<PAGE>   1
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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549
                                 ---------------

                                    FORM 10-K
        FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

(MARK ONE)
[X]    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
       ACT OF 1934

                    FOR THE FISCAL YEAR ENDED MARCH 31, 1998

                                       OR

[ ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
       EXCHANGE ACT OF 1934

                         COMMISSION FILE NUMBER: 1-11150

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

                        IMAGYN MEDICAL TECHNOLOGIES, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

               DELAWARE                                    98-0122944
    (STATE OR OTHER JURISDICTION OF                     (I.R.S. EMPLOYER
    INCORPORATION OR ORGANIZATION)                      IDENTIFICATION NO.)

            5 CIVIC PLAZA, SUITE 100, NEWPORT BEACH, CALIFORNIA 92660
               (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)(ZIP CODE)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 668-5858

        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                               TITLE OF EACH CLASS
                                ----------------
                                  COMMON STOCK

    Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

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

   As of June 22, 1998, the aggregate market value of the Common Stock held by
non-affiliates of the Registrant was approximately $16,166,955. The number of
shares outstanding of the Registrant's Common Stock as of June 22, 1998 was
36,303,125.

   Documents incorporated by reference into Part III: Portions of the definitive
Proxy Statement for the Registrant's 1998 Annual Meeting of Stockholders are
incorporated by reference into Part III hereof.


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                       IMAGYN MEDICAL TECHNOLOGIES, INC.

                               TABLE OF CONTENTS

<TABLE>
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                                                                                                           PAGE
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<S>          <C>                                                                                           <C>
PART I
  Item 1.      Business  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       1
  Item 2.      Properties  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       9
  Item 3.      Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      10
  Item 4.      Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . .      10

PART II
  Item 5.      Market for the Registrant's Common Equity and Related Stockholder Matters . . . . . . .      11
  Item 6.      Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      11
  Item 7.      Management's Discussion and Analysis of Financial Condition and Results of Operations .      12
  Item 7A      Quantitative and Qualitative Disclosures About Market Risk  . . . . . . . . . . . . . .      23
  Item 8.      Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . .      23
  Item 9.      Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  .      23

PART III
  Item 10.     Directors and Executive Officers of the Registrant  . . . . . . . . . . . . . . . . . .      24
  Item 11.     Executive Compensation  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      24
  Item 12.     Security Ownership of Certain Beneficial Owners and Management  . . . . . . . . . . . .      24
  Item 13.     Certain Relationships and Related Transactions  . . . . . . . . . . . . . . . . . . . .      24

PART IV
  Item 14.     Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . . . . . . . .      25

SIGNATURES                                                                                                II-1
</TABLE>




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                                     PART I

ITEM 1. BUSINESS

OVERVIEW

  Imagyn Medical Technologies, Inc. ("Imagyn" or the "Company") is a developer,
manufacturer and distributor of products for the urology, minimally invasive
and general surgery, and gynecology markets (the "Target Markets"). The Company
has a broad offering of products used by healthcare professionals for patients
suffering from impotence, and gynecological and urological disorders, and
conditions requiring minimally invasive and general surgery.  The Company was
incorporated in August 1985.

  The Company's strategy is to: (i) expand the range of products to its growing
Target Markets; (ii) leverage its sales force to increase sales of its
existing, newly acquired and recently developed products, including sales
through distributors and group purchasing organizations; (iii) further
capitalize on efficiencies and synergies available by continuing to consolidate
manufacturing of existing and acquired products into the Company's existing
manufacturing operations; (iv) continue to acquire and develop additional
innovative products and product lines; and (v) develop and expand an
international sales and marketing presence to capitalize on opportunities it
identifies in selected developed countries.

  In July 1995, the Company acquired Dacomed Corporation ("Dacomed") and
Allstate Medical Products, Inc. ("Allstate") and, in December 1995, acquired
Osbon Medical Systems Ltd. ("Osbon") and Advanced Surgical, Inc. ("Advanced").
Dacomed, Allstate, Osbon and Advanced were each acquired in stock-for-stock
mergers, which were accounted for as pooling of interests. The Company
completed the acquisitions of Endoscopic Imaging Systems, Inc. ("Endoscopic")
(May 1996), The Intermed Group, Inc. ("Intermed") (June 1996) and Richard-Allan
Medical, Inc. ("Richard-Allan") (August 1996) and the minimally invasive
surgery product lines of O.R. Concepts (June 1996) and X-Med, Inc. (August
1996). In addition, the Company acquired X-Cardia Corporation ("X-Cardia")
(February 1997) and Microsurge, Inc. ("Microsurge") (March 1997).  In September
1997 the Company acquired Imagyn Medical, Inc. ("Imagyn Medical"). Endoscopic,
Intermed, Richard-Allan and X-Cardia were accounted for as purchases.
Microsurge and Imagyn Medical were accounted for as pooling of interests.  The
Company changed its name to Imagyn Medical Technologies, Inc. after the
acquisition of Imagyn Medical.

MEDICAL PRODUCTS

  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 hand held instruments for
both open and minimally invasive surgeries. The Company's products also include
its Reflex(R) AEC35 articulating cutter and stapler, which is an endoscopic
surgical instrument with articulation capabilities, its pivoting scissors and
its AeroView(R), intubation visualization system which was recently
introduced. The Company also recently introduced its EV-II, which is an
inexpensive, portable video system that urologists, general surgeons, and
gynecologists can attach to an endoscope.  The Company has also offered since
March 1997 a line of reposable surgical instruments.  Reposable surgical
instruments are surgical instruments which include a reusable portion and a
disposable component.  Reposable instruments have been developed to address the
shortcomings of single-use disposable and traditional reusable surgical
instrumentation.

  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(R), Catalyst(TM), and Impower(TM).  During 1997,
the Food & Drug Administration approved for the first time the sale of vacuum
erection devices in the over-the- counter market.  The Company has recently
introduced a line of vacuum erection devices for sale  over-the-counter, in
drug stores.  The Company's vacuum erection devices are not subject to patent
protection that would prohibit others from offering competing products. The
Company believes it 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(R) System and the Knoll/MIDUS System, which are used to diagnose
impotence. 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 several medical/surgical products designed for the
treatment of incontinence, including a line of catheters and urinary drainage
systems.  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.





                                       1
<PAGE>   4
  The Company is developing a number of additional products including
additional articulating surgical instruments for use in minimally invasive
surgery and a breast biopsy system, which recently received FDA clearance, and
is being marketed as SiteSelect(TM).  The Company'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 and regulatory risks.
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. See "Factors Affecting Future Operating Performance -
Future Operating Results Dependent on Products."

SALES AND MARKETING

  The Company uses a combination of a direct sales force and a network of
distributors to market and sell its products.  This distribution channel, in
combination with a telemarketing staff, a national accounts department and a
network of international distributors gives the Company widespread access to
the markets it serves.

  Domestic surgical sales representatives call on general surgeons and
gynecologists, primarily in the operating room setting in hospitals and surgery
centers. This sales force assists distributor sales personnel in selling the
Company's full line of minimally invasive and general surgical instruments for
a wide range of diagnostic and operative procedures. In addition, these sales
representatives work with distributor sales representatives providing training
and technical support for the sales efforts of the Company's distributors for
these products.

  Domestic urology sales representatives call on urologists with the Company's
urology products. 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.

  The general surgery/gynecology sales forces sell EndoView(TM) and EV-II,
self-contained video endoscopy systems that can be used by all medical
specialties practicing visualization. The Company believes that the
availability of innovative products, such as EndoView(TM), EV-II, AeroView(R)
and the Reflex(R) 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
catheters and urinary drainage systems. These products are typically sold to
stocking distributors, hospitals and nursing home chains.

  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. The
Company has recently  entered into several agreements with large group
purchasing organizations.

INTERNATIONAL SALES

  International sales (sales outside of North America) were $2.8 million, $12.7
million and $16.8 million, for the nine months ended March 31, 1996 and for the
years ended March 31, 1997 and 1998, respectively. The Company distributes its
products through a network of distributors covering a number of countries
outside of North America.

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 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.  The Company's manufacturing facility in Richland, Michigan
is a sophisticated manufacturing facility devoted to surgical instruments that 
employs many manufacturing techniques designed to lower costs and insure 
quality.





                                       2
<PAGE>   5

  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. The Company's Costa Mesa, California and Richland,
Michigan manufacturing facilities are ISO9001 certified.

COMPETITION

  Competition in the field of medical products is intense and rapidly changing,
and the Company expects that competitive pressures will intensify. 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 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.

  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. In the erectile dysfunction market, the
Company 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 (e.g.,
Viagra(R) which is sold by Pfizer Corporation) and others as a treatment for
erectile dysfunction.

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 been partially
developed.

  The Company had $4.4 million, $8.0 million and $11.9 million in research and
development expenditures, for the nine months ended March 31, 1996 and for the
years ended March 31, 1997 and 1998, respectively. The historical focus of the
Company's research and development strategy has been a program of actively
acquiring or licensing developed technology. As a result, the Company has
acquired a number of technologies and partially developed products and has
consolidated the research and development groups of certain acquired companies
into a single group.   See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."





                                       3
<PAGE>   6

  The Company's current research and development efforts include completion of
animal studies and clinical trials and regulatory approval of its cardiac output
monitoring device.  The Company is also working closely with a manufacturer to
develop and obtain regulatory approval for brachytherapy seeds which will be
used in the treatment of prostate cancer. The Company recently obtained United
States regulatory clearance for its breast biopsy system. In addition, the
Company has several product development projects underway which involve
enhancements of, or improvements to, existing products. As the Company has
acquired businesses and technologies, it has acquired a number of products under
development which has and will require additional research and development
efforts by the Company in an attempt to bring products to market.

  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.

PATENTS, LICENSES AND TRADEMARKS

  The Company believes that patents and other proprietary rights are important
to its business. The Company's commercial 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 and not breaching technology
licenses that cover technology used in the Company's products. The Company owns
or has authority to use United States and foreign patent rights with respect to
some of its medical products and has filed, and expects in the future to file,
patent applications. It is uncertain whether any third party patents will
require the Company to develop alternative technology or to alter its products
and processes, obtain licenses or cease certain activities. If such licenses are
required, there can be no assurance that the Company will be able to obtain such
licenses on commercially favorable terms, if at all. Failure by the Company to
obtain a license to any technology that it may require to commercialize its
products could have a material adverse effect on the Company.  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 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
will provide the Company with competitive advantages. In addition, the Company
could incur substantial costs in defending its proprietary rights and there can
be no assurance that a competitor's technology or product would be found to
infringe such 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, 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. 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 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
competitors or potential competitors will not independently develop similar or
alternative technologies 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
conditions.

  The Company also relies on trade secrets, know-how, continuing technological
innovations and licensing opportunities to develop and maintain its competitive
position. There can be no assurance that others will not independently create
substantially equivalent proprietary information or otherwise gain access to or
disclose such information of the Company. It is the Company's policy to require
certain of its employees, contractors and consultants to execute
confidentiality agreements 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.





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<PAGE>   7

GOVERNMENT REGULATION

  Most of the Company's medical products are subject to regulation for safety
and efficacy 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. There can be no assurance
that even after such time and expenditures, regulatory approvals will be
obtained for any of the products developed by the Company. If regulatory
approval of a product is granted, such approval may entail limitations on the
indicated uses for which the product may be marketed. Further, discovery of
previously unknown problems with a product, manufacturer or its manufacturing
facilities may result in restrictions on such product or manufacturer,
including withdrawal from the market. 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, 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. The Company
incurs substantial costs in complying with regulatory requirements.

  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 reasonably to 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 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 90 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.





                                       5
<PAGE>   8
  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.

  Through March 31, 1998, 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 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 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 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.

   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. 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 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 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





                                       6
<PAGE>   9
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.

  There have been a number of proposals over the last several years that, if
implemented, could have the effect of eliminating or reducing, or curtailing
increases in, Medicare and Medicaid reimbursement for certain medical products,
and there has been increasing pressure from private payors to limit increases
in healthcare costs. Any of these proposals (including without limitation any
such proposal relating to the Company's impotence products), if adopted could
have a material adverse effect on the Company's business, results of
operations, future sales or its ability to collect accounts receivable related
to such sales and historical sales. In addition, increased pricing pressure
from private payors could have a material adverse effect on the Company's
business, results of operations or 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, financial condition and results of operations. 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 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 liquid 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.

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, financial
condition and results of operations 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 May 31, 1998, the Company employed approximately 600 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.





                                       7
<PAGE>   10

CORPORATE EXECUTIVE OFFICERS

  The following table sets forth the names and ages of executive officers of
the Company as of June 30, 1998. 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                  52        Chairman of the Board and Chief Executive Officer
                     Bruce A. Hazuka                     51        Executive Vice President and Chief Operating Officer
                     Michael A. Montevideo               44        Senior Vice President and Chief Financial Officer
                     Kevin M. Higgins                    56        Senior Vice President and General Counsel
                     Randall L. Condie                   43        President -- Urology Products
                     Michael Schuler                     48        President -- Surgical Products
                     M. Cassandra Hoag                   43        President -- Gynecology Products
</TABLE>

  CHARLES A. LAVERTY became Chief Executive Officer in September 1994, and
Chairman of the Board of Directors in December 1994. Mr. Laverty has spent the
last 15 years of his 20 years of management and marketing experience in the
healthcare field. Prior to joining the Company, Mr.  Laverty was employed as
Senior Executive Vice President and was a director of Coram Healthcare
Corporation, 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.

  BRUCE HAZUKA has served as Executive Vice President -- Operations since
September 1995 and became Chief Operating Officer in March 1997. 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. Mr. Hazuka is a director of Integrated Medical Resources, Inc., a
provider of disease management services for men suffering from erectile
dysfunction.

   MICHAEL A. MONTEVIDEO has served as Senior Vice President and Chief
Financial Officer of the Company since October 1997.  From 1985 to 1997, Mr.
Montevideo was employed by FHP International Corporation,  most recently
serving as Vice President and Treasurer. Prior to 1985,  he held various
financial positions at Fluor Corporation and Hughes Aircraft Company.

  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. Prior to that, Mr.
Higgins was with Avon Products, Inc.

  RANDALL L. CONDIE  has served as President - Urology Products since December
1997. Prior to that, Mr. Condie was President - Medical/Surgical Products and
Vice President, National Accounts for the Company, serving in that capacity
since August 1995. Prior to that he held several executive sales management
positions with the Company since October 1994.  From March 1993 to September
1994 Mr. Condie was Regional Vice President of NMC Home Care, Inc. a division
of W.R. Grace Inc.

  MICHAEL SCHULLER joined the Company in January 1996 as Senior Vice President,
New Business Development. He became President -- Visualization Products in
August 1996 and President - Surgical Products in December 1997.  Prior to
joining the Company, Mr. Schuler was with Advanced Surgical, Inc. from 1992
until 1995. He was appointed Chief Executive Officer of Advanced Surgical in
1994. Prior to Advanced, Mr. Schuler was with Johnson & Johnson Interventional
Systems as Vice President of Product Management.

  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. 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.





                                       8
<PAGE>   11
ITEM 2. PROPERTIES

  The following table summarizes the leased and owned facilities of the
Company:

<TABLE>
<CAPTION>
                                                                                              SQUARE
                         FACILITY LOCATION                    PRIMARY USES                      FEET     LEASED/OWNED
                         -----------------                    ------------                     ------    ------------
                         <S>                      <C>                                        <C>            <C>
                         Newport Beach, CA                 Corporate Offices                   17,500       leased
                         Costa Mesa, CA                      Manufacturing                     42,400       leased
                         Irvine, CA                            Warehouse                       42,000       leased
                         Richland, MI             Manufacturing; Sales; Administration         43,500       owned
                         Augusta, GA                 Sale Offices; Administration;             31,656       leased
                         Augusta, GA                       Offices; Warehouse                  57,500       owned
                         Watertown, SD                       Manufacturing                     15,700       leased
                         Sparta, NJ                       Office and Warehouse                  7,000       leased
                         Laguna Niguel, CA               Research & Development                15,524       leased
</TABLE>

  The Company has entered into a five-year lease expiring in April 2001 with
respect to approximately 17,500 square feet of office space which is used for
the Company's corporate executive offices. The lease provides for monthly
rental payments of approximately $24,000 per month.

  The Company leases approximately 42,400 square feet of space in Costa Mesa,
California that is used for manufacturing and assembly of its medical products.
The lease expires on March 31, 1999 and provides for monthly rental of $20,352
during 1997 and $22,048 during 1998.

  The Company leases approximately 42,000 square feet of warehouse space in
Irvine, California which is used as a warehouse facility. The lease expires in
December 1998 and provides for monthly rental payments of $24,700 per month.

  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 surgical product operations.

  The Company leases approximately 31,656 square feet of office and warehouse
space in Augusta, Georgia. 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 and warehouse space
in three other buildings in Augusta, Georgia. These facilities relate to
urology operations.

  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 is a month- to-month lease and provides for
rental payments of $1,218 per month. These leases relate to medical/surgical
product 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.

  The Company leases approximately 15,524 square feet of office space in Laguna
Niguel, California.  This space is used for the Company's research and
development operations.  The rent on this facility is approximately $13,816 per
month and the lease expires on December 31, 1998.  The Company is also leasing
an additional 10,750 of space at this location at a monthly rental of $10,428
which the Company is presently attempting to sub-lease to a third party.





                                       9
<PAGE>   12

ITEM 3. LEGAL PROCEEDINGS

  In July and August 1997, nine complaints were filed against the Company,
certain of its officers and directors and, in certain complaints, the lead
underwriters of the Company's November 1996 public offering requesting
certification of a class action, alleging various violations of Federal
securities laws and seeking unspecified compensatory damages. The suits were
filed in the United States District Court for the Central District of
California. All of the suits are based on substantially the same facts and have
been brought on behalf of purchasers of Common Stock of the Company during
various periods between July 18, 1996 and July 1, 1997.  On October 6, 1997,
the Court ordered the nine cases consolidated and ordered the plaintiff to file
an amended complaint setting forth all of the claims.  On November 20, 1997, a
consolidated and amended complaint was filed.  The Company filed a motion to
dismiss the lawsuit on December 23, 1997, and the motion was denied on March
19, 1998.  The parties have just begun discovery.

  On October 16, 1997, the Company filed a patent infringement lawsuit against
U.S. Surgical Corporation alleging that U.S. Surgical's breast biopsy system
infringes upon two patents owned by the Company.  In response to the lawsuit,
U.S. Surgical filed counterclaims against the Company alleging that certain of
the Company's products infringe on seven U.S. Surgical patents. The Company
believes that the counterclaims are without merit.  The parties are in the
discovery phase of the proceedings.

