
                                        ---------   --------    --------   -----------      ---------
<S>                                     <C>         <C>         <C>        <C>              <C>
Net sales.............................. $ 39,641    $ 15,705    $  4,354     $    --        $  59,700
Cost of sales..........................   12,896       8,195       2,509          --           23,600
                                         -------     -------      ------     -------          -------
Gross profit...........................   26,745       7,510       1,845          --           36,100
Operating expenses:
  Selling, general and
     administrative....................   32,218       7,450       1,378       1,717(b)        42,763
  Research and development.............    1,324         765           3          --            2,092
  Restructuring charges................    5,456          --          --          --            5,456
  Direct acquisition costs.............    4,232          --          --          --            4,232
                                         -------     -------      ------     -------          -------
     Total operating expenses..........   43,230       8,215       1,381       1,717           54,543
                                         -------     -------      ------     -------          -------
Income (loss) from operations..........  (16,485 )      (705)        464      (1,717)         (18,443)
Other income (expense):
  Minority interest....................      (55 )        --          --          --              (55)
  Interest income......................       23          42          --          --               65
  Interest expense.....................   (1,002 )      (183)        (14)     (2,229)(a)       (3,428)
Other..................................      (48 )        (9)         --          --              (57)
                                         -------     -------      ------     -------          -------
Income (loss) before taxes and
  extraordinary item...................  (17,567 )      (855)        450      (3,946)         (21,918)
Income tax expense (benefit)...........      431        (376)         --          --(c)            55
                                         -------     -------      ------     -------          -------
Income (loss) before extraordinary
  item................................. $(17,998 )  $   (479)   $    450     $(3,946)       $ (21,973)
                                         =======     =======      ======     =======          =======
Loss per share:
  Loss before extraordinary item....... $(17,998 )                                          $ (21,973)
  Dividends and accretion on redeemable
     convertible preferred stock.......     (579 )                                               (579)
                                         -------                                              -------
  Loss before extraordinary item
     attributable to common
     stockholders...................... $(18,577 )                                          $ (22,552)
                                         =======                                              =======
  Loss per share before extraordinary
     item attributable to common
     stockholders...................... $  (1.50 )                                          $   (1.55)
                                         =======                                              =======
Weighted average number of shares(d)...   12,344                                               14,575
                                         =======                                              =======
</TABLE>
 
                             See accompanying notes
 
                                       16
<PAGE>   18
 
                            UROHEALTH SYSTEMS, INC.
 
    NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
 
1.  ACQUISITIONS
 
  Acquisition of Richard-Allan Medical Industries, Inc.
 
     On July 5, 1996, UROHEALTH entered into an agreement to acquire all of the
outstanding capital stock of Richard-Allan in exchange for $27.5 million in cash
and 2,081,916 shares of UROHEALTH Common Stock. In addition, the Company agreed
to acquire the real estate on which the Richard-Allan facility is located from a
partnership for $1.5 million of cash and a $3.0 million note. The acquisition
was accounted for as a purchase and has been recorded based upon available
information and upon certain assumptions that the Company believes are
reasonable in the circumstances. The purchase price has been allocated to the
acquired assets and liabilities based on a preliminary determination of their
respective fair values.
 
     The Company evaluated the value of acquired incomplete research and
development incident to this acquisition. The evaluation included, among other
factors, the stage of development of each product, the time and resources needed
to complete each product, expected income and associated risks (including the
inherent difficulties and uncertainties in developing and manufacturing new
products and potential alternative surgical procedures in future target
markets). The Company included an estimated a one-time non-cash charge to
earnings of $25.5 million for incomplete research and development related to the
acquired company that does not have alternative future use.
 
     The total purchase price of the Richard-Allan acquisition, including direct
acquisition costs and the cost of the related real estate, of $60,000,000 was
determined as follows:
 
<TABLE>
            <S>                                                       <C>
            Issuance of 2,081,916 shares of UROHEALTH Common Stock
              at $13.21 per share...................................  $ 27,500,000
            Cash....................................................    29,000,000
            Note payable............................................     3,000,000
            Direct acquisition costs................................       500,000
                                                                      ------------
                                                                      $ 60,000,000
                                                                        ==========
</TABLE>
 
The cash and direct acquisition cost portions of the purchase price were
financed with $30.0 million of borrowings under a new $35.0 million bank credit
facility that consists of a $20.0 million term loan and a $15.0 million
revolving line of credit. The remaining amounts under the new bank credit
facility are available for general corporate purposes. The Company incurred $1.3
million of costs in connection with establishment of the new bank credit
facility that will be treated as deferred debt issuance costs.
 
  Acquisition of The Intermed Group, Inc.
 
     On July 1, 1996, UROHEALTH acquired Intermed pursuant to the terms of the
Agreement and Plan of Merger dated as of June 1, 1996. Under the terms of the
agreement, each outstanding share of common stock of Intermed was converted into
the right to receive .1242575 shares of UROHEALTH Common Stock, plus cash in the
amount of $1.5 million. Upon consummation of the merger, approximately 149,306
shares of UROHEALTH Common Stock (with a value of $2.05 million) were issued and
cash of $1.46 million was paid in exchange for all of the outstanding shares of
Intermed common stock. Direct acquisition costs incurred related to the
transaction were $400,000. The cash portion of the purchase price was funded
using a portion of the proceeds from the sale of the Debentures. The purchase
price has been allocated to the acquired assets and liabilities based on a
preliminary determination of their respective fair values. It was determined by
the Company that the acquired identifiable tangible and intangible assets had a
value of $1.18 million and assumed liabilities had a value of $1.61 million.
 
                                       17
<PAGE>   19
 
  Acquisition of Certain Assets of O.R. Concepts, Inc.
 
     On June 5, 1996, UROHEALTH acquired certain assets of O.R. Concepts
pursuant to an Asset Purchase Agreement dated June 5, 1996 among UROHEALTH, O.R.
Concepts and Vital Signs, Inc., a New Jersey Corporation. The purchase price for
the acquired assets was $2.8 million, payable in cash upon the closing of the
transaction. The purchase price was funded using a portion of the proceeds from
the sale of the Debentures. The purchase price has been allocated to the
acquired assets and liabilities based on a preliminary determination of their
respective fair values. It was determined by the Company that the acquired
identifiable tangible and intangible assets had a value of $273,000 (net of a
$291,000 write-down of certain acquired inventory, reflected as a charge to cost
of sales during the three months ended June 30, 1996) and that the assumed
liabilities had a value of $20,000.
 
     The historical amounts included in the accompanying pro forma condensed
financial statements as of March 31, 1996 and for the nine months then ended
reflect the financial position and results of operations of UROHEALTH prior to
the Acquisitions.
 
Pro Forma Adjustments
 
(a)   Interest on funds used and additional debt assumed to effect the
      Acquisitions including the new bank credit facility ($30.0 million),
      assumed note payable ($3.0 million), and internal funds (approximately $1
      million) at an estimated composite interest rate of 8.75%.
 
(b)   Amortization of costs in excess of book value of assets acquired in the
      Intermed ($4,348,000) and Richard-Allan transactions. Costs in excess of
      net assets acquired are amortized over 25 years.
 
(c)    No income tax effect has been provided for the pro forma adjustments
       since UROHEALTH's historical operations for the period would not permit
       any additional income tax benefit to be recognized.
 
(d)   The aggregate weighted average common share amounts represent the weighted
      average common shares of UROHEALTH plus the number of shares issued for
      Richard-Allan and Intermed. Common stock equivalents have not been
      included in the calculation as they are anti-dilutive.
 
                                       18
<PAGE>   20
 
                      SELECTED CONSOLIDATED FINANCIAL DATA
 
     The following selected consolidated financial data of the Company has been
derived from the financial statements of UROHEALTH which have been prepared in
accordance with United States generally accepted accounting principles ("GAAP")
and includes the statements of operations and balance sheet data for Osbon,
Advanced, Dacomed and Allstate which acquisitions were accounted for as
pooling-of-interests transactions. The selected consolidated financial data for
the Company as of March 31, 1996 and for the nine months ended March 31, 1996
and as of June 30, 1995 and for the year ended June 30, 1995 are derived from
the consolidated financial statements of UROHEALTH which have been audited by
Ernst & Young LLP, independent auditors. The data should be read in conjunction
with the consolidated financial statements, related notes, and other financial
information included or incorporated by reference herein. The financial
statements as of June 30, 1994 and for the year then ended have been derived
from financial statements audited by other auditors. The selected consolidated
financial data set forth below for the years ended June 30, 1992 and 1993 and as
of June 30, 1992 and 1993 are derived from audited financial statements not
included or incorporated by reference herein. The financial data for the six
months ended September 30, 1995 and 1996 is derived from the unaudited financial
statements of UROHEALTH, which contain all adjustments, consisting of normal
recurring accruals except for the extraordinary loss on early extinguishment of
debt, the related induced accretion as a result of the conversion of the
convertible notes and redeemable convertible preferred stock, restructuring
charges and the merger and acquisition costs identified in the accompanying
unaudited condensed consolidated statements of operations. The results of
operations for the six month period ended September 30, 1996 are not necessarily
indicative of those to be expected for the entire year. The selected financial
data presented below includes statement of operations data for Richard-Allan
from August 14, 1996. See "Pro Forma Financial Information." The following data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements of UROHEALTH included elsewhere herein.
 
   
<TABLE>
<CAPTION>
                                                                                     NINE MONTHS ENDED         SIX MONTHS ENDED
                                              YEAR ENDED JUNE 30,                        MARCH 31,              SEPTEMBER 30,
                                 ---------------------------------------------     ---------------------     --------------------
                                  1992        1993         1994         1995         1995         1996        1995         1996
                                 -------     -------     --------     --------     --------     --------     -------     --------
                                                           (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S>                              <C>         <C>         <C>          <C>          <C>          <C>          <C>         <C>
STATEMENTS OF OPERATIONS DATA:
  Net sales....................  $26,797     $32,565     $ 37,828     $ 45,453     $ 32,746     $ 39,641     $26,218     $ 38,280
  Gross profit.................   16,642      19,960       23,835       29,294       20,863       26,745      17,117       25,998
  Restructuring, direct
    acquisition and other
    costs(1)...................       --         563        1,000        2,351        1,200        9,688       1,909       29,500
  Income (loss) from
    operations.................  $(3,533)    $(9,535)    $(19,437)    $(17,007)    $(14,442)    $(16,485)    $(5,397)    $(24,251)
  Income (loss) before
    extraordinary items........   (4,026)     (9,985)     (20,127)     (18,506)     (15,497)     (17,998)     (6,328)     (26,448)
  Extraordinary items..........       --          --           --           --           --           --          --       (2,973)
  Net loss.....................  $(4,026)    $(9,985)    $(20,127)    $(18,506)    $(15,497)    $(17,998)    $(6,328)    $(29,421)
  Loss per share before
    extraordinary item.........  $ (0.40)    $ (0.88)    $  (1.77)    $  (1.52)    $  (1.28)    $  (1.50)    $ (0.56)    $  (1.86)
</TABLE>
    
 
   
<TABLE>
<CAPTION>
                                                               JUNE 30,
                                             ---------------------------------------------     MARCH 31,     SEPTEMBER 30,
                                              1992          1993        1994        1995         1996            1996
                                             -------       -------     -------     -------     ---------     -------------
                                                             (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S>                                          <C>           <C>         <C>         <C>         <C>           <C>
BALANCE SHEET DATA:
  Cash and equivalents.....................  $ 7,947       $ 6,800     $ 3,009     $ 1,051      $ 1,185        $   1,511
  Working capital (deficit)................  $16,974       $14,330     $ 8,346     $ 4,043      $(3,728)       $   5,995
  Total assets.............................  $28,177       $28,686     $25,075     $26,174      $27,835        $ 117,808
  Long-term liabilities, minority interest
    in subsidiary redeemable preferred
    stock, and convertible subordinated
    debentures.............................  $   125       $ 1,292     $ 3,386     $ 5,219      $13,771        $  79,276
  Common stockholders' equity (deficit)....  $22,964(2)    $20,390     $14,339     $10,538      $(6,190)       $   4,436
</TABLE>
    
 
---------------
(1) Includes restructuring charges, direct acquisition costs and settlement of
    litigation.
 
(2) Amount shown includes the sale of 1,378,500 units consisting of common stock
    and warrants providing net proceeds to the Company of approximately $9.7
    million.
 
                                       19
<PAGE>   21
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS
 
BACKGROUND
 
     Since October 1994, the Company has been transformed from a research and
development Company into a fully-integrated medical products company which
leverages a direct sales force of 140 people, integrated manufacturing
facilities and an experienced management team. As part of its growth strategy,
the Company has acquired seven medical products companies and two product lines.
Prior to July 1995, the Company operated primarily as a research and development
company and most of its sales came from the plastics business of Gates Plastics,
a wholly owned subsidiary. The income generated from the Gates business was
offset by expenses associated with the Company's effort to introduce proprietary
medical products into the urology marketplace.
 
     The mergers of Dacomed and Allstate were completed on July 28, 1995 and the
acquisitions of Osbon and Advanced closed on December 29, 1995. The operations
of the Company are presented on a combined basis historically, as these
transactions were all accounted for as pooling of interests. Each of these
acquired companies became a wholly owned subsidiary of UROHEALTH. On May 22,
1996, the Company acquired Endoscopic Imaging Systems, Inc. and on June 1, 1996
and June 5, 1996 the Company acquired Intermed and the minimally invasive
surgery product lines of O.R. Concepts, respectively. All three of these
transactions were accounted for as purchases and are included in the Company's
financials as of the date of the acquisitions. On August 14, 1996, the Company
acquired Richard-Allan. This acquisition was also accounted for as a purchase,
therefore, the results from Richard-Allan have been included commencing August
14, 1996, the date the acquisition closed.
 
     Prior to March 31, 1996, the combined operations of the Company for the
periods discussed below did not generate positive operating income. The Company
has recorded significant restructuring charges and direct acquisition costs
related to the acquisitions described above which have adversely impacted
operating results during those periods. The restructuring charges related
primarily to personnel reduction costs and facility reduction costs, as well as
write-downs of acquired assets to their estimated net realizable value. The
Company has realized cost savings and efficiencies from consolidating its
acquisitions to date and management expects to realize additional future cost
savings related to such consolidation efforts. The Company has included in the
financial statements as of and for the period ended September 30, 1996, a
one-time charge of approximately $25.5 million to write-down purchased
incomplete research and development costs associated with the acquisition of
Richard-Allan. The Company also included in the financial statements as of and
for the period ended September 30, 1996 approximately $4.0 million in
restructuring charges relating to the closure of certain duplicative
manufacturing facilities, and the elimination of certain duplicative general and
administrative costs and other redundancies relating to the Richard-Allan,
Intermed, O.R. Concepts and X-Med transactions. Management will continue to
review methods of improving the profitability of the Company, as well as to
pursue other acquisition candidates. As a result of the acquisitions the Company
has made and the restructuring plans implemented, management does not believe
that the historical financial performance is indicative of future financial
performance of the Company.
 
     In 1996, the Company changed its fiscal year end from June 30 to March 31,
therefore, the following discussion compares the nine month transition period
ending March 31, 1996 to the corresponding period of the prior year.
 
SIX MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30,
1995
 
   
     Net Sales. For the six months ended September 30, 1996, net sales of $38.3
million were $12.1 million or 46% higher than sales of $26.2 million for the
same period in 1995. This increase was largely due to higher sales of the
Company's impotence products which increased $6.8 million or 36% to $25.9
million, and the release of the Company's EndoView(TM) product which generated
sales of $3.2 million during the six months ended September 30, 1996. The recent
purchase of Richard-Allan, on August 19, 1996 increased revenues by
approximately $3.2 million for the six months ended September 30, 1996.
    
 
                                       20
<PAGE>   22
 
     Gross Profit. For the six months ended September 30, 1996, gross profit
increased $8.9 million or 52% over the same period in 1995. The gross margin
percentage increased from 65% to 68% for the six months ended September 30, 1996
largely due to sales growth in the Company's higher margin impotence product
lines and operational efficiencies as a result of consolidation of duplicate
facilities.
 
     Selling, General and Administrative. Selling, general and administrative
expenses for the six months ended September 30, 1996 increased $0.2 million or
0.01% over the same period in 1995. The Company's sales commissions increased in
proportion to the increase in sales during the six months. Overall
administrative costs during the six months ended September 30, 1996 decreased
due to the Company's ability to reduce some of the duplicate costs associated
with its recent acquisition.
 
     Research and Development. Research and development costs for the six months
ended September 30, 1996 decreased $47,000 or 5% over the same period in 1995.
 
     Write-off of Purchased Research and Development.  Subsequent to the
acquisition, a study was conducted to determine the proper allocation of the
purchase price of Richard-Allan. An independent valuation of Richard-Allan's
assets was performed and used as an aid in determining the fair market value of
each identifiable tangible and intangible asset and in allocating the purchase
price among the acquired assets, including the portion of the purchase price
properly attributed to incomplete research and development projects that should
be expensed pursuant to the provisions of Interpretation 4 of SFAS No. 2,
accordingly, it was determined that acquired in-process research and development
costs of approximately $25,500,000 should be expensed.
 
     Restructuring. In September 1996, the Company established a restructuring
plan to eliminate redundant manufacturing facilities resulting from
Richard-Allan, Intermed and O.R. Concepts acquisitions and their consolidation
with some of the existing manufacturing locations. This restructuring is
expected to be completed within one year except for redundant facilities, lease
costs and payments under certain severance agreements that may continue over
their terms. The Company has provided a restructuring charge of $4.0 million, of
which all are cash expenditures. This restructuring includes severance costs for
approximately 17 employees, certain facility closures and elimination of other
redundant selling and administrative costs. Although subject to future
adjustment, management of the Company believes that restructuring reserves as of
September 30, 1996 are adequate to complete the restructuring.
 
<TABLE>
<CAPTION>
                                 BEGINNING                                                       BALANCE AT
                               RESTRUCTURING     NON-CASH       CASH                            SEPTEMBER 30,
                                  ACCRUAL         CHARGES     CHARGES     RECLASSIFICATIONS         1996
                               --------------    ---------    --------    ------------------    -------------
                                                               (IN THOUSANDS)
    <S>                        <C>               <C>          <C>         <C>                   <C>
    Personnel reduction
      costs..................      $2,412         $    --       $160            $   --             $ 2,252
    Facility reduction
      costs..................       1,588              --        253                --               1,335
                                   ------            ----     ------             -----              ------
                                   $4,000         $    --       $413            $   --             $ 3,587
                                   ======            ====     ======             =====              ======
</TABLE>
 
     Interest Expense. Interest expense for the six months ended September 30,
1996 increased $2.5 million or 1,083% over the same period in 1995, primarily
due to increased borrowings on term loans, lines of credit and the issuance of
the convertible subordinated debentures to fund acquisitions.
 
NINE MONTHS ENDED MARCH 31, 1996 COMPARED TO NINE MONTHS ENDED MARCH 31, 1995
 
     Net Sales. Net sales during the nine months ended March 31, 1996 ("fiscal
1996" or "1996") increased $6.9 million or 21% over the nine months ended March
31, 1995 ("1995") primarily due to an increase in sales of the Company's
urological products. The Company's vacuum erection devices accounted for 56% and
58% of sales for 1996 and 1995, respectively. The Company continued to increase
its direct sales force and maintained an aggressive advertising campaign,
contributing to the sales growth.
 
     Gross Profit. Gross profit during 1996 increased $5.9 million or 28% over
the same period in 1995. The gross margin was 67% in 1996 and 64% in 1995. There
were no significant changes in the Company's product mix or product pricing
between periods. The Company closed two facilities in 1996 and improved
operating efficiencies, the effect of which was primarily realized in the last
quarter of fiscal 1996.
 
                                       21
<PAGE>   23
 
   
     Selling, General and Administrative. Selling, general and administrative
expenses during 1996 increased $6.7 million or 26% over the same period in 1995.
This increase was primarily due to increases in sales and marketing expenses as
the Company continued to build a sales organization. Also, general and
administrative costs increased due to the addition of key management personnel
and expenses associated with the integration of its four operating locations.
    
 
     Research and Development. Research and development expenses during 1996
decreased $6.9 million or 84% in 1996 over the same period in 1995. In
connection with the acquisition of Laparomed Corporation on July 27, 1994, the
Company expensed $5.3 million of purchased research and development. The
Laparomed Corporation acquisition has been accounted for as purchase with a
purchase price of approximately $7 million. Overall, the decline in research and
development costs is a result of the Company's decision to narrow the focus of
such efforts, and to adopt a program of actively acquiring or licensing
developed technology.
 
     Restructuring Charges. In December 1995, the Company implemented a
restructuring plan to consolidate redundant facilities and reduce personnel
resulting from the mergers with Dacomed, Osbon and Advanced. Under the plan, the
Company has eliminated approximately 70 manufacturing, engineering and
administrative personnel and closed all operations at two acquired facilities.
The estimated cost associated with each component of this restructuring plan and
the cash and non-cash charges incurred during fiscal 1996 are summarized in the
table below. Non-cash charges consist of the write-down of existing assets to
their estimated net realizable value. The remaining restructuring accrual at
March 31, 1996 relates primarily to terminated employee severance and facility
lease obligations, which are expected to be paid in cash. Although subject to
future adjustment, management of the Company believes that restructuring
reserves as of March 31, 1996 are adequate to complete the restructuring.
 
<TABLE>
<CAPTION>
                                   BEGINNING                                                      BALANCE AT
                                 RESTRUCTURING     NON-CASH       CASH                             MARCH 31,
                                    ACCRUAL         CHARGES     CHARGES     RECLASSIFICATIONS        1996
                                 --------------    ---------    --------    ------------------    -----------
                                                                (IN THOUSANDS)
    <S>                          <C>               <C>          <C>         <C>                   <C>
    Personnel reduction
      costs....................      $2,620          $   --      $1,171            $(730)            $  719
    Facility reduction costs...       2,836           1,187       1,258              730              1,121
                                     ------          ------      ------            -----             ------
                                     $5,456          $1,187      $2,429            $  --             $1,840
                                     ======          ======      ======            =====             ======
</TABLE>
 
   
     Direct Acquisition Costs. Merger and acquisition costs during 1996
increased $4.2 million over the same period in 1995. The results of operations
in 1996 reflect additional transaction costs of $4.2 million related to the
Company's mergers with Osbon, Advanced and Dacomed. These transaction costs
include expenses related to broker and other professional fees.
    
 
     Interest Expense. Interest expense during 1996 increased by approximately
$800,000 or 382% over the same period in 1995, primarily due to the issuance of
the Debentures as well as increased borrowings under term loans and lines of
credit.
 
YEAR ENDED JUNE 30, 1995 COMPARED TO YEAR ENDED JUNE 30, 1994
 
     Net Sales. Net sales during the year ended June 30, 1995 ("fiscal 1995")
increased $7.6 million or 20% over fiscal 1994 primarily due to an increase in
sales of the Company's urological products. The Company's vacuum erection
devices accounted for 57% and 55% of sales in fiscal 1995 and fiscal 1994,
respectively. The addition of direct sales people and an aggressive advertising
campaign contributed to the sales growth.
 
   
     Gross Profit. Gross profit during fiscal 1995 increased $5.5 million or 23%
over fiscal 1994. The gross margin was 64% in fiscal 1995 and 63% in fiscal
1994. There were no significant changes in the Company's product mix or product
pricing between periods.
    
 
   
     Selling, General and Administrative. Selling, general and administrative
expenses during fiscal 1995 increased $2.3 million or 7% over fiscal 1994. The
increase was due to the addition of direct sales people and pursuing an
aggressive advertising campaign. A decrease in bad debt expenses of
approximately $294,000 during fiscal 1995 offset this increase.
    
 
                                       22
<PAGE>   24
 
     Research and Development. Research and development expenses during fiscal
1995 decreased $665,000 or 7% over fiscal 1994. The reduction was due to
decreased research and development related to introduction of a new female
incontinence system.
 
     Restructuring Charges. During fiscal 1995, the Company hired a new senior
management team which adopted and implemented a restructuring plan (the "Plan")
under which it refocused the Company's strategic direction. Under the Plan, the
Company terminated or amended certain distribution, consulting and employment
agreements. Accordingly, the consolidated statement of operations reflects a
charge of $1.2 million to terminate or restructure these agreements under the
Plan. The components of the restructuring charges include a provision to
discontinue the distribution of the Adzorbstar(TM) product line of $360,000,
termination agreements which include indemnification costs of former employees
for legal fees associated with an SEC investigation of $250,000, termination of
certain other consulting and distributor agreements of $50,000, and the
amendment and settlement of certain claims under the employment agreement with
the former Chief Executive Officer of $540,000. All significant restructuring
charges were paid in cash during the 1995 calendar year.
 
     Direct Acquisition Costs. Direct acquisition costs during fiscal 1995
totalled approximately $851,000. These costs were directly attributable to the
expenses incurred by the Company in connection with the Dacomed and Allstate
mergers.
 
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY
 
     Expenses related to minority interest were $78,000 and $55,000 during
fiscal 1995 and 1996, respectively. Such expenses consist of 7% dividends
payable to stockholders of preferred stock of a subsidiary of the Company.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     Through September 1996, the Company's operations have been funded partially
by the sale of equity securities in both public and private offerings, and debt
financing. The Company had working capital of approximately $6.0 million at
September 30, 1996, and has historically had negative cash flows from
operations. The Company completed the $50.0 million securities purchase
agreement, under which the Company received net proceeds of approximately $45.2
million in exchange for 8.75% convertible subordinated debentures. The
Debentures are convertible into Common Stock of the Company at $11.00 per share.
Through September 30, 1996, the Company had used net proceeds for the repayment
of previous debt obligations, to complete two business acquisitions and to
finance the Company's operations.
 
     To finance the cash portion of the Richard-Allan acquisition, the Company
obtained a $35.0 million bank credit facility. The facility consists of a $20.0
million term loan and a $15.0 million revolving line of credit. The credit
facility is secured by substantially all the assets of the Company with the term
of five years and to be a rate of approximately 8.75% interest. Additionally,
the Company is required to meet certain financial covenants.
 
     Approximately $2.6 million of the Company's restructuring charges are
projected to be paid over the next twelve months. The long-term portion consists
of redundant facility lease costs to be paid out through 2003 and severance
costs to be paid out over the next two years.
 