  In addition, the Company is involved in other litigation in the normal course
of business, including litigation relating to the Company's current liquidity
situation. The Company does not anticipate that adverse outcomes in currently
pending litigation would have a material adverse affect on its business, results
of operations or financial condition. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations-Liquidity and Capital
Resources."

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

  No matter was submitted to a vote of security holders during the last quarter
of the fiscal year covered by this report.





                                       10
<PAGE>   13

                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

  The Company's Common Stock is traded on the Nasdaq SmallCap Market under the
symbol "IMTI." From November 26, 1996 until March 24, 1998, the Company's Common
Stock was traded on the Nasdaq National Market. Prior to November 26, 1996, the
Company's Common Stock was traded on the American Stock Exchange. The following
table sets forth the high and low closing sales prices per share for the periods
indicated.


<TABLE>
                           <S>                      <C>               <C>
                           FISCAL 1997:
                             First quarter           $16               $11  3/4
                             Second quarter          $15 1/4           $9   1/2
                             Third quarter           $13 1/4           $7   1/4
                             Fourth quarter          $11 7/8           $7   1/4

                           FISCAL 1998:
                             First quarter           $10 1/4           $4   3/4
                             Second quarter          $6  1/8           $4
                             Third quarter           $     6           $2  9/32
                             Fourth quarter          $3  1/8           $1 13/32
</TABLE>

  The Company has received notice from the Nasdaq that the Company does not
currently satisfy the continued listing criteria for inclusion of the Company's
Common Stock on the Nasdaq SmallCap Market, and requesting information from the
Company regarding the Company's plan for achieving compliance with the continued
listing criteria. In the event that the Company is unable to provide a plan for
achieving compliance acceptable to the Nasdaq, the Company's Common Stock would
begin to trade in the over-the-counter market (OTC:BB).    

  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  outstanding indebtedness.

  As of June 22, 1998, there were 1,570 record holders of the Company's
outstanding Common Stock.

ITEM 6. SELECTED FINANCIAL DATA

  The following selected consolidated financial data of the Company have been
derived from the consolidated financial statements of the Company which have
been prepared in accordance with United States generally accepted accounting
principles and include the statements of operations and balance sheet data for
Osbon Medical Systems, Ltd. ("Osbon"), Advanced Surgical, Inc. ("Advanced"),
Dacomed Corporation ("Dacomed"), Allstate Medical Products, Inc. ("Allstate"),
Microsurge, Inc. ("Microsurge") and Imagyn Medical, Inc. (Imagyn Medical) which
acquisitions were accounted for as pooling-of-interests transactions. The
selected consolidated financial data presented below also includes statement of
operations and balance sheet data for Richard-Allan, which has been accounted
for as a purchase, from August 14, 1996. For further information on these and
other business combinations, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the "Consolidated Financial
Statements" contained elsewhere in this report.


<TABLE>
<CAPTION>
                                                                   NINE MONTHS 12-MONTHS          YEAR  ENDED      
                                                                      ENDED       ENDED     ---------------------  
                                            YEAR  ENDED JUNE 30,   MARCH 31,(1)  MARCH 31,  MARCH 31,   MARCH 31,
                                            ---------   ---------   ---------   ---------   ---------   ---------
                                              1994         1995        1996       1996        1997        1998
                                            ---------   ---------   ---------   ---------   ---------   ---------
                                                   (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
 <S>                                       <C>         <C>         <C>         <C>         <C>         <C>
    STATEMENTS OF OPERATIONS DATA:
      Net sales ..........................  $  38,385   $  47,981   $  44,131   $  57,588   $  94,014   $ 105,519
      Gross profit .......................     23,770      29,868      28,100      36,843      53,305      45,928
      Selling, general and administrative      39,062      43,865      40,315      52,131      63,741      88,031
      Research and development ...........     13,397       7,203       4,459       5,999       7,984      11,897
      Restructuring, direct acquisition and
        other costs(2) ...................      1,000       7,663       9,688      10,539      62,832       8,066
                                            ---------   ---------   ---------   ---------   ---------   ---------
      Loss from operations ...............    (29,689)    (28,863)    (26,362)    (31,826)    (81,252)    (62,066)
      Interest expense ...................        394         345       1,227       1,134       8,143      22,234
    Loss from continuing operations
      before discontinued operations and
      extraordinary item .................    (29,794)    (30,106)    (24,239)    (30,345)    (86,539)    (81,163)
    Basic and diluted loss per share
      from continuing operations and
      before discontinued
      operations and extraordinary
      item ...............................  $   (1.57)  $   (1.46)  $   (1.13)  $   (1.38)  $   (2.90)  $   (2.28)
                           
</TABLE>




                                       11
<PAGE>   14


<TABLE>
<CAPTION>
                                                                        JUNE 30,                    MARCH 31,
                                                                 --------------------   -------------------------------
                                                                    1994      1995        1996       1997        1998  
                                                                 ---------  ---------   ---------  ---------  ---------
                                                                                   (IN THOUSANDS)
 <S>                                                            <C>        <C>         <C>        <C>        <C>
    BALANCE SHEET DATA:
      Cash and equivalents ....................................  $  14,292  $   4,825   $   6,622  $  22,574  $     702
      Working capital (deficit) ...............................  $  20,598  $   9,147   $   5,555  $  42,938  $ (55,656)
      Total assets ............................................  $  40,448  $  34,765   $  44,196  $ 186,041  $ 202,786
      Notes payable, bank term loan, capital leases and line of
        credit ................................................  $   6,881  $   3,997   $  16,091  $  60,870  $  39,980
      Convertible subordinated notes ..........................         $-         $-   $   2,276  $   5,268         $-
      Convertible subordinated debentures .....................         $-  $   1,077          $-  $  50,000  $  50,000
      Long-term liabilities, minority interest, and redeemable
        convertible preferred stock ...........................  $  22,131  $  22,864   $   5,635  $   5,208  $   3,864
     Senior subordinated notes, net ...........................         $-         $-          $-         $-  $ 108,306
      Common stockholders' equity (deficiency) ................  $   7,012  $  (4,971)  $   3,828  $  32,260  $ (49,923)
</TABLE>

(1) During 1996, the Company changed its fiscal year end from June 30 to March
    31.

(2) Includes restructuring charges, write-off of purchased research and
    development, direct acquisition costs and settlement of litigation. (See
    Note 7 of Notes to Consolidated Financial Statements contained elsewhere in
    this report).

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

GENERAL

  Background. Since October 1994, Imagyn has been transformed from a research
and development company into a fully-integrated medical products company.

  Historical Growth through Acquisitions; Pooling and Purchase Accounting. The
Company's business and operating results since July 1995 have been
significantly affected by the large number of acquisitions completed since that
time.  The mergers of Dacomed and Allstate were completed on July 28, 1995, the
acquisitions of Osbon and Advanced closed on December 29, 1995, the acquisition
of Microsurge was completed on March 31, 1997 and the acquisition of Imagyn
Medical was completed on September 29, 1997. The operations of the Company are
presented on a combined basis historically, as these transactions were all
accounted for as poolings of interests. On May 22, 1996, Imagyn acquired
Endoscopic Imaging Systems, Inc. and on June 1, 1996 and June 5, 1996 Imagyn
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 Imagyn's financials as of the date of the
acquisitions.  On August 14, 1996, Imagyn acquired Richard-Allan and on
February 28, 1997, Imagyn acquired X-Cardia. These acquisitions were also
accounted for as purchases, therefore, the results from Richard-Allan have been
included commencing August 14, 1996 and the results of X-Cardia have been
included from February 28, 1997, the date each acquisition closed,
respectively.

  Integration of Acquisitions; Restructuring Charges. The Company has recorded
significant direct acquisition costs, write-off of purchased research and
development and other charges related primarily to the Company's acquisitions
which have adversely impacted operating results during the periods discussed
below. 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. For the year ended March 31, 1998, these
charges totaled $8.0 million, consisting of $3.8 million of restructuring
charges and $4.2 million of merger and acquisition costs.  The Company
anticipates cost savings in future periods relating to restructuring plans
implemented during the third quarter of fiscal 1998, primarily relating to the
elimination of certain administrative and manufacturing functions in its Laguna
Niguel facility.

As a result of the foregoing, Imagyn's fiscal 1998 results are not necessarily
comparable to prior periods. The fiscal 1998 results also may not be comparable
due to, among other reasons, the pooling of results of operations of merged
entities for periods during which such entities were operated under a different
management.   In addition, historical results are not necessarily indicative
of, nor will they be comparable to, the financial results that the Company will
realize in future periods.

  Change in Fiscal Year End. In 1996, Imagyn changed its fiscal year end from
June 30 to March 31, therefore, the following discussion for fiscal 1998
compares the year ended March 31, 1998 with the year ended March 31, 1997 and
fiscal 1997 is compared with the twelve month period ended March 31, 1996.





                                       12
<PAGE>   15
YEAR ENDED MARCH 31, 1998 COMPARED TO YEAR ENDED MARCH 31, 1997.

   Net sales. For the year ended March 31, 1998 ("fiscal 1998" or "1998"), net
sales of $105.5 million were $11.5 million or 12.2% higher than sales of $94.0
million for the year ended March 31, 1997 ("fiscal 1997" or "1997").  Of this
increase, $12.9 million was attributable to initial surgical stocking orders
shipped during fiscal 1997 and recorded in the second quarter of fiscal 1998
and $17.5 million was attributable to an increase in surgical sales resulting
from increased effectiveness of the Company's distribution channels, and the
inclusion of sales for a full year from the Surgical division's (Richard-Allan)
operations which was purchased in August 1996.  The surgical increases were
partially offset by a $20.3 million decline in urology sales. The Company
believes that a majority of the decline in urology sales is attributable to the
introduction of drug-based treatments for impotence.  The Company is unable to
predict the long-term effects of this new treatment modality. However, in the
short term the Company believes that urology sales will continue to be
negatively impacted by this new treatment modality.  In addition, fiscal 1997
included $3.4 million of Rigiscan sales to a single urology customer which did
not reoccur in 1998.  Net sales of the Company's urology products, minimally
invasive and general surgery products and incontinence products represented
31.7%, 63.2% and 5.1%, respectively, of net sales for 1998.

  Gross profit. For fiscal 1998, gross profit decreased $7.4 million or 13.8%
over 1997.  The decrease was the net result of an increase in sales over the
period offset by a significant decline in gross profit margin.  The gross
profit margin decreased from 56.7% for 1997 to 43.5% for 1998.  The decrease in
gross profit margin was primarily due to a shift in sales from higher margin
urology products to lower margin surgical products. For 1997, higher margin
urology products accounted for 57.2% of net sales, decreasing to approximately
31.7% of net sales during 1998.

  Selling, general and administrative. Selling, general and administrative
expenses of $88.0 million for 1998 were $24.3 million or 38.1% higher than
selling, general and administrative expenses of $63.7 million for 1997.  The
increase was due to increased selling costs associated with growing sales and
the continued development of the Company's infrastructure, and the inclusion of
twelve months selling general and administrative expenses relating to the
Surgical division's (Richard-Allan) operation which was purchased in August
1996.

  Research and development. Research and development costs for 1998 increased
$3.9 million over 1997. The Company continues to make significant investments
in, and acquisitions of, technology. The increase in R&D expenditures is
related to the development of new products using the acquired technologies.

  Restructuring.  For 1998, the Company recorded a net restructuring charge of
$3.8 million consisting of $2.6 million in personnel reduction costs and $1.2
million in facility reduction costs.  Through March 31, 1998, $3.3 million of
this restructuring charge had been paid.

  Direct acquisition costs.  The Company had direct acquisition costs of
approximately $4.2 million related to expenses paid in connection with the
Imagyn Medical  merger.

   Discontinued operations. In April 1998, the Company decided that its
reusable pad and diaper business acquired through its July 1995 acquisition of
Allstate, would no longer be considered part of its core business. The Company
is currently negotiating with prospective buyers in an effort to sell the
operation's assets and liabilities.  The Company has accounted for the
operations of Allstate as a discontinued operation and prior years financial
statements have been restated to reflect the discontinuation of this operation.
As a consequence of this decision, the Company also recorded its estimate of the
loss to be incurred by Allstate's operations of $1.7 million from April 1, 1998
until the anticipated disposal date, expected to be in the latter part of the
Company's 1999 fiscal year.

  Net interest expense. Net interest expense for 1998 increased $14.1 million
over 1997. The increase was primarily due to higher debt levels associated with
the Company's 12.5% Senior Subordinated Notes which were issued during April
1997.

  Extraordinary expense.  The Company recorded an extraordinary loss of $3.9
million during 1998 related to the write-off of deferred financing costs,
related to the early retirement of two different bank credit facilities.





                                       13
<PAGE>   16
YEAR ENDED MARCH 31, 1997 COMPARED TO TWELVE MONTHS ENDED MARCH 31, 1996

  Net sales. Net sales during 1997 increased $36.4 million, or 63.3%, over the
twelve months ended March 31, 1996. This increase was primarily due to higher
sales of urology products which increased $11.8 million, or 28%, to $53.7
million, the purchase of Richard-Allan in August 1996 which increased revenues
by approximately $16.3 million, and the year over year growth in product line
revenue from Microsurge which increased revenues by $3.1 million and Imagyn
Medical which increased revenues by $5.7 million.  Net sales of the Company's
urology products, minimally invasive and general surgery products, and
incontinence products represented 57.2%, 38.5% and 4.3%, respectively, of net
sales for 1997.

  Gross profit. Gross profit during 1997 increased $16.5 million, or 44.7%,
over the 12-months ended March 31, 1996. The gross profit percentage was 56.7%
in 1997 and 63.9% for the 12-months ended March 31, 1996. The decrease in gross
profit percentage was primarily due to a change in the mix of products sold and
the write off of discontinued product inventory of approximately $1.7 million.
During the 12-months ended March 31, 1996, the Company's higher margin urology
products accounted for 72.8% of sales, decreasing to 57.2% of sales in fiscal
1997.

  Selling, general and administrative. Selling, general and administrative
expenses during 1997 increased by $11.6 million, or 22.2%, compared to the
12-months ended March 31, 1996. The increase in selling, general and
administrative expenses was related to increased sales levels and the selling,
general and administrative expenses of Microsurge and Richard-Allan which were
acquired during fiscal 1997. As a percentage of sales, selling, general and
administrative expenses decreased to 67.8% for 1997 from 90.5% for 1996. The
Company implemented a restructuring plan during the fourth quarter of fiscal
1997 at its Augusta, Georgia urology division to eliminate assembly operations,
and reduce administrative and finance functions.

  Research and development. Research and development expenses during 1997
increased $1.9 million, or 33.1%, over the 12-months ended March 31, 1996. The
increase was largely due to the Company devoting additional resources to
accelerate the development of new products for its gynecology and visualization
product lines.

  Write-off of purchased research and development. Subsequent to the
acquisition of Richard-Allan and X-Cardia, a study was conducted to determine
the proper allocation of the purchase price for each of these acquisitions. An
independent valuation of assets acquired 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. Additionally, during the
fourth quarter of fiscal 1997 the Company made acquisitions of technologies
under development that were also accounted for as purchased research and
development and written-off. Accordingly, $25.5 million, $11.5 million and
$10.2 million have been expensed in connection with the acquisitions of
Richard-Allan, X-Cardia and other technology purchases, respectively.

  Restructuring charges. In September 1996, the Company implemented a $4.0
million restructuring plan to eliminate redundant manufacturing facilities
resulting from the Richard-Allan, Intermed and O.R. Concepts acquisitions and
their consolidation with some of the Company's existing manufacturing
locations. This restructuring includes severance costs for approximately 18
employees, certain facility closures and elimination of other redundant selling
and administrative costs.

  In March 1997, the Company implemented a $8.0 million restructuring plan to
consolidate redundant facilities and reduce personnel resulting from the
mergers with Osbon and Microsurge. The plan provides for the elimination of
approximately 90 personnel and the closure of all significant operations at
Osbon (except for customer service, sales and a limited accounting support
staff) and the closure of all Microsurge facilities.

  The combined restructuring charge recorded in 1997 totaled $12.0 million
consisting of $9.5 million in personnel reductions and   $2.5 million in
facility reductions.  Through March 31, 1997, approximately $5.6 million of
this restructuring charge had been used. Although subject to future adjustment,
management of the Company believes that restructuring reserves as of March 31,
1997 are adequate to complete the restructuring.

  Direct acquisition costs. Merger and acquisition costs during 1997 decreased
$1.5 million, or 29.2%, over the 12-months ended March, 31, 1996. The decrease
was primarily due to acquisitions completed in fiscal 1997 being recorded as
purchase transactions which provides for the capitalization of acquisition
costs as opposed to expensing these costs incurred in transactions accounted
for as pooling of interests. These transaction costs include expenses related
to broker and other professional fees.





                                       14
<PAGE>   17
  Net interest expense. Interest expense during 1997 increased by approximately
$6.6 million, or 427.7%, over the 12-months ended March, 31, 1996. This
increase was primarily due to increased borrowings under term loans and lines
of credit and the issuance of $50 million of convertible subordinated
debentures during the second and third quarters of fiscal 1997.


Minority Interest in Consolidated Subsidiary

  Expenses related to minority interest were $55,000, $25,000 and $4,000 during
fiscal 1996, 1997 and 1998, respectively. Such expenses consist of 7% dividends
payable to stockholders of preferred stock of a subsidiary.

  The minority interested in Imagyn Medical Technologies California, Inc. at
March 31, 1997 consisted of 42,000 shares of its Series A preferred stock, which
were redeemed or exchanged for shares of common stock subsequent to March 31,
1997. The redemption price was $6.41 per share, consisting of the redemption
price of $5.00 per share plus accrued and unpaid dividends of $1.21 and a $0.20
per share redemption premium.  Redemption cost for these shares totaled
$269,220.  As of March 31, 1998, the Company had paid $174,000 in redemption
costs with the remaining balance being recorded as an accrued liability.

LIQUIDITY AND CAPITAL RESOURCES

  As of March 31, 1998, the Company had negative working capital of $55.7
million.  The Company's consolidated cash and cash equivalents and investments
of $46.6 million at March 31, 1997 decreased by $45.9 million during the year
ended March 31, 1998.  Uses of cash totaled $122.9 million during the year
ended March 31, 1998 and related primarily to cash used in operating activities
($82.6 million), restricted cash ($13.5 million) and cash used to purchase
property, plant, equipment and patents and for milestone technology payments to
X-Cardia ($26.8 million).  For the year ended March 31, 1998, approximately
$77.0 million in cash was provided from net incremental debt funding.

  The Company's negative cash flow from operations of $82.6 million for the
year ended March 31, 1998, was primarily related to operating losses and
increases in accounts receivable and inventory.  Net accounts receivable
balances at March 31, 1998 were approximately $25.0 million higher than at
March 31, 1997, as a result of increased sales and an increase in average days
sales outstanding.  The Company's inventory balances at March 31, 1998 were
approximately $9.2 million higher than at March 31, 1997, due to an increase in
inventories to levels to support anticipated future sales increases, and the
introduction of new products.

  Approximately $3.1 million of the Company's $4.2 million of remaining
restructuring liabilities are projected to be paid over the next 12 months. The
Company anticipates capital expenditures, primarily relating to tooling,
fixtures and information systems, to be approximately $4.0 million over the
next twelve months.

  During December 1997, the Company and its subsidiaries entered into a $40
million senior bank credit facility with a new senior lender.  The senior credit
facility is collateralized by substantially all of the assets of the Company and
the Company is required to meet certain financial covenants. Amounts available
under the senior credit facility are based on accounts receivable.  As of March
31, 1998, the Company had outstanding borrowings of $34.5 million under the
senior credit facility. Subsequent to March 31, 1998 the Company had borrowed an
additional $5.1 million under the senior credit facility.  The Company is
currently borrowing in excess of its borrowing eligibility based on a borrowing
base calculation and was granted a waiver by its lender that permits borrowings
in excess of its defined borrowing base. The waiver is revocable by the senior
lender at any time, and the Company is obligated to pay the senior lender an
amount equal to 1% of the credit commitment under the credit facility for each
month during which the amount outstanding under the senior credit facility
exceeds the borrowing base. In July 1998, the Company's senior lender increased
the maximum amount available under the senior credit facility from $40 million
to $43 million until July 29,1998. 

  The Company is a holding company whose material assets consist primarily of
the capital stock of its subsidiaries.  Consequently, the Company is dependent
upon dividends paid by its subsidiaries to pay the Company's debt obligations,
including its obligations under the Company's $50 million convertible
subordinated debentures and the $110 million senior subordinated notes. Amounts
advanced under the senior bank credit facility have been loaned to the
subsidiaries of the Company, and the Company has guaranteed the obligations of
its subsidiaries.





                                       15
<PAGE>   18
   Based on current cash flows, the Company will require additional funding to
continue its operations in the short-term.  The Company has an interest payment
of approximately $1.1 million due on June 30, 1998 to the holders of the
Company's Convertible Subordinated Debentures which as of July 13, 1998 had not
been paid.  The Company has a 30-day grace period in which to make the interest
payment on the Convertible Subordinated Debentures and management expects to
make full payment prior to the expiration of the grace period (see Note 5 to the
Consolidated Financial Statements). If the Company fails to make the interest
payment before expiration of the applicable grace period, failure to do so will
constitute an event of default under the Convertible Subordinated Debentures.
The occurrence of an event of default under the Convertible Subordinated
Debentures would constitute an event of default under the Company's senior
credit facility, and would become an event of default under the Company's Senior
Subordinated Notes, if either the senior lender or the holders of the
Convertible Subordinated Debentures elected to accelerate the maturity of debt
held by them.  

   As a result of the Company's recurring losses from operations, its
difficulties in generating sufficient cash flow to meet its obligations and
stockholders' capital deficiency, the report of the Company's independent
auditors indicates there is substantial doubt about the Company's ability to
continue as a going concern. Management is exploring several alternatives to
deal with the near-term liquidity situation, including obtaining additional
financing, the sale of non-strategic assets and consolidation and cost cutting
initiatives.

   The Company continues to seek additional financing on a short-term basis, and
is having discussions with a number of potential lenders.  On July 10, 1998, the
Company obtained a commitment for $3 million of additional short-term financing
from its senior lender, and discussions are continuing with the bank and others
regarding obtaining a larger commitment.  The additional $3 million financing
will help address the Company's immediate needs, however, additional financing
will likely be necessary depending upon the timing of planned asset sales.

   The Company is in the process of attempting to sell certain non-strategic
assets, and intends to use the proceeds of those sales to strengthen the
Company's balance sheet and to fund the operations of the Company, including
completion of pending product development projects and bringing new products to
market.  The Company is in discussions with several interested buyers, and has
received non-binding letters of interest (which contain estimated purchase
prices that are in ranges acceptable to the Company) from prospective purchasers
of three different product lines.  Discussions and due diligence continue with
these prospective purchasers, and, while no assurances can be given, the Company
expects to complete one or more sales by the end of the second quarter of fiscal
1999.

   As a result of consolidation and cost cutting initiatives taken in January
and May of 1998, operating expenses have been reduced from $26 million in the
third quarter of fiscal 1998 to approximately $18 million in the first quarter
of fiscal 1999.  Management expects operating expenses to remain at levels
consistent with those levels expected for the first quarter of fiscal 1999.
The Company expects to realize annualized cost savings of $34 million.

   Under the terms of the Company's senior credit facility and 12-1/2% Senior
Subordinated Notes, the Company has restrictions on the amount of additional
debt it can currently incur.  No assurances can be given that additional
financing will be available to the Company or that, if available, such
financing will be obtainable on terms favorable to the Company.  In the absence
of such financing or the successful sale of certain assets the Company will be
required to take additional steps to improve cash flow, including, but not
limited to the scaling back of current operations.

   The Company expects to report net sales for the quarter ended June 30, 1998
of approximately $12 million.  The Company anticipates lower quarterly revenues
going forward in comparison to previous quarters through at least the second
quarter of fiscal 1999.  The decline is in part attributable to significantly
lower sales of the Company's urology products as a result of competitive
pressures from the introduction of a new oral impotence drug.  In addition, the
Company, in an effort to improve its cash flow, has temporarily reduced its
surgical division's production resulting in lower sales of its surgical products
to distributors.  The Company believes that in the short-term its distributors
possess adequate inventory to continue shipping products to end-use customers.

FACTORS AFFECTING FUTURE OPERATING PERFORMANCE






                                       16
<PAGE>   19
  Liquidity Risks; Need for Additional Capital; Going Concern Qualification. The
Company is a party to a senior secured revolving credit facility with its senior
lender.  The Company has borrowed $39.6 million under the credit facility and
amounts borrowed currently exceed amounts available based on the borrowing base
calculation.  The senior lender has granted a waiver with respect to amounts
borrowed in excess of the borrowing base, however  the waiver is revocable by
the lender at any time.

  The Company continues to have significant liquidity issues and is exploring
several alternatives to deal with the near-term liquidity situation, including
obtaining additional financing, the sale of non-strategic assets and
consolidation and cost cutting initiatives.  See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."

  As a result of the foregoing uncertainty and other matters, the Company's
independent auditors have included an explanatory paragraph in the Independent
Auditors Report stating that there is substantial doubt about the Company's
ability to continue as a going concern.  The existence of the explanatory
paragraph may materially adversely affect the Company's relationships with its
creditors and suppliers, and therefore could have a material adverse affect on
the Company's business, financial condition and results of operations.

  Significant Leverage. The Company  has substantial indebtedness and
significant debt service obligations. At March 31, 1998 the Company had
approximately $252.7 million of outstanding liabilities, approximately $202.8
million of total assets, (approximately $126.9 million of total tangible
assets) and stockholders' deficit of $49.9 million.

   The Company's ability to satisfy its debt obligations will depend upon its
ability to satisfactorily deal with its current liquidity situation, and future
operating performance, which will be affected by prevailing economic conditions
and financial, business and other factors, certain of which are beyond its
control, as well as the availability of borrowings under its existing senior
credit facility or successor credit facilities or the proceeds of asset sales.
The Company will require substantial amounts of cash to fund scheduled payments
of principal and interest on its outstanding indebtedness as well as future
capital expenditures and any increased working capital requirements. The Company
historically has had negative cash flow from operations. In order to have
positive cash flow from operations and meet its various financial requirements,
including debt service, the Company  must experience substantial growth and
improvements in its results of operations.

   There can be no assurance that the Company will have positive cash flow from
operations in the future. If the Company is unable to meet its cash requirements
out of cash flow from operations or from available borrowings, there can be no
assurance that it will be able to obtain alternative financing or that it will
be permitted to do so under the terms of the senior credit facility, the
indenture relating to the Notes (the "Note Indenture"), or other debt
instruments. In the absence of such financing, the Company's ability to respond
to changing business and economic conditions, to make future acquisitions, to
absorb adverse operating results or to fund capital expenditures or research and
development may be adversely affected. Finally, it is anticipated that in order
to pay the principal balance of the Notes due at maturity, the Company will have
to obtain alternative financing.





                                       17
<PAGE>   20
   The Company's high degree of leverage could have important consequences
including, without limitation, the following: (i) a substantial portion of the
Company's net cash provided by operations will be committed to the payment of
the Company's interest expense and principal repayment obligations and will not
be available to the Company for its operations, capital expenditures,
acquisitions or other purposes; (ii) the Company's ability to obtain additional
financing in the future for working capital, capital expenditures or
acquisitions may be limited; (iii) the Company will be more highly leveraged
than most of its competitors, which may place it at a disadvantage and limit the
Company's flexibility in reacting to changes in its business; and (iv) the
Company's borrowings under the Credit Facility bear interest at variable rates,
which could result in higher interest expense if interest rates rise.

  Operating Losses; No Assurance of Profitability; Liquidity. The Company
reported net losses for the nine months ended March 31, 1996 and the years
ended March 31, 1997, and 1998, of $24.4 million, $91.5 million and $88.5
million, respectively. There can be no assurance that the Company will be
profitable in any future period. The net cash used in operating activities by
the Company for the nine months ended March 31, 1996 and for the years ended
March 31, 1997 and 1998 was $18.1 million, $61.3 million and $82.6 million,
respectively. There can be no assurance that the operating activities of the
Company will generate sufficient cash flow to meet its liquidity needs in any
future period. The future capital requirements of the Company will depend upon
many factors, including the success of its sales and marketing efforts, new
product development, and future acquisitions of companies and products. In
addition, other than certain permitted indebtedness (under the Note Indenture),
including indebtedness under the Credit Facility, the Company will need
improvement in results of operations in order to incur additional indebtedness
under the terms of the Note Indenture. If adequate funds are not available, the
Company may be required to delay, scale back or eliminate its acquisition and
product development efforts, which could have a material adverse effect on the
Company's business, results of operations or financial condition.

   Limitations Imposed by Certain Indebtedness. The documents governing the
indebtedness of the Company (including the Note Indenture and the senior credit
facility) contain significant covenants that limit the Company's and its
subsidiaries' ability to engage in various transactions and, in the case of the
senior credit facility, require satisfaction of specified financial performance
criteria. In addition, under each of the foregoing documents, the occurrence of
certain events (including, without limitation, failure to comply with the
foregoing covenants, material inaccuracies of representations and warranties,
certain defaults under or acceleration of other indebtedness and events of
bankruptcy or insolvency) would, in certain cases after notice and grace
periods, constitute an event of default permitting acceleration of the
indebtedness covered by such documents. The limitations imposed by the documents
governing the outstanding indebtedness of the Company and its subsidiaries are
substantial, and failure to comply with them could have a material adverse
effect on the Company and its subsidiaries. The Company had an interest payment
of approximately $1.1 million due on June 30, 1998 to the holders of the
Company's Convertible Subordinated Debentures which as of July 13, 1998 had not
been paid. The Company has a 30-day grace period in which to make the interest
payment. While management currently anticipates making the interest payment
before expiration of the applicable grace period, failure to do so will
constitute an event of default under the Convertible Subordinated Debentures.
The occurrence of an event of default under the Convertible Subordinated
Debentures would constitute an event of default under the Company's senior
credit facility, and would become an event of default under the Company's Senior
Subordinated Notes, if either the senior lender or the holders of the
Convertible Subordinated Debentures elected to accelerate the maturity of debt
held by them.

   Year 2000. As the year 2000 approaches, an issue impacting all companies has
emerged regarding how existing application software programs and operating
systems can accommodate this date value (the "Year 2000 Issue").  In brief,
many existing application programs in the marketplace were designed to
accommodate a two digit representation for the year (e.g. - "97" is stored on
the system and represents the year 1997).  As a result, the year 1999 could be
the maximum date that systems would be able to accurately process.

   Beginning in late 1997, the Company conducted a review of its existing
computer systems, including an assessment of the nature and potential extent of
the impact of the Year 2000 Issue.  The Company has reviewed and had an
independent third party review its internal management information systems and
believes that those systems are year 2000 compliant.  The Company has recognized
the need to review and assess risks associated with the Year 2000 Issue as it
relates to microprocessor chips imbedded in certain medical equipment
manufactured by the Company and in certain manufacturing equipment used by the
Company.  The Company anticipates completing such review by the end of calendar
year 1998 and being able to make any product design changes required in early
1999.  Because few of the Company's products involve microprocessors chips, the
Company does not believe that material resources will be required to resolve any
issues identified in that review.

   Additionally, the Company may face third party risks associated with the
Year 2000 Issue.  The Company believes that the primary third party risk
involves electronic interfaces with banks and other financial institutions.
The Company will remain in communication with those parties during 1998 and
test those electronic interfaces as those institutions complete their own year
2000 compliance programs.  The Company believes that it will be able to resolve
any issues identified before the year 2000, however, it has not yet quantified
the cost of any remediation efforts.

  Future Operating Results Dependent on Products. The future operating results
of the Company will be dependent upon its ability to increase sales of existing
medical products and the continued acceptance of such products 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.  The market for medical products is
characterized by rapid technological change and product obsolescence. In
particular, competition in the market for treatment of male impotence is
especially intense and has increased substantially in recent years. Competitors
and others may develop and introduce new products, devices or approaches for
treatment of the conditions targeted by the Company that could render one or
more of the Company's products obsolete or noncompetitive. The future operating
results of the Company will also be dependent, therefore, upon its 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 products of the Company,
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 the 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 has acquired. As
the Company has acquired businesses and technologies, it has acquired a number
of related products under development which will require additional research
and development efforts by the Company in an attempt to bring such products to
market.

   While members of management of the Company have experience in developing
products internally, the Company has not historically developed a significant
number of medical products internally. There can be no assurance that the
Company's medical products will be successfully developed and marketed, that
required regulatory approvals from the Food and Drug Administration or
equivalent foreign authorities for any indication will be obtained or that any
products, if produced, will be capable of being produced in commercial
quantities at reasonable costs, that such 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.





                                       18
<PAGE>   21

  Concentration of Credit Risk; Extended Payment Terms. The Company sells
several product lines that are considered "capital equipment" by hospitals and
other purchasers. From time to time, the Company offers certain customers
extended payment terms to facilitate sales of these products. The Company may
in the future grant similar extended payment terms.  The Company's typical
payment terms require payment from 30 to 90 days. As of March 31, 1998, the
Company had a total of $4.1 million of accounts receivable on extended payment
terms with Integrated Medical Resources, Inc. ("IMR") for sales of the
Company's Rigiscan product pursuant to terms under which the payments are due
over 15-36 months. Over the twelve month period ended March 31, 1998, the
Company did not sell any products to IMR on extended terms. IMR is a public
company traded on the Nasdaq under the symbol "IMRI."  Bruce Hazuka, Executive
Vice President -- Chief Operating Officer of the Company, is a member of the
board of directors of IMR.

  Uncertainty Relating to Third-Party Reimbursement.  In the United States,
health care providers, such as hospitals and physicians, that purchase the
Company's products and other medical devices, generally rely on third-party
payors, including private health insurance plans and federal Medicare and state
Medicaid, to reimburse all or part of the cost of the procedure in which the
medical device is being used.  Reimbursement has traditionally been available
in the United States for vacuum erection devices manufactured by the Company
and sold by prescription to patients under a specific reimbursement code. The
majority of the remaining Company products are used in procedures for which
reimbursement is generally available, however, there are no specific
reimbursement codes for the Company's products. There can be no assurance that
reimbursement will be available for procedures performed using the Company's
existing products or future products. In the event that reimbursement is not
available for procedures using such products, the market acceptance for such
products in the United States could be materially and adversely affected. In
addition, certain health care providers are moving toward a managed care system
in which such providers contract to provide comprehensive health care for a
fixed cost per covered individual. The Company is unable to predict what
changes will be made in the reimbursement methods utilized by third-party
health care payors, and the Company could be adversely affected by changes in
reimbursement policies of governmental or private health care payors,
particularly to the extent any such changes affect reimbursement for procedures
in which its products are used. Failure by physicians, hospitals and other
users of the Company's products to obtain sufficient reimbursement from health
care payors for procedures in which their products are used or adverse changes
in governmental and private third- party payors' policies toward reimbursement
for such procedures would have a material adverse effect on the Company's
business, financial condition and results of operations.

  Market acceptance of the Company's products in international markets may be
dependent in part upon the availability of reimbursement within prevailing
health care payment systems. Reimbursement and health care payment systems in
international markets vary significantly by country, and include both
government sponsored and private health insurance. There can be no assurance
that any international reimbursement approvals will be obtained in a timely
manner, or at all. Failure to receive international reimbursement approvals
could have a material adverse effect on market acceptance of the Company's
products in international markets and therefore could have a material adverse
effect on The Company's business, financial condition and results of
operations.

  Integration of Acquired Operations. The Company acquired Imagyn Medical, Inc.
during September 1997 and integrated the acquisition with its own operations.
No assurance can be given that the benefits expected from such integration 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.






                                       19
<PAGE>   22

  Reliance on Patents and Proprietary Rights. The commercial 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
and not breaching technology licenses that cover technology used in its
products. The Company owns or has authority to use United States and foreign
patent rights with respect to some of its medical products and has filed, and
expects in the future to file, patent applications. It is uncertain whether any
third party patents will require the Company to develop alternative technology
or to alter its products or processes, obtain licenses or cease certain
activities. If such licenses are required, there can be no assurance that the
Company will be able to obtain such licenses on commercially favorable terms, if
at all. Failure by the Company to obtain a license to any technology that it may
require to commercialize its products could have a material adverse effect on
the Company. 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 and there can be no assurance that a competitor's technology or product
would be found to infringe such 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, there can
be no assurances as to the breadth and degree of protection that will be
afforded the Company's patent rights or that other companies will not
independently develop similar but non-infringing competitive products.
Moreover, 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. In
addition, there is currently pending before Congress legislation providing for
changes to the patent law which may adversely affect the patent and proprietary
rights of pharmaceutical, biopharmaceutical and biomedical firms. If such
pending legislation is adopted, the extent to which such changes would affect
the operations of the Company cannot be ascertained.

  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
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 secrets, know-how, continuing technological
innovations and licensing opportunities to develop and maintain its competitive
position. There can be no assurance that others will not independently create
substantially equivalent proprietary information or otherwise gain access to or
disclose such information of the Company. It is the Company's policy to require
certain of its employees, contractors and consultants to execute
confidentiality agreements 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.