   
     The Company has filed an S-3 Registration Statement with the Securities and
Exchange Commission to sell approximately 2.5 million shares of Common Stock.
The Company anticipates completing this transaction during the month of November
1996.
    
 
     The Company's business strategy includes efforts to expand business
operations through the acquisition of new products, product lines and
businesses. The Company may use a portion of its cash balances or possibly have
future debt or equity financings to make such future acquisitions.
 
   
     In addition, in October 1996 the Company increased the term loan under its
credit facility by $1.5 million.
    
 
                                       23
<PAGE>   25
 
                                    BUSINESS
 
OVERVIEW
 
     UROHEALTH is a developer, manufacturer and distributor of products for the
minimally invasive and general surgery, urology, and gynecology markets (the
"Target Markets"). The Company was incorporated in August 1985. In October 1994,
under the leadership of new management, the Company adopted and began to
implement a strategic plan which took advantage of consolidation opportunities
in the highly fragmented medical products industry. Management's strategy was to
position the Company to benefit from the competitive advantages and operating
efficiencies inherent in an infrastructure which combines an experienced
management team and sophisticated manufacturing facilities with a large direct
sales force. As an important component of its strategy, the Company began to
acquire and develop a broad offering of products for health care professionals
and their patients suffering from impotence, incontinence and other
gynecological and urological problems, or other conditions requiring minimally
invasive and general surgery. At the same time, the Company integrated the
acquired product lines and companies into its operations.
 
     Since October 1994, the Company has acquired seven medical product
companies as well as two product lines as part of its strategy.
 
<TABLE>
<CAPTION>
             ACQUISITION               DATE ACQUIRED             PRODUCTS ACQUIRED
-------------------------------------  -------------   -------------------------------------
<S>                                    <C>             <C>
MIS AND GENERAL SURGERY(1)
Richard-Allan........................  August 1996     Broad product line of surgical
                                                       instruments and devices, including
                                                       the Reflex(@) AEC35(TM)
X-Med(2).............................  August 1996     Minimally invasive surgery products
O.R. Concepts(2).....................  June 1996       Minimally invasive surgery
                                                       accessories
Advanced Surgical....................  December 1995   Minimally invasive surgery
                                                       instruments
UROLOGY
Osbon................................  December 1995   Vacuum erection devices
Dacomed..............................  July 1995       Products for treatment and diagnosis
                                                       of impotence
VISUALIZATION(3)
Endoscopic Imaging...................  May 1996        Acquired selected technology for
                                                       EndoView(TM) product
INCONTINENCE(1)
Intermed.............................  June 1996       Incontinence products
Advanced.............................  December 1995   RelaX(TM) - female valved catheter
                                                       system under development
Allstate.............................  July 1995       Reusable diapers and related
                                                       incontinence products
</TABLE>
 
---------------
(1) These products are used for, among other uses, gynecological applications.
(2) Certain product lines were acquired.
(3) The Company currently markets its visualization products to several of its
    Target Markets.
 
     As a result of its growth strategy, the Company believes that it has
developed well-established and integrated urology and minimally invasive and
general surgery platforms and that it is well-positioned further to acquire and
develop new product lines to enable it to become a leader in each of its Target
Markets. The Company believes that it has in place the infrastructure to
integrate the operations of acquired companies with those of its own to achieve
operating and marketing efficiencies. As a result of its strategy, the Company
has increased sales from $4.3 million for the year ended June 30, 1994 (prior to
giving effect to its acquisitions) to
 
                                       24
<PAGE>   26
 
   
$59.7 million (on a pro forma basis) for the nine months ended March 31, 1996.
    
 
GROWTH STRATEGY
 
     The Company's strategy is to: (i) offer a broad range of products to its
growing Target Markets; (ii) leverage its 140-person direct sales force to
increase sales of its existing, newly acquired and recently developed minimally
invasive and general surgery, urology and gynecology products; (iii) capitalize
on efficiencies and synergies by consolidating manufacturing of existing and
acquired products into the Company's manufacturing operations in Costa Mesa,
California and Richland, Michigan; (iv) continue to acquire and develop
additional innovative products and product lines which are complementary to the
Company's existing products; and (v) develop and expand an international sales
and marketing presence to capitalize on opportunities it identifies in selected
developed countries.
 
     The Company believes that its acquisition and product development strategy
has been successful in building a broad selection of medical products and
combining companies and product lines that can capitalize on the manufacturing
and distribution capabilities of UROHEALTH. In the urology market, the Company
acquired Dacomed which offered a line of high-quality products designed to
diagnose and treat male impotence, but which lacked manufacturing and marketing
expertise and an effective distribution channel. The Company then acquired Osbon
which was the market leader in vacuum erection devices for the treatment of male
impotence primarily on the strength of Osbon's sales force. The Company
relocated Dacomed manufacturing operations to its Costa Mesa, California
manufacturing facility and began to market and sell the Dacomed products through
the Osbon distribution channel. As a result of the combination, the Dacomed
products were marketed through an established distribution channel and the Osbon
sales force had a broader product line to offer their customers.
 
     To expand its presence in the market for minimally invasive and general
surgery products, the Company acquired Advanced which had a pipeline of
potential products but had limited manufacturing and distribution capabilities
and was experiencing significant liquidity and capital constraints as the result
of its substantial research and development program. Advanced's commercially
viable products were integrated into UROHEALTH's manufacturing and distribution
infrastructure. In June 1996, the Company acquired product lines of O.R.
Concepts. In August 1996, UROHEALTH acquired Richard-Allan, an established
company with a broad array of minimally invasive products including the recently
introduced Reflex(@) AEC35(TM) articulating cutter and stapler. In August 1996,
the Company also acquired a line of minimally invasive surgery products from
X-Med. Management believes that operating efficiencies and synergies similar to
those created by combining the acquired urology products and companies will
result from the combination of Advanced, Richard-Allan and the product lines
acquired from O.R. Concepts and X-Med.
 
     In June 1996, the Company introduced its EndoView(TM) video endoscopy
system which is being well-received by physicians because of its ease-of-use and
its small portable nature. The EndoView(TM) system is designed for use in the
hospital and physician's office setting and is priced to make it affordable for
widespread use in the offices of physician's performing endoscopic procedures.
In September 1996, the Company released its new Reflex(@) AEC35(TM) articulating
cutter and stapler, which greatly increases the types and number of procedures
that can be performed using minimally invasive surgical techniques. The AEC35's
articulating head gives the surgeon greater range and flexibility in performing
minimally invasive surgical procedures. Products such as the EndoView(TM) and
the Reflex(@) AEC35(TM) provide the Company's sales force with increased access
to physicians and surgeons, and, therefore, increased selling opportunities as
physicians and surgeons are anxious to learn about innovations which could have
a material effect on their practices.
 
     The Company also has under development its RelaX(TM) product, which is a
valved catheter system designed to treat female incontinence. The Company is
currently seeking regulatory approval and has selected sites for expanded
clinical trials, which are expected to begin during 1996.
 
                                       25
<PAGE>   27
 
The Company now has in place a direct sales force of approximately 140 persons.
The Company plans to expand further its product offerings for its Target Markets
with products currently under development and through the acquisition of
complementary products and product lines. The Company targets urologists,
gynecologists and general surgeons using its direct sales force, of which 70
sales representatives call primarily on urologists and 70 sales representatives
focus their selling efforts on gynecologists and general surgeons.
 
     The Company believes that the medical products industry is highly
fragmented and that there are a significant number of opportunities to acquire
additional product lines or companies in complementary lines of business. The
Company is continuously exploring these opportunities and management currently
believes that future growth, will, in significant part, be through acquisitions.
 
MARKETS
 
     The Company develops, manufactures and markets products designed for the
diagnosis and treatment of urological and gynecological disorders, including
products designed to treat erectile dysfunction and incontinence. The Company
also offers a comprehensive line of products designed to serve the minimally
invasive and general surgery market and has recently introduced visualization
products which can be used in a number of medical applications.
 
Minimally Invasive and General Surgery
 
     Minimally invasive surgery, or endoscopy, relies on viewing tubes
(endoscopes) that allow surgeons to look into the body. Such surgeries are
carried out using special instruments that are inserted into one to six small
"keyhole" incision sites. Laparoscopy is the term for minimally invasive surgery
within the abdominal cavity. Laparoscopy was primarily developed by
gynecologists who use minimally invasive surgical techniques to perform
hysterectomies, tubal ligations, infertility procedures and to remove fibroid
tumors and ovarian cysts, as well as for other exploratory and diagnostic
procedures. General surgeons use laparoscopy for such common procedures as gall
bladder removal, hernia repair and appendectomies. Gastroenterologists remove
intestinal tissue laparoscopically, including operations for Crohn's disease,
diverticulitis, non-cancerous polyps and colon tumors. Urologists can perform
nephrectomies (removal of a kidney) and bladder neck suspensions
laparoscopically, as well as remove kidney stones and treat bladder cancer.
 
     Because minimally invasive surgery is far less traumatic than conventional
open surgery techniques, patient recovery time is much faster and the period of
hospitalization is greatly reduced. Typically, patients are back to normal
activity levels within one week of surgery performed using minimally invasive
surgery techniques. While minimally invasive surgery requires surgeons to learn
a new set of skills, it is estimated that 80% of all general surgery will be
done endoscopically by the year 2000. The transition from open surgery to
minimally invasive surgery has gained significant momentum in the past few years
as studies have shown minimally invasive surgery to be more economical and
beneficial to the patient, including shortening the hospital stay and reducing
post-operative complications, resulting in faster recovery.
 
     The Company believes that successful companies in this marketplace will
develop and market products that make these procedures more cost and time
effective.
 
Erectile Dysfunction
 
     Erectile dysfunction is estimated to affect between 10 and 20 million men
in the United States, with the vast majority of cases remaining untreated. Only
recently have physicians become more knowledgeable regarding treatment
alternatives and most patients suffering from erectile dysfunction fail to seek
medical treatment for their problem. Erectile dysfunction can have either a
psychological or physiological cause. Approximately 85% of erectile dysfunction
cases are attributable to physiological causes, the most common of which are
related to vascular disease.
 
     There are three basic treatments for physiological erectile dysfunction:
(i) drug therapy; (ii) mechanical therapy, involving the use of vacuum erection
devices; and (iii) surgery, involving the implantation of a penile prothesis.
While there are a number of drug and delivery systems under development, the
only currently
 
                                       26
<PAGE>   28
 
available drug therapy is an injectable prostaglandin. The introduction in
November 1995 of the injectable prostaglandin has increased physician and
patient interest in the types of treatments available for erectile dysfunction.
Mechanical therapy involves the use of non-invasive vacuum erection devices
which create a vacuum in a plastic cylinder that increases blood flow to the
penis causing erection. Once an erection is achieved a tension band is placed at
the base of the penis to sustain the erection during sexual activity. Vacuum
erection devices are low cost compared with other treatment options. Surgical
treatment for erectile dysfunction involves the implantation of a prostheses in
the corporal body of the penis which provides rigidity adequate for sexual
activity. Penile protheses can be either manually or hydraulically operated to
achieve an erection.
 
     The Company believes that the market for erectile dysfunction products
could increase significantly as patients and others become more knowledgeable
regarding the treatment alternatives available to deal with the problem. In
addition, the market for erectile dysfunction products could grow as the average
age of the United States population continues to increase.
 
Visualization
 
     Endoscopy, meaning "to look within the body," is enabled through the use of
telescopes, light sources, cameras and video viewing, recording and printing
systems. Telescopes (referred to as "endoscopes") differ in size and
functionality relative to specific anatomies, including those to look within the
abdomen (laparoscopes), the uterus (hysteroscopes), the bladder (cystoscopes),
the joints (arthroscopes), the colon (signoidoscopes), and other organs and
physiological structures. Physicians can monocularly view the desired anatomy
through an eyepiece on the end of the scope. Generally, bright light must be
introduced to the organ or anatomy, through the scope, to enhance visualization.
Cameras can be coupled to scopes to convert an image to a video monitor for real
time viewing in the operative environment and to a recorder for procedure
documentation purposes. Technological advances in endoscopy include the use of
fiber optics for miniaturization and flexibility, and the development of camera
chips that can be built into the proximal end of the scope. These advances,
combined with product durability and affordability have spurred growth in the
visualization marketplace.
 
     The Company believes that this market is complementary to those for the
treatment of urological and gynecological disorders and to the minimally
invasive surgical instrument market. New and innovative endoscopic visualization
products should fuel the movement of surgical and diagnostic procedures out of
the hospital and into the physician office setting.
 
Incontinence
 
     Urinary incontinence is estimated to affect between 15 and 25 million
adults in the United States of which approximately 85% are female. A recent
survey revealed that one out of every six adult women in the United States
suffers from some form of urinary incontinence. Women typically experience a
higher incidence of incontinence than men primarily as a result of childbearing
and its impact on the urinary system. There are three basic types of urinary
incontinence: (i) stress incontinence, which involves leakage related to rapid
movement, a sneeze or exercise; (ii) urge incontinence, which involves a sudden
need to empty the bladder; and (iii) overflow incontinence, which results from
an overly distended bladder, typically caused by an obstruction or a weakened
bladder.
 
     The vast majority of patients who suffer from some form of incontinence do
not seek treatment for their problem, with most of the patients utilizing some
form of home treatment to deal with their medical problem. There are a number of
treatments for incontinence, including adult diapers and pads, catheterization
and clamping of the urethra, pelvic muscle repositioning and training,
electrical stimulation therapy, surgery, collagen injections and drug therapy.
 
     The Company believes that the market for incontinence products could also
increase as patients become more knowledgeable about treatment options. In
addition, the number of patients suffering from incontinence problems could
increase as the average age in the United States continues to increase. With
new, less invasive
 
                                       27
<PAGE>   29
 
technologies in development, such as urethral inserts for women, the general
interest of both physicians and consumers in treatments for incontinence should
increase.
 
MEDICAL PRODUCTS
 
     The Company offers a broad range of products to urologists, general
surgeons and gynecologists. Historically, the Company has been highly dependent
on the sale of vacuum erection devices for the treatment of male impotence.
However, the Company believes that with the acquisition of Richard-Allan and
other businesses and the introduction of its EndoView(TM) product, the Company's
reliance on vacuum erection devices has and should continue to decrease.
 
     The Company offers a broad line of minimally invasive and general surgery
instruments, which are sold primarily to general surgeons, gynecologists and
urologists. The Company's comprehensive product line includes an antifogger,
pneumo needles, trocars, graspers, scissors, retractors, a kittner, specimen
retrieval bags, wound access and closure devices and electrosurgical and suction
and irrigation probes. The recent acquisition of Richard-Allan expanded the
Company's product offerings of access products, wound closure products and hand
held instruments for both open and minimally invasive surgeries. The Company is
currently introducing its Reflex(@) AEC35(TM) articulating cutter and stapler,
which is the only endoscopic surgical product on the market to have articulation
capabilities. The Company also recently introduced its EndoView(TM) product,
which is an inexpensive, portable video viewing system that urologists, general
surgeons, and gynecologists can attach to an endoscope. The Company believes
that there are additional product opportunities in the "visualization" area and
is exploring those opportunities.
 
     The Company offers a number of products designed for the treatment of
urological disorders, including the leading vacuum erection system, a penile
prosthesis and diagnostic equipment. The Company's vacuum erection systems
include Esteem(TM), ErecAid(@), Catalyst(TM) and Impower(TM). The Company's
vacuum erection devices are not subject to patent protection that would prohibit
others from offering competing products. The Company is a leader in the vacuum
erection system market primarily as a result of its high level of customer
service and physician assistance in training patients on the use of the
products. The Company also offers the RigiScan(@) System, a
microprocessor-controlled impotence diagnostic monitor, and its Inform(TM), a
disposable impotence screening device. Many of the minimally invasive surgery
products and medical/surgical products offered by the Company are used in the
treatment of urological disorders.
 
     The Company offers a number of products designed for the treatment of
incontinence, including Femina(TM) cones, a line of catheters and urinary
drainage systems, and other products such as washable pads, briefs and diapers.
The Company is actively seeking additional products to serve this market. The
Company also has under development its RelaX(TM) product, which is a valved
catheter system for the management of female stress incontinence. These products
are marketed to both gynecologists and urologists, as are the Company's
AccuBar(TM) and AccuLoop(TM) vaporizing electrodes. Urologists use vaporizing
electrodes to ablate prostate tissue, and gynecologists use them to ablate
endometrial tissue.
 
     UROHEALTH's future success will depend in part on its ability to
commercialize products under development and to develop new medical products
both for its existing markets and for new markets. The extent and pace at which
market acceptance of such products is achieved is a function of many variables,
including price, product performance and attributes, product reliability, the
effectiveness of marketing and sales efforts, the ability to meet delivery
schedules, as well as general economic conditions affecting customers'
purchasing patterns. New product development and introduction in the medical
product market requires considerable time and capital and is subject to the
risks of market acceptance. There can be no assurance as to the continued market
acceptance of the Company's existing products or the Company's ability to
develop or acquire additional products in the future.
 
SALES AND MARKETING
 
     The Company believes that its strategy of focusing on products for the
minimally invasive and general surgery, urology and gynecology markets by
utilizing a direct sales force has and will continue to afford it competitive
advantages. This distribution channel, in combination with a telemarketing
staff, a national
 
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<PAGE>   30
 
accounts department and a network of international distributors gives the
Company widespread access to the markets it serves.
 
     Approximately 70 domestic sales representatives call on general surgeons
and gynecologists, primarily in the operating room setting in hospitals and
surgery centers. This sales force offers a full line of minimally invasive and
general surgical instruments, including pneumo needles, trocars, retractors,
scissors, staplers and access and wound closure devices for a wide range of
diagnostic and operative procedures. With proprietary technology, such as that
demonstrated by the new Reflex(@) AEC35(TM) articulating cutter and stapler, an
endoscopic surgical device that simultaneously cuts and staples tissues in
difficult to reach anatomy, this sales force has been welcome in the operating
room.
 
     Another 70 domestic sales representatives call on urologists with the
Company's urological products, including the ErecAid(@) and Esteem(TM) vacuum
erection systems, the RigiScan(@), a microprocessor-controlled impotence
diagnostic monitor, the Dura-II(TM) penile prosthesis and the AccuBar(TM) and
AccuLoop(TM) vaporizing electrodes. The urology sales representative becomes an
extension of the urologist's practice through patient education and in service
training relating to the Company's products. As a value added service to
patients and physicians, the Company staffs a 24 hour, 365 days per year urology
"hot line" to answer questions about erectile dysfunction and product use. The
Company believes that its high level of customer and physician service is
important to its market leadership in vacuum erection systems.
 
     Both the urology and general surgery/gynecology sales forces sell
EndoView(TM), the first self-contained video endoscopy system that can be used
by all medical specialties practicing visualization. This product, which creates
a new segment in the visualization market, was successfully launched in June,
1996. The Company expects to protect its market position with this new product
and to develop follow-on products for distribution through its 140 sales
representatives. The Company believes that the availability of innovative
products, such as EndoView(TM) and the Reflex(@) AEC35(TM) articulating cutter
and stapler, provides the Company's sales force with additional access to
physicians and surgeons, and therefore, increases selling opportunities as
physicians are anxious to learn about innovations which could have a material
effect on their practices.
 
     Telemarketers solicit leads and reorders in support of both the urology and
general surgery/gynecology sales forces. Telemarketing is an important source of
sales for the Company's medical/surgical products as well, including reusable
underpads, briefs and diapers, catheters and urinary drainage systems. These
products are typically sold to stocking distributors, hospitals and nursing home
chains and commercial laundries.
 
     A national accounts staff seeks national and regional contracting
opportunities for the Company's products, prepares competitive proposals, makes
presentations and enters into long term sales relationships with hospital
chains, managed care organizations and medical/surgical distributors.
 
INTERNATIONAL SALES
 
     International sales (sales outside of North America, excluding
Richard-Allan) were $1.8 million, $3.3 million and $1.7 million for the years
ended June 30, 1994 and 1995 and for the nine months ended March 31, 1996,
respectively. International sales (sales outside of North America) of
Richard-Allan were $4.8 million, $5.6 million and $4.2 million for the years
ended June 30, 1994 and 1995 and for the nine months ended March 31, 1996.
Currently, the Company distributes its products through a network of
distributors covering a number of countries outside of North America. With the
number of acquisitions completed by the Company during the last 12 months, the
Company is currently implementing a strategy for combining, coordinating and
further developing the international sales efforts of the entities acquired and
has recently retained an executive to coordinate those efforts.
 
MANUFACTURING
 
     The Company's manufacturing operations are conducted primarily at its
facilities in Costa Mesa, California and Richland, Michigan. At its Costa Mesa
facility, the Company conducts injection molding operations, assembles products
and conducts quality assurance procedures. The Company has a Class 100
 
                                       29
<PAGE>   31
 
clean room at its Costa Mesa facility. Because of the Company's injection
molding capabilities, the Company has been able to manufacture a number of its
acquired products in-house, thereby realizing significant cost savings. The
Company has significant capacity to take on additional medical products molding
work related to its own existing and new products, as well as medical products
of third parties, without additional capital expenditures. The Company's
manufacturing facility in Richland, Michigan is a sophisticated manufacturing
facility that employs many manufacturing techniques designed to lower costs and
insure quality.
 
     The Company manufactures and distributes Class I, II and III medical
devices following "good manufacturing practice" ("GMP") guidelines at its
manufacturing facilities in Costa Mesa, California and Richland, Michigan. The
Company's manufacturing operations consist of the fabrication of certain
specialized components and assembly, inspection, testing and packaging of these
components into a final product. Final assembly and packaging operations for
some of the products are conducted in environmentally controlled rooms. Various
components, subassemblies and certain finished products are manufactured by
suppliers to the Company's specifications. In addition, the Company manufactures
its line of reusable underpads and briefs at its manufacturing facility in
Watertown, South Dakota, and conducts certain assembly operations at its
facilities in Augusta, Georgia.
 
     The Company has not experienced in the past material difficulty in
obtaining equipment, supplies and materials which it may require in connection
with manufacturing its products. Although the Company presently believes that
there are a number of possible vendors for most of the raw materials, components
and subassemblies required for the Company's products, certain components
currently are obtained from a single source. Moreover, substitute raw materials
and components may not be immediately available in quantities needed by the
Company. The disruption or termination of any single source vendor could have a
material adverse effect on the Company's operations. The Company's manufacturing
facilities are subject to periodic inspection by regulatory authorities,
including GMP compliance inspections conducted by the FDA and by state
regulatory authorities.
 
COMPETITION
 
     While the Company competes with a number of multi-product companies, there
are a number of "single product" companies serving, or developing products for,
some of the Company's Target Markets. The Company believes that it has a
competitive advantage over many "single product" companies. Competition in the
field of medical products is intense and rapidly changing, and the Company
expects that competitive pressures will intensify. The Company competes on the
basis of a number of factors, including product features and price. Some of the
companies producing competing products have greater marketing and distribution
capabilities than the Company, and many of them have substantially greater
financial and other resources with which to pursue development, manufacturing,
marketing and distribution of their products. The Company expects its
competitors to continue to improve the performance of their current products and
to introduce new products with improved features and lower prices. New product
introductions by the Company's competitors could cause a decline in sales or
loss of market acceptance of the Company's existing or future products.
Increased competitive pressure also could lead to intensified price-based
competition that could materially adversely affect the Company's business,
results of operations and financial condition. There can be no assurance that
the Company will be able to compete successfully in the future.
 
     The Company believes that the primary competitive factors affecting its
business are the safety and effectiveness of the products offered, ease of
product use, product reliability, price, physician familiarity with the
manufacturer and its products, distribution channels and third party
reimbursement policies. For certain of the Company's potential products, an
important factor in competition may be the timing of market introduction of its
or its competitors' products. Accordingly, the Company believes that its ability
to compete successfully will depend on its capability to create and maintain
technology, develop proprietary products, attract and retain scientific
personnel, obtain patent or other proprietary protection for its products and
technologies, obtain required regulatory approvals and manufacture, assemble and
successfully market products either alone or through other parties. Rapid
technological development by others may result in the Company's products
becoming obsolete before the Company recovers a significant portion of the
research, development and commercialization expenses incurred with respect to
those products. Some of the Company's
 
                                       30
<PAGE>   32
 
competitors have long-term or preferential supply arrangements with hospitals.
Such arrangements may act as a barrier to market entry by the Company. There can
be no assurance that the Company will be able to compete successfully with
existing or future competitors.
 
     There are a number of other companies, both public and private, engaged in
the production of urological products which are the same as or similar to those
of the Company, and other companies may enter this industry in the future. In
the erectile dysfunction market, UROHEALTH competes with companies such as
Mission Pharmacal and Mentor. The Company's products also compete with those of
others designed for alternative methods of treatment, such as drugs sold by
pharmaceutical companies as a treatment for erectile dysfunction. In the
incontinence market, the Company competes with disposable paper adult diapers
and briefs manufactured by large paper companies, such as Kimberly Clark, and
with competing products similar to those offered by the Company. In the
minimally invasive surgery market, the Company competes with medical products
companies, including United States Surgical Corporation and Ethicon, Inc., a
division of Johnson & Johnson.
 
RESEARCH AND DEVELOPMENT; PRODUCT DEVELOPMENT
 
     The Company recognizes that the sale of medical products requires
continuous development of new products and refinements of established products.
A major component of the Company's research and development strategy, involves
identifying products and companies that have developed products that may be
potential acquisition candidates. The Company believes that there are a number
of opportunities to acquire products and technologies that have already been
developed or partially developed.
 
     The Company had $9.5 million, $8.8 million and $1.3 million in research and
development expenditures (excluding Richard-Allan) in the years ended June 30,
1994 and 1995 and the nine months ended March 31, 1996, respectively. The
research and development expenditures of the Company have decreased
significantly as the Company has decided to narrow the focus of its research and
development efforts, and to adopt a program of actively acquiring or licensing
developed technology. As a result the Companies research and development
expenditures have decreased as the Company has consolidated the research and
development groups of the Company, Advanced and Dacomed, into a single group and
as a result of the write-down of significant research and development of
acquired entities in 1994 and 1995. In addition, the Company will record
significant charges relating to the write-down of incomplete research and
development relating to the Richard-Allan acquisition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
 
     The Company's current research and development efforts include the
regulatory approval and commercialization of the Company's RelaX(TM) product
which is a valved catheter system for the treatment of stress incontinence in
females. In addition, the Company has several product development projects
underway which involve enhancements of, or improvements to, existing products.
 