  Regulatory Matters. Most of the Company's medical products are subject to
regulation for safety and efficacy by, among other governmental entities, the
United States Food and Drug Administration and corresponding agencies of state
and foreign countries in which the Company sell its products. The process of
receiving governmental approval may take a number of years and the expenditure
of substantial resources.  There can be no assurance that even after such time
and expenditures, regulatory approval will be obtained for any of the products
developed by the Company. If regulatory approval of a product is granted, such
approval may entail limitations on the indicated uses for which the product may
be marketed. Further, discovery of previously unknown problems with a product,
manufacturer or its manufacturing facilities may result in restrictions on such
product or manufacturer, including withdrawal of the product from the market.
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. Product development and approvals within this
regulatory framework take a number of years and involve the expenditure of
substantial resources. 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





                                       20
<PAGE>   23
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 the 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 being
introduced into the market. 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. 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
requires 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.

  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 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. There can be no assurances that technological change,
including the development of new treatment modalities, will not place one or
more of the Company's existing or future products at a competitive disadvantage.
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 no
assurance that the Company will be able to compete successfully in the future.

  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
a material adverse effect on the Company's business if a suitable replacement
could not be found. The Company 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. The Company has "key person" insurance on the
life of Mr. Laverty in the amount of $5.0 million; 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.

  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
products of the Company enter the market, the Company 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 series of claims or adverse publicity resulting from a claim,
regardless of whether such claims are covered by insurance, could have a
material adverse effect on the Company's business, results of operations or
financial condition.

  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





                                       21
<PAGE>   24

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 of the Company.

  Limitation on Use of Tax Net Operating Loss Carryovers. As of March 31, 1998,
the Company had accumulated net operating loss carryovers for U.S. federal and
state income tax purposes of approximately $175 million and $104 million,
respectively. These loss carryovers would expire, if not previously utilized
against income of the Company, in various years through 2012. 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 Medical
Systems Ltd. in December 1995, 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 the acquisition of Microsurge on March 31, 1997, an
additional ownership change may have occurred. The Company believes this
additional ownership change will not reduce the December 29, 1995 Section 382
limitation, but will place limitations on the maximum annual utilization of
operating loss carryforwards generated subsequent to such date.

  Warrants and Options; Potential Dilution and Adverse Impact on Additional
Financing.  The Company has a significant number of outstanding options and
warrants. 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 the Company Common Stock at a
conversion price, subject to adjustment, of $10.90 per share. The holders of
the Debentures would be entitled to receive 4,587,156 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.

  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 the Company
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.

  Volatility of Stock Price.  The market price of the Company's 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 Company Common Stock, regardless of the Company's
actual operating performance. The market price of the Company's Common Stock
has historically been very volatile.

  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.

  Forward-Looking Statements. Certain statements contained, or incorporated by
reference, herein, including without limitation, statements containing the
words "believes," "anticipates," "intends," "expects" and words of similar
import, constitute "forward-looking statements." Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
that may cause the actual results, performance or achievements of the Company
or industry results to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such factors include, among others, the following: liquidity risks;
risks relating to historical operating losses; general economic and business
conditions, both domestic and foreign; industry capacity; development of
products; proprietary rights; demographic changes; existing government
regulations and changes in, or the failure to comply with, government
regulations; legislative proposals for healthcare reform; liability and other
claims asserted against the Company; competition; the loss of any significant
customers; changes in operating strategy or development plans; the ability to
attract and retain qualified personnel; the significant indebtedness of the
Company; and other factors referenced herein. Given these uncertainties, the
Company stockholders are cautioned not to place undue reliance on such
forward-looking statements. All forward-looking statements in this report are
made as of the date hereof, based on information available to the Company as of
the date hereof, and the Company assumes no obligation to update any
forward-looking statement.





                                       22
<PAGE>   25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS

  Not Applicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

  The information required by this item is set forth herein. Such information
is listed under Item 14 of Part IV of this report.

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

  Effective February 27, 1998, the Company notified Ernst & Young LLP that the
Company's board of directors had elected to change independent auditors for the
Company.  Effective March 3, 1998, the Company engaged Deloitte & Touche LLP as
its new independent auditors.  This change in independent auditors was reported
by the Company in a Current Report in Form 8-K filed with the Securities and
Exchange Commission on March 5, 1998.

  During the Company's two most recent fiscal years and the subsequent interim
period before the dismissal of Ernst & Young LLP, there were no disagreements
between the Company and Ernst & Young LLP on any matter of accounting principles
or practices, financial statement disclosure or auditing scope or procedure
which, if not resolved to Ernst & Young's satisfaction, would have caused it to
make a reference to the subject matter of the disagreement in connection with
its report.  Ernst & Young's report on the Company's financial statements for
the two most recent fiscal years did not contain any adverse opinion and was not
qualified as to uncertainty, audit scope or accounting principles.





                                       23
<PAGE>   26

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

  Information regarding directors of the Company is set forth under the caption
"Election of Directors" and "Executive Compensation and Other Information --
Compliance with Section 16(a) of the Exchange Act" in the Company's definitive
Proxy Statement to be filed in connection with its 1998 Annual Meeting of
Stockholders and is incorporated herein by reference. A list of executive
officers of the Company is included in Part I of this report.

ITEM 11. EXECUTIVE COMPENSATION

  The information required by this item is set forth under the caption
"Executive Compensation and Other Information" and "Election of Directors --
Compensation of Directors" in the Company's definitive Proxy Statement to be
filed in connection with its 1998 Annual Meeting of Stockholders and is
incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

  The information required by this item is set forth under the caption
"Principal Stockholders" in the Company's definitive Proxy Statement to be
filed in connection with its 1998 Annual Meeting of Stockholders and is
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

  The information required by this item is set forth under the captions
"Executive Compensation and Other Information -- Certain Relationships and
Related Transactions and Compensation Committee Interlocks and Insider
Participation" in the Company's definitive Proxy Statement to be filed in
connection with its 1998 Annual Meeting of Stockholders and is incorporated
herein by reference.





                                       24
<PAGE>   27

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

  The following consolidated financial statements of the Company are included
herein:

<TABLE>
<CAPTION>
                                                                                                   PAGE OR METHOD
                                                                                                      OF FILING  
                                                                                                   --------------
<S>                                                                                                <C>
 (a)(1)   Consolidated Financial Statements
          (1) Report of Independent Auditors -- Deloitte & Touche LLP                                    F-2
          (2) Report of Ernst & Young LLP........................................................        F-3
          (3) Report of Coopers & Lybrand L.L.P..................................................        F-4
          (4) Report of Coopers & Lybrand L.L.P..................................................        F-5
          (5) Consolidated Balance Sheets at March 31, 1997 and 1998.............................        F-6
          (6) Consolidated Statements of Operations for the nine months ended March 31, 1996
                and for the years ended March 31, 1997 and 1998 .................................        F-7
          (7) Consolidated Statements of Common Stockholders' Equity (deficiency) for the nine 
                months ended March 31,1996, and for the years ended March 31, 1997 and 1998......        F-8
          (8) Consolidated Statements of Cash Flows for the nine months ended March 31, 1996 
                and for the years ended March 31, 1997 and 1998..................................        F-10
          (9) Notes to Consolidated Financial Statements.........................................        F-11

 (a)(2)   Financial Statement Schedules
          Report of Independent Auditors.........................................................        S-1
          Schedule I --  Condensed Financial Statements of Parent Company........................        S-2
          Schedule II -- Consolidated Valuation Accounts.........................................        S-5

          All other financial statement schedules have been omitted because they are inapplicable
          or the information required thereby is included elsewhere herein.

 (a)(3)   Exhibits

          Reference is made to the Exhibit Index immediately preceding the exhibits hereto for 
          the exhibits included herein.

(b) Reports on Form 8-K.
</TABLE>

The Company filed with the Securities and Exchange Commission a Current Report
on Form 8-K, dated March 5, 1998, during the fourth quarter of fiscal 1998
(Commission file no. 1-11150)





                                       25
<PAGE>   28

                       IMAGYN MEDICAL TECHNOLOGIES, INC.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                                                          PAGE
                                                                                          ----
<S>                                                                                       <C>

 Independent Auditors Reports.......................................................       F-2
 Consolidated Balance Sheets at March 31, 1997 and 1998.............................       F-6
 Consolidated Statements of Operations for the nine months ended March 31, 1996
   and for the years ended March 31, 1997 and 1998..................................       F-7
 Consolidated Statements of Common Stockholders' Deficiency for the nine months
   ended March 31, 1996 for the years ended March 31, 1997 and 1998.................       F-8
 Consolidated Statements of Cash Flows for the nine months ended March 31, 1996
   and for the years ended March 31, 1997 and 1998..................................       F-10
 Notes to Consolidated Financial Statements.........................................       F-11
</TABLE>















                                      F-1
<PAGE>   29

                          INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Stockholders of
Imagyn Medical Technologies, Inc.

We have audited the accompanying consolidated balance sheet of Imagyn Medical
Technologies, Inc. and subsidiaries (formerly Urohealth Systems, Inc.) (the
Company) as of March 31, 1998, and the related consolidated statements of
operations, common stockholders' equity (deficiency), and cash flows for the
year then ended.  Our audit also included the financial statement schedules as
of and for the year ended March 31, 1998 included in Item 14.  These financial
statements and financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedules 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Imagyn Medical Technologies, Inc.
and subsidiaries at March 31, 1998, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.  Also, in our opinion such financial statement schedules,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein as
of and for the year ended March 31, 1998.

The accompanying consolidated financial statements give retroactive effect to
the merger of Urohealth Systems, Inc. and Imagyn Medical, Inc., which has been
accounted for as a pooling of interests as described in Note 1 to the
consolidated financial statements.

Other auditors previously audited and reported on the balance sheet of
Urohealth Systems, Inc. as of March 31, 1997, and the related consolidated
statements of operations, changes in stockholders' equity (deficit), cash
flows, and consolidated financial statement schedule for the year ended March
31, 1997 and the nine month period ended March 31, 1996, prior to the
restatement for the 1998 pooling of interests, and their report dated July 8,
1997, made reference to their reliance on other auditors in expressing an
unqualified opinion on those financial statements.  The financial statements of
Imagyn Medical, Inc. for the year ended March 31, 1997 and the nine month
period ended March 31, 1996, were audited by other auditors, whose report dated
January 27, 1998, expressed an unqualified opinion. We audited the combination
of the accompanying consolidated balance sheet as of March 31, 1997, and the
related statements of operations, changes in shareholders' equity (deficit),
and cash flows for the year ended March 31, 1997 and the nine month period
ended March 31, 1996, after restatement for the 1998 pooling of interests; in
our opinion, such consolidated financial statements have been properly combined
on the basis described in Note 1 to the consolidated financial statements.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern.  As discussed in Note 1 to the
financial statements, the Company's recurring losses from operations, its
difficulties in generating sufficient cash flow to meet its obligations and
sustain its operations and its stockholders' capital deficiency raise
substantial doubt about its ability to continue as a going concern.
Management's plans concerning these matters are also described in Note 1.  The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

/s/ DELOITTE & TOUCHE L.L.P.

Costa Mesa, California
July 13, 1998





                                      F-2
<PAGE>   30

                         REPORT OF INDEPENDENT AUDITORS


We have audited the consolidated financial statements of UROHEALTH Systems,
Inc. (before giving effect to the business combination with Imagyn Medical,
Inc. which occurred on September 29, 1997 and was accounted for as a pooling of
interests) as of March 31, 1996 and 1997, and the related consolidated
statements of operations, stockholders' equity (deficiency) and cash flows for
the nine months ended March 31, 1996 and the year ended March 31, 1997.  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 financial statements of certain wholly-owned
subsidiaries, which statements reflect total assets constituting 16.5% and 3.9%
of consolidated total assets as of March 31, 1996 and 1997, respectively, and
net sales constituting 8% and 8% of consolidated net sales for the nine months
ended March 31, 1996 and the year ended March 31, 1997, respectively.  Those
statements were audited by other auditors whose reports have been furnished to
us, and our opinion, insofar as it relates to data included in the consolidated
financial statements for such entities, is based solely on the reports 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 and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.  We believe that our audits and the reports of other auditors
provide a reasonable basis for our opinion.

In our opinion, based on our audits and reports of other auditors, the
financial statements referred to above present fairly, in all material
respects, the consolidated financial position of UROHEALTH Systems, Inc.
(before giving effect to the business combination with Imagyn Medical, Inc.,
which occurred on September 29, 1997 and was accounted for as a pooling of
interests) at March 31, 1996 and 1997, and the consolidated results of its
operations and its cash flows for the nine months ended March 31, 1996 and the
year ended March 31, 1997 in conformity with generally accepted accounting
principles.


                                               /s/ Ernst & Young LLP

Orange County, California
July 8, 1997





                                      F-3
<PAGE>   31

                       REPORT OF INDEPENDENT ACCOUNTANTS



Board of Directors
Imagyn Medical Technologies, Inc.
Newport Beach, California

  We have audited the accompanying consolidated balance sheet of Imagyn
Medical, Inc. as of March 31, 1997, and the related consolidated statements of
operations, stockholders' equity and cash flows for the nine month period ended
March 31, 1996 and the year ended March 31, 1997 (not included separately
herein) These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 provide a reasonable basis
for our opinion.

  As described in Note 1 to the financial statements, on September 29, 1997,
Imagyn Medical, Inc. was acquired by and became a wholly-owned subsidiary of
Imagyn Medical Technologies, Inc.

  In our opinion, the consolidated  financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Imagyn Medical, Inc. as of March 31, 1997, and the results of their
operations and their cash flows for the nine-month period ended March 31, 1996
and the year ended March 31, 1997, in conformity with generally accepted
accounting principles.


                                        /s/ COOPERS & LYBRAND L.L.P.





Newport Beach, California
January 27, 1998





                                      F-4
<PAGE>   32
                       REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors of
Imagyn Medical Technologies, Inc.

  We have audited the accompanying balance sheet of Microsurge, Inc. as of
March 31, 1997 and the related statements of operations, stockholders' deficit
and cash flows for the year ended March 31, 1997 and the nine months ended
March 31, 1996 (not included separately herein). These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

  As described in Note 1 to the financial statements, on March 31, 1997,
Microsurge, Inc. was acquired by and became a wholly owned subsidiary of
UROHEALTH Systems, Inc. (subsequently renamed Imagyn Medical Technologies,
Inc.)

  In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Microsurge, Inc. as of March
31, 1997 and the results of its operations and its cash flows for the year
ended March 31, 1997 and the nine months ended March 31, 1996 in conformity
with generally accepted accounting principles.


                                             /s/ COOPERS & LYBRAND L.L.P.





Boston, Massachusetts
May 9, 1997





                                      F-5
<PAGE>   33
                       IMAGYN MEDICAL TECHNOLOGIES, INC.

                          CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                            MARCH 31,
                                                                     ---------------------
                                                                        1997        1998
                                                                     ---------   ---------
                                                                     (IN THOUSANDS, EXCEPT
                                                                          SHARE DATA)
                                                                     ---------------------
<S>                                                                 <C>         <C>
 CURRENT ASSETS:
   Cash and equivalents ...........................................  $  22,574   $     702
   Short-term investments .........................................     18,375          --
   Receivables, net of allowance for doubtful accounts of $1,899
     and $3,359 in 1997 and 1998, respectively ....................     16,662      41,828
   Income tax receivable ..........................................        377          --
   Advances to officers ...........................................        114          --
   Inventories, net ...............................................     22,826      31,989
   Distributor inventories ........................................      6,307          --
   Prepaid expenses ...............................................      3,049       2,098
   Net assets of discontinued operations ..........................      1,935       2,001
                                                                     ---------   ---------
 Total current assets .............................................     92,219      78,618
 Long-term cash investments .......................................      5,611          --
 Restricted cash ..................................................         48      13,589
 Receivables -- long term .........................................      2,722       2,513
 Property and equipment, net ......................................     26,915      29,229
 Patents and intangibles, net of accumulated amortization of $3,217
   and $4,836 in 1997 and 1998, respectively ......................      6,285       8,559
 Loans to officers ................................................        550       2,227
 Deposits and other assets ........................................      2,288         694
 Deferred debt issuance costs, net ................................      5,986       9,559
 Goodwill, net ....................................................     43,417      57,798
                                                                     ---------   ---------
                                                                     $ 186,041   $ 202,786
                                                                     =========   =========
 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
 Current liabilities:
   Accounts payable and other accrued liabilities .................  $  22,013   $  42,325
   Compensation and employee benefits .............................      3,230       4,133
   Restructuring liabilities ......................................      6,192       3,101
   Short-term debt ................................................     14,518      34,462
   Current portion of long-term debt ..............................      3,328      50,253
                                                                     ---------   ---------
 Total current liabilities ........................................     49,281     134,274
 Deferred income ..................................................      1,000       1,000
 Long-term liabilities:
   Long-term debt .................................................     98,292       5,265
   Senior subordinated notes, net .................................         --     108,306
   Restructuring liabilities, less current portion ................        822       1,120
   Other liabilities ..............................................      4,149       2,744
 Minority interest in consolidated subsidiary .....................        237          --
 Commitments and contingencies (Notes 1 and 8)
 Stockholders' equity (deficiency):
 Preferred stock, $0.001 par value: Authorized shares - 5,000,000:
  Issued and outstanding shares - none ............................         --          --
 Common stock, $0.001 par value: Authorized shares -- 100,000,000:
  Issued and outstanding shares -- 34,992,415 and 36,303,125,
   at March 31, 1997 and 1998, respectively .......................         35          36
 Warrants .........................................................      5,359       7,683
 Additional paid-in capital .......................................    225,132     228,293
 Note receivable from shareholder .................................       (121)         --
 Unearned compensation ............................................       (615)         --
 Deficit ..........................................................   (197,516)   (286,041)
 Foreign currency translation adjustment ..........................        (14)        106
                                                                     ---------   ---------
 Total common stockholders' equity (deficiency) ...................     32,260     (49,923)
                                                                     ---------   ---------
                                                                     $ 186,041   $ 202,786
                                                                     =========   =========
</TABLE>

          See accompanying notes to consolidated financial statements.