     The Company employs a product development staff with product design
capabilities and also employs a product quality department to ensure that its
products are acceptable for patient use. The Company has recently initiated an
ISO9001 registration program.
 
PATENTS, LICENSES AND TRADEMARKS
 
     The Company's success and future revenue growth will depend, in part, on
its ability to operate without infringing on the rights of others both in the
United States and abroad. The Company holds a number of patents and has other
patent rights with respect to its medical products and has filed, and expects in
the future to file, additional patent applications. The Company believes that
some measure of patent protection with respect to its products will be required
to allow it to compete with large medical products companies. There can be no
assurance that the patents applied for will be issued or that any patents issued
to or licensed by the Company will not be challenged, invalidated or
circumvented, or that the rights granted thereunder provide the Company with
competitive advantages. In addition, the Company could incur substantial costs
in defending its proprietary rights. Although the Company believes that its
patents are valid, there can be no assurance that the validity of any patent
will be upheld if asserted by the Company against any party. Further,
 
                                       31
<PAGE>   33
 
there can be no assurance as to the breadth and degree of protection of these
rights or that other companies will not independently develop products similar
to the Company's products that will not infringe on the Company's rights but
will compete directly with the Company's products.
 
     The patents or proprietary rights of others may have an adverse effect on
the ability of the Company to do business in the future. The Company may be
required to obtain licenses to patents or proprietary rights of other parties in
order to produce and sell certain of its products. No assurance can be given
that the Company's technology can be developed and commercialized without a
license to such patents or proprietary rights or that any licenses required
under any such patent or proprietary rights would be made available on terms
acceptable to the Company, if at all. If the Company does not obtain or maintain
such licenses, it could encounter delays in product introductions while it
attempts to design around or contest the validity of such patents, or it could
find that the development, manufacture or sale of products requiring such
licenses could be foreclosed, any one of which could have a material adverse
effect on the Company. Furthermore there can be no assurance that others will
not independently develop similar or alternative technologies to those of the
Company, duplicate any of the Company's technologies, or design around the
patented technologies developed by the Company or its licensors, any of which
could have a material adverse effect on the Company.
 
     The Company also relies on trade secret law and confidentiality agreements
with its employees, consultants and contractors to protect its unpatented
proprietary technology and "know-how." There can be no assurance that such
confidentiality agreements will not be breached, that the Company would have
adequate remedy for such breach, or that the Company's trade secrets will not
otherwise become known through independent discovery by competitors. Moreover,
in the absence of patent protection, the Company's business may be adversely
affected by competitors who independently develop substantially equivalent
technology.
 
GOVERNMENT REGULATION
 
     Most of the Company's laboratory and medical products are subject to
regulation by, among other governmental entities, the FDA and corresponding
agencies of states and foreign countries in which the Company sells its
products. The process of receiving governmental approval may take a number of
years and the expenditure of substantial resources. The Federal Food, Drug and
Cosmetic Act (the "FDC Act"), the Public Health Services Act and other federal
statutes and regulations govern or influence the testing, manufacture, safety,
labeling, storage, recordkeeping, approval, advertising and promotion of such
products. Noncompliance with applicable requirements may have a material adverse
effect on the Company, and can result in fines, warning letters, recall or
seizure of products, total or partial suspension of production, refusal by the
government to approve product license applications or allow the Company to enter
into supply contracts, and criminal prosecution. The FDA also has the authority
to revoke product licenses and establishment licenses previously granted.
Failure to comply with present or future regulatory requirements, or respond to
new information reflecting on the safety or effectiveness of an approved
product, can lead the FDA to withdraw its approval to market the product.
 
     With the enactment of the Medical Device Amendments in May 1976 to the FDC
Act, the FDA classified medical devices in commercial distribution into three
classes, Class I, II or III. This classification is based on the controls
necessary to reasonably ensure the safety and effectiveness of the medical
device. Class I devices are those devices whose safety and effectiveness can
reasonably be ensured through general controls, such as adequate labeling,
premarket notification, and adherence to GMP regulations. Some Class I devices
are further exempted from some of the general controls. Class II devices are
those devices whose safety and effectiveness can reasonably be ensured through
the use of 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 pursuant to a premarket
approval ("PMA") application to ensure their safety and effectiveness.
Generally, Class III devices are limited to life sustaining, life-supporting or
implantable devices.
 
     The FDA requires that a manufacturer introducing a new medical device or a
new indication for use of an existing medical device obtain either a premarket
notification clearance pursuant to Section 510(k) of the FDC Act ("510(k)
Notification") or a PMA prior to being introduced into the market. In general,
clearance
 
                                       32
<PAGE>   34
 
of a 510(k) Notification may be obtained if a manufacturer or distributor of a
medical product can establish that a new device is "substantially equivalent" in
terms of safety, effectiveness and intended use to another legally marketed and
approved medical device. The FDA may also require review by an advisory panel as
a condition for 510(k) Notification, which can further lengthen the process. In
addition to requiring clearance for new products, FDA rules typically require a
filing and a waiting period prior to marketing modified versions of existing
products. The Company anticipates that most of its products will be eligible for
the 510(k) Notification procedure. The process of obtaining a 510(k)
Notification typically takes at least three months from the date of filing of
the application and generally requires the submission of supporting data, which
in some cases can be extensive and, as a result, may extend the process for a
considerable length of time. At this time, the FDA typically responds to a
submission of a 510(k) Notification within 180 to 360 days. Market clearance may
take three to twelve months or longer. If the FDA were to require suspension of
the sale of one or more of the Company's products pending receipt of a newly
required 510(k) Notification or if the FDA were to refuse to grant 510(k)
Notification, the Company's revenues and operating income could be materially
and adversely affected. Under the Safe Medical Devices Act of 1990 ("SMDA"), the
FDA is directed to adopt new 510(k) notice regulations which could potentially
make the approval process for the Company's products more time-consuming,
difficult and expensive. The SMDA includes new provisions relating to
post-market surveillance requirements for certain types of devices and
authorizes the FDA to adopt new controls to be applied to certain devices such
as some being developed by the Company, including the promulgation of a
performance standard, requirements for patient registries and imposition of
guidelines.
 
     In the event that the shorter 510(k) Notification procedure is not
available, or if the Company cannot obtain 510(k) Notification for a product
subject to FDA marketing approval, the Company will be required to seek approval
to market the device through the PMA process. The preparation and processing of
a PMA is significantly more complex and time consuming than the 510(k)
Notification process. The PMA process may take several years or longer and
requires the submission of extensive supporting data and clinical information.
An approved PMA application for a new instrument indicates that the FDA has
determined that a device has been proven, through the submission of preclinical
and clinical data and manufacturing information, to be safe and effective for
its intended uses. Upon receipt, the FDA will conduct a preliminary review of
the PMA to determine whether the submission is sufficiently complete to permit a
substantive review. If sufficiently complete, the submission is declared
fileable by the FDA. By regulation, the FDA has 180 days to review a PMA once it
is determined to be fileable. While the FDA generally has responded to PMAs
within the allotted time period, complete PMA reviews more often occur over a
significantly protracted time period, and generally take approximately two years
or more from the date of filing to approval.
 
     Substantially all of the Company's FDA marketing clearances have been
obtained through the 510(k) process. Certain future applications, however, may
require PMA clearance. The Company believes that it is in material compliance
with the FDA's 510(k) requirements for new and modified devices. The FDA has
announced a program to review approvals (510(k)s and PMAs) for certain devices.
There can be no assurance that upon any such review the FDA will agree with the
Company's determination regarding its 510(k)s. If the FDA were to disapprove,
the Company could be required to file appropriate applications, either 510(k) or
PMA, with the FDA or be required to take the products in question off the
market. Also, the FDA could bring regulatory or enforcement actions against the
Company. The Company has met and continues to meet the requirements for FDA
compliance through their good manufacturing practice guidelines and semi-annual
FDA inspections.
 
     International sales of medical devices are subject to regulatory
requirements that vary widely from country to country. The time required to
obtain approvals by foreign countries may be longer or shorter than that
required for FDA approval, and regulatory requirements in foreign countries may
differ significantly from those of the FDA. The receipt or denial of FDA
approval for a particular product may result in the receipt or denial of
regulatory approval for that product in certain other countries. In addition,
international sales of medical devices not cleared by the FDA for distribution
in the United States may be subject to FDA export requirements, which require
the Company to document that the sale of the device is not in violation of that
country's medical device laws. This documentation is then submitted to the FDA
with a request for a permit for export to that country.
 
                                       33
<PAGE>   35
 
     There can be no assurance that the Company will obtain timely regulatory
approval for their future products, or that existing approvals will not be
withdrawn. Moreover, regulatory approvals, if granted, may include significant
limitations on the indicated uses for which a product may be marketed. Failure
to comply with applicable regulatory requirements can, among other consequences,
result in fines, civil penalties, injunctions, suspensions or losses of
regulatory approvals, product recalls, seizure of products, operating
restrictions, refusal of the government to allow each company to enter into
supply contracts, and criminal prosecution. In addition, governmental
regulations may be established that could prevent or delay regulatory approval
of any of the Company's products. Delays in receipt of, or failure to receive,
approvals, or the loss of previously received approvals, could have a material
adverse affect on the Company's business, financial condition and results of
operations.
 
     FDA and state regulations also govern the manufacturing of the Company's
medical products. The Company is registered as a medical device manufacturer
with the FDA and state health service agencies. The FDA and state health service
agencies inspect the Company from time to time to determine whether it is in
compliance with various regulations relating to medical device manufacturing,
including the Good Manufacturing Practice ("GMP") regulations governing
manufacturing, testing and quality control, and product liability of medical
devices. Although the Company believes that it currently is in material
compliance with these regulations, a determination that the Company is in
material violation of such regulations could lead to the imposition of
injunctions, suspension or loss of regulatory approvals, refusal to approve
future marketing clearances, recalls, cessation of distribution, or product
seizures, and, in the most egregious cases, criminal sanctions or closure of the
Company's manufacturing facilities.
 
     Healthcare is an area of extensive and dynamic regulatory change. In recent
years, an increasing number of legislative proposals have been introduced or
proposed in Congress and in some state legislatures that would effect major
changes in the healthcare system, either nationally or at the state level. Among
the proposals under consideration are cost controls on hospitals, insurance
market reforms to increase the availability of group health insurance to small
businesses, requirements that all businesses offer health insurance coverage to
their employees and the creation of a single government health insurance plan
that would cover all citizens. Key elements in many of the healthcare reform
proposals were various insurance market reforms, the requirement that businesses
provide health insurance coverage for their employees, reductions or smaller
increases in future Medicare and Medicaid reimbursement to providers and more
stringent governmental cost controls. None of these proposals have been adopted.
There continue to be efforts at the federal level to introduce various insurance
market reforms, expanded fraud and abuse and anti-referral legislation and
further reduction in Medicare and Medicaid reimbursement. A broad range of both
similar and more comprehensive healthcare reform initiatives is likely to be
considered at the state level. The costs of certain proposals would be funded in
part by reductions in payments by governmental programs, including Medicare and
Medicaid to healthcare providers. In addition, both public and private payors
are increasing pressures to limit increases in healthcare costs. These changes
could have a material adverse effect on the Company's business, results of
operations and financial condition.
 
     Healthcare is subject to laws and regulations of federal, state and local
governments and is an area of extensive and dynamic regulatory change. The
process of obtaining required regulatory clearances can be lengthy and
expensive, and compliance with the FDA's GMP regulations and regulatory
requirements can be burdensome. Laws and regulations often are adopted to
regulate new and existing products, services and industries. Changes in the law
or regulations or in the interpretation of existing laws can have a dramatic
effect on permissible activities and the relative costs of doing business. There
can be no assurance that federal, state or local governments will not impose
additional restrictions upon all or a portion of the Company's activities which
could have a material adverse effect on the Company's business, results of
operations and financial condition. Moreover, there can be no assurance that the
required regulatory clearances will be obtained, or that those obtained may not
include significant limitations on the uses of the product in question. In
addition, changes in existing regulations or the adoption of new regulations
could make regulatory compliance by the Company more difficult in the future.
The Company believes that the FDA has increased its scrutiny of the medical
device market, thus slowing the regulatory review process for medical devices.
This may affect the Company's proposed sale of certain products. The failure to
obtain the required regulatory clearances or to
 
                                       34
<PAGE>   36
 
comply with applicable regulations would result in fines, delays or suspensions
of clearances, seizures or recalls of products, operating restrictions and
criminal prosecutions and could have a material adverse effect on the Company.
 
ENVIRONMENTAL MATTERS
 
     The Company also is subject to federal, state and local laws, regulations
and ordinances that (i) govern activities or operations that may have adverse
environmental effects (such as emissions to air, discharges to water, and the
generation, handling, storage and disposal of solid and hazardous wastes) or
(ii) impose liability for the costs of clean up or other remediation of
contaminated property, including damages from spills, disposals or other
releases of hazardous substances or wastes, in certain circumstances without
regard to fault. Certain of the Company's operations routinely involve the
handling of chemicals and wastes, some of which are or may become regulated as
hazardous substances. The Company has not incurred any significant expenditures
or liabilities for environmental matters to date. However, no assurance can be
given that the Company will not incur significant expenditures in future periods
with respect to complying with environmental laws.
 
LITIGATION
 
     The Company is involved in litigation in the normal course of business. The
Company does not anticipate that the negative outcome of such proceedings would
likely have a material adverse effect on its business, results of operations or
financial condition.
 
PRODUCT LIABILITY AND INSURANCE
 
     The nature of the Company's present and planned medical products,
particularly surgically implanted products, exposes the Company to product
liability risks. The Company maintains product liability insurance, which it
believes is adequate. There can be no assurance, however, that the amount of
such insurance will be adequate to satisfy claims made against the Company in
the future or that the Company will be able to obtain insurance in the future at
satisfactory rates or in adequate amounts. Product liability claims or product
recalls could have a material adverse effect on the business, results of
operations and financial condition of the Company. In addition, the Company is
required under certain of its licensing agreements to indemnify its licensors
against certain product liability claims by third parties.
 
EMPLOYEES
 
     As of September 30, 1996, the Company employed approximately 849 persons.
The Company has experienced no work stoppages and is not a party to any
collective bargaining agreement. The Company believes that its relations with
employees are good.
 
FACILITIES
 
     During 1996, the Company entered into a five-year lease expiring in April
2001 with respect to approximately 13,000 square feet of office space which is
used for the Company's corporate executive offices. The lease provides for
monthly rental payments of approximately $18,000 per month.
 
     The Company leases approximately 42,400 square feet of space in Costa Mesa,
California for its research and development personnel and manufacturing and
assembly of its medical products. The lease expires on March 31, 1999 and
provides for monthly rental of $19,080 during 1996, $20,352 during 1997 and
$22,048 during 1998. The Company leased an additional 10,200 square feet at the
same location on August 1, 1996. The lease expires on July 31, 1997 and provides
for monthly payments of $4,080.
 
     The Company leases 15,700 square feet of space at a plant location in
Watertown, South Dakota. The lease runs from August 1, 1995 through July 31,
2000 and provides for rental payments of $2,171 per month. The lease requires
the Company to pay for utilities and other costs not specifically borne by the
landlord. The Company also leases 1,115 square feet of office space in
Minnetonka, Minnesota. The lease runs from April 1,
 
                                       35
<PAGE>   37
 
1993 through March 31, 1998 and provides for rental payments of $1,218 per
month. These leases relate to Allstate operations.
 
     The Company leases approximately 31,656 square feet of office and warehouse
space in Augusta, Georgia, from a partnership controlled by former Osbon
stockholders. The lease runs from February 1, 1995 through December 31, 2003,
and provides for rental payments of $17,500 per month. The lease also requires
the Company to pay insurance, utility, maintenance and other costs. The Company
owns 57,500 square feet of office, warehouse and assembly space in three other
buildings in Augusta, Georgia. These facilities relate to Osbon operations.
 
     The Company owns approximately 30 acres in Richland, Michigan and
approximately 43,500 square feet of office and manufacturing facilities located
on that property related to Richard-Allan operations.
 
     The Company leases approximately 7,000 square feet of office and warehouse
space in Sparta, New Jersey. The lease runs from August 1996 through March 2000,
and provides for rental payments of $8,500 per month.
 
                                       36
<PAGE>   38
 
                                   MANAGEMENT
 
     The following table sets forth the names and ages of all executive
officers, certain key employees and directors of the Company as of August 31,
1996. A summary of the background and experience of each of these individuals is
set forth below.
 
<TABLE>
<CAPTION>
                NAME                    AGE                         POSITION HELD
------------------------------------    ---     -----------------------------------------------------
<S>                                     <C>     <C>
Charles A. Laverty(1)...............    51      Chairman of the Board and Chief Executive Officer
James L. Johnson....................    48      Executive Vice President and Chief Financial Officer
Kevin M. Higgins....................    54      Senior Vice President and General Counsel
Julian W. Osbon(1)..................    56      President -- Urology Products and Director
Richard Kindberg....................    39      President -- Surgical Products
M. Cassandra Hoag...................    41      President -- Gynecology Products
Bruce A. Hazuka.....................    50      President -- Medical/Surgical Products
Michael Shuler......................    47      President -- Visualization Products
Mitchell J. Blutt, M.D..............    39      Director
Abbey J. Butler(2)..................    57      Director
John S. Chamberlin..................    68      Director
Robert W. Elkins, M.D.(3)...........    51      Director
Melvyn J. Estrin(3).................    52      Director
C. Sage Givens......................    40      Director
Lawrence Goelman(1)(2)(3)...........    54      Director
Michael S. Gross....................    35      Director
Richard Newhauser...................    49      Director
James B. Osbon......................    58      Director
Francis J. Tedesco(2)...............    52      Director
Gerald W. Timm......................    54      Director
</TABLE>
 
---------------
(1) Member of Executive Committee.
 
(2) Member of Audit Committee.
 
(3) Member of Compensation Committee.
 
     Directors of the Company are elected at annual meetings of stockholders to
serve one-year terms or until their successors are elected and officers of the
Company serve at the discretion of the Board of Directors.
 
     CHARLES A. LAVERTY became Chief Executive Officer in September 1994, and
Chairman of the Board of Directors in December 1994. Mr. Laverty also served as
President of the Company from September 1994 until December 1995. Mr. Laverty
has spent the last 15 years of his 20 years of management and marketing
experience in the healthcare field and currently serves as a director of
Integrated Living Communities, an operator of retirement communities, and of
Pinnacle Micro, Inc., a manufacturer and marketer of optical storage equipment.
Prior to joining the Company, Mr. Laverty was employed as Senior Executive Vice
President and was a director of Coram Healthcare Corporation, the second largest
home infusion therapy company in the U.S., which was formed by the merger of
Curaflex Health Services, Inc., HealthInfusion, Inc., Medisys, Inc., and T2
Medical, Inc. Mr. Laverty served as the Chairman of the Board, President and
Chief Executive Officer of Curaflex Health Services from February 1989 to July
1994. Prior to his association with Curaflex, Mr. Laverty served as President
and Chief Executive Officer of InfusionCare, Inc., a home infusion services
company, from October 1988 to February 1989. In addition, he has held several
positions, including Chief Operating Officer, with Foster Medical Corporation, a
durable medical equipment supply company, and worked in both sales and
management for C.R. Bard, a medical device company.
 
                                       37
<PAGE>   39
 
     JAMES L. JOHNSON has served as Executive Vice President and Chief Financial
Officer of the Company since September 1995. Prior to that time, Mr. Johnson was
a partner at Ernst & Young LLP. His responsibilities included a regional role as
the Area Leader for the Healthcare Industry. Prior to joining Ernst & Young LLP,
Mr. Johnson was a partner of Arthur Andersen LLP. During his 22 years in public
accounting, Mr. Johnson had served as an advisor, strategist and coordinating
partner for many of the firm's most prestigious healthcare clients. Mr. Johnson
is a certified public accountant.
 
     KEVIN M. HIGGINS became Senior Vice President and General Counsel of the
Company in November 1995. From 1989 to 1995 Mr. Higgins was Vice President and
General Counsel of Curaflex Health Services, Inc. From 1987 to 1989 he was Vice
President and General Counsel of Foster Medical Corporation. Mr. Higgins was
with Avon Products, Inc. for 15 years, serving in a number of positions,
including Corporate Director of Government Affairs.
 
     JULIAN W. OSBON became President -- Urology Products and was elected a
director of the Company in December 1995. Mr. Osbon was the founder, Chairman
and Chief Executive Officer of Osbon Medical Systems from 1989 until December
1995 when Osbon Medical Systems became a subsidiary of the Company. Mr. Osbon
held various other management positions with Osbon Medical Systems from 1984
until 1989. Julian Osbon is the brother of James Osbon.
 
     RICHARD KINDBERG has served as President -- Surgical Products since August
1996. He joined Richard-Allan as Director of Marketing, Sales Development and
International Sales in January 1995 and served in these capacities until August
1996 when the Company acquired Richard-Allan. He was Director of New Product
Development at Focal International during 1994. Prior to that time, he served as
Director of Professional Education & Marketing at the Ethicon Division of
Johnson & Johnson.
 
     M. CASSANDRA HOAG served as Senior Vice President -- Sales and Marketing
from October 1994 through August 1996 at which time she became
President -- Gynecological Products. Prior to joining the Company, Ms. Hoag
served as a Division Vice President of Curaflex Health Services, Inc., a home
infusion company. From April 1989 to December 1992, Ms. Hoag served as
Curaflex's Vice President, Central Operations. Prior to joining Curaflex, Ms.
Hoag held several positions, including Vice President of Central Operations,
with Foster Medical Corporation and Abbey Healthcare Group from February 1985 to
April 1989.
 
     BRUCE A. HAZUKA served as Executive Vice President -- Operations from
September 1995 through August 1996 at which time he became President -- Medical
Surgical Products. Mr. Hazuka has spent his entire 27 years of general
management, marketing and operations experience in the healthcare field, and was
founder, President and Chief Executive Officer of Healthcare Associates, Inc.
which was founded in January 1990. Prior to joining the Company, Mr. Hazuka
served as Chairman of the Board, President and Chief Executive Officer of
Allscrips Pharmaceuticals, Inc., a pharmaceutical benefits management company,
from September 1990 to June 1994.
 
     MICHAEL SHULER joined the Company in January 1996 as Senior Vice President,
New Business Development. He became President -- Visualization Products in
August 1996. Prior to joining the Company, Mr. Shuler was with Advanced
Surgical, Inc. from 1992 until 1995. He was appointed Chief Executive Officer in
1994. Prior to Advanced, Mr. Shuler was with Johnson and Johnson Interventional
Systems as Vice President of Product Management.
 
     ABBEY J. BUTLER has served as a director of the Company since March 1995.
He is Co-Chairman and Co-Chief Executive Officer of FoxMeyer Health Corporation,
a distributor of health care products and information-based services throughout
North America. Mr. Butler became a director of FoxMeyer Health Corporation in
1990. Mr. Butler also serves as managing partner of Centaur Partners, L.P., an
investment partnership owning substantial holdings in FoxMeyer Health, as well
as president and a director of C.B. Equities Capital Corp., a New York-based
portfolio management firm. Mr. Butler presently serves on the Board of Directors
of FWB Bancorporation, the holding company of FWB Bank of Maryland, CST
Entertainment Imaging, Inc., a company engaged in digital color enhancement of
black and white films, Cyclone Fence Corp., the leading U.S. distributor and
installer of chain link fence systems, Phar-Mor, Inc., a discount drug store
chain, and Carson Products, Inc., a health and beauty products manufacturer. Mr.
Butler is also
 
                                       38
<PAGE>   40
 
Co-Chairman of Ben Franklin Retail Stores, Inc., a retail craft and variety
store chain. Ben Franklin Retail Stores, Inc. and certain of its affiliates and
certain subsidiaries of FoxMeyer Health Corporation are currently involved in
bankruptcy reorganizations under Chapter 11 of the federal bankruptcy laws.
 
     MITCHELL J. BLUTT, M.D. has served as a director of the Company since June
1996. Dr. Blutt is the Executive Partner of Chase Capital Partners and an
Adjunct Assistant Professor of Medicine at The New York Hospital-Cornell Medical
Center. He serves as a director of Hanger Orthopedic Group, Collegiate Health
Care, Innotech Corporation, InteCare, Inc., Landec Corporation, Senior
Psychology Services Corporation, General Medical Corporation, UtiliMed, Inc.,
Medical Arts Press, Inc., and ASC Network Corporation. Dr. Blutt received a B.A.
and M.D. from the University of Pennsylvania, and an M.B.A. from the Wharton
School, University of Pennsylvania.
 
     JOHN S. CHAMBERLIN has served as a director of the Company since June 1996.
Mr. Chamberlin worked for 22 years in various assignments for General Electric
Company, including sales, product planning, marketing, General Manager of Radio
Receiver Department and Vice President and General Manager of the Housewares and
Audio Business Division. From 1976 to 1985 he was the President and Chief
Executive Officer of Lenox, Inc. and in 1985 joined Avon Products, Inc. as
President and Chief Operating Officer, leaving Avon in 1988. Mr. Chamberlin is
presently Chairman of the Board of Life Fitness Company and WNS, Inc., and he
serves on the Boards of Directors of The Scotts Co., Seasons, Inc., the Robbins
Company, Healthsouth Corporation and the Sports Holding Company. Mr. Chamberlin
is a Trustee of the Medical Center of Princeton and the Woodrow Wilson National
Fellowship Foundation.
 
     ROBERT N. ELKINS, M.D. has served as a director of the Company since March
1995. Dr. Elkins is the founder of Integrated Health Services, Inc., a provider
of post acute and subacute care through more than 25,000 beds in 192 facilities
located in 30 states. Dr. Elkins has served as the Chairman and Chief Executive
Officer of Integrated Health Services since 1986. Dr. Elkins, a graduate of the
University of Pennsylvania, received his M.D. degree from the Upstate Medical
Center at the State University of New York and completed his residency at
Harvard University.
 