                                      F-6
<PAGE>   34
                       IMAGYN MEDICAL TECHNOLOGIES, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                               NINE MONTHS
                                                                  ENDED       YEAR ENDED     YEAR ENDED
                                                                MARCH 31,      MARCH 31,      MARCH 31,
                                                                   1996           1997           1998   
                                                                ---------      ---------      ---------
                                                                  (IN THOUSANDS, EXCEPT PER SHARE DATA)
 <S>                                                           <C>            <C>            <C>
 Net sales ................................................     $  44,131      $  94,014      $ 105,519
 Cost of sales ............................................        16,031         40,709         59,591
                                                                ---------      ---------      ---------
 Gross profit .............................................        28,100         53,305         45,928
 Operating expenses:
   Selling, general and administrative ....................        40,315         63,741         88,031
   Research and development ...............................         4,459          7,984         11,897
   Restructuring charges ..................................         5,456         12,000          3,846
   Write-off of purchased research and development ........            --         47,232             --
   Direct acquisition costs ...............................         4,232          3,600          4,220
                                                                ---------      ---------      ---------
 Total operating expenses .................................        54,462        134,557        107,994
                                                                ---------      ---------      ---------
 Loss from operations .....................................       (26,362)       (81,252)       (62,066)

 Other income (expense):
   Minority interest consisting of accrued dividends on
      preferred stock of subsidiary .......................           (55)           (25)            (4)
   Interest income ........................................           365          2,656          2,679
   Interest expense .......................................        (1,227)        (8,143)       (22,234)
   Other ..................................................         3,475             --            464
                                                                ---------      ---------      ---------
 Loss from continuing operations before provision (benefit)
   for income taxes .......................................       (23,804)       (86,764)       (81,161)
 Provision (benefit) for income taxes .....................           435           (225)             2
                                                                ---------      ---------      ---------
 Loss from continuing operations before discontinued
    operations and extraordinary item .....................       (24,239)       (86,539)       (81,163)

 Discontinued operations:
   Loss from operations of discontinued business ..........          (224)        (2,028)        (1,835)
   Loss on disposal of discontinued business ..............            --             --         (1,667)
                                                                ---------      ---------      ---------
 Loss before extraordinary item ...........................       (24,463)       (88,567)       (84,665)
 Extraordinary item (early extinguishment of debt) ........            --         (2,973)        (3,860)
                                                                ---------      ---------      ---------
 Net loss .................................................     $ (24,463)     $ (91,540)     $ (88,525)
                                                                =========      =========      =========

 Net loss per share:
  Loss before extraordinary item ..........................     $ (24,463)     $ (88,567)     $ (84,665)
  Dividends and accretion on redeemable convertible
   preferred stock ........................................          (599)          (398)            --
                                                                ---------      ---------      ---------
  Loss before extraordinary item attributable to common
  stockholders ............................................       (25,062)       (88,965)       (84,665)
  Extraordinary item ......................................            --         (2,973)        (3,860)
                                                                ---------      ---------      ---------
  Net loss attributable to common stockholders ............     $ (25,062)     $ (91,938)     $ (88,525)
                                                                =========      =========      =========
  Basic and diluted loss per share from continuing
    operations before discontinued operations and
    extraordinary item ....................................     $   (1.13)     $   (2.90)     $   (2.28)
                                                                =========      =========      =========
  Basic and diluted loss per share from
    discontinued operations ...............................     $   (0.01)     $   (0.07)     $   (0.10)
                                                                =========      =========      =========
  Basic and diluted loss per share from extraordinary 
   item ...................................................     $      --      $   (0.10)     $   (0.11)
                                                                =========      =========      =========
  Basic and diluted loss per share ........................     $   (1.14)     $   (3.07)     $   (2.49)
                                                                =========      =========      =========
 Weighted average number of shares used to compute net
  loss per share ..........................................        22,071         29,959         35,608
                                                                =========      =========      =========
</TABLE>


          See accompanying notes to consolidated financial statements.






                                      F-7


<PAGE>   35
                        IMAGYN MEDICAL TECHNOLOGIES, INC.

       CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (DEFICIENCY)
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                              
                                    COMMON STOCK              ADDITIONAL              AMOUNTS DUE             FOREIGN     
                                 ------------------             PAID-IN    UNEARNED      FROM                CURRENCY    
                                 SHARES    AMOUNT    WARRANTS   CAPITAL  COMPENSATION STOCKHOLDERS DEFICIT  TRANSLATION   TOTAL
                                 ------   --------- ---------  --------- ------------ ------------ -------- -----------  --------- 
<S>                              <C>      <C>          <C>       <C>          <C>       <C>        <C>         <C>       <C>
Balance at June 30, 1995......   15,087   $     325    $1,402   $ 70,901  $    --       $(293)    $ (80,143)   $ 115     $ (7,693)
 Adjustments for pooling                                                                                                          
   of interests...............       --          --        --         --       --          --          (373)      --         (373)
 Exercise of options and                                                                                                          
   warrants...................      227          63        --        880       --          --            --       --          943
 Issuance of equity                                                                                                               
   securities by pooled        
   company....................      467          --        --      4,149       --          --            --       --        4,149
 Issuance of common            
   stock for preferred                                                                                                            
   stock of subsidiary........        3           1        --         45       --          --            --       --           46
 Common stock issued upon      
   conversion of preferred                                                                                                        
   stock......................    1,509      28,129        --         --       --          --            --       --       28,129
 Cancellation of common        
   stock and amount due                                                                                                           
   from stockholder...........      (64)       (238)       --         --       --         170            --       --          (68)
 Amount due from                                                                                                                  
   stockholder from            
   common stock...............      459         102        --         --       --         (73)           --       --           29
 Bridge financing                                                                                                                 
   warrants exchanged          
   for common stock...........      393         465        --         --       --          --            --       --          465
 Common stock issued                                                                                                              
   for consulting.............        1           1        --         --       --          --            --       --            1
 Unearned compensation         
   related to stock                                                                                                               
   options granted............       --       1,603        --         --   (1,145)         --            --       --          458
 Compensation related to                                                                                                         
   stock options vesting......       --          --        --         --      180          --            --       --          180
 Dividends and accretion                                                                                                          
   on redeemable convertible   
   preferred stock............       --          --        --         --       --          --          (599)      --         (599)
 Warrants.....................       --          --     1,598         --       --          --            --       --        1,598
 Net loss.....................       --          --        --         --       --          --       (24,463)      --      (24,463)
 Foreign currency                                                                                                                 
   translation loss...........       --          --        --         --       --          --            --     (213)        (213)
                                 ------   ---------    ------   --------  -------       -----     ---------    -----     --------
Balance at March 31, 1996.....   18,082      30,451     3,000     75,975     (965)       (196)     (105,578)     (98)       2,589
 Exercise of options                                                                                                              
   and warrants...............      404          24        --      1,436       --          --            --       --        1,460
 Issuance of common stock      
   for preferred stock                                                                                                            
   of subsidiary..............       54          --        --        860       --          --            --       --          860
 Issuance of common            
   shares relating to          
   secondary offering.........    2,684           3        --     18,814       --          --            --       --       18,817
 Issuance of common            
   shares related to                                                                                                              
   acquisitions...............    4,088           4        --     48,042       --          --            --       --       48,046
 Issuance of common            
   shares on conversion        
   of convertible                                                                                                                 
   preferred stock............    1,056           1        --      3,656       --          --            --       --        3,657
 Issuance of common            
   shares on conversion        
   of convertible note........      359           1        --      1,326       --          --            --       --        1,327
 Issuance of common            
   shares under stock                                                                                                             
   purchase plan..............       48          49        --        359       --          --            --       --          408
 Issuance of common            
   shares.....................    4,427      60,242        --         --       --          --            --       --       60,242
 Compensation related to       
   stock options vesting......       --          --        --         --      350          --            --       --          350
 Conversion of                 
   convertible redeemable      
   preferred stock into        
   common stock...............    3,801      13,910        --         --       --          --            --       --       13,910
 Reclassification of                                                                                                             
   amounts to new common       
   stock par value............       --    (104,534)       --     74,664       --          --            --       --      (29,870)
 Settlement of                                                                                                                    
   stockholder loan...........      (11)       (116)       --         --       --          75            --       --          (41)
 Warrants.....................       --          --     2,359         --       --          --            --       --        2,359
 Dividends and accretion                                                                                                          
   on redeemable convertible                                                                                                      
   preferred stock............       --          --        --         --       --          --          (398)      --         (398)
 Net loss.....................       --          --        --         --       --          --       (91,540)      --      (91,540)
 Foreign currency                                                                                                                 
   translation gain...........       --          --        --         --       --          --            --       84           84
                                 ------   ---------    ------   --------  -------       -----     ---------    -----     --------
Balance at March 31, 1997.....   34,992          35     5,359    225,132     (615)       (121)     (197,516)     (14)      32,260
                                 ======   =========    ======   ========  =======       =====     =========    =====     ========
</TABLE>

          See accompanying notes to consolidated financial statements.





                                      F-8
<PAGE>   36

                        IMAGYN MEDICAL TECHNOLOGIES, INC.

 CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                             
                                COMMON STOCK              ADDITIONAL                AMOUNTS DUE                FOREIGN 
                              ----------------             PAID-IN      UNEARNED       FROM                   CURRENCY 
                               SHARES   AMOUNT  WARRANTS   CAPITAL    COMPENSATION  STOCKHOLDERS   DEFICIT   TRANSLATION   TOTAL
                              -------  -------  --------  ----------  ------------  ------------  --------   -----------  ---------
<S>                            <C>        <C>    <C>       <C>        <C>            <C>           <C>         <C>          <C>
Balance at March 31,
   1997....................    34,992     35      5,359     225,132       (615)          (121)    (197,516)       (14)     32,260
  Exercise of options and       
    warrants...............       573      1         --         284         --             --          --          --         285
  Issuance of common        
    shares related to
    acquisition............       411     --         --       1,820         --             --          --          --       1,820
  Issuance of common        
    shares on settlement 
    of X-Med note..........       231     --         --         714         --             --          --          --         714
  Issuance of common stock         
    under stock purchase 
    plan...................        96     --         --         343         --             --          --          --         343
  Compensation related to         
    stock options vesting..        --     --         --          --        615             --          --          --         615
  Warrants ................        --     --      2,324          --         --             --          --          --       2,324
  Settlement of 
    stockholder loan.......        --     --         --          --         --            121          --          --         121
  Net loss ................        --     --         --          --         --             --     (88,525)         --     (88,525)
  Foreign currency 
   translation gain........        --     --         --          --         --             --          --         120         120
                              -------  -----     ------    --------    -------        -------   ---------   ---------   ---------
  Balance at March 31, 
    1998...................    36,303  $  36     $7,683    $228,293    $    --        $    --   $(286,041)  $     106   $ (49,923)
                              =======  =====     ======    ========    =======        =======   =========   =========   =========
</TABLE>


          See accompanying notes to consolidated financial statements.





                                      F-9
<PAGE>   37


                       IMAGYN MEDICAL TECHNOLOGIES, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                       NINE MONTHS ENDED YEAR ENDED  YEAR ENDED
                                                             MARCH 31,    MARCH 31,   MARCH 31,
                                                               1996         1997        1998
                                                        ---------------- ---------    --------
<S>                                                     <C>             <C>          <C>
OPERATING ACTIVITIES
Loss from continuing operations before
 discontinued operations and
 extraordinary item ....................................     $ (24,239)   $(86,539)   $(81,163)
Non-cash items included in net loss:
  Write-off of purchased research and development ......            --      40,982          --
  Depreciation and amortization ........................         1,853       5,476      10,483
  Loss on retirement/write-off of assets ...............           664         354       1,993
  Deferred income taxes ................................          (152)         --          --
  Amortization of deferred debt issuance costs .........           637         813       1,743
  Provision for doubtful accounts ......................         1,126         (39)      2,671
  Accretion and accrued interest on convertible notes ..            15         445          --
  Accrued dividends on preferred stock of subsidiary ...            55          25           4
  Non-cash interest income on officer loan .............            --          (8)       (137)
  Non-cash interest expense on bridge financing
    warrants ...........................................           141          --          --
  Compensation related to stock options vesting ........           180         350         615
Other non-cash item ....................................             1          --          --
Changes in operating assets and liabilities ............         1,802     (21,551)    (16,490)
                                                             ---------   ---------   ---------
Net cash used in continuing operating activities .......       (17,917)    (59,692)    (80,281)
Net cash used in extraordinary item ....................            --        (540)       (526)
Net cash used in discontinued operations ...............          (198)     (1,044)     (1,832)
                                                             ---------   ---------   ---------
Net cash used in operating activities ..................       (18,115)    (61,276)    (82,639)
INVESTING ACTIVITIES
Purchases of investments ...............................        (6,024)    (19,463)    (26,561)
Sale of investments ....................................         2,282         243      50,547
Purchases of property and equipment, net ...............        (3,172)    (13,025)    (10,688)
Payments for acquisition of businesses, net of cash
  acquired .............................................            --     (38,161)    (15,836)
Proceeds from disposal of property and equipment .......           788          --          --
Purchases of technology ................................          (333)     (1,207)       (323)
Decrease (increase) in restricted cash .................            --          48     (13,541)
Loans and advances to officers .........................            --        (664)     (1,305)
                                                             ---------   ---------   ---------
Net cash provided by investing activities ..............        (6,459)    (72,229)    (17,707)
FINANCING ACTIVITIES
Issuance of common shares ..............................            --      47,832          --
Secondary offering of common stock .....................            --      18,817          --
Exercise of stock options and warrants .................           754       1,453         628
Issuance of preferred stock by subsidiary ..............         1,831          --          --
Issuance of equity securities by pooled company ........         4,149          --          --
Issuance of warrants ...................................           670          --          --
Proceeds from bridge financing notes ...................           880          --          --
Proceeds from sale of convertible preferred stock ......         7,879          --          --
Repayment of convertible subordinated note .............            --          --      (5,268)
Proceeds from long-term debt ...........................         7,913     110,184     112,301
Revolving lines of credit, net .........................         5,433       1,977      25,212
Principal payments on long-term debt ...................          (868)    (19,888)    (46,205)
Repurchase of preferred stock ..........................            --          --        (174)
Deferred debt issuance costs ...........................          (221)    (11,022)     (8,020)
                                                             ---------   ---------   ---------
Net cash provided by financing activities ..............        28,420     149,353      78,474
                                                             ---------   ---------   ---------
Net increase (decrease) in cash and equivalents ........         3,846      15,848     (21,872)
Cash and equivalents, beginning of year ................         2,880       6,726      22,574
                                                             ---------   ---------   ---------
Cash and equivalents, end of year ......................     $   6,726   $  22,574   $     702
                                                             =========   =========   =========

</TABLE>
          See accompanying notes to consolidated financial statements.





                                      F-10
<PAGE>   38

                       IMAGYN MEDICAL TECHNOLOGIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.  DESCRIPTION OF THE COMPANY AND BASIS OF FINANCIAL STATEMENT PRESENTATION

Description of the Company

  Imagyn Medical Technologies, Inc. ("Imagyn" or the "Company" formerly
Urohealth Systems, Inc.) is engaged in the manufacturing, marketing and
distribution of products used by surgeons, urologists and gynecologists. The
Company is focused on developing a broad range of products specific to these
three specialties using a direct sales and distributor distribution channel.

Basis of Financial Statement Presentation

  The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries, all of which are wholly owned except for
Imagyn Medical Technologies California, Inc. All significant intercompany
accounts and transactions are eliminated in consolidation.  Certain amounts in
the fiscal 1996 and 1997 consolidated financial statements have been
reclassified to conform with the fiscal 1998 presentation.

  In 1996, the Company changed its fiscal year to March 31. Fiscal 1996 is a
nine month transition period ended March 31, 1996.

  On September 29, 1997, the Company acquired all of the outstanding voting
securities of Imagyn Medical, Inc. (Imagyn Medical) a designer and manufacturer
of products for use in diagnosis and treatment of gynecological and reproductive
disorders.  This transaction was accounted for as a pooling of interests.
Financial information for 1996 and 1997 has been restated to reflect the fiscal
1998 merger with Imagyn Medical, Inc., which has been accounted for as a pooling
of interests. In connection with this transaction the Company changed its name
to Imagyn Medical Technologies, Inc.

  On March 31, 1997, the Company acquired all of the outstanding voting
securities of Microsurge, Inc. (Microsurge), a designer and manufacturer of
products for use in minimally invasive surgery, in a transaction accounted for
as a pooling of interests. Additionally, during the nine months ended March 31,
1996 the Company acquired four other companies in separate transactions
accounted for as pooling of interests.  Dacomed Corporation (Dacomed), a
manufacturer of urological products, and Allstate Medical Products, Inc.
(Allstate), a manufacturer and distributor of disposable urinary incontinence
products, were acquired in July 1995. Osbon Medical Systems, Ltd. (Osbon), a
manufacturer of urological products, and Advanced Surgical, Inc. (Advanced), a
manufacturer and distributor of minimally invasive surgical products, were
acquired in December 1995. The accompanying consolidated financial statements
include the accounts of these entities for all periods presented.  The
following number of shares of the Company's common stock were issued in the
transactions: Imagyn Medical - 11,287,246; Microsurge - 2,771,366; Dacomed -
1,610,367; Allstate - 190,488; Osbon- 5,000,000 and Advanced - 937,833.





                                      F-11
<PAGE>   39
  The results of operations previously reported by the Company, and those of
Imagyn Medical included in the accompanying consolidated financial statements
are summarized below (in thousands):

<TABLE>
<CAPTION>
                                            NINE MONTHS
                                               ENDED      YEAR ENDED   YEAR ENDED
                                             MARCH 31,     MARCH 31,    MARCH 31,
                                               1996          1997         1998
                                            ----------    ----------   ----------
<S>                                         <C>            <C>           <C>
    Net sales:
      Net sales without Imagyn Medical ..    $  41,155     $  85,293     $  97,242
      Net sales of Imagyn Medical .......        2,976         8,721         8,277
                                             ---------     ---------     ---------
                                             $  44,131     $  94,014     $ 105,519
                                             =========     =========     =========
    Net loss:
      Net loss without Imagyn Medical ..     $ (23,024)    $ (86,483)    $ (80,541)
      Net loss of Imagyn Medical .......        (1,439)       (5,057)       (7,984)
                                             ---------     ---------     ---------
                                             $ (24,463)    $ (91,540)    $ (88,525)
                                             =========     =========     =========
</TABLE>


  No adjustments were required to be made to the net assets of the combining
enterprises to conform accounting practices and there was no effect on net
income (loss) previously reported.

  The minority interest in Imagyn Medical Technologies California, Inc. at
March 31, 1997 consists of 42,000 shares of its Series A preferred stock, which
were redeemed or exchanged for shares of common stock subsequent to March 31,
1997. The redemption price was $6.41 per share, consisting of the redemption
price of $5.00 per share plus accrued and unpaid dividends of $1.21 and a $0.20
per share redemption premium.  Redemption cost for these shares totaled
$269,220.  As of March 31, 1998 the Company had paid $174,000 in redemption
costs with the remaining balance being recorded as an accrued liability.

   During the year ended March 31, 1997, in transactions accounted for as
purchases, the Company acquired: Richard-Allan Medical Industries, Inc.
(Richard-Allan); X-Cardia Corporation (X-Cardia); The Intermed Group (Intermed);
certain assets from O.R. Concepts, Inc. (O.R. Concepts) and three other
immaterial businesses. Richard-Allan and the O.R. Concepts assets are engaged in
the development, manufacture and marketing of surgical products and supplies;
X-Cardia is developing cardiac monitoring products; and Intermed develops,
manufactures and markets disposable medical products. The aggregate initial
purchase price for these entities, including direct acquisition costs, was $39.7
million in cash, $3.0 million in debt, and 3,622,000 shares of the Company's
common stock valued at $44.0 million. In allocating the total purchase price for
these acquisitions, it was determined that acquired in-process research and
development costs aggregating $37.0 million related to the Richard-Allan and
X-Cardia acquisitions should be immediately expensed and the balance of the
total purchase price allocated to the fair value of the net assets acquired,
including $44.6 million assigned to goodwill that is being amortized over a
period of 25 years. Independent valuations were obtained in connection with the
Richard-Allan and X-Cardia acquisitions and were used as aids in the allocation
of the purchase price for these entities. The Company agreed to make additional
payments in connection with the X-Cardia acquisition of up to $21.3 million upon
achievement of clinical and patent approval milestones.  During the year ended
March 31, 1998 a $18.3 million payment was made in connection with the
completion of the X-Cardia patent milestone.  This amount was recognized as
additional goodwill.  A $3.0 million payment payable in stock relating to the
achievement of clinical milestone remains. There can be no assurance that this
milestone will be achieved. In addition, the Company is obligated to pay a
percentage of sales for a four-year period after commercial introduction of the
first product using the acquired X-Cardia technology.

  These entities have been included in the Company's consolidated operating
results from their respective acquisition dates.  Additionally, during the year
ended March 31, 1997, the Company purchased five in-process research and
development projects that did not constitute businesses, and expensed the
aggregate purchase price of $10.2 million as acquired in-process research and
development costs.

Liquidity and Capital Resources; Going Concern and Management Plans

  The accompanying consolidated financial statements have been prepared on a
going concern basis which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. As of March 31,
1998, the Company had negative working capital of $55.7 million.  The Company's
consolidated cash and cash equivalents and investments of $46.6 million at
March 31, 1997 decreased by $45.9 million during the year ended March 31, 1998.
Uses of cash totaled $122.9 million during the year ended March 31, 1998 and
related primarily to cash used in operating activities ($82.6 million),
restricted cash ($13.5 million) and cash used to purchase property, plant,
equipment, and patents and for milestone technology payments to X-Cardia ($26.8
million).  For the year ended March 31, 1998, approximately $77.0 million in
cash was provided from net incremental debt funding.





                                      F-12
<PAGE>   40
  Based on current cash flows, the Company believes that additional funding
will be necessary to fund its operations in the short-term. The Company has
historically experienced negative cash flows from operations and expects
negative cash flows to continue in fiscal 1999.  The Company is currently
borrowing in excess of its borrowing eligibility based on a borrowing base
calculation and was granted a waiver by its lender that permits borrowing in
excess of its defined borrowing base.  The waiver is revocable by the senior
lender at any time.  In addition, the Company had an interest payment of
approximately $1.1 million due on June 30, 1998 to the holder's of the
Company's Convertible Subordinated Debentures which, as of July 13, 1998 had
not been paid.  The Company has a 30-day grace period in which to make the
interest payment on the Convertible Subordinated Debentures and management
expects to make full payment prior to the expiration of the grace period. The
Company's recurring losses from operations, its difficulties in generating
sufficient cash flow to meet its obligations and stockholders' capital
deficiency raise substantial doubt about its ability to continue as a going
concern. Management is exploring several alternatives to deal with the near-term
liquidity situation, including obtaining additional financing, the sale of
non-strategic assets and consolidation and cost cutting initiatives.

   The Company continues to seek additional financing on a short-term basis,
and is having discussions with a number of potential lenders.  On July 10, 1998
the Company obtained a commitment for $3 million of additional short-term
financing from its senior lender, and discussions are continuing with the bank
and others regarding obtaining a larger commitment.  The additional $3 million
financing will help address the Company's immediate needs, however, additional
financing will likely be necessary depending upon the timing of planned asset
sales.

   The Company is in the process of attempting to sell certain non-strategic
assets, and intends to use the proceeds of those sales to strengthen the
Company's balance sheet and to fund the operations of the Company, including
completion of pending product development projects and bringing new products to
market.  The Company is in discussions with several interested buyers, and has
received non-binding letters of interest (which contain estimated purchase
prices that are in ranges acceptable to the Company) from prospective purchasers
of three different product lines.  Discussions and due diligence continue with
these prospective purchasers, and, while no assurances can be given, the Company
expects to complete one or more sales by the end of the second quarter of fiscal
1999.

  As a result of consolidation and cost cutting initiatives taken in January
and May of 1998, operating expenses have been reduced from $26 million in the
third quarter of fiscal 1998 to approximately $18 million in the first quarter
of fiscal 1999.  Management expects operating expenses to remain at levels
consistent with those levels expected for the first quarter of fiscal 1999.
The Company expects to realize annualized cost savings of $34 million.

2. SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

  Revenue from sales is recognized on the dates of shipment to customers and
distributors or, if applicable, acceptance by the customers and distributors.
The Company provides for estimated returns and rebates at the date of shipment
or, if applicable, acceptance by the customer and distributor.  With respect to
certain distributor initial stocking orders shipped during fiscal 1997 to new
distributors, the Company recognized revenue totaling $12.9 million on those
orders during the September 1997 quarter, upon establishment of a sales and
payment history by those distributors.

  The Company grants its distributors limited stock balancing rights whereby
inventory previously purchased may be returned for credit against purchases of
other Company products.  It also generally provides the ultimate customers for
its products with a right to return products they find unsatisfactory within 30
days after purchase.  Sales revenue and cost of sales reported in the
consolidated statements of operations are net of estimated provisions,
determined based on experience, for costs or losses that may be incurred in
connection with sales returns.

Cash and Equivalents

  Cash and equivalents consists of cash in bank, certificates of deposit and
other marketable securities with original maturities of three months or less.





                                      F-13
<PAGE>   41

Investments

  The Company's short-term and long-term cash investments are managed by
outside brokerage firms and consist primarily of commercial paper, certificates
of deposit, and short-term bond instruments and are held to maturity.
Short-term cash investments have acquired maturities of one year or less, while
long-term cash investments have maturities of greater than one year.  The
carrying amount of short-term and long-term cash investments is the cost plus
interest earned which approximates market value.

  The Company liquidated $26.9 million of securities acquired in the merger with
Imagy Medical Inc. to respond to the Company's cash needs. This amount
represented the amortized cost of the securities at the date of transfer.  The
fair value of those securities approximated their amortized cost.  All such
securities were liquidated by December 31, 1997.

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
computed 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 aircraft and molds, 40
years for buildings and three to five years for vehicles. For leasehold
improvements, the useful life is determined to be the 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-five
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.

Asset Impairment

  Following adoption of Statement of Financial Accounting Standards (SFAS) No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long Lived
Assets to be Disposed Of" in the first quarter of fiscal 1996, the Company tests
for and records impairment losses 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 the assets' carrying amount. Asset
impairment is recognized on long-lived assets held for sale when the estimated
fair value less costs to sell is less than the assets carrying amount. As a
result of the Company's decision to classify certain real estate properties in
Augusta, Georgia as being held for sale, the Company recorded in the fourth
quarter of fiscal 1998, a $1.3 million charge, included in selling, general and
administrative expenses, relating to the write down of the properties carrying
value to its estimated fair market value. As a result of the Company's decision
to de-emphasize its participation in incontinence clinics, the Company recorded
in the fourth quarter of fiscal 1997, a $0.3 million charge relating to the
impairment of the goodwill recorded on the acquisition of Urohealth of Kentucky.

Advertising Expense

  Advertising and promotion costs are expensed when incurred. Such costs in
fiscal 1996, 1997 and 1998 were $1.0 million, $2.1 million and $3.5 million
respectively.

Research and Development Expense

  Research and development expenses are charged to operations 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 revenue is recognized from the
sale of products. Actual costs are charged against the accrual when paid.





                                      F-14
<PAGE>   42

Net Loss Per Share

  During 1998 the Company adopted SFAS No. 128, "Earnings Per Share" which
requires the disclosure of basic and diluted earnings per share for all current
and prior periods.

  Net loss per share is based on net loss attributable to common stockholders
and the weighted average number of shares of common stock outstanding during
the periods presented. Common stock equivalents and other potentially dilutive
securities have not been included in the calculation as they are anti-dilutive.

  SFAS 128 supersedes the previous disclosure requirements of primary and fully
diluted earnings per share.  Former per share amounts have been restated.  The
restatement was not materially different from amounts previously reported.

Recent Accounting Pronouncements

  The Company intends to adopt, if applicable, SFAS No. 130, "Reporting
Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," in fiscal 1999.  Both will require
additional disclosure but will not have a material effect on the Company's
consolidated financial position or results of operations.  SFAS No. 130 will
first be reflected in the Company's first quarter of fiscal 1999 interim
financial statements.  Components of comprehensive income for the Company
include items such as net income, foreign currency translation activities and
changes in the value of available-for-sale securities. SFAS No. 131 requires
segments to be determined based on how management measures performance and makes
decisions about allocating resources.  SFAS No. 131 will first be reflected in
the Company's fiscal 1999 Annual Report.

Use of Estimates

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

Reclassification and Restatements

   Certain amounts previously reported have been reclassified to conform to the
current periods presentation.  In addition, certain amounts have been restated
to reflect the pooling with Imagyn Medical and the reporting of a discontinued
operation (See Note 6).

3. PROPERTY AND EQUIPMENT

  Property and equipment consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                                  MARCH 31,    MARCH 31,
                                                                    1997         1998
                                                                  ---------    ---------
<S>                                                               <C>         <C>
              Office equipment ...............................     $11,441     $14,263
              Equipment and tooling ..........................      16,291      14,578
              Building .......................................       6,179       5,631
              Molds ..........................................       1,336       4,111
              Aircraft .......................................          --       2,965
              Leasehold improvements .........................       2,265       2,189
              Land ...........................................         334         432
              Other ..........................................         658         561
                                                                   -------     -------
                                                                    38,504      44,730
              Accumulated depreciation .......................      11,589      15,501
                                                                   -------     -------
                                                                   $26,915     $29,229
                                                                   =======     =======
              Equipment recorded under capital leases included
                above ........................................     $ 1,475     $ 1,496
              Accumulated depreciation .......................         937       1,141
                                                                   -------     -------
                                                                   $   538     $   355
                                                                   =======     =======
</TABLE>





                                      F-15
<PAGE>   43
4. 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>
                                                                    MARCH 31,    MARCH 31,
                                                                      1997        1998
                                                                     -------     -------
<S>                                                                 <C>         <C>
              Raw materials and supplies ......................      $ 9,502     $14,559
              Work in progress ................................        3,341       4,649
              Finished goods ..................................        9,983      12,781
                                                                     -------     -------
                                                                     $22,826     $31,989
                                                                     =======     =======
              Distributor inventories .........................      $ 6,307     $    --
                                                                     =======     =======
</TABLE>

  Distributor inventories at March 31, 1997 are comprised of initial stocking
orders shipped during fiscal 1997 to new distributors for which revenue
recognition was recognized during the September 1997 quarter. (See Note 2 --
Revenue Recognition.)

5.  DEBT

Short-term debt

  Short-term debt consists of the following (dollars in thousands):

<TABLE>
<CAPTION>
                                                                           MARCH 31,   MARCH 31,
                                                                             1997        1998
                                                                            -------     -------
<S>                                                                        <C>         <C>
              Line of credit, interest at 10.00%, matures on
               December 30, 1998 ......................................     $     -     $34,462
              Line of credit under Credit Agreement, interest at 9.75%,
                repaid in April 1997 ..................................       9,250          --
              Convertible subordinated notes at 9.25%, repaid in
               August 1997 ............................................       5,268          --
                                                                            -------     -------
                                                                            $14,518     $34,462
                                                                            =======     =======
</TABLE>

  On November 22, 1995, the Company entered into a $10.0 million Credit
Agreement consisting 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. In connection with this repayment, the Company incurred
an extraordinary loss of $3.0 million (consisting primarily of unamortized
deferred financing costs) resulting from the early repayment of this debt.

  In February 1996, Microsurge entered into a credit agreement with a group of
lenders who agreed to purchase a series of convertible subordinated notes up to
$3,268,180 upon the request of the Company. In August 1996, the agreement was
amended to provide for total advances of $5,268,180. The Company received
advances of $2,334,414 in February and March 1996, $933,766 in June 1996 and
$2,000,000 in August 1996. These notes accrued interest at 9.25% and matured on
August 28, 1997.  The Company paid cash to retire the notes at maturity.

  To finance the cash portion of the Richard-Allan acquisition during 1997, the
Company obtained a $35.0 million bank credit facility. The facility originally
consisted of a $20.0 million dollar term loan and a $15.0 million revolving
line of credit, which was subsequently increased to $16.5 million in November
1996. A portion of the proceeds from the public equity offering in November
1996 were used to reduce the term loan by $6.5 million. The credit facility was
secured by substantially all the assets of the Company, had a five-year term
and accrued interest at a rate of approximately 9.75%.  In March 1997, the
Company's term and revolving credit facility was amended to provide for maximum
borrowings of $55.0 million, consisting of $45.8 million of term loans and $9.2
million of revolving loans. As of March 31, 1997, the Company had outstanding
borrowings of $54.3 million under this facility.

  On April 10, 1997, the Company used proceeds from the sale of the Senior
Subordinated Notes (see below) to repay all amounts outstanding under the
Company's term and revolving credit facility. In connection with this
repayment, the Company incurred an extraordinary loss of $1.8 million
(consisting primarily of unamortized deferred financing costs) resulting from
the early repayment of this debt.  Concurrently with the repayment of the
existing credit facility, the Company entered into an amended and restated $50
million revolving credit facility with its senior lender. The new credit
facility was secured by substantially all of the Company's assets and contains
the same basic covenants as in the prior facility.  Through December 30, 1997,
the Company had an outstanding balance of $20.0 million against this facility.





                                      F-16
<PAGE>   44
  During December 1997, the Company entered into a new $40 million revolving
bank credit facility.  The credit facility is intended to be used for working
capital and matures on December 30, 1998 and may be extended for two additional
one year periods on each December 30th, provided no event of default occurred
during the preceding year, but in no case beyond December 30, 2000.  The
facility is secured by substantially all of the Company's assets and bears
interest at prime plus 1.50% or LIBOR plus 3.25%.  The Company pays a fee of
0.5% on the unused portion of the facility and is required to meet certain
covenants under the facility.  Available amounts under the revolving facility
are based on accounts receivable as defined.  In December 1997, the Company
borrowed $20 million under this facility to repay its previous facility. In
connection with this repayment, the Company incurred an extraordinary loss of
$2.0 million consisting primarily of unamortized deferred financing costs
resulting from the early repayment of this debt.

  The Company is currently borrowing in excess of its borrowing eligibility
based on a borrowing base calculation and was granted a waiver by its lender
that permits borrowings in excess of its defined borrowing base.  The waiver is
revocable by the senior lender at any time, and the Company is obligated to pay
the senior lender an amount equal to 1% of the credit commitment under the
credit facility for each month during which the amount outstanding under the
senior credit facility exceeds the borrowing base.  The Company is currently in
compliance with all other financial covenants under this facility. The Company
had outstanding borrowings of $34.5 million under this facility as of March 31,
1998.

Long-term debt

  Long-term debt consist of the following (dollars in thousands):

<TABLE>
<CAPTION>
                                                                                  MARCH 31,    MARCH 31,
                                                                                    1997         1998
                                                                                  --------     --------
<S>                                                                              <C>          <C>
              Convertible subordinated debentures ...........................     $ 50,000     $ 50,000
              Term loan under Credit Agreement, repaid April 10, 1997 .......       45,000           --
              Bank note dated December 21, 1992, due in 180 monthly
                installments with interest at 8.75% collateralized by a
                building ....................................................          167          157
              Note dated August 15, 1996, interest at 8.25%. Note is
                collateralized by a building and matures on August 15, 2006.
                The entire balance is due on maturity .......................        3,000        3,000
              Note dated August 15, 1996, interest at 6.25%, repaid
                on January 7, 1998 ..........................................        3,000           --
              Bank note dated April 29, 1994, due in 36 monthly installments
                with interest at 8.75%; collateralized by equipment .........           14            7
              Bank note dated July 16, 1997, due in 119 monthly installments
                with interest at 9.5%; collateralized by aircraft ...........           --        2,202
              Various notes payable with interest from 8.5% to 10%, due dates
                through August 1, 1997, secured by equipment ................           40           --
              Capital leases ................................................          399          152
                                                                                  --------     --------
                                                                                   101,620       55,518
              Less current maturities .......................................        3,328       50,253
                                                                                  --------     --------
                                                                                  $ 98,292     $  5,265
                                                                                  ========     ========
</TABLE>

  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 $12.88 per warrant, subject to
anti-dilution adjustments. 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 Company did not make the interest payment due on March 31, 1998 but did
make the payment within the allowed 30 day grace period.  The interest payment
due on June 30, 1998 has not been paid as of July 13, 1998 and accordingly the
entire principal balance has been classified as a current liability in the
accompanying consolidated financial statements.  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 $10.90 per share, subject to further anti-dilution
adjustments, 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.

  The Company renegotiated the terms of its $3.0 million note on January 7,
1998. The note was repaid with a $0.8 million cash payment and stock valued at
$0.7 million. The remaining $1.5 million resulted in an adjustment to goodwill.





                                      F-17
<PAGE>   45

  The Company has various capital equipment leases with future minimum lease
payments for years ending March 31, 1999, 2000, 2001, 2002 and 2003 of $79,000,
$42,000, $12,000, $11,000 and 8,000 respectively. Pursuant to a capital lease
agreement entered into during 1993 and as amended in 1994, the Company
maintained $48,000 in restricted cash at March 31, 1997 and 1998.

Senior Subordinated Notes

  On April 10, 1997, the Company completed the sale of $110 million of
12-1/2% Senior Subordinated Notes due 2004 (the "Notes") raising net cash
proceeds of approximately $105 million. The Notes bear interest, payable
semi-annually, at 12-1/2% per annum, subject to increase if certain
obligations are not satisfied, and mature on April 1, 2004. There are no
mandatory redemption or sinking fund payments required on the Notes. The
Company is entitled to redeem the Notes on or after April 1, 2001 for an amount
equal to the principal amount of the Note, accrued but unpaid interest through
the redemption date, the redemption premium and liquidated damages, if any. In
the event of a Change of Control (as defined in the Indenture), each holder of
a Note is entitled to require the Company to purchase such holder's Notes at
101% of the principal amount of the Notes, plus accrued but unpaid interest to
the date of repurchase and liquidated damages, if any.