     MELVYN J. ESTRIN is Co-Chairman and Co-Chief Executive Officer of FoxMeyer
Health Corporation, a distributor of health care products and information-based
services throughout North America. Mr. Estrin became a director of FoxMeyer
Health Corporation in 1990. Mr. Estrin also serves as Managing Partner of
Centaur Partners, L.P., an investment partnership owning substantial holdings in
FoxMeyer Health, as Chairman of Estrin International/Human Service Group, Inc.,
a privately held company that provides training, development and technical
assistance to governmental and educational institutions and that pursues real
estate development and investments. Mr. Estrin is also a member of the board of
directors of Washington Gas Light Company, Phar-Mor Corporation, a chain of
discount drug stores, and FWB Bancorporation, a bank holding company, and
FoxMeyer Canada. Certain subsidiaries of FoxMeyer Health Corporation, of which
Mr. Estrin is an officer or director, are currently involved in bankruptcy
reorganizations under Chapter 11 of the federal bankruptcy laws.
 
     C. SAGE GIVENS has served as a director of the Company since June 1996. Ms.
Givens is the founding Managing Partner of Acacia Venture Partners, located in
San Francisco. Acacia Venture Partners was formed to invest exclusively in all
stages of healthcare service companies. Prior to forming Acacia Venture
Partners, Ms. Givens was a General Partner of First Century Partners, a private,
diversified venture capital and buyout fund, where she launched and managed the
partnership's diversification into healthcare. Ms. Givens was also formerly a
Managing Director at Smith Barney and presently serves as a director of
Healthsouth Corporation and Phycor, and serves on the Boards of Directors of
several other private portfolio companies.
 
     LAWRENCE GOELMAN has served as a director of the Company since March 1995.
From 1981 until 1995, Mr. Goelman served as the Chairman and Chief Executive
Officer of CostCare, a national healthcare cost management firm. Mr. Goelman
became a member of the Board of Directors of Pinnacle Micro in April 1996 and
President and Chief Executive Officer in May 1996.
 
     MICHAEL S. GROSS has served as a director of the Company since June 1996.
Mr. Gross is one of the founding principals of Apollo Advisors, L.P. which,
together with an affiliate, acts as managing general partner
 
                                       39
<PAGE>   41
 
of Apollo Investment Fund, L.P., AIF II, L.P. and Apollo Investment Fund III,
L.P., private securities investment funds, and of Lion Advisors, L.P., which
acts as financial advisor to and representative for certain institutional
investors with respect to securities investments. Prior to 1990, Mr. Gross was
employed with Drexel Burnham Lambert, Inc. Mr. Gross is a director of Converse,
Inc., The Florsheim Shoe Company, Inc., Furniture Brands International, Inc. and
Proffitts, Inc. and a member of the Supervisory Board of Directors of
Memorex-Telex NV.
 
     RICHARD NEWHAUSER became a director of the Company in August 1996. Prior to
that he served as Chairman and Chief Executive Officer of Richard-Allan from
1974 until the acquisition of Richard-Allan by the Company in August 1996.
 
     JAMES B. OSBON became a Vice President and a director of the Company in
December 1995. Mr. Osbon was President of Osbon Medical Systems from 1989 until
December 1995 when Osbon Medical Systems became a subsidiary of the Company.
James Osbon is the brother of Julian Osbon.
 
     FRANCIS J. TEDESCO, M.D. has served as a director of the Company since
December 1995. Dr. Tedesco has served as President of the Medical College of
Georgia since 1988, and prior to that time he held several different positions
at the college, including Professor of Medicine and Chief, Section of
Gastroenterology and Vice President for Clinical Affairs.
 
     GERALD W. TIMM, PH.D. became Vice Chairman of the Board of Directors in
July 1995 and served as Executive Vice President of the Company from July 1995
until April 1996. Dr. Timm was the founder of Dacomed Corporation (which became
a subsidiary of the Company in July 1995) and served as an officer of Dacomed
from its formation in 1980. Dr. Timm served as Chairman of the Board, President,
Chief Executive Officer and Treasurer of Dacomed from April 1992 until its
acquisition by the Company in July 1995.
 
                                       40
<PAGE>   42
 
   
                             PRINCIPAL STOCKHOLDERS
    
 
   
     The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of November 12, 1996 of (i) each
person known by the Company to own beneficially 5% or more of the Common Stock,
(ii) each current director of the Company, (iii) each named executive officer,
and (iv) all current directors and executive officers as a group.
    
 
   
<TABLE>
<CAPTION>
                                                                     SHARES BENEFICIALLY OWNED
                                                               -------------------------------------
                                                                              PERCENT       PERCENT
                                                                              PRIOR TO     AFTER THE
                     NAME AND ADDRESS(1)                         NUMBER       OFFERING     OFFERING
-------------------------------------------------------------  ----------     --------     ---------
<S>                                                            <C>            <C>          <C>
FoxMeyer Health Corporation(2)...............................   2,464,827      12.3%
Apollo Advisors II, L.P.(3)..................................   2,142,682       11.2
Chase Venture Capital Associates, L.P.(4)....................   2,142,682       11.2
Gerald W. Timm(5)............................................   1,218,480        6.4
Charles A. Laverty(6)........................................     811,820        4.1
Robert N. Elkins, M.D.(7)....................................     109,352       *
Lawrence Goelman(8)..........................................     113,387       *
Melvyn J. Estrin(9)..........................................   2,472,327       12.3
Abbey J. Butler(9)...........................................   2,472,327       12.3
Julian W. Osbon..............................................   3,000,000       15.8
James B. Osbon...............................................     500,655        2.6
Robert E. Osbon..............................................     485,000        2.6
Anthony D. Osbon.............................................     466,000        2.5
Carolyn Osbon Heath..........................................     455,200        2.4
Francis J. Tedesco(10).......................................       7,500       *
Mitchell J. Blutt, M.D.(11)..................................   2,142,682       11.2
Michael S. Gross(12).........................................   2,142,682       11.2
John Chamberlin(13)..........................................       9,722       *
C. Sage Givens(14)...........................................       9,722       *
James L. Johnson(15).........................................     161,854       *
Bruce A. Hazuka(16)..........................................      88,889       *
M. Cassandra Hoag(17)........................................      96,759       *
Richard Newhauser............................................   2,081,916       11.0
All current directors and executive officers as a group (18
  persons)(18)...............................................  14,975,247       57.0
</TABLE>
    
 
---------------
  *  Less than 1%.
 
 (1) Unless otherwise indicated in the following footnotes, each person named in
     the table has sole voting and investment power with respect to all shares
     shown as beneficially owned, subject to applicable community property law.
     Unless otherwise noted in the following notes the address of each person
     listed is c/o UROHEALTH Systems, Inc., 5 Civic Plaza, Suite 100, Newport
     Beach, California 92660. The foregoing table presents voting securities
     which include Common Stock and the Debentures which vote with the Common
     Stock on an "as converted" basis.
 
 (2) Includes 1,414,827 shares of Common Stock and warrants to purchase
     1,050,000 shares of Common Stock which are currently exercisable. The
     address of FoxMeyer Health Corporation is 1220 Senlac Drive, Carrollton,
     Texas 75006.
 
 (3) Represents Debentures which vote on an "as converted" basis and warrants to
     purchase 113,750 shares of Common Stock which are currently outstanding.
     The address for Apollo Advisors II, L.P. is 1301 Sixth Avenue, New York,
     New York 10019.
 
                                       41
<PAGE>   43
 
 (4) Represents Debentures which vote on an "as converted" basis and warrants to
     purchase 113,750 shares of Common Stock which are currently outstanding.
     The address for Chase Venture Capital Associates, L.P. is 380 Madison
     Avenue, New York, New York 10017.
 
   
 (5) Includes 101,540 shares held by Mr. Timm's spouse, Julia Coleman Timm. Also
     includes 194,618 shares held in trusts for the benefit of the four children
     of Gerald W. Timm and Julia Coleman Timm.
    
 
 (6) Includes 811,820 shares subject to options exercisable on or before January
     15, 1997.
 
 (7) Includes 109,352 shares subject to options exercisable on or before January
     15, 1997.
 
 (8) Includes 113,387 shares subject to options exercisable on or before January
     15, 1997.
 
 (9) Includes the 2,464,827 shares of Common Stock and Warrants beneficially
     owned by FoxMeyer as shown above and 7,500 shares subject to options
     exercisable on or before January 15, 1997. Messrs. Estrin and Butler are
     Co-Chairmen of the Board of Directors of FoxMeyer Health Corporation.
 
   
(10) Includes 7,500 shares subject to options exercisable on or before January
     15, 1997.
    
 
   
(11) Represents securities held by Chase Venture Capital Association, L.P., of
     which Dr. Blutt is the Executive Partner. Dr. Blutt disclaims beneficial
     ownership of such shares except to the extent of his pecuniary interest
     therein.
    
 
   
(12) Represents securities held by Apollo Advisors II, L.P., of which Mr. Gross
     is a Principal. Mr. Gross disclaims beneficial ownership of such shares
     except to the extent of his pecuniary interest herein.
    
 
   
(13) Includes 9,722 shares subject to options exercisable on or before January
     15, 1997.
    
 
   
(14) Includes 9,722 shares subject to options exercisable on or before January
     15, 1997.
    
 
   
(15) Includes 158,739 shares subject to options exercisable on or before January
     15, 1997.
    
 
   
(16) Includes 88,889 shares subject to options exercisable on or before January
     15, 1997.
    
 
   
(17) Includes 96,759 shares subject to options exercisable on or before January
     15, 1997.
    
 
   
(18) Includes 1,470,890 shares subject to options exercisable on or before
     January 15, 1997, warrants to purchase 1,277,500 shares of Common Stock and
     Debentures which vote on an "as converted" basis with respect to 4,545,454
     Common Stock equivalents.
    
 
                                       42
<PAGE>   44
 
                          DESCRIPTION OF CAPITAL STOCK
 
GENERAL
 
   
     The Company is authorized to issue up to 50,000,000 shares of Common Stock,
$.001 par value, and 5,000,000 shares of Preferred Stock, $.001 par value of
which 250,000 shares have been designated as Series A Junior Participating
Preferred Stock (the "Series A Preferred Shares"). As of November 12, 1996,
there were 16,496,205 shares of Common Stock issued and outstanding and no
preferred stock issued or outstanding. As of November 4, 1996, there were
options, warrants and convertible securities to purchase 13,511,454 shares of
the Company Common Stock outstanding.
    
 
COMMON STOCK
 
     Each holder of Common Stock is entitled to one vote for each share held of
record on each matter submitted to a vote of stockholders. There are no
cumulative voting rights. Accordingly, the holders of a majority of the shares
of Common Stock (and the Debentures described below) entitled to vote in any
election of directors may elect all of the directors standing for election.
Subject to any preferences which may be granted to the holders of Preferred
Stock, each holder of Common Stock is entitled to receive ratably such
dividends, if any, as may be declared by the Board of Directors out of funds
legally available therefor, as well as any distributions to the stockholders
upon liquidation, dissolution or winding up of the Company. Each holder of
Common Stock is entitled to share ratably in all assets of the Company remaining
after payment of all debts and other liabilities and subject to the prior rights
of any outstanding Preferred Stock. Holders of Common Stock have no conversion,
redemption, subscription or preemptive rights or other rights to subscribe for
additional shares. The outstanding shares of Common Stock are validly issued,
fully paid and nonassessable. The rights, preferences and privileges of holders
of Common Stock are subject to, and may be adversely affected by, the rights of
the holders of shares of any series of Preferred Stock which the Company may
designate and issue in the future.
 
PREFERRED STOCK
 
     The Board of Directors is authorized to issue the Preferred Stock in one or
more series and to fix the rights, preferences, privileges and restrictions,
including the dividend rights, conversion rights, voting rights, rights and
terms of redemption, redemption price or prices, liquidation preferences and the
number of shares constituting any series or the designations of such series,
without any further vote or action by the stockholders of the Company. The
issuance of Preferred Stock may have the effect of delaying, deferring or
preventing a change in control of the Company without further action of the
stockholders of the Company. The issuance of Preferred Stock with voting and
conversion rights may adversely affect the voting power of the holders of Common
Stock of the Company, including the loss of voting control to others.
 
     The Company has adopted a Preferred Share Purchase Rights Plan (the "Rights
Plan") which is designed to deter coercive or certain takeover tactics, to
prevent a person or group from gaining control of the Company without offering
fair value to all stockholders and to deter other abusive takeover tactics which
are not in the best interest of stockholders. In May 1993, the Company executed
the Rights Plan with its transfer agent and 250,000 Series A Preferred Shares
were designated for potential issuance under the Rights Plan. Under the terms of
the Rights Plan each share of Common Stock is accompanied by one right; each
right entitles the registered stockholder to purchase from the Company
one-hundredth of a share of Series A Junior Participating Preferred Stock,
$0.001 par value, at an exercise price of $200. The rights only become
exercisable ten days after a public announcement that an acquiring person (as
defined in the Rights Plan) has acquired 20% or more of the outstanding shares
of Common Stock of the Company or a person or group offers to acquire 35% or
more of the outstanding Common Stock or ten days after the Company determines
that a person is an Adverse Person (as defined in the Rights Plan). The Company
can redeem the Rights for $.01 per Right at any time until ten days after the
rights become exercisable (the 10-day period can be extended by the Company).
The Rights Plan will expire on June 30, 2003 unless earlier redeemed by the
Company. If, subsequent to the rights becoming exercisable, the Company is
acquired in a merger or other business combination at any time when there is a
20% or more holder, the rights will then entitle a holder to
 
                                       43
<PAGE>   45
 
buy shares of common stock of the acquiring company with a market value equal to
twice the exercise price of each right. Alternatively, if the 20% holder
acquires the Company by means of a merger in which the Company and its stock
survive, or if any person acquires 35% or more of the Company's Common Stock,
each right now owned by a 20% or more stockholder, will become exercisable for
Common Stock of the Company having a market value equal to twice the exercise
price of the right.
 
VOTING DEBENTURES
 
   
     The holders of the Debentures are entitled to vote on all matters submitted
to a vote of the stockholders of the Company, voting together with the holders
of the Common Stock (and any other shares of capital stock of the Company
entitled to vote at a meeting of stockholders) as one class. Each Debenture is
entitled to a number of votes equal to the number of shares of Common Stock into
which the Debenture could then be converted. As of November 12, 1996, there was
$50.0 million aggregate principal amount of Debentures outstanding which would
convert into 4,545,454 shares of Common Stock.
    
 
DELAWARE ANTI-TAKEOVER LAW
 
     Section 203 of the Delaware General Corporation Law ("Section 203")
provides, in general, that a stockholder acquiring more than 15% of the
outstanding voting shares of a corporation subject to the statute (an
"Interested Stockholder") but less than 85% of such shares may not engage in
certain "Business Combinations" with the corporation for a period of three years
subsequent to the date on which the stockholder became an Interested Stockholder
unless (i) prior to such date the corporation's Board of Directors approved
either the Business Combination or the transaction in which the stockholder
became an Interested Stockholder or (ii) the Business Combination is approved by
the corporation's board of directors and authorized by a vote of at lest
two-thirds of the outstanding voting stock of the corporation not owned by the
Interested Stockholder.
 
     Section 203 defines the term "Business Combination" to encompass a wide
variety of transactions with or caused by an Interested Stockholder in which the
Interested Stockholder receives or could receive a benefit on other than a pro
rata basis with other stockholders, including mergers, certain asset sales,
certain issuances of additional shares to the Interested Stockholder,
transactions with the corporation which increase the proportionate interest of
the Interested Stockholder, or transactions in which the Interested Stockholder
receives certain other benefits.
 
REGISTRATION RIGHTS
 
     The Company has granted registration rights to the holders of the
Debentures with respect to both the Debentures and the shares of Common Stock
into which the Debentures may be converted. Pursuant to such rights, the Company
may, on no more than one occasion and when requested by the holders of not less
than 51% of the aggregate principal amount of the Debentures outstanding at such
time the request is made, be required to register the Debentures for resale
under the Securities Act. In addition, the Company may, on no more than three
occasions, be required to register the shares of Common Stock into which the
Debentures may be converted. Such registration may only be required of the
Company if the registration is requested with respect to not less than 20% of
the shares of Common Stock underlying the Debentures. Finally, shares of Common
Stock into which the Debentures may be converted may also participate in any
other registered offering initiated by the Company for its own account or for
shares of Common Stock owned by other stockholders of the Company.
 
     The Company has granted registration rights to FoxMeyer Health Corporation
("FoxMeyer") in connection with the issuance of a convertible note and Series B
Preferred Shares to FoxMeyer with respect to the shares of Common Stock issued
upon conversion of the convertible note and the Series B Preferred Shares and
issuable upon exercise of the warrants issued to FoxMeyer in those transactions.
At any time, the holders of not less than 20% of the shares of Common Stock
received or to be received in connection with these transactions may, on two
occasions, require the Company to register such shares of Common Stock for
resale under the Securities Act. In addition, shares of Common Stock issued or
to be issued in connection with these
 
                                       44
<PAGE>   46
 
transactions may also participate in any other registered offering initiated by
the Company for its own account or for shares of Common Stock owned by other
stockholders of the Company.
 
     The Company has granted registration rights to certain "affiliates" of
Osbon with respect to shares of Common Stock received by them in the acquisition
of Osbon by the Company. The holders of not less than 20% of the shares of
Common Stock received in the acquisition of Osbon by holders of registration
rights may, on one occasion, require the Company to register such shares of
Common Stock for resale under the Securities Act. In addition, shares of Common
Stock received by "affiliates" of Osbon in the Company's acquisition of Osbon
may also participate in any other registered offering initiated by the Company
for its own account or for shares of Common Stock owned by other stockholders of
the Company.
 
     The Company has granted registration rights to certain "affiliates" of
Dacomed with respect to shares of Common Stock received by them in the
acquisition of Dacomed by the Company. The holders of not less than 20% of the
shares of Common Stock received in the acquisition of Dacomed by the Company by
the holders of registration rights may, on one occasion, require the Company to
register such shares of Common Stock for resale under the Securities Act. In
addition, shares of Common Stock received by "affiliates" of Dacomed in the
Company's acquisition of Dacomed may also participate in any other registered
offering initiated by the Company for its own account or for shares of Common
Stock owned by other stockholders of the Company.
 
     The Company has granted certain piggyback registration rights with respect
to shares of Common Stock to be received upon exercise of warrants issued to a
lender in connection with loans to the Company and granted piggyback and demand
registration rights to another lender with respect to shares issuable upon
exercise of a warrant issued in connection with the Company's former credit
facilities.
 
TRANSFER AGENT AND REGISTRAR
 
     American Stock Transfer and Trust Company is the transfer agent and
registrar for the Common Stock.
 
                                       45
<PAGE>   47
 
                                  UNDERWRITING
 
   
     The Underwriters named below (the "Underwriters"), for whom Bear, Stearns &
Co. Inc. ("Bear Stearns"), Needham & Company, Inc. and Piper Jaffray Inc. are
acting as representatives (the "Representatives"), have severally agreed,
subject to the terms and conditions of the Underwriting Agreement, to purchase
from the Company the number of shares of Common Stock set forth below opposite
their respective names. The Underwriters are obligated to purchase and pay for
all of such shares of Common Stock if any are purchased.
    
 
<TABLE>
<CAPTION>
                                                                                NUMBER OF
                                   UNDERWRITER                                   SHARES
    --------------------------------------------------------------------------  ---------
    <S>                                                                         <C>
    Bear, Stearns & Co. Inc. .................................................
    Needham & Company, Inc. ..................................................
    Piper Jaffray Inc. .......................................................
 
</TABLE>
 
   
     The Underwriters have advised the Company that they propose to offer the
Common Stock to the public initially at the public offering price set forth on
the cover page of this Prospectus and to certain selected dealers (who may
include the Underwriters) at such public offering price less a concession not to
exceed $     per share. The selected dealers may reallow a concession to certain
other dealers not to exceed $
per share. After this offering, the public offering price, the concession to
selected dealers and the reallowance to other dealers may be changed by the
Representatives.
    
 
   
     The Company has granted to the Underwriters an option exercisable for 30
days from the date of this Prospectus to purchase up to 375,000 additional
shares of Common Stock at the public offering price set forth on the cover page
of this Prospectus less the underwriting discount. The Underwriters may exercise
such options solely for the purpose of covering over-allotments incurred in the
sale of the shares of Common Stock offered hereby. To the extent the
Underwriters exercise their option, each of the Underwriters will be committed,
subject to certain conditions, to purchase a number of additional shares
proportionate to such Underwriter's initial commitment as indicated in the
preceding table.
    
 
   
     The Underwriting Agreement provides that the Company will indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act, or will contribute to payments the Underwriters may be
required to make in respect thereof.
    
 
   
     Pursuant to the Underwriting Agreement, the Company and certain
stockholders have agreed that they will not offer, issue, sell, agree to sell,
grant any option for the sale of or otherwise dispose of, directly or
indirectly, any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock (except for options granted
pursuant to its existing stock option plans), for a period of 120 days from the
date of this Prospectus without the prior written consent of Bear Stearns. The
Company's directors and executive officers have agreed that, during such 120 day
period, they will not offer, sell, grant any option to purchase or otherwise
dispose (excluding certain pledges) of any shares of Common stock owned by them
without the prior written consent of the Representatives.
    
 
     Bear Stearns, Needham & Company and Piper Jaffray have from time to time in
recent years performed various investment banking services for the Company, for
which they have received customary compensation. Bear Stearns owns a warrant to
purchase 50,000 shares of Common Stock which expires in 2001 and has an exercise
price of $7.25 per share.
 
                                       46
<PAGE>   48
 
                                 LEGAL MATTERS
 
   
     The validity of the Common Stock will be passed upon for the Company by
Morrison & Foerster LLP, Irvine, California. Certain matters relating to this
offering will be passed upon for the Underwriters by Skadden, Arps, Slate,
Meagher & Flom LLP, Los Angeles, California.
    
 
                                    EXPERTS
 
     The consolidated financial statements of the Company as of March 31, 1996
and for the nine months then ended and as of June 30, 1995 and for the year then
ended appearing herein, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon included herein in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
 
     The consolidated financial statements of the Company as of June 30, 1994
and for the year then ended have been audited, as to the combination only, by
Ernst & Young LLP. These consolidated financial statements included UROHEALTH
Systems, Inc., Dacomed Corporation, Allstate Products, Inc, Osbon Medical
Systems, Ltd. and Advanced Surgical Inc. The consolidated financial statements
of the Company as of June 30, 1994 and for the year then ended were audited by
Doane Raymond, Chartered Accountants. The consolidated financial statements of
Dacomed Corporation as of June 24, 1995, and for the fiscal year then ended and
for the fiscal year ended October 29, 1994, were audited by KPMG Peat Marwick
LLP, independent accountants. The consolidated financial statements of Osbon
Medical Systems Ltd. as of September 30, 1994 and for the year then ended have
been audited by Cherry, Bekaert & Holland, independent certified public
accountants. The consolidated financial statements of Advanced Surgical Inc. for
the year ended December 31, 1994 and the year then ended, have been audited by
Coopers & Lybrand L.L.P., independent auditors, as set forth in their report,
which includes an explanatory paragraph related to Advanced's ability to
continue as a going concern. The consolidated financial statements of the
Company as of June 30, 1994 and for the year then ended are included herein in
reliance upon such reports given upon the authority of such firms as experts in
accounting and auditing.
 
     The consolidated financial statements of Richard-Allan Medical Industries,
Inc. as of March 31, 1996 and for the nine months then ended and as of June 30,
1995 and 1994 and for the years then ended, appearing in the Company's Form
8-K/A filed with the Securities and Exchange Commission on September 26, 1996
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report thereon included therein and incorporated herein by reference. Such
consolidated financial statements are incorporated herein by reference in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
 
                             AVAILABLE INFORMATION
 
     The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the following regional offices of
the Commission: Chicago Regional Office, Room 1024, Klyczynski Building, 230
South Dearborn Street, Chicago, Illinois 60604; and New York Regional Office, 75
Park Place, 14th Floor, New York, New York 10017. In addition, certain of the
information regarding the Company is available through the Internet by accessing
the Securities and Exchange Commission web site at http://www.sec.gov. Copies of
such material can be obtained at prescribed rates from the Public Reference
Section of the Commission at its principal office at 450 Fifth Street, N.W.,
Washington, D.C. 20549. In addition, such material can be inspected at the
offices of the American Stock Exchange, 86 Trinity Place, New York, New York
10006.
 
     The Company has filed with the Commission a Registration Statement under
the Securities Act of 1933, as amended, with respect to the Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. Statements
 
                                       47
<PAGE>   49
 
contained herein concerning the provisions of any documents are necessarily
summaries of such documents, and each such statement is qualified in its
entirety by reference to the copy of the applicable document filed with the
Commission. For further information concerning the Company and the Common Stock
offered hereby, reference is made to the Registration Statement, including the
exhibits and schedules thereto. The Registration Statement, including the
exhibits and schedules thereto, may be inspected without charge at the
Commission's principal office, 450 Fifth Street, N.W., Washington, D.C. 20549,
and copies of all or any part thereof may be obtained from the Commission's
Public Reference Section at prescribed rates.
 
                INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
 
     The Company hereby incorporates by reference in this Prospectus the
following documents, which have been filed with the Commission pursuant to the
Exchange Act: (i) the Company's Annual Report on Form 10-K for the transition
period ended March 31, 1996 (Commission file no. 1-11150); (ii) the Company's
Current Report on Form 8-K, dated July 1, 1996, as amended by the Form 8-K/A's
filed with the Commission on August 12, 1996 and September 26, 1996 (Commission
file no. 1-11150); and (iii) the Company's Quarterly Reports on Form 10-Q for
the quarters ended June 30, 1996 and September 30, 1996 (Commission file no.
1-11150).
 
     All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of this offering shall be deemed to be incorporated by reference
into this Prospectus and to be a part hereof from the date of filing of such
documents.
 
     The Company will provide without charge to each person to whom this
Prospectus is delivered, upon the written or oral request of such person, a copy
of any or all of the documents referred to above which have been or may be
incorporated by reference in this Prospectus (excluding exhibits to the
information that is incorporated herein by reference unless such exhibits are
specifically incorporated by reference into the information that this Prospectus
incorporates). Requests for such copies should be directed to Kevin M. Higgins,
Senior Vice President and General Counsel, UROHEALTH Systems, Inc., 5 Civic
Plaza, Suite 100, Newport Beach, 92660; telephone number (714) 668-5858.
 