  The Notes are general unsecured obligations of the Company subordinated in
right of payment to all existing and future senior indebtedness of the Company.
The Indenture governing the Notes contains certain covenants, including, among
other matters, limitations on the ability of the Company to: (i) incur
additional indebtedness; (ii) incur certain liens; (iii) engage in certain
transactions with affiliates; (iv) engage in unrelated lines of business; or
(v) engage in mergers, consolidations or similar transactions. The Company used
$19.2 million of the proceeds from the sales of the Notes to purchase
government securities (the "Pledged Securities") which have been pledged for
the benefit of the holders of the Notes.  The unpaid amount has been presented
as restricted cash at March 31, 1998.  The scheduled interest and principal
payments on the Pledged Securities is in an amount sufficient to pay when due
the first three scheduled interest payments on the Notes.  The Company
recognized $0.8 million of interest income from their securities in fiscal 1998
and made its first interest payment of $6.5 million on October 1, 1997.

  The Notes place certain limitations on the Company with respect to dividend
payment or other distributions to stockholders, as well as any redemption of
shares of common stock, options or warrants of the Company.

  The Company is a holding company with no material tangible assets or
operations other than its investments in its subsidiaries. The Notes are
guaranteed by all of the Company's domestic and material foreign subsidiaries.
The guarantees are full, unconditional, and joint and several.  All of the
guarantor subsidiaries are wholly-owned by the Company. Assets, equity, income
and cash flows of all other subsidiaries of the Company that have not
guaranteed the Notes are less than two percent of the respective consolidated
amounts and are inconsequential, individually and in the aggregate to the
Company. The Company has included separate financial information for the
guarantors in Note 18.

  In connection with the issuance of the Notes, the Company issued with each
$1,000 principal amount of Notes, a warrant entitling the holder to purchase
4.44 shares of Common Stock of the Company (or 9.06 shares, if a certain level
of earnings before interest, taxes, depreciation and amortization (EBITDA) for
fiscal 1998 is not achieved) at an exercise price of $9.50 per share. The
Company did not meet its EBITDA requirement and issued additional warrants
during April 1998, entitling the holder to purchase on additional 4.62 shares
of common stock.  The warrants are exercisable on or after June 30, 1998 and
expire April 1, 2004.  The warrants were valued at $1.9 million and have been
offset against the face value of the $110 million Notes.  The value of the
warrants will be amortized to interest expense over the life of the Notes.

Debt Maturities

  The contractual maturities of all debt securities of the Company at March 31,
1998 are as follows (in thousands):

<TABLE>
<CAPTION>
              YEAR ENDING MARCH 31,
              ---------------------
<S>                                   <C>
              1999 ...............     $ 84,715
              2000 ...............          224
              2001 ...............          213
              2002 ...............          230
              2003 ...............          246
              Thereafter .........      114,352
                                       --------
                   Total .........     $199,980
                                       ========
</TABLE>





                                      F-18
<PAGE>   46

6.      DISCONTINUED OPERATIONS

   In April 1998, the Company decided that its incontinent business acquired
through its July 1995 acquisition of Allstate, would no longer be considered
part of its core business. The Company is currently negotiating with
prospective buyers in an effort to sell the operation's assets and liabilities.
The Company has accounted for the operations of Allstate as a discontinued
operation and the prior years financial statements have been restated to
reflect the discontinuation of this operation.  Accordingly, the net assets of
Allstate operations have been classified as a current asset at March 31, 1997
and 1998 and comprise of:

<TABLE>
<CAPTION>
                                                  1997          1998       
                                                 -------      -------
                                                      (IN THOUSANDS)
<S>                                             <C>          <C>
              Current assets ...............     $ 2,543      $ 2,830
              Non-current assets ...........         618          502
              Current liabilities ..........      (1,226)      (1,331)
                                                 -------      -------
                                                 $ 1,935      $ 2,001
                                                 =======      =======
</TABLE>

   The Company anticipates that the disposition will occur in the latter part of
the fiscal 1999.  The net proceeds from the disposition are expected to exceed
the current carrying value.

   Revenue and expenses of the Allstate operations for fiscal years 1996, 1997
and 1998 have been reclassified and recorded in the loss from discontinued
business line of the statement of operations. Revenues from the Allstate
operations for fiscal years 1996, 1997 and 1998 were $1.8 million, $5.4 million
and $8.9 million respectively.

  As of March 31, 1998, the Company recorded a provision for loss on disposal of
discontinued business of $1.7 million.  This charge represents the estimated
loss that will be generated by Allstate's operations from April 1, 1998 up until
the disposal date which is expected to occur in the latter part of the Company's
1999 fiscal year.

7.  RESTRUCTURING CHARGES

  In December 1995, the Company implemented a $5.4 million 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.

  In September 1996, the Company implemented a $4.0 million restructuring plan
to eliminate redundant manufacturing facilities resulting from the
Richard-Allan, Intermed and O.R. Concepts acquisitions and their consolidation
with some of the existing manufacturing locations. This restructuring included
severance costs for approximately 18 employees, certain facility closures and
elimination of other redundant selling and administrative costs.

  In March 1997, the Company implemented a $8.0 million restructuring plan to
consolidate redundant facilities and reduce personnel resulting from the
mergers with Osbon and Microsurge. The plan provides for the elimination of
approximately 90 personnel and the closure of all operations at Osbon except
for customer service, sales and a limited accounting support staff, and the
closure of all Microsurge facilities.

  In September 1997, the Company implemented a $5.4 million restructuring plan
to consolidate redundant facilities and reduce personnel resulting from the
merger with Imagyn Medical.





                                      F-19
<PAGE>   47

   The estimated cost associated with each of the above restructuring plans and
the cash and non-cash charges incurred through March 31, 1998 are summarized in
the table below.


<TABLE>
<CAPTION>
                                             BEGINNING                                 BALANCE AT
                                          RESTRUCTURING    NON-CASH        CASH         MARCH 31,
                                              ACCRUAL       CHARGES       CHARGES        1998  
                                              -------       -------       -------       -------
                                                        (IN THOUSANDS)
<S>                                          <C>           <C>           <C>           <C>
              Personnel reduction costs       $15,697       $ 1,718       $11,821       $ 2,158
              Facility reduction costs          7,172         1,521         3,588         2,063
                                              -------       -------       -------       -------
                                              $22,869       $ 3,239       $15,409       $ 4,221
                                              =======       =======       =======       =======
</TABLE>

  The Company periodically reviews the restructuring reserves and adjusts them
if appropriate. Management believes that restructuring liabilities as of March
31, 1998 are adequate to complete the actions contemplated by the restructuring
plans.

8. COMMITMENTS AND CONTINGENCIES

  Dacomed is a defendant in approximately five lawsuits seeking damages in
product liability and related theories. Dacomed has also been notified of
certain other product 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 product 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. The Company does not anticipate that adverse outcomes in currently
pending litigation would have a material adverse effect on its business, results
of operations or financial condition. No provision for any liability that may
result from the ultimate resolution of such matters has been included in the
accompanying consolidated financial statements.

  The Company has various operating lease agreements for office and production
facilities. Minimum future lease payments for years ending March 31, 1999, 2000,
2001, 2002, 2003 and thereafter are $1.2 million, $0.7 million, $0.5 million,
$0.2 million, $0.2 million, $0.1 million, respectively. In addition, 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, $1.6 million and $1.7 million in 1996, 1997 and 1998, respectively.

  The Company has employment agreements with 8 officers providing for annual
aggregate salaries of approximately $2.4 million per annum.

  The Company has various product licensing arrangements which require the
payment of certain of the licensors patent costs and royalties on sales of
products which incorporate the licensed technology.

9. CAPITAL STOCK

  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, 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.

  At March 31, 1998, the Company had reserved 16,929,902 shares of authorized
common stock, subject to increase under anti-dilution provisions, pursuant to
outstanding stock options and warrants.

 10. STOCK OPTIONS AND WARRANTS

  The Company has outstanding, under various stock option plans, options
granted to current and former employees, management personnel and directors for
up to 8,624,093 shares of the Company's common stock. Options granted generally
have five to ten-year terms and generally vest and become exercisable over
periods of one to five years.





                                      F-20
<PAGE>   48

  The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.

  Pro forma information regarding loss per share is required by SFAS 123,
"Accounting for Stock Based Compensation," which also requires that the
information be determined as if the Company has accounted for its employee stock
options granted under the fair value method of that Statement. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions for fiscal
1996, 1997 and 1998, respectively: risk-free interest rates of 5.6%, 6.6% and
5.6%; no dividend yield; volatility factors of the expected market price of the
Company's common stock of 63%, 57% and 64%; and a weighted-average expected life
of the option of 6 years.

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

  For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands except for earnings per share
information):

<TABLE>
<CAPTION>
                                                    1996            1997            1998   
                                                 ----------      ----------      ---------- 
<S>                                             <C>             <C>              <C>
              Pro forma net loss ...........     $  (26,000)     $  (98,707)     $  (98,497)
              Pro forma net loss per share .     $    (1.18)     $    (3.29)     $    (2.77)
</TABLE>

  Because SFAS 123 is applicable only to options granted subsequent to June 30,
1995, its pro forma effect will not be fully reflected until fiscal 2000.

  A summary of the Company's stock option activity, and related information for
the nine months ended March 31, 1996, and years ended March 31, 1997 and 1998 
follows:

<TABLE>
<CAPTION>
                                                      1996                          1997                         1998        
                                              --------------------------   --------------------------  ---------------------------
                                                            WEIGHTED-                     WEIGHTED-                   WEIGHTED-
                                             OPTIONS         AVERAGE       OPTIONS         AVERAGE     OPTIONS         AVERAGE
                                              (000)       EXERCISE PRICE   (000)       EXERCISE PRICE  (000)        EXERCISE PRICE
                                              -----       --------------   -----       --------------  -----        --------------
<S>                                         <C>           <C>             <C>             <C>           <C>             <C>
Outstanding -- beginning of periods            1,533         $   10.23      4,920         $   8.54      6,690         $   8.29
Granted                                        4,067              6.16      2,455             7.11      3,797             6.02
Assumed in acquisitions                           --             --            52             2.22         --            --
Exercised                                       (619)             1.46       (436)            3.94       (535)            0.43
Forfeited                                        (61)             6.17       (301)            8.03     (1,328)            8.03
                                              ------         ---------     ------         --------     ------         --------
Outstanding end of periods                     4,920         $    8.54      6,690         $   8.29      8,624         $   7.64
Exercisable at end of periods                    975         $    9.14      2,943         $   9.31      4,784         $   8.96
Weighted-average fair value of options
 granted during year                        $   5.35                       $ 6.44                    $   3.71
</TABLE>


  Exercise prices for options outstanding as of March 31, 1998 ranged from
$1.86 to $54.50. The weighted average remaining contractual life of those
options is 7.09 years.

  Additionally, at March 31, 1998, the Company has non-employee stock options
and warrants for 3,718,746 shares of common stock outstanding with exercise
prices ranging from $2.46 to $54.49 per share, of which options and warrants
for 2,717,108 are currently exercisable. These options and warrants were
assigned values at issuance generally using a Black-Scholes option pricing
model and expire at various dates through May 2005. The outstanding
non-employee options and warrants are exercisable for the following per share
prices: less than $5 per share -- 318,498; $5 to $10 per share -- 3,031,578;
$10 to $20 per share -- 356,027; and the 12,643 have exercise prices in excess
of $20 per share.





                                      F-21
<PAGE>   49

11. PENDING LITIGATION

   In July and August 1997, nine complaints were filed against the Company,
certain of its officers and directors and, in certain complaints, the lead
underwriters of the Company's November 1996 public offering, requesting
certification of a class action, alleging various violations of federal
securities laws and seeking unspecified compensatory damages.  The suits were
filed in the United States District Court for the Central District of
California.  All suits are based on substantially the same facts and have been
brought on behalf of purchasers of the Company's Common Stock during various
periods between July 18, 1996 and July 1, 1997.  On October 6, 1997, the Court
ordered the nine cases consolidated and ordered the plaintiffs to file an
amended complaint setting forth all of the claims.  On November 20, 1997, a
consolidated and amended class action complaint was filed.  The Company filed a
motion to dismiss on December 23, 1997. The Company intends to vigorously
defend the class action complaints.

   The Company filed a patent infringement suit against U.S. Surgical
Corporation on October 16, 1997.  In its complaint, the Company alleges that
U.S. Surgical's ABBI breast biopsy device is infringing on two patents relating
to Imagyn's Percutaneous incisional breast biopsy device, which will be
marketed under the name SITESELECT (TM).  The Company's complaint asks the
court for an injunction barring further ABBI manufacturing and sales in the
United States and damages for U.S. Surgical's willful infringement of the
patents, and attorneys' fees.

   On November 19, 1997, US Surgical filed seven counterclaims against the
Company.  The claims allege patent infringement on a wide range of endoscopic
products being marketed through the Surgical division of the Company.

   The Company intends to aggressively pursue its claim that the US Surgical
ABBI device infringes on two of the Company's patents and it will vigorously
defend the infringement claims that were filed by US Surgical in response to
the Company lawsuit.

   The Company does not anticipate that adverse outcomes in currently pending
litigation would have a material adverse effect on its business, results of
operations or financial condition.

12. 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>
                                                                            MARCH 31,        MARCH 31,
                                                                              1997             1998   
                                                                            --------         --------
                                                                                 (IN THOUSANDS)
<S>                                                                        <C>              <C>
                 Deferred tax assets:
                   Federal, state and foreign net operating loss
                      carryovers ...................................        $ 43,129         $ 66,916
                   Restructuring and merger costs ..................           1,305            1,702
                   Tax credit carryovers ...........................           2,642            2,705
                   Accrued compensation ............................           2,179            2,387
                   Inventory reserve ...............................           1,944            2,480
                   Allowance for doubtful accounts .................           1,160            2,722
                   Capitalized costs ...............................           1,936            1,735
                   Other ...........................................           2,285            2,219
                   Valuation allowance .............................         (54,949)         (79,508)
                                                                            --------         --------
                           Total deferred tax assets, net ..........           1,631            3,358
                 Deferred tax liabilities:
                   Book basis of fixed assets in excess of tax basis              78              259
                   State taxes .....................................           1,553            3,099
                                                                            --------         --------
                           Total deferred tax liabilities ..........           1,631            3,358
                                                                            --------         --------
                           Total ...................................         $     -         $      -
                                                                            ========         ========
</TABLE>





                                      F-22
<PAGE>   50

  The Company increased its valuation allowance during the period ended 
March 31, 1998 by $24.6 million due to uncertainties as to the ultimate
realization of the Company's deferred tax assets. Certain reductions in the
valuation allowance totaling approximately $1.1 million will be credited to
additional paid-in capital.

  The components of the provision (benefit) for income taxes from continuing
operations are as follows:

<TABLE>
<CAPTION>
                                                         NINE MONTHS
                                                            ENDED      YEAR ENDED    YEAR ENDED
                                                            MARCH 31,    MARCH 31,     MARCH 31,
                                                             1996          1997          1998   
                                                            -----         -----         -----
                                                                     (IN THOUSANDS)
<S>                                                        <C>           <C>           <C>
                 Current:
                   Federal .........................        $ 420         $(262)           $-
                   Foreign .........................           14            --            --
                   State ...........................          153            37             2
                                                            -----         -----         -----
                           Total current ...........          587          (225)            2
                 Deferred:
                   Federal .........................         (128)           --            --
                   Foreign .........................           --            --            --
                   State ...........................          (24)           --            --
                                                            -----         -----         -----
                           Total deferred ..........         (152)           --            --
                                                            -----         -----         -----
                 Provision (benefit) for income taxes       $ 435         $(225)        $   2
                                                            =====         =====         =====
</TABLE>


  The income tax benefit from continuing operations at the Company's effective
tax rate differed from the provision for income tax provision (benefit) at the
statutory rate as follows:

<TABLE>
<CAPTION>
                                                                     NINE MONTHS
                                                                        ENDED          YEAR ENDED       YEAR ENDED
                                                                       MARCH 31,        MARCH 31,        MARCH 31,
                                                                         1996             1997             1998
                                                                       --------         --------         --------
                                                                                    (IN THOUSANDS)
<S>                                                                   <C>              <C>              <C>
                 Tax benefit at the expected statutory rate ...        $ (7,925)        $(29,030)        $(28,908)
                 Increases (decreases) in taxes resulting from:
                   Valuation allowance, net ...................           7,145           10,464           24,559
                   Loss without benefit .......................              --               --               --
                   Non-deductible goodwill ....................              --           16,150            2,971
                   State income taxes, net ....................              69              593              787
                   Reverse foreign net operating loss not
                    previously benefited ......................           1,994               --               --
                 Establishment of deferred tax assets 
                  previously benefited ........................          (1,075)              --               --
                   Other ......................................             227            1,598              593
                                                                       --------         --------         --------
                 Provision (benefit) for income taxes .........        $    435         $   (225)        $      2
                                                                       ========         ========         ========
</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. The issuance of stock at
March 31, 1997 in connection with the Company's merger with Microsurge caused
an ownership change which may further limit the Company's annual utilization of
a portion of its NOL's. However, the Company does not believe this limitation
will exceed the previous limitation resulting from the December 29, 1995 change
in ownership. 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, 1998, the Company had NOL's for U.S. federal and state income tax
purposes of approximately $178.0 million and $104.0 million, respectively, and
general business credit carryovers of approximately $1.8 million and $0.8
million, respectively. These NOL's and general business credits are available to
offset future taxable income, if any, through the year 2012 and are subject to
certain limitations including separate return limitations.





                                      F-23
<PAGE>   51
  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 $15.0 million, of which $4.0 million would expire in
various years through 2003 and $11.0 million 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.

  The Company's total U.S. domestic and international sales are as follow:

<TABLE>
<CAPTION>
                                                             NINE MONTHS       YEAR            YEAR
                                                                ENDED          ENDED           ENDED
                                                               MARCH 31,      MARCH 31,       MARCH 31,
                                                                1996            1997             1998  
                                                              --------        --------        --------
                                                                           (IN THOUSANDS)
<S>                                                          <C>             <C>             <C>
                 U.S. domestic .......................        $ 41,331        $ 81,314        $ 88,719
                 International .......................           2,800          12,700          16,800
                                                              --------        --------        --------
                 Total sales .........................        $ 44,131        $ 94,014        $105,519
                                                              ========        ========        ========
</TABLE>


13.  RELATED PARTY TRANSACTIONS

   During 1992, the Company entered into a License, Manufacturing and
Distribution Agreement (the "Agreement") with Terumo Corporation ("Terumo"), a
stockholder, granting Terumo the right to manufacture and distribute certain of
the Company's products in Japan. Under the terms of the Agreement, Terumo was
required to pay the Company a $1.1 million, non-refundable fee, for the right
to distribute the Company's products in Japan and $1 million as a license fee
for the right to manufacture certain of the Company's products for sale in
Japan.  The Agreement also requires Terumo to pay royalties to the Company upon
sales of products manufactured by Terumo under the terms of the Agreement.  The
Company is required to provide manufacturing know-how, training and
documentation to Terumo for the purpose of establishing manufacturing
capability relating to such products within two years after Japanese government
approval of the product, which was obtained in August 1996.  In the event the
company does not meet its obligation for the transfer of manufacturing
know-how, the license fee is subject to refund with interest at 10%.  Based on
the Company's continuing obligations under the license portion of the
Agreement, the Company has deferred income recognition of the $1 million
license fee.