     Any statement contained in a document incorporated by reference shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any subsequently filed
incorporated document or in any accompanying prospectus supplement modifies or
supersedes such statement (but not to the extent that any statement and any such
other filed document is only summarized herein or in any other subsequently
filed document). Any such statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
 
                                       48
<PAGE>   50
 
                         INDEX TO FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                                                       PAGE
                                                                                       -----
<S>                                                                                    <C>
Independent Auditors Reports.........................................................  F-2
Consolidated Balance Sheets as of June 30, 1995 and March 31, 1996...................  F-8
Consolidated Statement of Operations for the years ended June 30, 1994 and 1995 and
  for the nine months ended March 31, 1996...........................................  F-9
Consolidated Statements of Common Stockholders' Equity for the years ended June 30,
  1994 and 1995 and for the nine months ended March 31, 1996.........................  F-10
Consolidated Statements of Cash Flows for the years ended June 30, 1994 and 1995 and
  for the nine months ended March 31, 1996...........................................  F-11
Notes to Consolidated Financial Statements...........................................  F-12
Condensed Consolidated Balance Sheet as of September 30, 1996........................  F-29
Condensed Consolidated Statements of Operations for the six months ended
  September 30, 1995 and 1996........................................................  F-30
Condensed Consolidated Statements of Cash Flows for the six months ended
  September 30, 1995 and 1996........................................................  F-31
Notes to the Condensed Consolidated Financial Statements.............................  F-32
</TABLE>
 
                                       F-1
<PAGE>   51
 
                         REPORT OF INDEPENDENT AUDITORS
 

Stockholders and Board of Directors
UroHealth Systems, Inc.
 
     We have audited the accompanying consolidated balance sheets of UroHealth
Systems, Inc. as of March 31, 1996, and June 30, 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the nine months ended March 31, 1996 and the year ended June 30, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based upon
our audits. We did not audit the fiscal 1995 financial statements of Dacomed
Corporation, a wholly-owned subsidiary, which statements reflect total assets
and total revenues constituting 4% and 10% of the related consolidated totals.
Those statements were audited by other auditors whose report has been furnished
to us, and our opinion, insofar as it relates to data included in the fiscal
1995 consolidated financial statements for Dacomed Corporation, is based solely
on the report of other auditors.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audits 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 and the report of other auditors provide a reasonable
basis for our opinion.
 
     In our opinion, based upon our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of UroHealth Systems, Inc. at March 31, 1996
and June 30, 1995, and the consolidated results of its operations and its cash
flows for the nine months ended March 31, 1996 and the year ended June 30, 1995
in conformity with generally accepted accounting principles.
 
     We also have audited, as to combination only, the accompanying consolidated
statements of operations, stockholders' equity and cash flows for the year ended
June 30, 1994. As described in Note 1, these statements have been combined from
the financial statements of UroHealth Systems, Inc., Dacomed Corporation,
Allstate Medical Products, Inc., Osbon Medical Systems, Ltd., and Advanced
Surgical, Inc. (which statements are not presented separately herein). The
reports of the other auditors who have audited these statements, other than the
financial statements of Allstate Medical Products, Inc., which are immaterial
and unaudited, appear elsewhere herein. In our opinion, the accompanying
consolidated financial statements for the year ended June 30, 1994 have been
properly combined on the basis described in Note 1.
 

                                          /s/  ERNST & YOUNG LLP
                                          --------------------------------
                                               Ernst & Young LLP
 
Orange County, California
June 4, 1996
 
                                       F-2
<PAGE>   52
 
                         REPORT OF INDEPENDENT AUDITORS
 
To the Directors of
UROHEALTH Systems, Inc.
 
     We have audited the consolidated statements of operations, stockholders'
equity and cash flows of UROHEALTH Systems, Inc. for the year ended June 30,
1994 (not included herein) presented under United States generally accepted
accounting principles. These financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
 
     We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance 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.
 
     Under date of August 22, 1994, we previously reported, without
qualification, on the consolidated statements of operations, shareholders'
equity and cash flows of the company for the year ended June 30, 1994 presented
in accordance with accounting principles generally accepted in Canada.
 
     In our opinion, the consolidated financial statements referred to in the
first paragraph present fairly, in all material respects, the results of
operations of the company and its cash flows for the year ended June 30, 1994 in
accordance with accounting principles generally accepted in the United States.
 


                                          /s/  DOANE RAYMOND
                                          --------------------------------------
                                               Chartered Accountants
 
Toronto, Canada
August 22, 1994
 
                                       F-3
<PAGE>   53
 
                          INDEPENDENT AUDITORS' REPORT
 
To the Board of Directors and Stockholders
Dacomed Corporation:
 
     We have audited the accompanying consolidated balance sheet of Dacomed
Corporation and subsidiary as of June 24, 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the fiscal
year then ended (not included separately herein). 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 audit.
 
     We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
 
     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Dacomed
Corporation and subsidiary as of June 24, 1995, and the results of their
operations and their cash flows for the fiscal year then ended, in conformity
with generally accepted accounting principles.
 


                                          /s/  KPMG PEAT MARWICK LLP
                                          --------------------------------------
                                               KPMG Peat Marwick LLP
 
Minneapolis, Minnesota
October 10, 1995
 
                                       F-4
<PAGE>   54
 
                          INDEPENDENT AUDITORS' REPORT
 

To the Board of Directors and Stockholders
Dacomed Corporation:
 
     We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of Dacomed Corporation and subsidiary for
the fiscal year ended October 29, 1994 (not included separately herein). 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 audit.
 
     We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
 
     In our opinion, the 1994 consolidated financial statements referred to
above present fairly, in all material respects, the results of operations and
cash flows of Dacomed Corporation and subsidiary for the fiscal year ended
October 29, 1994, in conformity with generally accepted accounting principles.


 
                                          /s/  KPMG PEAT MARWICK LLP
                                          --------------------------------------
                                               KPMG Peat Marwick LLP
 
Minneapolis, Minnesota
December 19, 1994
 
                                       F-5
<PAGE>   55
 
                          INDEPENDENT AUDITORS' REPORT
 
The Board of Directors and Shareholders
Advanced Surgical, Inc.:
 
     We have audited the accompanying consolidated balance sheet of Advanced
Surgical, Inc. and subsidiary as of December 31, 1994, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the year ended December 31, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
 
     We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
 
     In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Advanced
Surgical, Inc. and subsidiary as of December 31, 1994, and the results of their
operations and their cash flows for the year ended December 31, 1994, in
conformity with generally accepted accounting principles.
 
     The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
2 to the consolidated financial statements, the Company has suffered recurring
losses and negative cash flows from operations. The Company anticipates that
losses and negative cash flows from operations will continue and that cash
resources currently available may not be sufficient to sustain operations
through 1995. These factors raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 2. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
 


                                               /s/ COOPERS & LYBRAND L.L.P.
                                          --------------------------------------
                                                   COOPERS & LYBRAND L.L.P.
 
Princeton, New Jersey
February 24, 1995
 
                                       F-6
<PAGE>   56
 
               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

 
To the Stockholders of
Osbon Medical Systems, Ltd.:
 
     We have audited the accompanying balance sheet of Osbon Medical Systems,
Ltd. ("the Company") as of September 30, 1994, and the related statements of
operations, changes in stockholders' equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
 
     We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
 
     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Osbon Medical Systems, Ltd.
as of September 30, 1994, and the results of its operations, changes in
stockholders' equity and cash flows for the year then ended, in conformity with
generally accepted accounting principles.


 
                                          /s/  CHERRY, BEKAERT & HOLLAND, L.L.P.
                                          --------------------------------------
                                               Cherry, Bekaert & Holland, L.L.P.
 
Augusta, Georgia
December 6, 1994 (except with respect to
  the matter discussed in Note 19, as to
  which the date is September 5, 1995)
 
                                       F-7
<PAGE>   57
 
                            UROHEALTH SYSTEMS, INC.
 
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                                                        UNAUDITED
                                                                                        PRO FORMA
                                                             JUNE 30,     MARCH 31,     MARCH 31,
                                                               1995         1996          1996
                                                             --------     ---------     ---------
                                                                   (IN THOUSANDS, EXCEPT 
                                                                      PER SHARE DATA)
<S>                                                          <C>          <C>           <C>
ASSETS
Current assets:
  Cash and equivalents.....................................  $  1,051      $  1,185      $ 33,695
  Short-term investments...................................     1,026            --            --
  Receivables, net of allowance for doubtful accounts of
     $538 and $1,644 in 1995 and 1996, respectively........     6,666         7,337         7,337
  Note receivable from officer of subsidiary...............       105            --            --
  Inventories..............................................     4,680         5,705         5,705
  Prepaids and deposits....................................       932         1,685         1,685
  Deferred debt issuance costs.............................        --           614         4,731
                                                             --------      --------      --------
Total current assets.......................................    14,460        16,526        53,153
Property and equipment, net................................     8,698         8,132         8,132
Patents and intangibles, net of accumulated amortization of
  $1,860 and $2,102 in 1995 and 1996, respectively.........     2,334         2,135         2,135
Deposits and other assets..................................       273           649           649
Goodwill...................................................       409           393           393
                                                             --------      --------      --------
                                                             $ 26,174      $ 27,835      $ 64,462
                                                             ========      ========      ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable and accrued expenses....................  $  6,670      $  9,455      $  9,455
  Compensation and employee benefits.......................     1,259         2,045         2,045
  Restructuring accrual....................................       268         1,345         1,345
  Revolving lines of credit................................     1,689         7,123            --
  Current portion of notes payable and capital leases......       531           286           286
                                                             --------      --------      --------
Total current liabilities..................................    10,417        20,254        13,131
Long-term liabilities:
  Notes payable............................................     1,077         6,641           641
  Capital leases...........................................       323           211           211
  Convertible note.........................................     1,077         1,284            --
  Other liabilities........................................       151           185           185
  Restructuring, less current portion......................       218           823           823
Minority interest in consolidated subsidiary...............     1,230         1,073         1,073
Redeemable convertible preferred stock.....................     1,143         3,554            --
Convertible subordinated debentures........................        --            --        50,000
Commitments and contingencies
Common stockholders' equity:
  Preferred stock, $0.001 par value
     Authorized shares -- 5,000,000
     Issued and outstanding shares -- none.................        --            --            --
  Common stock, $0.001 par value
     Authorized shares -- 20,000,000
     Issued and outstanding shares -- 12,287,000 and
       12,460,000, respectively (13,266,000 pro forma).....        12            12            13
  Warrants.................................................     1,402         2,922         4,172
  Additional paid-in capital...............................    52,820        55,050        59,887
  Foreign currency adjustment..............................       115           (98)          (98)
  Deficit..................................................   (43,811)      (64,076)      (65,576)
                                                             --------      --------      --------
Total common stockholders' equity..........................    10,538        (6,190)       (1,602)
                                                             --------      --------      --------
                                                             $ 26,174      $ 27,835      $ 64,462
                                                             ========      ========      ========
</TABLE>
 
                            See accompanying notes.
 
                                       F-8
<PAGE>   58
 
                            UROHEALTH SYSTEMS, INC.
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                                                         NINE
                                                                                        MONTHS
                                                              YEAR ENDED JUNE 30,        ENDED
                                                             ---------------------     MARCH 31,
                                                               1994         1995         1996
                                                             --------     --------     ---------
                                                                   (IN THOUSANDS, EXCEPT 
                                                                      PER SHARE DATA)
<S>                                                          <C>          <C>          <C>
Net sales..................................................  $ 37,828     $ 45,453      $ 39,641
Cost of sales..............................................    13,993       16,159        12,896
                                                             --------     --------      --------
Gross profit...............................................    23,835       29,294        26,745
Operating expenses:
  Selling, general and administrative......................    32,802       35,145        32,218
  Research and development.................................     9,470        8,805         1,324
  Restructuring charges....................................        --        1,200         5,456
  Direct acquisition costs.................................        --          851         4,232
  Settlement of litigation.................................     1,000          300            --
                                                             --------     --------      --------
Total operating expenses...................................    43,272       46,301        43,230
                                                             --------     --------      --------
Loss from operations.......................................   (19,437)     (17,007)      (16,485)
Other income (expense):
  Minority interest consisting of accrued dividends on
     preferred stock of subsidiary.........................      (175)         (78)          (55)
  Interest income..........................................       318          263            23
  Interest expense.........................................      (267)        (303)       (1,002)
  Other....................................................        --            5           (48)
                                                             --------     --------      --------
Loss before taxes..........................................   (19,561)     (17,120)      (17,567)
Provision for income taxes.................................       566        1,386           431
                                                             --------     --------      --------
Net loss...................................................  $(20,127)    $(18,506)     $(17,998)
                                                             ========     ========      ========
Net loss per share:
  Net loss.................................................  $(20,127)    $(18,506)     $(17,998)
                                                             --------     --------      --------
  Dividends and accretion on redeemable convertible
     preferred stock.......................................        --          (45)         (579)
                                                             --------     --------      --------
  Net loss attributable to common stockholders.............  $(20,127)    $(18,551)     $(18,577)
                                                             ========     ========      ========
  Net loss per share.......................................  $  (1.77)    $  (1.52)     $  (1.50)
                                                             ========     ========      ========
Weighted average number of shares used to compute net loss
  per share................................................    11,384       12,235        12,344
                                                             ========     ========      ========
</TABLE>
 
                            See accompanying notes.
 
                                       F-9
<PAGE>   59
 
                            UROHEALTH SYSTEMS, INC.
 
             CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                          COMMON STOCK                   ADDITIONAL                  FOREIGN
                                       ------------------                 PAID-IN                   CURRENCY
                                       SHARES     AMOUNT     WARRANTS     CAPITAL      DEFICIT     TRANSLATION     TOTAL
                                       ------    --------    --------    ----------    --------    -----------    --------
<S>                                    <C>       <C>         <C>         <C>           <C>         <C>            <C>
Balance at June 30, 1993.............  11,003    $ 34,238     $   --       $ 3,235     $(17,083)      $  --       $ 20,390
  Redeemable common stock............      --          --         --          (281)          --          --           (281)
  Stock compensation.................      --          --         --           926           --          --            926
  Exercise of options and warrants...      56         195         --             1           --          --            196
  Stockholder distribution...........      --          --         --            --          (85)         --            (85)
  Change in valuation of redeemable
     common stock....................      --          --         --            --          281          --            281
  Foreign currency translation.......      --          --         --            --            8          --              8
  Issue of shares subscribed.........     250         598         --            --           --          --            598
  Cancellation of stock options......      --          --         --           (10)          --          --            (10)
  Exchange of preferred stock of
     subsidiary......................     323       4,453         --            --           --          --          4,453
  Purchase of Laparomed
     Corporation.....................     236       6,990         --            --           --          --          6,990
  Net loss...........................      --          --         --            --      (20,127)         --        (20,127)
  Net unrealized gain/loss on
     investments.....................      --          --         --            --           --          --
  Settlement of litigation...........      --          --      1,000            --           --          --          1,000
                                       ------    --------     ------       -------     --------       -----       --------
Balance at June 30, 1994.............  11,868      46,474      1,000         3,871      (37,006)         --         14,339
  Exercise of options and warrants...      55          87         --            --           --          --             87
  Issuance of common shares..........     169         899         --            95           --          --            994
  Warrants...........................      --          --        402            --           --          --            402
  Exchange of preferred stock of
     subsidiary......................     195       2,720         --            --           --          --          2,720
  Reincorporation in Delaware........      --     (50,168)        --        50,168           --          --             --
  Adjustment for pooling of
     interest........................      --          --         --            --       10,432          --         10,432
  Dividends and accretion on
     redeemable convertible preferred
     stock...........................      --          --         --            --          (45)         --            (45)
  Net loss...........................      --          --         --            --      (18,506)         --        (18,506)
  Foreign currency translation.......      --          --         --            --           --         115            115
                                       ------    --------     ------       -------     --------       -----       --------
Balance at June 30, 1995.............  12,287          12      1,402        54,134      (45,125)        115         10,538
  Adjustments for pooling of
     interests.......................      --          --         --            --         (374)         --           (374)
  Exercise of options and warrants...     170          --         --           871           --          --            871
  Exchange of preferred stock of
     subsidiary......................       3          --         --            45           --          --             45
  Dividends and accretion on
     redeemable convertible preferred
     stock...........................      --          --         --            --         (579)         --           (579)
  Warrants...........................      --          --      1,520            --           --          --          1,520
  Net loss...........................      --          --         --            --      (17,998)         --        (17,998)
  Foreign currency translation.......      --          --         --            --           --        (213)          (213)
                                       ------    --------     ------       -------     --------       -----       --------
Balance at March 31, 1996............  12,460    $     12     $2,922       $55,050     $(64,076)      $ (98)      $ (6,190)
                                       ======    ========     ======       =======     ========       =====       ========
</TABLE>
 
                            See accompanying notes.
 
                                      F-10
<PAGE>   60
 
                            UROHEALTH SYSTEMS, INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                              YEAR ENDED JUNE 30,      NINE MONTHS ENDED
                                                             ---------------------         MARCH 31,
                                                               1994         1995             1996
                                                             --------     --------     -----------------
<S>                                                          <C>          <C>               <C>
OPERATING ACTIVITIES
Net loss...................................................  $(20,127)    $(18,506)         $(17,998)
Noncash items included in net loss:
  Depreciation and amortization............................     1,612        2,723             1,422
  Loss on retirement/write-off of assets...................       114           26               629
  Deferred income taxes....................................       160           46              (110)
  Amortization of deferred loan costs......................        --           --               637
  Settlement of litigation.................................     1,000           --                --
  Increase in provision for doubtful accounts..............       322           54             1,106
  Stock compensation.......................................       936           --                --
  Other....................................................         8          147                49
  Equity issued for purchased research and development.....     5,312        5,312                --
Changes in operating assets and liabilities:
  Receivables..............................................    (1,472)      (1,563)           (1,743)
  Inventories..............................................      (399)        (604)           (1,092)
  Prepaids and deposits....................................       110         (261)           (1,044)
  Note receivable from related party.......................       (40)         (60)               --
  Other....................................................       (64)         469                --
  Accounts payable and accrued expenses....................       659        2,968             2,909
  Compensation and employee benefits.......................       (18)         343               729
  Accrued dividends on preferred stock of subsidiary.......       175          132                --
  Accrued restructuring charges............................        --          486             2,005
  Other....................................................        24           76                --
                                                             --------     --------          --------
Net cash used in operating activities......................   (11,688)      (8,212)          (12,501)
INVESTING ACTIVITIES
Purchase of investments....................................    (2,280)      (2,280)               --
Purchases of property and equipment, net...................    (1,935)      (3,469)           (2,596)
Proceeds from disposal of property and equipment...........      (163)           5               788
Cash acquired from acquisition of business.................     1,008           --                --
Sale of investments........................................     5,972        6,361             1,026
Patents/intangibles........................................      (398)        (315)              (43)
Deposits and other assets..................................       324        1,162                --
Other......................................................       (60)         (31)               --
                                                             --------     --------          --------
Net cash provided by (used in) investing activities........     2,468        1,433              (825)
FINANCING ACTIVITIES
Issuance of common shares..................................       177          748                --
Exercise of employee stock options.........................        18            1               700
Issuance of preferred stock by subsidiary..................     6,286        1,831                --
Issuance of redeemable convertible preferred stock.........        --        1,500             1,830
Issuance of warrants.......................................        --           --               670
Proceeds from notes payable................................       314          738                --
Proceeds from term loan....................................        --           --             5,579
Proceeds from issuance of convertible debt.................        --        1,000                --
Proceeds from revolving lines of credit....................    11,280        9,278             5,568
Principal payments on notes payable and capital leases.....      (761)        (724)             (887)
Principal payments on lines of credit......................   (11,021)      (9,022)               --
Cash paid for shareholder distribution.....................       (85)          --                --
                                                             --------     --------          --------
Net cash provided by financing activities..................     6,208        5,350            13,460
                                                             --------     --------          --------
Net increase (decrease) in cash............................    (3,012)      (1,429)              134
Cash, beginning of year....................................     6,798        3,994             1,051
                                                             --------     --------          --------
Cash, end of year..........................................  $  3,786     $  2,565          $  1,185
                                                             ========     ========          ========
NONCASH INVESTING AND FINANCING ACTIVITIES
Equipment acquired under capital leases....................  $    235     $    160          $     --
                                                             ========     ========          ========
Preferred stock of subsidiary exchanged for common 
  shares of the Company....................................  $  4,452     $  2,721          $     45
                                                             ========     ========          ========
Shares subscribed for in 1992 for which common 
  shares were issued in 1994...............................  $    598     $     --          $     --
                                                             ========     ========          ========
Equity issued in acquisition of a business.................  $     --     $  6,990          $     --
                                                             ========     ========          ========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest.....................................  $     57     $    195          $    912
                                                             ========     ========          ========
Cash paid for taxes, net of refunds........................  $      5     $  1,262          $  1,010
                                                             ========     ========          ========
</TABLE>
 
                            See accompanying notes.
 
                                      F-11
<PAGE>   61
 
                            UROHEALTH SYSTEMS, INC.
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1.  DESCRIPTION OF THE COMPANY AND BASIS OF FINANCIAL STATEMENT PRESENTATION
 
  Description of the Company
 
     UROHEALTH Systems, Inc. (the "Company") is engaged in the manufacture,
marketing and distribution of products used by urologists and gynecologists. The
Company is focused on developing a broad range of products specific to these two
specialities using a direct sales distribution channel.
 
  Basis of Financial Statement Presentation
 
     In 1996, the Company changed its fiscal year end to March 31. Fiscal 1996
is a nine month transition period ended March 31, 1996.
 
     During the nine month period ended March 31, 1995, the Company's results of
operations included: net sales of $32.7 million; gross profits of $21.7 million;
income taxes of $1.0 million; net loss of $15.5 million; and net loss per share
of $1.28.
 
     Financial information for fiscal years 1994 and 1995 has been restated to
reflect mergers with Osbon Medical Systems Ltd., Dacomed Corporation, Advanced
Surgical, Inc. and Allstate Medical Products, Inc. Significant intercompany
accounts and transactions have been eliminated in consolidation and certain
amounts have been reclassified in prior periods to conform to the current period
presentation.
 
  Unaudited Pro Forma Financial Information
 
     The accompanying pro forma balance sheet as of March 31, 1996 has been
prepared assuming the Company completed a private placement of $50.0 million of
convertible subordinated debentures and converted the convertible note and
redeemable convertible preferred stock into common stock as of that date.
 
     The first and second closings of a private placement of $50.0 million,
8.75% convertible debentures were completed on May 13, 1996 and May 20, 1996,
respectively, and upon consummation of the third closing, is estimated to
provide proceeds of approximately $45.0 million, net of debt issuance costs
(Note 7). The Company used $16.5 million of the private placement proceeds to
repay amounts outstanding under a Credit Agreement. As of March 31, 1996,
approximately $13.1 million was outstanding under the Credit Agreement (Note 6).
In connection with the $50.0 million private placement, a break-up fee
consisting of $500,000 cash and 200,000 warrants, was paid to the lender under
the Credit Agreement. The warrants have an exercise price of $9.15 and expire in
May 2001. The break-up fee and unamortized deferred loan costs related to the
Credit Agreement totaling approximately $2.0 million, net of taxes, will be
recorded as an extraordinary expense in fiscal 1997.
 
     Also on May 13, 1996, obligations under the convertible note and redeemable
convertible preferred stock, totalling approximately $8.5 million, were
exchanged for 1,414,827 shares of the Company's common stock, (Note 8). As of
March 31, 1996, approximately $4.8 million was outstanding under these
securities and were convertible into approximately 806,000 shares.
 
  Business Combinations
 
     In December 1995, the Company acquired all of the outstanding common stock
of Osbon Medical Systems, Ltd. (Osbon), a private healthcare company in the
urological products field and Advanced Surgical, Inc. (Advanced), a publicly
held manufacturer and distributor of minimally invasive surgical products and a
proprietary female incontinence product under development. The acquisitions were
completed in two separate transactions both of which have been accounted for as
pooling of interests and accordingly, the accompanying consolidated financial
statements of the Company include the assets, liabilities and operations of
these companies with those of the Company for all periods presented. The Company
issued 5,937,833 shares of its common stock in connection with these
acquisitions.
 
                                      F-12
<PAGE>   62
 
                            UROHEALTH SYSTEMS, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
1.  DESCRIPTION OF THE COMPANY AND BASIS OF FINANCIAL STATEMENT PRESENTATION
    (CONTINUED)

     In July 1995, the Company acquired all of the outstanding common stock of
Dacomed Corporation (Dacomed), a private healthcare company in the urological
products field and Allstate Medical Products, Inc. (Allstate), a private
manufacturer and distributor of disposable urinary incontinence products. The
acquisitions were completed in two separate transactions both of which have been
accounted for as pooling of interests and accordingly, the accompanying
consolidated financial statements of the Company include the assets, liabilities
and operations of these companies with those of the Company for all periods
presented. The Company issued 1,800,856 shares of its common stock in connection
with these acquisitions.
 
     The results of operations previously reported by Osbon, Advanced, Dacomed
and Allstate included in the accompanying consolidated financial statements are
summarized below (in thousands):
 
<TABLE>
<CAPTION>
                                                                                     NINE
                                                                                    MONTHS
                                                          YEAR ENDED JUNE 30,        ENDED
                                                         ---------------------     MARCH 31,
                                                           1994         1995         1996
                                                         --------     --------     ---------
    <S>                                                  <C>          <C>          <C>
    Net sales:
      Osbon............................................  $ 20,681     $ 25,767      $ 23,653
      Advanced.........................................     1,754        2,231         1,223
      Dacomed..........................................     8,920        9,300         8,017
      Allstate.........................................     2,215        2,275         1,798
      UroHealth........................................     4,258        5,880         4,950
                                                         --------     --------      --------
              Combined.................................  $ 37,828     $ 45,453      $ 39,641
                                                         ========     ========      ========
    Net income (loss):
      Osbon............................................  $    813     $  2,035      $    528
      Advanced.........................................   (13,068)     (12,283)       (2,408)
      Dacomed..........................................    (1,389)        (692)       (1,310)
      Allstate.........................................       148          (42)         (623)
      UroHealth........................................    (6,631)      (7,524)      (14,185)
                                                         --------     --------      --------
              Combined.................................  $(20,127)    $(18,506)     $(17,998)
                                                         ========     ========      ========
</TABLE>
 
     Prior to the December 1995 merger, Osbon prepared its financial statements
on the basis of a September 30 fiscal year and Advanced had a December 31 year
end. The consolidated results of operations for the years ended June 30, 1994
and 1995 include the results of operations of Osbon for the years ended
September 30, 1994 and 1995, respectively. Accordingly, revenues of
approximately $6,809,000 and net income from operations of $373,000 were
included in the consolidated results of operations for both fiscal periods ended
June 30, 1995 and March 31, 1996. The consolidated results of operations for the
years ended June 30, 1994 and 1995 include the results of operations of Advanced
for the year ended December 31, 1994 and for the year ended June 30, 1995,
respectively. Accordingly, revenues of approximately $1,111,000 and net loss
from operations of $10,154,000 for Advanced were included in both the June 30,
1994 and 1995 consolidated results of operations.
 
     Prior to the July 1995 merger, Dacomed and Allstate prepared their
financial statements on the basis of an October 31 and December 31 fiscal year
end, respectively. Revenues of approximately $3,500,000 and net loss from
operations of $315,000 of Dacomed for the period from July 1, 1994 to October
31, 1994 were included in both the June 30, 1994 and 1995 consolidated results
of operations. Revenues of approximately $1,100,000 and net income of $74,000 of
Allstate for the period from July 1, 1994 to December 31, 1994 were included in
both the June 30, 1994 and 1995 consolidated results of operations.
 
                                      F-13
<PAGE>   63
 
                            UROHEALTH SYSTEMS, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
1.  DESCRIPTION OF THE COMPANY AND BASIS OF FINANCIAL STATEMENT PRESENTATION
    (CONTINUED)

     No adjustments were required to be made to the net assets of the combining
enterprises to conform accounting practices. There was no effect on net income
previously reported. The individual fiscal years of the merged companies were
not changed.
 
     On March 17, 1995, the Company acquired all of the issued and outstanding
stock of UroHealth of Kentucky, Inc. in exchange for an aggregate of 25,000
shares of the Company's common stock and assumption of debt, aggregating
approximately $137,000 to two principal stockholders of UroHealth of Kentucky,
Inc. The acquisition of UroHealth of Kentucky, Inc. has been accounted for by
the purchase method of accounting and, accordingly, the operations are included
in the accompanying consolidated financial statements from the acquisition date.
The excess of cost over fair value of net assets acquired in this transaction
has been allocated to goodwill in the consolidated balance sheet. In addition,
one principal stockholder entered into an employment agreement, two principal
stockholders entered into consulting arrangements with the Company, and all
three principal stockholders are entitled to receive, in the aggregate, fifty
percent of the Company's net profits generated from future incontinence clinics
operated by the Company if employing the UroHealth of Kentucky, Inc. operating
model.
 
     On July 27, 1994 through its Advanced subsidiary, the Company purchased all
of the outstanding capital stock of Laparomed Corporation, a developer,
manufacturer and marketer of single-use instruments for minimally invasive
surgery, primarily laparoscopic procedures used by gynecologists and general
surgeons, in exchange for 236,000 shares of the Company's common stock. The
acquisition has been accounted for by the purchase method of accounting and the
purchase price of $6,990,000 approximates the fair value of the net assets
acquired. The operating results of this acquisition, including purchased
research and development as a result of this acquisition, are included in the
Company's consolidated results of operations from the date of the Laparomed
acquisition. During the fiscal year ended June 30, 1995, the Company incurred
approximately $1,665,000 related to the relocation of Laparomed's operations and
employee termination costs.
 
2.  SIGNIFICANT ACCOUNTING POLICIES
 
  Revenue Recognition
 
     Revenue from sales of manufactured products is recognized upon shipment to
customers.
 
  Cash and Equivalents
 
     Cash and equivalents include time deposits, certificates of deposit and
other marketable securities with original maturities of three months or less.
 
  Property and Equipment
 
     Property and equipment are recorded at cost, less accumulated depreciation
and amortization. Maintenance and repairs are charged to expense as incurred,
and renewals and betterments are capitalized. Depreciation and amortization are
provided on the straight line method over the assets estimated useful lives.
Estimated useful lives range from five to seven years for office equipment, five
to ten years for equipment and tooling, ten years for molds and three to five
years for vehicles. For leasehold improvements, the useful life is determined to
be the original term of the lease.
 
  Patents, Intangibles and Goodwill
 
     Intangible assets consisting of patents, trademarks and goodwill are
amortized on a straight-line basis over various periods up to twenty years.
Intangible assets are reviewed if the facts and circumstances suggest that they
may be impaired. An intangible asset is deemed to be impaired when the
unamortized balance exceeds the undiscounted estimated future cash flows from
the related assets.
 
                                      F-14
<PAGE>   64
 
                            UROHEALTH SYSTEMS, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
2.  SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
  Advertising Expense
 
     Advertising and promotion costs are expensed when incurred. Such costs in
fiscal 1994, 1995 and 1996 were $952,000, $1,037,000 and $727,000, respectively.
 
  Research and Development Expense
 
     Research and development expenses are charged against income as incurred.
 
  Warranty and Product Liability Costs
 
     Estimated warranty costs, insurance deductible amounts associated with
product liability claims, and an amount for incurred but not reported product
liability incidents are accrued in the period the products are sold. Actual
costs are charged against the accrual when paid.
 
  Per Share Information
 
     Net loss per share is based on net income attributable to common
stockholders and the weighted average number of shares of common stock
outstanding during the periods presented. Common stock equivalents have not been
included in the calculation as they are anti-dilutive.
 
  Recent Accounting Pronouncements
 
     Effective March 1995, the Financial Accounting Standards Board issued
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long Lived Assets to be Disposed of ("FAS 121), which requires impairment losses
to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than assets' carrying amount. FAS 121 also addresses
the accounting for long-lived assets that are expected to be disposed of. The
Company adopted FAS 121 during the first quarter of fiscal 1996 and, with no
material effect to its financial statement position or results of operations.
 
     In November 1995, the Financial Accounting Standards Board issued Statement
No. 123 Accounting for Stock Based Compensation ("FAS 123"). The Company has
elected to continue accounting for stock options under APB No. 25 Accounting for
Stock Issued to Employees and adopt the pro forma disclosure provisions of FAS
123. The adoption of FAS 123 would not have a material effect on the Company's
financial position or results of operations for the year ended December 31,
1995.
 
  Use of Estimates
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
 
                                      F-15
<PAGE>   65
 
                            UROHEALTH SYSTEMS, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
3.  INVESTMENTS
 
     All investments have been classified as available-for-sale, and are carried
at fair value or amortized cost. At June 30, 1995, investments consist of mutual
funds, corporate bonds and certificates of deposits in the amounts of $1.0
million, $20,000 and $6,000, respectively. All debt securities carried as
investments matured in six months or less.
 
4.  PROPERTY AND EQUIPMENT
 
     Property and equipment consists of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                                      JUNE 30,     MARCH 31,
                                                                        1995         1996
                                                                      --------     ---------
    <S>                                                               <C>          <C>
    Office equipment................................................   $ 4,027      $ 4,560
    Equipment and tooling...........................................     5,582        3,920
    Molds...........................................................     2,169        2,177
    Leasehold improvements..........................................       462        1,150
    Building........................................................     1,265        1,718
    Land............................................................       247          247
    Other...........................................................       484          962
                                                                       -------      -------
                                                                        14,236       14,734
    Accumulated depreciation........................................     5,538        6,602
                                                                       -------      -------
                                                                       $ 8,698      $ 8,132
                                                                       =======      =======
    Equipment recorded under capital leases included above..........   $   534          534
    Accumulated depreciation thereon................................        80          124
                                                                       -------      -------
                                                                       $   454      $   410
                                                                       =======      =======
</TABLE>
 
5.  INVENTORIES
 
     Inventories are carried at the lower of cost, determined on the first-in,
first-out basis, or market and consist of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                                       JUNE 30,     MARCH 31,
                                                                         1995         1996
                                                                       --------     ---------
    <S>                                                                <C>          <C>
    Raw materials and supplies.......................................   $1,783       $1,963
    Work in progress.................................................      262          318
    Finished goods...................................................    2,635        3,424
                                                                        ------       ------
                                                                        $4,680       $5,705
                                                                        ======       ======
</TABLE>
 
                                      F-16
<PAGE>   66
 
                            UROHEALTH SYSTEMS, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
6.  NOTES PAYABLE AND LINES OF CREDIT
 
     Notes payable consist of the following (dollars in thousands):
 
<TABLE>
<CAPTION>
                                                                                     
                                                                       JUNE 30,     MARCH 31,
                                                                         1995         1996
                                                                       --------     ---------
    <S>                                                                <C>          <C>
    Term loan under Credit Agreement, repaid May 13, 1996..........     $   --       $6,000
    Bank note, interest at prime plus 3%, repaid in November
      1995.........................................................        375           --
    Bank note, interest at 8.75%, repaid in April 1996.............        338          326
    Bank note, interest at 8.75%, repaid in April 1996.............        253          221
    Bank note dated December 21, 1992, due in 180 monthly
      installments with interest at 8.75% collateralized by a
      building.....................................................        180          175
    Unsecured bank notes with interest rates of prime plus .5% to
      10%, repaid in October 1995..................................        170           --
    Bank note dated April 29, 1994, due in 36 monthly installments
      with interest at 8.75%; collateralized by equipment..........         42           41
    Bank note dated February 11, 1994, due in 30 monthly
      installments with interest at 8.75%; collateralized by
      equipment....................................................         34           29
    Various notes payable with interest from 8.5% to 10%, due dates
      through August 1, 1997, secured by equipment.................         43           19
                                                                        ------       ------
                                                                         1,435        6,811
              Less current maturities..............................        358          170
                                                                        ------       ------
                                                                        $1,077       $6,641
                                                                        ======       ======
</TABLE>
 
     Revolving lines of credit consist of the following (dollars in thousands):
 
<TABLE>
<CAPTION>
                                                                       JUNE 30,     MARCH 31,
                                                                         1995         1996
                                                                       --------     ---------
    <S>                                                                <C>          <C>
    Line of credit under Credit Agreement, interest at prime rate
      plus 4%, repaid in May 1996....................................   $   --       $ 5,500
    Line of credit with a bank in the lesser of $2,000 or 80% of
      subsidiaries' qualifying accounts receivable; interest at the
      bank's prime minus .25%; guaranteed by a stockholder of the
      company; repaid in May 1996....................................      986         1,623
    Line of credit with interest at the bank's reference rate plus
      2.5%; repaid in April 1996.....................................      378            --
    Line of credit, interest at bank prime plus 2%, repaid in
      November 1995..................................................      150            --
    Line of credit, interest at bank prime plus 2%, repaid in October
      1995...........................................................      175            --
                                                                        ------        ------
                                                                        $1,689       $ 7,123
                                                                        ======        ======
</TABLE>
 
     In October 1995, the Company refinanced all lines of credit assumed under
the Dacomed and Allstate mergers under a Credit Facility which provided for
borrowings up to $2.6 million under a revolving line of credit and maintained an
existing $375,000 term loan. In connection with the Credit Facility the Company
also granted 50,000 warrants with a five year term and an exercise price of
$10.50.
 
     In November 22, 1995, the Company refinanced the $2.6 million revolving
line of credit and the $375,000 term loan under the Credit Facility, entering
into a $10.0 million Credit Agreement with a new bank. The Credit Agreement
consisted initially of a $6.0 million term loan and a $4.0 million revolving
line of credit. The revolving line of credit under the Credit Agreement was
increased to $5.5 million in March 1996 and to $10.5 million in April 1996.
Interest on all borrowings under the Credit Agreement was at the bank's prime
rate plus 4.0% (plus 2.0% in the event of default). The Credit Agreement was
repaid with proceeds from the sale of convertible subordinated debentures in May
1996.
 
                                      F-17
<PAGE>   67
 
                            UROHEALTH SYSTEMS, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
6.  NOTES PAYABLE AND LINES OF CREDIT (CONTINUED)
     In connection with the initial borrowings under the Credit Agreement, the
Company granted a warrant to purchase 366,667 shares of the Company's common
stock at $9.15 per share. The warrant expires on November 22, 2000. In
connection with subsequent increases of amounts available under the line of
credit and significant covenant modifications the Company granted a warrant to
purchase 350,000 shares of the Company's common stock at $9.15 per share. The
warrant expires on April 12, 2001.
 
7.  CONVERTIBLE SUBORDINATED DEBENTURES -- (UNAUDITED)
 
     On May 3, 1996, the Company authorized the issuance of $50.0 million of
8.75% convertible subordinated debentures (the "Debentures") and warrants to
purchase 250,000 shares of the Company's common stock at $13.00. The Debentures
are convertible at any time and are subject to certain registration rights. The
Debentures mature in May 2006 and interest is payable quarterly in arrears. The
warrants expire in five years.
 
     The Debentures are redeemable at the option of the Company after two years,
if the average market price of the Company's common stock is above $22.00 for 60
consecutive days, or after three years without regard to the Company's common
stock price. The redemption price is equal to 105% of the principal amount
decreasing annually to the principal amount in 2004, plus accrued and unpaid
interest.
 
     The Debentures are convertible into common stock at $11.00 per share, are
subordinate to all future senior borrowings and will have voting rights on all
matters on an "as converted" basis. The holders of the Debentures must approve
any dividend, payment or other distribution to stockholders, as well as any
redemption of shares of common stock, options or warrants of the Company or any
subsidiary other than the preferred stock issued by Urohealth-California.
 
8.  CONVERTIBLE NOTE AND REDEEMABLE CONVERTIBLE PREFERRED STOCK
 
     In connection with the private placement of convertible subordinated
debentures, the holder of the Company's convertible note and the redeemable
convertible preferred stock exchanged these securities, plus accrued interest,
for 358,617 and 1,056,210 shares of the Company's common stock, respectively.
The exchange price was $6.00 per share. As a result of the conversion, deferred
debt issuance costs totalling approximately $0.9 million were charged to
additional paid-in capital. Warrants previously granted to the holder to
purchase 800,000 shares of the Company's common stock at $6.88 remain
outstanding and expire in 2000 and a warrant to purchase 250,000 shares of the
Company's common stock at $10.00 per share which expires in 2000 was issued to
the holder in connection with the conversion and modification of certain other
rights.
 
9.  CAPITAL AND OPERATING LEASES
 
     The Company has various capital equipment leases and operating lease
agreements for office and production facilities. The Company is required to pay
maintenance and property taxes attributable to the facilities. Rent expense
under all operating leases was approximately $1.0 million, $1.1 million and
$625,000 in 1994, 1995 and 1996, respectively.
 
                                      F-18
<PAGE>   68
 
                            UROHEALTH SYSTEMS, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
9.  CAPITAL AND OPERATING LEASES (CONTINUED)

     Future minimum lease payments at March 31, 1996 are shown in the following
table:
 
<TABLE>
<CAPTION>
                                                                        CAPITAL     OPERATING
                                                                        LEASES       LEASES
                                                                        -------     ---------
                                                                           (IN THOUSANDS)
    <S>                                                                 <C>         <C>
    Years ending March 31:
      1997............................................................    $150        $  925
      1998............................................................     140           733
      1999............................................................      66           738
      2000............................................................      36           461
      2001............................................................      --           442
      thereafter......................................................       1           368
                                                                          ----        ------
    Net minimum lease payments........................................     393        $3,667
                                                                                      ======
    Less imputed interest.............................................      66
                                                                          ----
    Present value of net minimum lease payments.......................     327
    Less current portion..............................................     116
                                                                          ----
    Long-term portion.................................................    $211
                                                                          ====
</TABLE>
 
10.  RESTRUCTURING CHARGES
 
     During the year ended June 30, 1995, the Company hired a new senior
management team which adopted and implemented a restructuring plan (the Plan)
under which it has refocused the Company's strategic direction. Under the Plan,
the Company terminated or amended certain distribution, consulting and
employment agreements. Accordingly, the consolidated statement of operations
reflects a charge of $1,200,000 ($.06 per common share) to terminate or
restructure these agreements under the Plan. The components of the restructuring
charges include a provision to discontinue the distribution of the
Adzorbstar(TM) product line of $360,000, termination agreements which include
indemnification costs of former employees for legal fees associated with an SEC
investigation of $250,000, termination of certain other consulting and
distributor agreements of $50,000, and the amendment and settlement of certain
claims under the employment agreement with the former Chief Executive Officer of
$540,000. All significant restructuring charges were paid in cash during the
1995 calendar year. Through March 31, 1996, cash payments have reduced the
components of the restructuring accrual to $328,000 primarily relating to the
settlement of certain claims with the former Chief Executive Officer.
 
     In December 1995, the Company implemented a restructuring plan to
consolidate redundant facilities and reduce personnel resulting from the mergers
with Dacomed Corporation, Osbon Medical Systems, Ltd. and Advanced Surgical,
Inc. Under the plan the Company has eliminated approximately 70 manufacturing,
engineering and administrative personnel and closed all operations at two
acquired facilities. The estimated cost associated with each component of this
restructuring plan and the cash and non-cash charges incurred during fiscal 1996
are summarized in the table below. Non-cash charges consist of the write-down of
existing assets to their estimated net realizable value. Reclassifications
during the period relate to decreases in severence amounts payable to officer's
of acquired companies, offset by increases in estimates for facility closure
costs including loss on sale of discontinued product lines and closure costs
related to international operations of acquired companies. The remaining
restructuring accrual at March 31, 1996 relates primarily to terminated employee
severance and facility lease obligations, which are expected to be paid in cash.
Although subject to future adjustment, management of the Company believes that
restructuring reserves as of March 31, 1996 are adequate to complete the
restructuring.
 
                                      F-19
<PAGE>   69
 
                            UROHEALTH SYSTEMS, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
10.  RESTRUCTURING CHARGES (CONTINUED)
 
<TABLE>
<CAPTION>
                                   BEGINNING                                                      BALANCE AT
                                 RESTRUCTURING     NON-CASH       CASH                             MARCH 31,
                                    ACCRUAL         CHARGES     CHARGES     RECLASSIFICATIONS        1996
                                 --------------    ---------    --------    ------------------    -----------
                                                                (IN THOUSANDS)
    <S>                          <C>               <C>          <C>         <C>                   <C>
    Personnel reduction
      costs....................      $2,620         $   --      $1,171            $(730)            $  719
    Facility reduction costs...       2,836          1,187       1,258              730              1,121
                                     ------         ------      ------            -----             ------
                                     $5,456         $1,187      $2,429            $  --             $1,840
                                     ======         ======      ======            =====             ======
</TABLE>
 
11.  MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY
 
     In September and October 1993, the Company, and its subsidiary, Urohealth,
Inc. (California) ("Urohealth-California"), completed two private placements for
430,000 units at a subscription price of $10.00 per unit for gross proceeds of
$4,300,000. The net proceeds to Urohealth-California were $3,820,000. In the
first private placement, each unit consisted of two shares of Series A
Convertible Preferred Stock of Urohealth-California ("Urohealth-California
Series A Preferred Stock") and one warrant to purchase one third of a share of
common stock of the Company at an exercise price of $5.00 per preferred share.
In the second private placement, each unit consisted of two shares of Junior
Convertible Preferred Stock of Urohealth-California ("Urohealth-California
Junior Preferred Stock") and one warrant to purchase one third of a share of
common stock of the Company at an exercise price of $5.00 per share. The
Urohealth-California Series A Preferred Stock and Urohealth-California Junior
Preferred Stock are hereinafter collectively referred to as the
"Urohealth-California Preferred Stock." Each share of the Urohealth-California
Preferred Stock has a liquidation preference of $5.00 per preferred share,
together with all accrued but unpaid dividends. Cumulative dividends of 7% per
annum accrue on the Urohealth-California Preferred Stock, payable when and if
declared by the Board of Directors of the Company out of legally available
funds, prior to any dividend on the Company's common stock. Unless exchanged or
converted prior to redemption, each share of the Urohealth-California Preferred
Stock is redeemable by the Company upon 30 days' notice, by payment of $5.00 per
preferred share together with any accrued but unpaid dividends and prior to
October 31, 2001, and a designated redemption premium. The Board of Directors of
the Company, subsequent to year end, has authorized the redemption of all
outstanding Urohealth-California Series A Preferred Stock. The terms of the
warrants included in the units are identical to the terms of the warrants issued
as part of the units sold in the public offering in March 1992 (Note 15).
 
     In May 1994, the Company and Urohealth-California completed an additional
private placement for 178,180 units at a subscription price of $15.50 per unit
for gross proceeds of $2,762,000. The net proceeds to Urohealth-California were
$2,466,000. In fiscal 1995, the Company accepted subscriptions for 130,000 units
(representing 390,000 shares of Urohealth-California Subordinate Preferred
Stock, and 390,000 warrants of the Company) at $15.50 per unit for total
proceeds of $2,015,000. The net proceeds to Urohealth-California was $1,831,000.
Each unit consisted of three shares of Subordinate Convertible Preferred Stock
of Urohealth-California (the "Urohealth-California Subordinate Preferred Stock")
and three warrants identical to the warrants issued as part of the units sold in
the public offering in March 1992 (Note 15). All outstanding shares of
Urohealth-California Subordinate Preferred Stock were exchanged for 177,000
shares of the Company's common stock in fiscal 1995.
 
                                      F-20
<PAGE>   70
 
                            UROHEALTH SYSTEMS, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
11.  MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY (CONTINUED)

     Minority interest reflected in the consolidated balance sheets consists of
(dollars in thousands):
 
<TABLE>
<CAPTION>
                                                       JUNE 30, 1995            MARCH 31, 1996
                                                    --------------------     --------------------
                                                     SHARES      AMOUNT       SHARES      AMOUNT
                                                    --------     -------     --------     -------
<S>                                                 <C>          <C>         <C>          <C>
     Davstar Series A Preferred Stock:
       Outstanding at beginning of year...........   267,000     $ 1,186      213,000     $   944
       Issued during year.........................        --          --           --          --
       Exchanged during year......................   (54,000)       (242)     (10,000)        (45)
                                                    --------     -------     --------     -------
       Outstanding at end of year.................   213,000         944      203,000         899
     Davstar Subordinate Preferred Stock:
       Outstanding at beginning of year...........   140,568         648           --          --
       Issued during year.........................   390,000       1,831           --          --
       Exchanged during year......................  (530,568)     (2,479)          --          --
                                                    --------     -------     --------     -------
       Outstanding at end of year.................        --          --           --          --
                                                    --------     -------     --------     -------
     Outstanding at June 30, 1995.................   213,000     $   944      203,000     $   899
                                                    ========     =======     ========     =======
</TABLE>
 
     The redemption value at March 31, 1996 of the outstanding 203,000 Davstar
preferred stock is $1,239,750.
 
12.  RELATED PARTY TRANSACTIONS
 
     Corporations related through common ownership provide advertising,
publishing management and computer services to the Company. Such services
totaled $1,035,000, $1,977,000 and $1,359,000 for the fiscal periods ended June
30, 1994 and 1995 and March 31, 1996, respectively. At June 30, 1994 and 1995
and March 31, 1996, amounts owed to these related corporations totaled $127,000,
$28,000 and $53,000, respectively. These services are in all cases competitively
priced and of comparable value to services that would have been received from a
third party.
 
     The Company leases certain of its office facilities from a party related to
certain shareholders; rental expense under the lease is approximately $17,000
per month and the lease expires in 2003.
 
13.  CAPITAL STOCK
 
     Subsequent to March 31, 1996 the Board of Directors approved an increase in
the number of common shares authorized to be issued from 20.0 million shares to
50.0 million shares, which increase is subject to stockholder approval.
 
     Each outstanding share of the Company's common stock carries a stock
purchase right. Under certain circumstances, each right may be exercised to
purchase one-hundredth of a share of the Company's Series B Preferred Stock for
$200. Under certain circumstances, following the acquisition of 20% or more of
the Company's outstanding common stock by an acquiring person, as defined in the
Preferred Share Purchase Rights Plan (Note 16), each right (other than rights
held by an acquiring person) may be exercised to purchase common stock of the
Company or a successor company with a market value of twice the $200 exercise
price. The rights, which are redeemable by the Company at $.01 per right, expire
June 30, 2003.
 
     The Series B Preferred Stock is issuable in series holding rights and
restrictions as designated by the directors before issue. In June 1993, the
directors designated a series of 250,000 Series A Preferred Stock. Subsequent to
March 31, 1996, the Board of Directors created Series C Preferred Stock of the
Company having the rights, preferences and privileges designated by the
directors. The Series C Preferred Stock will be
 
                                      F-21
<PAGE>   71
 
                            UROHEALTH SYSTEMS, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
13.  CAPITAL STOCK (CONTINUED)

exchanged for convertible subordinated debentures (Note 7) upon approval by
stockholders of voting rights for the convertible subordinated debentures.
Except as described above, no other series of preference shares has been
designated.
 
     In December 1994, the Company completed a private placement of 121,667
common shares for net proceeds of $618,000. At March 31, 1996, the number of
common shares potentially issuable in relation to outstanding stock options,
warrants, the convertible note, redeemable convertible preferred stock and
conversion of preferred stock of Urohealth-California and the Company was
7,925,669 shares, subject to increase under anti-dilution provisions.
 
14.  STOCK OPTION PLANS
 
     In March 1986, the Company established a stock option plan (the "1986
Plan"), which provides for the granting of common stock options to directors,
officers and key employees of the Company and its subsidiaries. The 1986 Plan
was amended in March 1988. Under the 1986 Plan, common stock options for up to
10% of the number of common shares of the Company outstanding from time to time
may be granted, provided that options in favor of any one individual may not
exceed 5% of the issued and outstanding common shares. However, the total number
of common shares under the 1986 Plan and any other option plan maintained by the
Company may not exceed 10% of the common shares of the Company outstanding from
time to time.
 
     The exercise price of all stock options granted under the 1986 Plan must be
at least equal to the fair market value of such shares on the date of grant, and
the maximum term of each option may not exceed five years.
 
     In October 1992, the Company adopted the 1992 Employee Stock Option Plan
(the "1992 Plan"), which provides for the granting of both incentive and
nonstatutory common stock options (as defined) to officers and employees of the
Company and its subsidiaries. Under the 1992 Plan, up to 366,667 options may be
granted; however, the total number of common shares under the 1992 Plan and any
other option plan maintained by the Company may not exceed 10% of the number of
common shares of the Company outstanding from time to time. The 1992 Plan
received stockholder approval at the Company's annual meeting held in December
1992.
 
     The exercise price of all options granted under the 1992 Plan is to be
determined by the Board; however, in the case of incentive stock options, the
exercise price must be at least equal to the fair market value of such shares on
the date of grant, and the maximum term of each option may not exceed ten years.
 
     In October 1994, the Company established a stock option plan (the "1994
Plan") which provides for the granting of both incentive and nonstatutory common
stock options to employees, consultants and independent contractors of the
Company and its affiliates. The 1994 Plan, as amended, authorizes the issuance
of up to the greater of 2,333,333 shares of common stock or 20% of the Company's
outstanding shares in the form of stock options, stock grants, rights to
purchase restricted stock and stock appreciation rights.
 
     The exercise price for any incentive stock option granted under the 1994
Plan shall not be less than the fair market value of the stock on the date of
the grant. However, no incentive option may be granted to a person who, at the
time of grant, owns stock constituting more than 10% of the total combined
voting power of all classes of the Company's stock, unless the exercise price is
at least 110% of the fair market value of the stock on the option grant date.
The exercise price for any nonstatutory stock option granted under the 1994 Plan
may not be less than 85% of the fair market value of the stock on the date the
option is granted; provided, however, that the exercise price of options granted
to covered employees shall not be less than 100% of the fair market value on the
date of the grant.
 
     The term of an incentive stock option granted under the 1994 Plan shall not
exceed ten years; provided that the term of any option granted to a 10%
stockholder shall not exceed five years.
 
                                      F-22
<PAGE>   72
 
                            UROHEALTH SYSTEMS, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
14.  STOCK OPTION PLANS (CONTINUED)

     Pursuant to the merger agreement with Dacomed, the Company assumed the
obligation to Dacomed employees for stock options granted under the Dacomed 1989
Stock Option Plan (the "Dacomed Plan"). The Dacomed Plan provides for granting
of both incentive and non-statutory stock options at the fair market value of
such shares at the date granted and the option term may not exceed ten years.
 
     Pursuant to the merger agreement with Advanced, the Company assumed the
obligation to Advanced employees for stock options granted under Advanced's 1992
stock option plan for employees and consultants (the "Advanced Plan"); there are
reserved for issuance 289,300 common shares of the Company. The Advanced Plan
provides for the granting of incentive and non-qualified stock options. The
exercise price of options under this plan may not be less than 85% of the fair
market value of the shares at the time of grant. Options may be exercised for
not more than ten years from the date of grant and vest at various rates.
Options under the 1986 Plan, the 1992 Plan, the 1994 Plan, the Dacomed Plan and
the Advanced Plan expire at various dates through 2005.
 
     The following table summarizes the activity under the 1986 Plan, the 1992
Plan, the 1994 Plan, the Dacomed Plan and the Advanced Plan for the year ended
June 30, 1995 and for the nine months ended March 31, 1996.
 
<TABLE>
<CAPTION>
                                                                       NUMBER OF SHARES
                                                                    -----------------------
                                                                    JUNE 30,      MARCH 31,
                                                                      1995          1996
                                                                    ---------     ---------
    <S>                                                             <C>           <C>
    Outstanding at beginning of year..............................    458,483     1,526,658
    Granted.......................................................  1,141,789     2,682,499
    Exercised (1995 -- $1.50 per share,
      1996 -- $2.25 to $12.125 per share).........................    (30,360)     (159,805)
    Expired or cancelled..........................................    (43,254)      (38,798)
                                                                    ---------     ---------
    Outstanding at end of year....................................  1,526,658     4,010,554
                                                                    =========     =========
    Exercisable at end of year (1995 and 1996 -- $1.86 to
      $58.48 per share)...........................................    761,732       969,360
                                                                    =========     =========
</TABLE>
 
  Option Agreements
 
     In November 1992, the Company adopted the Non-Employee Directors Stock
Option Plan (the "Directors Plan"). Under the terms of the Directors Plan, up to
200,000 options may be granted. The Directors Plan received stockholder approval
at the Company's annual meeting held December 1992. The term of each option is
five years, and an option first becomes exercisable one year after the date of
the grant. Under the Plan, each person serving as a director of the Company who,
during the previous fiscal year, has attended 75% of the total number of
meetings of the Board and committees of the Board on which he or she served, and
who is not employed by the Company, will automatically be granted 7,500 options.
At March 31, 1996, 60,000 options were outstanding under the Directors Plan.
 
     In December 1992, the Company adopted a Stock Appreciation Rights Plan (the
"SAR Plan"), which provides for granting of Stock Appreciation Rights ("SARs")
to officers and significant employees of the Company and its subsidiaries. Under
the SAR Plan, up to 500,000 SAR's may be granted and the SAR holder may elect to
receive cash, common stock or a combination of cash and common stock upon
exercise of a SAR. During 1995, of the 300,000 outstanding SAR's, 150,000 SAR's
were cancelled and 150,000 SAR's were converted to options to purchase the
Company's common stock. None of the remaining 200,000 SAR's were granted, and
the plan was terminated in 1995.
 
                                      F-23
<PAGE>   73
 
                            UROHEALTH SYSTEMS, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
15.  OTHER STOCK OPTIONS AND WARRANTS
 
     The following table indicates the expiration dates, exercise prices per
share and number of non-employee common stock options and warrants outstanding
at June 30, 1995 and March 31, 1996.
 
<TABLE>
<CAPTION>
                                                                       NUMBER OF SHARES
                                                                    -----------------------
                                                                    JUNE 30,      MARCH 31,
                                                                      1995          1996
                                                                    ---------     ---------
    <S>                                                             <C>           <C>
    Warrants issued in conjunction with public offering
      in March 1992 expiring in March 1997........................    499,415       499,415
    Warrants issued to underwriters in conjunction with
      public offering expiring in March 1997:
      110,000 units...............................................     73,333        73,333
      110,000 warrants............................................     36,667        36,667
    Warrants issued in conjunction with private placements........    451,513       451,513
    Other non employee stock options and warrants expiring
      between November 1993 and May 2005, exercise price 1995 and
      1996 $1.86 to $23.625.......................................  1,330,353     1,980,571
                                                                    ---------     ---------
    Outstanding at end of year....................................  2,391,281     3,041,499
                                                                    =========     =========
    Exercisable at end of year (1995 and 1996 $1.86 to $23.625 per
      share)......................................................  1,113,809     1,322,367
                                                                    =========     =========
</TABLE>
 
     Each warrant issued in conjunction with the public offering or private
placements in the table above entitles the holder to purchase a one third share
of common stock of the Company at a price of $5.00 until the warrants expire in
March 1997. The number and kind of securities or other property for which the
options are exercisable are subject to adjustments in certain events, such as
mergers, reorganizations or stock splits, to prevent dilution. The Company may
redeem any unexercised outstanding warrants for $0.25 per warrant (upon 30 days'
written notice) at any time at which the closing price for the Company's common
shares, has exceeded $22.50 per share for any period of 30 consecutive trading
days within the 60 trading days preceding the call notice.
 
16.  PREFERRED SHARE PURCHASE RIGHTS PLAN
 
     On December 22, 1992, the Board adopted the Preferred Share Purchase Rights
Plan (the "Rights Plan") which is designed to deter coercive or unfair takeover
tactics, to prevent a person or group from gaining control of the Company
without offering fair value to all stockholders and to deter other abusive
takeover tactics which are not in the best interest of stockholders. In May
1993, the Company executed the Rights Plan with its transfer agent.
 
     Under the terms of the Rights Plan each common share is accompanied by one
right; each right entitles the registered stockholder to purchase from the
Company, one-hundredth of a share of, Series A Junior Participating Preferred
Stock, $0.001 par value, at an exercise price of $200.
 
     The rights only become exercisable ten days after a public announcement
that an acquiring person (as defined in the Rights Plan) has acquired 20% or
more of the outstanding common shares of the Company or a person or group offers
to acquire 35% or more of the outstanding common shares of the Company or ten
days after the Company determines that a person is an Adverse Person (as defined
in the Rights Plan). The Company can redeem the Rights for $.01 per Right at any
time until ten days after the rights become exercisable (the 10-day period can
be extended by the Company). The Rights Plan will expire on June 30, 2003 unless
earlier redeemed by the Company.
 
                                      F-24
<PAGE>   74
 
                            UROHEALTH SYSTEMS, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
16.  PREFERRED SHARE PURCHASE RIGHTS PLAN (CONTINUED)

     If, subsequent to the rights becoming exercisable, the Company is acquired
in a merger or other business combination at any time when there is a 20% or
more holder, the rights will then entitle a holder to buy shares of common stock
of the acquiring company with a market value equal to twice the exercise price
of each right. Alternatively, if the 20% holder acquires the Company by means of
a merger in which the Company and its stock survive, or if any person acquires
35% or more of the Company's common stock, each right not owned by a 20% or more
stockholder, will become exercisable for common stock of the Company having a
market value equal to twice the exercise price of the right.
 
17.  SETTLEMENT OF LITIGATION AND WARRANTS TO BE ISSUED
 
     Class action litigation which has been settled, was filed against the
Company and its former management in November 1992, in the United States
District Court in Los Angeles, California alleging federal securities law
claims. The Company negotiated a settlement that was approved by the court in
March, 1995. Under the terms of the settlement, the Company will issue to the
stockholder class and register pursuant to the Securities Act 260,163 warrants
to purchase Common Stock identical to the Company's currently outstanding
publicly traded warrants having an exercise price of $15.00 per share and an
expiration date of March 20, 1997. The Company's insurance carrier will make a
cash payment to the stockholder class in the amount of $2.4 million. The
settlement included a release of class claims.
 
     The Securities and Exchange Commission (the "Commission") also instituted
an investigation relating to the above matters. The Commission has approved a
settlement under which the Company neither admits nor denies the findings of the
Commission and under which the Company is the subject of a cease and desist
order. There were no monetary sanctions sought against the Company as a part of
the settlement.
 
     The Company required Advanced as part of the merger agreement to resolve a
class action complaint filed in the United States District Court for the
Southern District of New York which names Advanced as one of the defendants in
the class action lawsuit titled "In re Blech Securities Litigation." In
September 1995, Advanced and the plaintiffs in the litigation, through their
attorneys, reached an agreement in principle for the settlement of the class
action with respect to Advanced, the terms of which are set forth in a
Stipulation of Settlement between such parties (the "Stipulation of
Settlement"). Pursuant to the terms of the Stipulation of Settlement, Advanced
paid $300,000 in settlement of such lawsuit.
 
                                      F-25
<PAGE>   75
 
                            UROHEALTH SYSTEMS, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
18.  INCOME TAXES
 
     Deferred income taxes reflect the net effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:
 
<TABLE>
<CAPTION>
                                                                       JUNE 30,    MARCH 31,
                                                                         1995        1996
                                                                       --------    ---------
                                                                          (IN THOUSANDS)
    <S>                                                                <C>         <C>
    Deferred tax assets:
      Federal, state and foreign net operating loss carryovers.....    $ 16,785     $19,132
      Restructuring and merger costs...............................          --       2,875
      Tax credit carryovers........................................         715       1,072
      Inventory reserve............................................          --         805
      Allowance for doubtful accounts..............................          --         645
      Other........................................................         816         561
      Valuation allowance..........................................     (18,157)    (23,365)
                                                                       --------     -------
              Total deferred tax assets, net.......................         159       1,725
    Deferred tax liabilities:
      Book basis of fixed assets in excess of tax basis............         159         765
      State taxes..................................................          --         960
                                                                       --------     -------
              Total deferred tax liabilities.......................         159       1,725
                                                                       --------     -------
              Total................................................    $     --     $    --
                                                                       ========     =======
</TABLE>
 
     The Company increased its valuation allowance during the period ended March
31, 1996 by $5,208,000 since the realization of tax benefits of operating loss
carryforwards is not assured. Certain reductions in the valuation allowance
totaling approximately $105,000 will be credited to additional paid-in capital.
 
     The components of the provision (benefit) for income taxes are as follows:
 
<TABLE>
<CAPTION>
                                                               JUNE 30,     JUNE 30,   MARCH 31,
                                                                 1994         1995       1996
                                                               --------     --------   ---------
                                                                       (IN THOUSANDS)
    <S>                                                        <C>          <C>        <C>
    Current:
      Federal..............................................      $451        $1,199      $ 420
      Foreign..............................................        --            --         14
      State................................................        96           137        149
                                                                 ----        ------      -----
              Total current................................       547         1,336        583
    Deferred:
      Federal..............................................        16            42       (128)
      Foreign..............................................        --            --         --
      State................................................         3             8        (24)
                                                                 ----        ------      -----
              Total deferred...............................        19            50       (152)
                                                                 ----        ------      -----
    Provision for income taxes.............................      $566        $1,386      $ 431
                                                                 ====        ======      =====
</TABLE>
 
                                      F-26
<PAGE>   76
 
                            UROHEALTH SYSTEMS, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
18.  INCOME TAXES (CONTINUED)

     The provision for income taxes at the Company's effective tax rate differed
from the provision for income taxes at the statutory rate as follows:
 
<TABLE>
<CAPTION>
                                                            JUNE 30,     JUNE 30,     MARCH 31,
                                                              1994         1995         1996
                                                            --------     --------     ---------
                                                                      (IN THOUSANDS)
    <S>                                                     <C>          <C>          <C>
    Tax benefit at the expected statutory rate............   $(6,626)     $(5,560)     $(5,953)
    Increases (decreases) in taxes resulting from:
      Valuation allowance.................................     7,094        6,486        5,208
      Reverse foreign net operating loss not previously
         benefited........................................        --           --        1,994
      State income taxes, net.............................        61          137           69
      Other...............................................        37           37          188
      Non-deductible goodwill.............................        --          286           --
      Establishment of deferred tax assets not previously
         benefited........................................        --           --       (1,075)
                                                             -------      -------      -------
      Provision for income taxes..........................   $   566      $ 1,386      $   431
                                                             =======      =======      =======
</TABLE>
 
     The utilization of net operating loss carryovers (NOL's) of the Company is
limited by change in ownership rules under section 382 of the Internal Revenue
Code of 1986. Accordingly, the annual utilization of the Company's NOL's is
limited to a prescribed annual amount equal to 5.75% multiplied by the fair
market value of the Company as of December 29, 1995. Additionally, certain
losses and credits of each individual subsidiary which arose prior to its merger
with the Company can only be used against that subsidiary's future taxable
income.
 
     At March 31, 1996, the Company had net operating loss carryovers for U.S.
federal and state income tax purposes of approximately $42,000,000 and
$30,000,000, respectively, and generally business credit carryovers of
approximately $800,000 and $180,000, respectively. These net operating loss
carryovers and general business credits are available to offset future taxable
income, if any, through the year 2011 and are subject to limitations as well as
separate return limitations for the subsidiaries Urohealth-California, Advanced,
and Laparomed, as described below.
 
     Urohealth-California has a June 30 tax year end. At March 31, 1996,
Urohealth-California had federal and state net operating loss carryovers of
approximately $17,000,000 and $9,000,000, respectively, and general business
credit carryovers of approximately $200,000 and $180,000, respectively,
reflecting the tax return filings through July 24, 1995.
 
     Advanced had a December 31 tax year end prior to its merger with the
Company. As of December 29, 1995, Advanced has federal and state net operating
loss carryovers of approximately $25,000,000 and $21,000,000, respectively and
research and experimental credit carryovers of approximately $600,000.
Advanced's wholly-owned subsidiary, Laparomed, has federal and state net
operating loss carryovers (of approximately $7,000,000 and $3,000,000,
respectively) and research and experimental credits (of approximately $172,000)
included in the amounts above. There is a strong likelihood that a portion of
these attributes will expire before utilization.
 
     On July 24, 1995, the Company redomesticated from Canada to the United
States. As of this date, the Company had loss carryovers for Canadian income tax
purposes of approximately $15,000,000, of which $4,000,000 would expire in
various years through 2003 and $11,000,000 would carryforward indefinitely.
These losses will not be carried forward due to the redomestication. Any
potential Canadian tax liability arising from the redomestication will be offset
against the Company's Canadian loss carryovers. Accordingly, no provision for
any such potential liability has been included in the accompanying consolidated
financial statements.
 
                                      F-27
<PAGE>   77
 
                            UROHEALTH SYSTEMS, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
19.  COMMITMENTS AND CONTINGENCIES
 
     Dacomed is a defendant in approximately five lawsuits seeking damages
against Dacomed in products liability and related theories. Dacomed has also
been notified of certain other products liability claims that may become the
subject of lawsuits in the future. Dacomed is being defended in such lawsuits by
law firms selected by Dacomed's products liability insurer(s).
 
     The Company has employment agreements with 14 officers providing for annual
aggregate salaries of approximately $3.0 million per annum.
 
     The Company has various product licensing arrangements which require the
payment of certain of the licensor's patent costs and royalties on sales of
products which incorporate the licensed technology.
 
     In addition, the Company is involved from time to time in various claims
and legal actions in the ordinary course of business. No provision for any
liability that may result from the ultimate resolution of such matters has been
included in the accompanying consolidated financial statements.
 
                                      F-28
<PAGE>   78
 
                            UROHEALTH SYSTEMS, INC.
 
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                 (DOLLARS IN THOUSANDS, EXCEPT PAR VALUE DATA)
 
<TABLE>
<CAPTION>
                                                                                    SEPTEMBER
                                                                                       30,
                                                                                      1996
                                                                                   -----------
                                                                                   (UNAUDITED)
<S>                                                                                <C>
ASSETS
Current assets :
  Cash and equivalents...........................................................   $   1,511
  Receivables, net of allowance for doubtful accounts............................      17,006
  Inventories....................................................................      17,134
  Prepaids and deposits..........................................................       4,063
  Income tax receivable..........................................................         377
                                                                                     --------
Total current assets.............................................................      40,091
Property and equipment, net......................................................      23,692
Patents and intangibles, net of accumulated amortization.........................       4,490
Deposits and other assets........................................................       1,415
Deferred debt issuance costs.....................................................       5,854
Goodwill.........................................................................      42,266
                                                                                     --------
                                                                                    $ 117,808
                                                                                     ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable and accrued expenses..........................................   $  14,052
  Restructuring accrual..........................................................       2,593
  Compensation and employee benefits.............................................       2,141
  Revolving lines of credit......................................................      15,000
  Current portion of notes payable and capital leases............................         310
                                                                                     --------
Total current liabilities........................................................      34,096
Long-term liabilities:
  Notes payable..................................................................       6,023
  Bank term loan.................................................................      20,000
  Capital leases.................................................................         150
  Convertible subordinated debentures............................................      50,000
  Deferred compensation..........................................................          28
  Other liabilities..............................................................         113
  Restructuring accrual, less current portion....................................       1,853
Minority interest in consolidated subsidiary.....................................       1,109
Common Stockholders' Equity :
  Preferred stock, $.001 par value
     Authorized shares -- 5,000,000, issued and outstanding shares -- none.......          --
  Common stock -- $0.001 par value
     Authorized -- 50,000,000, issued and outstanding -- 16,495,205..............          16
  Warrants.......................................................................       5,217
  Additional paid-in capital.....................................................      93,177
  Deficit........................................................................     (93,892)
  Foreign currency adjustment....................................................         (82)
                                                                                     --------
          Total common stockholders' equity......................................       4,436
                                                                                     --------
                                                                                    $ 117,808
                                                                                     ========
</TABLE>
 
                            See accompanying notes.
 
                                      F-29
<PAGE>   79
 
                            UROHEALTH SYSTEMS, INC.
 
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
            (UNAUDITED, IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                         SIX MONTHS ENDED
                                                             -----------------------------------------
                                                             SEPTEMBER 30, 1996     SEPTEMBER 30, 1995
                                                             ------------------     ------------------
<S>                                                          <C>                    <C>
Net sales..................................................       $ 38,280               $ 26,218
Cost of sales..............................................         12,282                  9,101
                                                                   -------                -------
Gross profit...............................................         25,998                 17,117
Operating expenses:
  Selling, general and administrative......................         19,795                 19,604
  Research and development.................................            954                  1,001
  Merger and acquisition costs.............................             --                  1,909
  Write-off of purchased research and development..........         25,500                     --
  Restructuring charge.....................................          4,000                     --
                                                                   -------                -------
Total operating expenses...................................         50,249                 22,514
                                                                   -------                -------
Income (loss) from operations..............................        (24,251)                (5,397)
Other income (expense):
  Minority interest consisting of accrued dividends on
     preferred stock of subsidiary.........................            (36)                   (36)
  Interest income..........................................            147                     74
  Interest expense.........................................         (2,685)                  (227)
  Other....................................................             --                   (108)
                                                                   -------                -------
Income (loss) before tax and extraordinary item............        (26,825)                (5,694)
Provision for income tax (benefit).........................           (377)                   634
                                                                   -------                -------
Income (loss) before extraordinary item....................        (26,448)                (6,328)
Extraordinary item (early extinguishment of debt)..........         (2,973)                    --
                                                                   -------                -------
Net income (loss)..........................................       $(29,421)              $ (6,328)
                                                                   =======                =======
Net income (loss) per share:
  Net income (loss)........................................       $(29,421)              $ (6,328)
  Dividends and accretion on redeemable convertible
     preferred stock.......................................            398                    208
                                                                   -------                -------
  Net income (loss) attributable to common stockholders....       $(29,819)              $ (6,536)
                                                                   =======                =======
  Net income (loss) per share..............................       $  (2.07)              $  (0.56)
                                                                   =======                =======
Weighted average number of common shares used to compute
  loss
  per share................................................         14,436                 11,628
                                                                   =======                =======
</TABLE>
 
                            See accompanying notes.
 
                                      F-30
<PAGE>   80
 
                            UROHEALTH SYSTEMS, INC.
 
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                       (UNAUDITED, DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                                 SIX MONTHS ENDED
                                                                      ---------------------------------------
                                                                      SEPTEMBER 30, 1996   SEPTEMBER 30, 1995
                                                                      ------------------   ------------------
<S>                                                                   <C>                  <C>
Cash flows from operating activities:
  Net loss..........................................................       $(29,421)            $ (6,328)
  Non cash items included in net loss:
    Extraordinary expense...........................................          2,433                   --
    Write-off of incomplete research and development................         25,500                   --
    Depreciation and amortization...................................          1,648                1,001
    Deferred debt issue costs.......................................            442                   36
    Accretion and accrued interest on convertible note..............             42                   22
    Accrued dividend on preferred stock in subsidiary...............             36                   --
    Provision for doubtful accounts.................................           (300)                  --
    Other...........................................................             17                  317
  Changes in operating assets:
    Receivables.....................................................         (5,575)              (1,451)
    Income tax receivable...........................................           (377)                  --
    Inventories.....................................................         (9,529)                (909)
    Prepaids and deposits...........................................         (2,915)                 667
  Changes in operating liabilities:
    Accounts payable and accrued expenses...........................         (3,949)               1,415
    Compensation and employee benefits..............................             96                 (432)
    Accrued dividend on preferred stock of subsidiary...............             --                   62
    Other liabilities...............................................           (169)                  --
    Accrued restructuring charges...................................          2,278                  (55)
                                                                            -------              -------
         Net cash used in operating activities......................        (19,743)              (5,655)
Cash flows from investing activities:
  Purchase of property and equipment, net...........................         (8,542)              (1,692)
  Purchase of patents, net..........................................           (102)                 (22)
  Asset purchase from O. R. Concepts................................         (2,784)                  --
  Asset purchase from X-Med.........................................         (3,443)                  --
  Proceeds used to acquire Richard-Allan............................        (27,560)                  --
  Proceeds from sale of investments.................................             --                  779
  Deposits and other assets.........................................             --                  (28)
  Other.............................................................             --                  (69)
                                                                            -------              -------
         Net cash used in investing activities......................        (42,431)              (1,032)
Cash flows from financing activities:
  Deferred financing fees paid......................................         (5,913)                  --
  Issuance of common stock..........................................          1,099                   83
  Proceeds from note payable........................................                                 375
  Repayments on revolving line of credit............................         (7,323)                  --
  Repayments on bank term loan......................................         (6,000)                  --
  Proceeds from convertible subordinated debentures.................         50,000                   --
  Principal payments on capital leases and notes payable............         (4,363)                (255)
  Proceeds from revolving line of credit............................         15,000                1,790
  Proceeds from term loan...........................................         20,000                   --
  Issuance of redeemable convertible preferred stock................             --                4,000
  Exercise of employee stock options................................             --                   42
                                                                            -------              -------
         Net cash provided by financing activities..................         62,500                6,035
                                                                            -------              -------
Net (decrease) increase in cash.....................................            326                 (652)
Cash, beginning of period...........................................          1,185                1,331
                                                                            -------              -------
Cash, end of period.................................................       $  1,511             $    679
                                                                            =======              =======
Supplemental cash flow information:
  Cash paid for interest............................................       $  2,010             $    277
                                                                            =======              =======
Non-cash transaction:
  Warrant issuance in connection with sale of redeemable convertible
    debentures......................................................       $    206             $     --
                                                                            =======              =======
</TABLE>
 
                            See accompanying notes.
 
                                      F-31
<PAGE>   81
 
                            UROHEALTH SYSTEMS, INC.
 
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1996
                                  (UNAUDITED)
 
1. INTERIM REPORTING
 
BASIS OF PRESENTATION
 
     The accompanying unaudited condensed consolidated financial statements are
prepared in accordance with generally accepted accounting principles (GAAP) and
include the accounts of Urohealth Systems, Inc. (the "Company") and its
subsidiaries. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with GAAP have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. The condensed consolidated financial statements have been restated
to reflect business combinations accounted for using the pooling of interests
method.
 
     In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to present
fairly the Company's condensed consolidated financial position as of September
30, 1996, its condensed consolidated results of operations for the six month
periods ended September 30, 1996 and September 30, 1995, and its condensed
consolidated cash flows for the six month periods ended September 30, 1996 and
September 30, 1995. Adjustments consist of normal recurring accruals except for
the extraordinary loss on early extinguishment of debt, the related induced
accretion as a result of the conversion of convertible notes and redeemable
convertible preferred stock, restructuring charges and the merger and
acquisition costs identified in the accompanying unaudited condensed
consolidated statements of operations. The results of operations for the six
month period ended September 30, 1996 are not necessarily indicative of those to
be expected for the entire year.
 
     These consolidated financial statements should be read in conjunction with
the financial statements included in the Company's Annual Report on Form 10-K
for the year ended March 31, 1996, as filed with the Securities and Exchange
Commission.
 
BUSINESS COMBINATIONS
 
     On June 5, 1996, Urohealth Systems, Inc. ("Urohealth") acquired certain
assets of O.R. Concepts, Inc. pursuant to an Asset Purchase Agreement dated June
5, 1996 among Urohealth, O.R. Concepts, Inc., a Texas Corporation, and Vital
Signs, Inc., a New Jersey Corporation. The acquired assets are used in the
development, manufacture, and marketing of laparoscopic surgery products and
accessories.
 
     The purchase price for the acquired assets was $2,786,000, payable in cash
upon the closing of the transaction. The purchase price was funded using a
portion of the proceeds from the sale of Urohealth's 8.75% Convertible
Subordinated Debentures issued May 13, 1996.
 
     On July 1, 1996, Urohealth acquired The Intermed Group, Inc., a Delaware
Corporation ("Intermed"), pursuant to the terms of the Agreement and Plan of
Merger dated as of June 1, 1996 between Urohealth, Urohealth, Inc. (California),
and Intermed. Intermed is engaged in the development, manufacture, and marketing
of disposable medical products.
 
     Under the terms of the agreement, Intermed was merged into Urohealth, Inc.
(California), and each outstanding share of common stock of Intermed was
converted into the right to receive .1242575 shares of Urohealth Common Stock,
plus cash in the amount of $1,462,412 was paid in exchange for all of the
outstanding shares of Intermed common stock. The cash portion of the purchase
price was funded using a portion of the proceeds from the sale of Urohealth's
8.75% Convertible Subordinated Debentures issued May 13, 1996.
 
     On July 5, 1996, Urohealth entered into an agreement to acquire all of the
outstanding capital stock of Richard-Allan Medical Industries, Inc.
("Richard-Allan"), an Illinois corporation, in exchange for $27.5 million in
cash and 2,081,916 shares of Urohealth common stock. Richard-Allan manufactures
and markets
 
                                      F-32
<PAGE>   82
 
                            UROHEALTH SYSTEMS, INC.
 
      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               SEPTEMBER 30, 1996
                                  (UNAUDITED)
 
1. INTERIM REPORTING -- (CONTINUED)
surgical operating room supplies. In addition, the Company agreed to acquire the
real estate on which the Richard-Allan facility is located from a partnership
for $1.5 million of cash and a $3.0 million note for the balance of the purchase
price. The acquisition was completed on August 14, 1996.
 
     The total purchase price of the Richard-Allan acquisition, including direct
acquisition costs and the cost of the related real estate, of $60,000,000 was
determined as follows:
 
<TABLE>
    <S>                                                                       <C>
    Issuance of 2,081,916 shares of Urohealth Common Stock at $13.21 per
      share.................................................................  $27,500,000
    Cash....................................................................   29,000,000
    Note payable............................................................    3,000,000
    Direct acquisition costs................................................      500,000
                                                                              -----------
                                                                              $60,000,000
                                                                              ===========
</TABLE>
 
     The cash and direct acquisition cost portions of the purchase price were
financed with $30.0 million of borrowings under a new $35.0 million bank credit
facility that consists of a $20.0 million term loan and a $15.0 million
revolving line of credit. The remaining amounts under the new bank credit
facility are available for general corporate purposes. The Company incurred $1.3
million of costs in connection with establishment of the new bank credit
facility that will be treated as deferred debt issuance costs.
 
     Subsequent to the acquisition, a study was conducted to determine the
proper allocation of the purchase price of Richard-Allan. An independent
valuation of Richard-Allan's assets was performed and used as an aid in
determining the fair market value of each identifiable tangible and intangible
asset and in allocating the purchase price among the acquired assets, including
the portion of development projects that should be expensed pursuant to the
provisions of Interpretation 4 of SFAS No. 2. Accordingly, it was determined
that acquired in-process research and development costs of approximately
$25,500,000 should be expensed.
 
     All of these transactions have been accounted for as purchases whereby the
results of operations from each separate entity or group of assets will be
included in the results of operations of the Company from the date of purchase.
 
     The following summarized, unaudited pro forma results of operations for the
periods presented, assume the acquisitions occurred as of the beginning of the
respective periods (dollars in thousands except per share amounts):
 
<TABLE>
<CAPTION>
                                                                         SIX MONTHS ENDED
                                                                          SEPTEMBER 30,
                                                                        ------------------
                                                                         1996       1995
                                                                        -------    -------
    <S>                                                                 <C>        <C>
    Net sales........................................................   $47,592    $39,681
    Net loss.........................................................   (30,935)    (8,072)
    Net loss per share...............................................   $ (1.93)   $ (0.58)
</TABLE>
 
2. NET LOSS PER SHARE
 
     Net loss per share is based on the weighted average number of shares of
common stock outstanding during the periods presented. Common stock equivalents
have not been included in the calculation because they are anti-dilutive. Net
loss per common share for the three months ended June 30, 1996 has been restated
to reflect $295,000 of additional dividends and accretion on redeemable
convertible preferred stock resulting from the induced conversion of such stock
into the Company's common stock in May 1996.
 
                                      F-33
<PAGE>   83
 
                            UROHEALTH SYSTEMS, INC.
 
      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               SEPTEMBER 30, 1996
                                  (UNAUDITED)
 
3. INVENTORIES
 
     Inventories are carried at the lower of cost or net realizable value. Cost
is determined on the first-in, first-out basis (in thousands).
 
<TABLE>
<CAPTION>
                                                                          SEPTEMBER 30,
                                                                              1996
                                                                          -------------
        <S>                                                               <C>
        Finished goods..................................................     $ 9,154
        Raw materials and supplies......................................       6,501
        Work in progress................................................       1,479
                                                                             -------
                                                                             $17,134
                                                                             =======
</TABLE>
 
4. DEBT
 
     On July 9, 1996, the Company completed the last part of the issuance of
$50.0 million of 8.75% convertible subordinated debentures (the "Debentures")
and warrants to purchase 250,000 shares of the Company's common stock at $13.00
per share. The Debentures mature in May 2006 and interest is payable quarterly
in arrears. The warrants expire in five years.
 
     The Debentures are redeemable at the option of the Company after two years,
if the average market price of the Company's common stock is above $22.00 per
share for 60 consecutive days, or after three years without regard to the
Company's common stock price. The redemption price is equal to 105% of the
principal amount decreasing annually to the principal amount in 2004, plus
accrued and unpaid interest.
 
     The Debentures are convertible into common stock at $11.00 per share, are
subordinate to all future senior borrowings and have voting rights on all
matters on an "as converted" basis. The holders of the Debentures must approve
any dividend, payment or other distribution to stockholders, as well as any
redemption of shares of common stock, options or warrants of the Company or any
subsidiary other than the preferred stock issued by Urohealth-California.
 
     The holders of the Debentures required that the Company induce the holders
of the convertible debt and redeemable preferred stock to convert such
securities into shares of the Company's common stock. This resulted in a charge
to increase net loss attributable to common stockholders by $295,000 or $0.02
per share for the six months ended September 30, 1996.
 
     In connection with the financing, the Company incurred an extraordinary
loss of $2,973,000 in connection with the early retirement of bank debt of
$16,500,000 on May 13, 1996.
 
5. RESTRUCTURING
 
     During the year ended June 30, 1995, the Company hired a new senior
management team which adopted and implemented a restructuring plan (the Plan)
under which it has refocused the Company's strategic direction. Under the Plan,
the Company terminated or amended certain distribution, consulting and
employment agreements. All significant restructuring charges were paid in cash
during the 1995 calendar year. Through June 30, 1996, cash payments have reduced
the components of the restructuring accrual to $136,000 primarily relating the
settlement of certain claims with the former Chief Executive Officer.
 
     In December 1995, the Company implemented a restructuring plan to
consolidate redundant facilities and reduce personnel resulting from the mergers
with Dacomed Corporation, Osbon Medical Systems, Ltd. and Advanced Surgical,
Inc. Under the Plan, the Company has eliminated approximately 70 manufacturing,
engineering and administrative personnel and closed all operations at two
acquired facilities. The estimated cost associated with each component of this
restructuring plan and the cash and non-cash charges incurred
 
                                      F-34
<PAGE>   84
 
                            UROHEALTH SYSTEMS, INC.
 
      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               SEPTEMBER 30, 1996
                                  (UNAUDITED)
 
5. RESTRUCTURING -- (CONTINUED)
during fiscal 1996 are summarized in the table below. Non-cash charges consist
of the write-down of existing assets to their estimated net realizable value.
Reclassifications during the period relate to decreases in severance amounts
payable to officers of acquired companies, offset by increases in estimates for
facility closure costs including losses on sale of discontinued product lines
and closure costs related to international operations of acquired companies. The
remaining restructuring accrual at September 30, 1996 relates primarily to
terminated employee severance and facility lease obligations, which are expected
to be paid in cash.
 
<TABLE>
<CAPTION>
                                   BEGINNING                                                     BALANCE AT
                                 RESTRUCTURING      NON-CASH       CASH                         SEPTEMBER 30,
                                    ACCRUAL         CHARGES       CHARGES   RECLASSIFICATIONS       1996
                                 -------------   --------------   -------   -----------------   -------------
                                                                (IN THOUSANDS)
    <S>                          <C>             <C>              <C>       <C>                 <C>
    Personnel reduction
      costs....................     $ 2,620          $   --       $1,813          $(730)            $  77
    Facility reduction costs...       2,836           1,199        1,722            730               645
                                     ------          ------       ------          -----            ------
                                    $ 5,456          $1,199       $3,535          $  --             $ 722
                                     ======          ======       ======          =====            ======
</TABLE>
 
     The Company has determined that the implementation of the restructuring
plan to eliminate redundant manufacturing facilities resulting from
Richard-Allan, Intermed, O.R. Concepts and consolidation of some of the existing
manufacturing locations will be approximately $4.0 million. This restructuring
includes severance cost, certain facility closures and elimination of other
redundant selling and administrative costs. Although subject to future
adjustment, management of the Company believes that restructuring reserves as of
September 30, 1996 are adequate to complete the restructuring.
 
<TABLE>
<CAPTION>
                                   BEGINNING                                                     BALANCE AT
                                 RESTRUCTURING      NON-CASH       CASH                         SEPTEMBER 30,
                                    ACCRUAL         CHARGES       CHARGES   RECLASSIFICATIONS       1996
                                 -------------   --------------   -------   -----------------   -------------
                                                                (IN THOUSANDS)
    <S>                          <C>             <C>              <C>       <C>                 <C>
    Personnel reduction
      costs....................     $ 2,412          $   --        $ 160          $  --            $ 2,252
    Facility reduction costs...       1,588              --          253             --              1,335
                                     ------          ------       ------          -----             ------
                                    $ 4,000          $   --        $ 413          $  --            $ 3,587
                                     ======          ======       ======          =====             ======
</TABLE>
 
6. MINORITY INTEREST REDEMPTION
 
     The Company has approved the redemption of the Series A Preferred Stock
issued by Urohealth, Inc., a wholly owned subsidiary. The Board authorized the
Company to redeem the remaining 203,000 shares of the Series A Preferred Stock
at $5.00 per share plus a $0.25 premium and accrued interest, for total
consideration of $6.20 per share. The share repurchase will eliminate the
accumulation of dividends which accrue at 7% per annum. It is anticipated that
during the next quarter the Company will complete this transaction.
 
7. INCOME TAXES
 
     The Company recorded an income tax benefit in the amount of $0.4 million
for the quarter ended September 30, 1996. The income tax benefit is recognized
due to the availability of separate company operating losses which can be
carried back to Osbon Medical Ltd.'s separate return years' taxable income
resulting in refundable income taxes. The Company maintains its valuation
allowance on remaining operating loss carryforwards since the realization of tax
benefits on these carryforwards is not assured.
 
                                      F-35
<PAGE>   85
 
                            UROHEALTH SYSTEMS, INC.
 
      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               SEPTEMBER 30, 1996
                                  (UNAUDITED)
 
8. CONTINGENCIES
 
     The Company is a defendant in approximately five lawsuits seeking damages
against the Company in products liability and related theories. The Company has
also been notified of certain other products liability claims that may become
the subject of lawsuits in the future. The Company is being defended in such
lawsuits by law firms selected by the Company's products liability insurer(s).
 
     In addition, the Company is involved from time to time in various claims
and legal actions in the ordinary course of business. No provision for any
liability that may result from the ultimate resolution of such matters has been
included in the accompanying consolidated financial statements.
 
                                      F-36
<PAGE>   86
 
                         REPORT OF INDEPENDENT AUDITORS
 
     We have audited the consolidated financial statements of UroHealth Systems,
Inc. as of March 31, 1996 and June 30, 1995, and for the nine months ended March
31, 1996 and the year ended June 30, 1995, and have issued our report thereon
dated June 4, 1996 (included elsewhere in this Registration Statement). Our
audits also included the financial statement schedule listed in Item 14(a)(2) of
this Registration Statement. These schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. We have not audited the fiscal 1995 financial statements of Dacomed
Corporation, a wholly-owned subsidiary, which statements reflect total assets
and total revenues constituting 4% and 10% of the related consolidated totals.
Those statements were audited by other auditors whose report has been furnished
to us, and our opinion, insofar as it relates to data included in the fiscal
1995 consolidated financial statements for Dacomed Corporation, is based solely
on the report of other auditors.
 
     We also have audited, as to combination only, the financial statement
schedule of UroHealth Systems, Inc., Dacomed Corporation, Allstate Medical
Products, Inc., Osbon Medical Systems, Ltd., and Advanced Surgical for the year
ended June 30, 1994. The schedule has been combined from the financial
statements of UroHealth Systems, Inc., Dacomed Corporation, Allstate Medical
Products, Inc., Osbon Medical Systems, Ltd., and Advanced Surgical, Inc. (which
statements are not presented separately herein). The reports of other auditors
who have audited these statements, other than the financial statements of
Allstate Medical Products, Inc., which are immaterial and unaudited, appear
elsewhere herein.
 
     In our opinion, based on our audits and the report of other auditors, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
 
                                          (LOGO)         LLP
                                          ERNST & YOUNG LLP
 
Orange County, California
June 4, 1996
 
                                       S-1
<PAGE>   87
 
                            UROHEALTH SYSTEMS, INC.
 
                                  SCHEDULE II
                        CONSOLIDATED VALUATION ACCOUNTS
 
<TABLE>
<CAPTION>
                                                BALANCE AT
                                                BEGINNING                                   BALANCE AT END
                 DESCRIPTION                    OF PERIOD      ADDITIONS     WRITE OFFS       OF PERIOD
----------------------------------------------  ----------     ---------     ----------     --------------
<S>                                               <C>            <C>           <C>            <C>
Nine month period ended March 31, 1996:
     Allowance for doubtful accounts..........     $538          $1,106         $ --            $1,644
     Reserve for inventory obsolescences......      241           1,140           --             1,381
                                                   ----          ------         ----            ------
          Total...............................     $779          $2,246         $ --            $3,025
                                                   ====          ======         ====            ======
Year ended June 30, 1995:
     Allowance for doubtful accounts..........     $506          $   54         $(22)           $  538
     Reserve for inventory obsolescences......       --             272          (31)              241
                                                   ----          ------         ----            ------
          Total...............................     $506          $  326         $(53)           $  779
                                                   ====          ======         ====            ======
Year ended June 30, 1994:
     Allowance for doubtful accounts..........     $167          $  348         $ (9)           $  506
     Reserve for inventory obsolescences......       --              --           --                --
                                                   ----          ------         ----            ------
          Total...............................     $167          $  348         $ (9)           $  506
                                                   ====          ======         ====            ======
</TABLE>
 
                                       S-2
<PAGE>   88
 
------------------------------------------------------
------------------------------------------------------
 
    NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS NOT BEEN
ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF.
                               ------------------
 
                               TABLE OF CONTENTS
 
   
<TABLE>
<CAPTION>
                                       PAGE
                                       ----
<S>                                    <C>
Prospectus Summary..................     3
Risk Factors........................     6
Use of Proceeds.....................    11
Capitalization......................    12
Price Range of Common Stock and
  Dividends.........................    13
Pro Forma Financial Information.....    14
Selected Consolidated Financial
  Data..............................    19
Management's Discussion and Analysis
  of Financial Condition and Results
  of Operations.....................    20
Business............................    24
Management..........................    37
Principal Stockholders..............    41
Description of Capital Stock........    43
Underwriting........................    46
Legal Matters.......................    47
Experts.............................    47
Available Information...............    47
Incorporation of Documents by
  Reference.........................    48
Index to Consolidated Financial
  Statements........................   F-1
</TABLE>
    
 
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
 
   
                                2,500,000 SHARES
    
                            UROHEALTH SYSTEMS, INC.
                                  COMMON STOCK
                              --------------------
 
                                   PROSPECTUS
                              --------------------
                            BEAR, STEARNS & CO. INC.
                            NEEDHAM & COMPANY, INC.
                               PIPER JAFFRAY INC.
                                              , 1996
 
------------------------------------------------------
------------------------------------------------------
<PAGE>   89
 
                                    PART II
 
                     INFORMATION NOT REQUIRED IN PROSPECTUS
 
ITEM 14.  OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
 
     The expenses in connection with the offer and sale of the securities being
registered, other than underwriting discounts and commissions, are estimated as
follows:
 
<TABLE>
    <S>                                                     <C>
    Registration Fee....................................... $ 27,635
    NASD Filing Fee........................................    8,514
    Legal Fees and Expenses................................  200,000
    Blue Sky Fees and Expenses.............................   15,000
    Accounting Fees and Expenses...........................  100,000
    Printing and Engraving Expenses........................  150,000
    Transfer Agent and Registrar Fees......................   20,000
    Miscellaneous..........................................   78,851
                                                            --------
    Total.................................................. $600,000
                                                            ========
</TABLE>
 
ITEM 15.  INDEMNIFICATION OF DIRECTORS AND OFFICERS
 
     Reference is made to Section 145 ("Section 145") of the General Corporation
Law of the State of Delaware (the "DGCL") which provides for indemnification of
directors and officers in certain circumstances.
 
     UROHEALTH's Certificate of Incorporation provides that a director of
UROHEALTH will not be personally liable to UROHEALTH or its stockholders for
monetary damages for breach of fiduciary duty as a director of UROHEALTH except
for liability (i) for any breach of such director's duty of loyalty to UROHEALTH
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of the law, (iii) under
Section 174 of the DGCL (unlawful payment of dividends), or (iv) for any
transaction from which such director derived an improper personal benefit.
 
     UROHEALTH is empowered by Section 145 of the DGCL, subject to the
procedures and limitations stated therein, to indemnify any person against
expenses (including attorney's fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in the defense of any
threatened, pending or completed action, suit or proceeding in which such person
is made a party by reason of his or her being or having been a director or
officer of UROHEALTH. The statute provides that indemnification pursuant to its
provisions is not exclusive of other rights of indemnification to which a person
may be entitled under any bylaw, agreement, vote of stockholders or
disinterested directors, or otherwise.
 
     UROHEALTH's Bylaws provide that UROHEALTH shall indemnify its directors,
and may indemnify its officers, to the full extent permitted by law.
 
     The Registrant has entered into agreements with certain directors and
officers that require the Registrant to indemnify such persons against expenses,
judgments, fines, settlements and other amounts to the fullest extent permitted
by law incurred in connection with any proceeding to which any such person may
be made a party by reason of the fact that such person is or was a director or
officer of the Registrant or any of its affiliated enterprises, provided such
person acted honestly and in good faith with a view to the best interests of the
corporation.
 
     There are directors' and officers' liability insurance policies presently
in force insuring directors and officers of the Registrant and its subsidiaries.
 
                                      II-1
<PAGE>   90
 
ITEM 16.  EXHIBITS.
 
  Exhibits
 
   
<TABLE>
<CAPTION>
EXHIBIT NO.                                       DESCRIPTION
-----------                                       -----------
<S>             <C>
 1.1            Form of Underwriting Agreement.**

 3.1            Certificate of Incorporation of the Registrant.**

 3.2            Bylaws of the Registrant. Incorporated by reference to Exhibit 3.2 of the
                Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1995.

 4.1            Form of Certificate for Common Stock. Incorporated by reference to Exhibit 4.1
                of the Company's Annual Report on Form 10-K for the fiscal period ended March
                31, 1996.

 4.2            Rights Agreement. Incorporated by reference to Exhibit 4.1 to the Registrant's
                Current Report on Form 8-K dated May 20, 1993 (the "May 20, 1993 Form 8-K").

 4.3            Form of Rights Certificate. Incorporated by reference to Exhibit 4.2 to the
                Registrant's May 20, 1993 Form 8-K.

 5.1            Opinion of Morrison & Foerster LLP.**

23.1            Consent of Ernst & Young LLP.**

23.2            Consent of Doane Raymond.**

23.3            Consent of Coopers & Lybrand L.L.P.**

23.4            Consent of KPMG Peat Marwick LLP.**

23.5            Consent of Cherry, Bekaert & Holland.**

23.6            Consent of Ernst & Young LLP.**

23.7            Consent of Morrison & Foerster LLP (included in Exhibit 5.1).**

23.8            Consent of BDO Seidman.**

24.1            Power of Attorney of certain officers and directors.**
</TABLE>
    
 
---------------
   
 ** Previously filed.
    
 
                                      II-2
<PAGE>   91
 
ITEM 17.  UNDERTAKINGS.
 
     (a) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933 (the "Act"), each
filing of the registrant's annual report pursuant to Section 13(a) or Section
15(d) of the Exchange Act of 1934 (the "Exchange Act") (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Exchange Act) that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
 
     (b) Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the provisions described in Item 15 above, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
 
     (c) The undersigned registrant hereby undertakes that:
 
          (1) For purposes of determining any liability under the Act, the
     information omitted from the form of prospectus filed as part of this
     registration statement in reliance upon Rule 430A and contained in a form
     of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
     497(h) under the Act shall be deemed to be part of this registration
     statement as of the time it was declared effective.
 
   
          (2) For the purpose of determining any liability under the Act, each
     post-effective amendment that contains a form of prospectus shall be deemed
     to be a new registration statement relating to the securities offered
     therein, and the offering of such securities at that time shall be deemed
     to be the initial bona fide offering thereof.
    
 
                                      II-3
<PAGE>   92
 
                                   SIGNATURES
 
   
     Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment No. 4 to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized in the City of Newport Beach, State of California, on November
12, 1996.
    
 
                                          UROHEALTH SYSTEMS, INC.
 
                                          By: /s/ CHARLES A. LAVERTY
                                            ------------------------------------
                                            Charles A. Laverty
                                            Chairman and Chief Executive
                                            Officer
 
     Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
 
   
<TABLE>
<CAPTION>
               SIGNATURES                               TITLE                       DATE
               ----------                               -----                       ----
<C>                                       <S>                                <C>

         /s/ CHARLES A. LAVERTY           Chief Executive Officer and         November 12, 1996
----------------------------------------  Director (Principal Executive
           Charles A. Laverty             Officer)

          /s/ JAMES L. JOHNSON            Chief Financial Officer             November 12, 1996
----------------------------------------  (Principal Financial Officer and
            James L. Johnson              Principal Accounting Officer)

                   *                      Director                            November 12, 1996
----------------------------------------
        Mitchell J. Blutt, M.D.

                   *                      Director                            November 12, 1996
----------------------------------------
            Abbey J. Butler

                   *                      Director                            November 12, 1996
----------------------------------------
            John Chamberlin

                   *                      Director                            November 12, 1996
----------------------------------------
            Robert N. Elkins

                   *                      Director                            November 12, 1996
----------------------------------------
            Melvyn J. Estrin

                   *                      Director                            November 12, 1996
----------------------------------------
             C. Sage Givens

                                          Director                                       , 1996
----------------------------------------
            Lawrence Goelman

                   *                      Director                            November 12, 1996
----------------------------------------
            Michael S. Gross
</TABLE>
    
 
                                      II-4
<PAGE>   93
 
   
<TABLE>
<CAPTION>
               SIGNATURES                               TITLE                       DATE
               ----------                               -----                       ----
<C>                                       <S>                                <C>

                   *                      Director                            November 12, 1996
----------------------------------------
           Richard Newhauser

                   *                      Director                            November 12, 1996
----------------------------------------
             James B. Osbon

                   *                      Director                            November 12, 1996
----------------------------------------
            Julian W. Osbon

                   *                      Director                            November 12, 1996
----------------------------------------
           Francis J. Tedesco

                   *                      Director                            November 12, 1996
----------------------------------------
             Gerald W. Timm

*By:    /s/ CHARLES A. LAVERTY
----------------------------------------
            Charles A. Laverty
             Attorney-In-Fact
</TABLE>
    
 
                                      II-5
<PAGE>   94
 
                                 EXHIBIT INDEX
 
   
<TABLE>
<CAPTION>
                                                                                     SEQUENTIALLY
    EXHIBIT                                                                            NUMBERED
    NUMBER                                 DESCRIPTION                                   PAGE
    ------                                 -----------                               ------------
    <C>       <S>                                                                    <C>
       1.1    Form of Underwriting Agreement.**....................................

       3.1    Certificate of Incorporation of the Registrant.**....................

       3.2    Bylaws of the Registrant. Incorporated by reference to Exhibit 3.2 of
              the Registrant's Annual Report on Form 10-K for the fiscal year ended
              June 30, 1995........................................................

       4.1    Form of Certificate for Common Stock. Incorporated by reference to
              Exhibit 4.1 of the Company's Annual Report on Form 10-K for the
              fiscal period ended March 31, 1996...................................

       4.2    Rights Agreement. Incorporated by reference to Exhibit 4.1 to the
              Registrant's Current Report on Form 8-K dated May 20, 1993 (the "May
              20, 1993 Form 8-K")..................................................

       4.3    Form of Rights Certificate. Incorporated by reference to Exhibit 4.2
              to the Registrant's May 20, 1993 Form 8-K............................

       5.1    Opinion of Morrison & Foerster LLP.**................................

      23.1    Consent of Ernst & Young LLP.**......................................

      23.2    Consent of Doane Raymond.**..........................................

      23.3    Consent of Coopers & Lybrand L.L.P.**................................

      23.4    Consent of KPMG Peat Marwick LLP.**..................................

      23.5    Consent of Cherry, Bekaert & Holland.**..............................

      23.6    Consent of Ernst & Young LLP.**......................................

      23.7    Consent of Morrison & Foerster LLP (included in Exhibit 5.1).**......

      23.8    Consent of BDO Seidman.**

      24.1    Power of Attorney of certain officers and directors.**...............
</TABLE>
    
 
---------------
   
 ** Previously filed.