  Corporations related through common ownership by a former director provide
advertising, publishing management and computer services to the Company. Such
services totaled $1.4 million, $2.7 million and $0.3 million for the fiscal
periods ended March 31, 1996, 1997 and 1998, respectively. In the opinion of
management, 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 a
former director; rental expense under the lease is $17,500 per month and the
lease expires in 2003.

  In August 1996, the Company acquired the real estate on which the
Richard-Allan facility is located from a partnership for $4.5 million,
consisting of a cash payment of $1.5 million and a note due to the partnership
for the balance of the purchase price. A member of the board of directors is a
general partner in this partnership.

  A member of the board of directors is affiliated with the holder of $25
million of the 8.75% convertible debentures described in Note 5.  Interest
expense for the $25 million of debentures aggregated $1.9 million and $2.2
million for the year ended March 31, 1997 and 1998, respectively.

  An officer of the Company is a member of the board of directors of a customer
to which the Company made net sales aggregating approximately $5.8 million and
$0.8 million in the year ended March 31, 1997 and 1998.  At March 31, 1997 and
1998 accounts receivable due from this customer totaled $4.3 million and $4.4
million, respectively.

  In April 1997, the Company advanced to its Chairman and Chief Executive
Officer $1.5 million pursuant to an unsecured loan accruing interest at 6.02%
and maturing on November 25, 1999.





                                      F-24
<PAGE>   52

14.  SUPPLEMENTAL CASH FLOW INFORMATION

<TABLE>
<CAPTION>
                                                                MARCH 31,        MARCH 31,        MARCH 31,
                                                                  1996             1997              1998   
                                                                --------         --------         --------
                                                                              (IN THOUSANDS)
<S>                                                            <C>              <C>              <C>
     Changes in operating assets and liabilities (net
       of acquisitions):
       Receivables .....................................        $ (2,554)        $ (6,464)        $(27,628)
       Income tax receivable ...........................              --             (377)             377
       Inventories .....................................            (837)         (13,285)          (9,163)
       Distributor inventories .........................              --           (6,307)           6,307
       Prepaid expenses ................................          (1,044)            (447)             951
       Net assets of business held for sale ............             (96)          (2,580)             (69)
       Deposits and other assets .......................            (160)          (1,786)           1,594
       Accounts payable and accrued liabilities ........           3,640              361           14,673
       Compensation and employee benefits ..............             666            1,154              903
       Restructuring liabilities .......................           2,005            5,319           (3,030)
       Other liabilities ...............................             182            2,861           (1,405)
                                                                --------         --------         --------
                                                                $  1,802         $(21,551)        $(16,490)
                                                                ========         ========         ========
     NON-CASH INVESTING AND FINANCING ACTIVITIES:
      Equipment acquired under capital leases ..........        $     --         $     41         $     52
                                                                ========         ========         ========

      Preferred stock of subsidiary exchanged for common
         shares of the Company .........................        $     45         $    860         $     --
                                                                ========         ========         ========
      Equity issued in acquisitions of businesses ......        $     --         $ 48,046         $  1,820
                                                                ========         ========         ========
      Equity issued in settlement of bank note .........        $     --         $     --         $    714
                                                                ========         ========         ========
      Warrants issued in early extinguishment of debt ..        $     --         $  1,794         $    385
                                                                ========         ========         ========
      Warrants issued in connection with financings ....        $  1,520         $    501         $  1,939
                                                                ========         ========         ========
      Issuance of common stock on debt and preferred
         stock conversions .............................        $     --         $  4,984         $     --
                                                                ========         ========         ========
      Cancellation of loan to stockholder and 64,264
       shares of common stock ..........................        $   (170)        $     --         $     --
                                                                ========         ========         ========
      Sale of 459,296 shares of common stock to an
       officer in exchange for a promissory note .......        $     72         $     --         $     --
                                                                ========         ========         ========
     Accretion of convertible redeemable preferred stock
         for against the accumulated deficit ...........        $     20         $     --         $     --
                                                                ========         ========         ========
     Exchange of convertible redeemable preferred                                                          
         stock for common stock ........................         $ 20,182         $     --         $     --
                                                                 ========         ========         ========
      Conversion of bridge financing notes to
         preferred stock ...............................        $  2,056         $     --         $     --
                                                                ========         ========         ========
      Exchange of bridge financing warrants for
         common stock ..................................        $    331         $     --         $     --
                                                                ========         ========         ========
      Common stock issued for consulting services ......        $      1         $     --         $     --
                                                                ========         ========         ========
      Unearned compensation related to stock
         options granted ...............................        $  1,145         $     --         $     --
                                                                ========         ========         ========
      Settlement of loan to stockholder and related
       interest receivable in exchange for common stock         $     --         $     83         $     --
                                                                ========         ========         ========
      Conversion of 2,715,546 shares of convertible
       redeemable preferred stock to shares of common
       stock on a one-for one basis ....................        $     --         $  9,935         $     --
                                                                ========         ========         ========
     SUPPLEMENTAL CASH FLOW INFORMATION
     Cash paid for interest ............................        $    982         $  7,529         $ 13,975
                                                                ========         ========         ========
     Cash paid for taxes, net of refunds ...............        $  1,012         $     19         $      6
                                                                ========         ========         ========
</TABLE>





                                      F-25
<PAGE>   53

15.  SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

    Set forth below is summary operating results on a quarterly basis for
fiscal 1998 and 1997 (in thousands except share data):


<TABLE>
<CAPTION>
FISCAL 1998:
                                                                       QUARTERS
                                          ---------------------------------------------------------------------
                                            First          Second         Third         Fourth          Total
                                          ---------      ---------      ---------      ---------      ---------
<S>                                       <C>            <C>            <C>            <C>            <C>
Net sales ...........................     $  24,176      $  40,753      $  21,178      $  19,412      $ 105,519
Gross profit ........................        13,637         21,587          8,451          2,253         45,928
Loss from continuing operations .....       (12,503)       (14,687)       (22,492)       (31,481)       (81,163)
Discontinued operations .............           (35)           (88)          (480)        (2,899)        (3,502)
Extraordinary item ..................        (1,823)            --         (2,037)            --         (3,860)
Net loss ............................       (14,361)       (14,775)       (25,009)       (34,380)       (88,525)
Basic and diluted loss per share from
 continuing operations before
 discontinued operations and
 extraordinary item .................         (0.36)         (0.42)         (0.63)         (0.87)         (2.28)
Basic and diluted loss per share from
 discontinued operations ............         (0.01)            --          (0.01)         (0.08)         (0.10)
Basic and diluted loss per share from
 extraordinary item .................         (0.05)            --          (0.06)            --          (0.11)
Basic and diluted loss per share ....         (0.42)         (0.42)         (0.70)         (0.95)         (2.49)
</TABLE>

    The operating results for the fourth quarter of fiscal 1998 includes a
$1.3 million charge relating to the write down of the value of certain real
estate properties (See note 2).


<TABLE>
<CAPTION>
FISCAL 1997:

                                                                       QUARTERS    
                                          ----------------------------------------------------------------
                                            First        Second         Third       Fourth         Total
                                          --------      --------      --------      --------      --------
<S>                                      <C>           <C>           <C>           <C>           <C>
Net sales ...........................     $ 18,922      $ 23,044      $ 30,027      $ 22,021      $ 94,014
Gross profit ........................       12,148        14,685        17,985         8,487        53,305
Loss from continuing operations .....       (1,693)      (30,975)       (3,104)      (50,767)      (86,539)
Discontinued operations .............         (206)         (464)         (693)         (665)       (2,028)
Extraordinary item ..................       (2,973)           --            --            --        (2,973)
Net loss ............................       (4,872)      (31,439)       (3,797)      (51,432)      (91,540)
Basic and diluted loss per share from
 continuing operations before
 discontinued operations and
 extraordinary item .................        (0.16)        (0.92)        (0.12)        (1.70)        (2.90)
Basic and diluted loss per share from
 discontinued operations ............        (0.01)        (0.02)        (0.02)        (0.02)        (0.07)
Basic and diluted loss per share from
 extraordinary item .................           --         (0.10)           --            --         (0.10)
Basic and diluted loss per share ....        (0.17)        (1.04)        (0.14)        (1.72)        (3.07)
</TABLE>


    The operating results for the fourth quarter of fiscal 1997 include the
write-off of acquired in-process research and development of $21.7 million,
costs of restructuring certain operations of  $8.0 million, costs associated
with the Microsurge merger of $3.6 million, the write-off of $1.9 million in
discontinued product inventory, $0.2 million in costs associated with the
abandoned Relax project, and $0.3 million relating to the impairment of goodwill
on the Company's Urohealth of Kentucky subsidiary.





                                      F-26
<PAGE>   54
16.  DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate
that value:

Cash and short-term investments

The carrying amount approximates fair value because of the short maturity of
those instruments.

Long-term investments

The fair value of long-term investments are estimated based on quoted market
prices for those or similar investments.

Long-term debt

The fair value of the Company's long-term debt is estimated based on the quoted
market prices for the same or similar issues or on the current rates offered to
the Company for debt of the same remaining maturities.  For debt for which there
are no quoted market prices, a reasonable estimate of fair value could not be
made without incurring excessive costs. The estimated fair value of the
Company's financial instruments are as follows (in thousands):

<TABLE>
<CAPTION>
                                                     1997                       1998
                                             ---------------------     ---------------------
                                             Carrying       Fair       Carrying       Fair
                                              Amount        Value       Amount        Value
                                             --------     --------     --------     --------
<S>                                         <C>          <C>          <C>          <C>
    Cash and short-term investments ....     $ 40,949     $ 40,949     $    702     $    702
    Long-term investments ..............        5,611        5,611           --           --
    Long  term debt for which it is:
      Practicable to estimate fair value       51,620       51,620        5,518        5,518
      Not practicable ..................       50,000           --      158,306           --
</TABLE>

17. SUBSEQUENT EVENTS

    On July 10, 1998, the Company's senior lender increased the maximum amount
available under the Company's senior credit facility from $40 million to $43
million.  As a condition to that increase, the senior lender required that the
Company's Chief Executive Officer guarantee $3.0 million of the Company's
indebtedness to the Senior Lender.  In consideration of the personal guarantee,
the Board of Directors approved the grant to the Chief Executive Officer of an
option to acquire 1,000,000 shares of Common Stock at the closing price of the
stock on that date. The option is fully vested on the date of grant and expires
on July 10, 2008.

18.  SUPPLEMENTAL GUARANTOR SUBSIDIARY INFORMATION

    As discussed in Note 5, each of the Guarantor Subsidiaries has fully and
unconditionally guaranteed, on a joint and several basis, the obligation to pay
principal and interest with respect to the Notes.  Substantially all of the
Company's operating income and cash flow is generated by its subsidiaries.  As
a result, funds necessary to meet the Company's debt service obligations are
provided in part by distributions or advances from its subsidiaries.  Under
certain circumstances, contractual and legal restrictions, as well as the
financial condition and operating requirements of the Company's subsidiaries,
could limit the Company's ability to obtain cash from its subsidiaries for the
purpose of meeting its debt service obligations, including the payment of
principal and interest on the Notes.  Although holders of the Notes will be
direct creditors of the Company's principal direct subsidiaries by virtue of
the guarantees, the Company has subsidiaries ("Non-Guarantor Subsidiaries")
that are not included among the Guarantor Subsidiaries, and such subsidiaries
will not be obligated with respect to the Notes.  As a result, the claims of
creditors of the Non-Guarantor Subsidiaries will effectively have priority with
respect to the assets and earnings of such companies over the claims of
creditors of the Company, including the holders of the Notes.

The following supplemental condensed consolidating financial statements
present:

1.  Condensed consolidating balance sheets at March 31, 1997 and 1998,
    condensed consolidating statements of operations for the nine months ended
    March 31, 1996 and for the years ended March 31, 1997 and 1998 and
    condensed consolidating statements of cash flows for the nine months ended
    March 31, 1996 and for the years ended March 31, 1997 and 1998.

2.  Imagyn Medical Technologies, Inc. (the "Parent"), combined Guarantor
    Subsidiaries and combined Non-Guarantor Subsidiaries with their investments
    in subsidiaries accounted for using the equity method.

3.  Elimination entries necessary to consolidate the Parent and all of its
    subsidiaries.

Management does not believe that separate financial statements for the
Guarantor Subsidiaries of the Notes are material to investors in the Notes.





                                      F-27
<PAGE>   55
                        IMAGYN MEDICAL TECHNOLOGIES, INC.

                          CONSOLIDATING BALANCE SHEET
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                                    March 31, 1998
                                                         ---------------------------------------------------------------------
                                                                                         Non-
                                                                        Guarantor     Guarantor     Elimination
                                                          Parent       Subsidiaries  Subsidiaries      Entries         Total
                                                         ---------     ------------  ------------   -----------      ---------
<S>                                                     <C>            <C>            <C>            <C>            <C>
 ASSETS
 Current assets:
   Cash and equivalents ............................      $      3       $    684        $    15      $      --       $    702
   Receivables, net ................................            --         41,791             37             --         41,828
   Advance receivable - subsidiaries ...............       105,549             --             --       (105,549)            --
   Inventories .....................................            --         31,800            189             --         31,989
   Prepaid expenses ................................            --          2,089              9             --          2,098
   Net assets of discontinued operations ...........            --          2,001             --             --          2,001
                                                          --------       --------        -------      ---------       --------
 Total current assets ..............................       105,552         78,365            250       (105,549)        78,618
 Investments in subsidiaries .......................       (37,475)            --             --         37,475             --
 Restricted cash ...................................            --         13,589             --             --         13,589
 Receivables -- long term ..........................            --          2,513             --             --          2,513
 Property and equipment, net .......................            --         29,131             98             --         29,229
 Patents and intangibles, net ......................            --          8,559             --             --          8,559
 Loans to officers .................................            --          2,227             --             --          2,227
 Deposits and other assets .........................            --            694             --             --            694
 Deferred debt issuance costs ......................         7,654          1,905             --             --          9,559
 Goodwill ..........................................        33,746         24,052             --             --         57,798
                                                          --------       --------        -------      ---------       --------
                                                          $109,477       $161,035            348      $ (68,074)      $202,786
                                                          ========       ========        =======      =========       ========
 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
 Current liabilities:
   Accounts payable and accrued liabilities ........      $  1,094       $ 41,105        $   126      $      --       $ 42,325
   Advance payable - subsidiaries ..................            --        104,185          1,364       (105,549)            --
   Compensation and employee benefits ..............            --          4,133             --             --          4,133
   Restructuring liabilities .......................            --          3,101             --             --          3,101
   Short-term debt .................................            --         34,462             --             --         34,462
   Current portion of long-term debt ...............        50,000            253             --             --         50,253
                                                          --------       --------        -------      ---------       --------
 Total current liabilities .........................        51,094        187,239          1,490       (105,549)       134,274
 Deferred income ...................................            --          1,000             --             --          1,000
 Long-term liabilities:
   Long-term debt ..................................            --          5,265             --             --          5,265
   Senior subordinated notes, net ..................       108,306             --             --             --        108,306
   Restructuring liabilities, less current portion .            --          1,120             --             --          1,120
   Other liabilities ...............................            --          2,744             --             --          2,744
 Stockholders' equity (deficiency) .................       (49,923)       (36,333)        (1,142)        37,475        (49,923)
                                                          --------       --------        -------      ---------       --------
                                                          $109,477       $161,035        $   348      $ (68,074)      $202,786
                                                          ========       ========        =======      =========       ========
</TABLE>





                                      F-28
<PAGE>   56
                        IMAGYN MEDICAL TECHNOLOGIES, INC.

                          CONSOLIDATING BALANCE SHEET
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                                   March 31, 1997
                                                         -------------------------------------------------------------------
                                                                                       Non-
                                                                       Guarantor     Guarantor     Elimination
                                                           Parent    Subsidiaries  Subsidiaries      Entries         Total
                                                         ---------   ------------  ------------     ---------      ---------
<S>                                                     <C>           <C>           <C>            <C>            <C>
 ASSETS
 Current assets:
   Cash and equivalents .............................    $       3     $  22,533     $      38      $      --      $  22,574
   Short-term investments ...........................           --        18,375            --             --         18,375
   Receivables, net .................................           --        16,636            26             --         16,662
   Advance receivable - subsidiaries ................       13,013            --            --        (13,013)            --
   Income tax receivable ............................           --           377            --             --            377
   Advances to officers .............................           --           114            --             --            114
   Inventories ......................................           --        22,684           142             --         22,826
   Distributor inventories ..........................           --         6,307            --             --          6,307
   Prepaid expenses .................................           --         3,027            22            --          3,049
   Net assets of discontinued operations ............           --         1,935            --             --          1,935
                                                         ---------     ---------     ---------      ---------      ---------
 Total current assets ...............................       13,016        91,988           228        (13,013)        92,219
 Investments in subsidiaries ........................       29,150            --            --        (29,150)            --
 Long-term cash investments .........................           --         5,611            --             --          5,611
 Restricted cash ....................................           --            48            --             --             48
 Receivables -- long term ...........................           --         2,722            --             --          2,722
 Property and equipment, net ........................           --        26,786           129             --         26,915
 Patents and intangibles, net .......................          668         5,617            --             --          6,285
 Loans to officers ..................................           --           550            --             --            550
 Deposits and other assets ..........................           --         2,288            --             --          2,288
 Deferred debt issuance costs .......................        4,148         1,838            --             --          5,986
 Goodwill ...........................................       35,279         8,138            --             --         43,417
                                                         ---------     ---------     ---------      ---------      ---------
                                                         $  82,261     $ 145,586     $     357      $ (42,163)     $ 186,041
                                                         =========     =========     =========      =========      =========
 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
 Current liabilities:
   Accounts payable and accrued liabilities .........    $       1     $  21,957     $      55      $      --      $  22,013
   Advance payable - subsidiaries ...................           --        11,647         1,366        (13,013)            --
   Compensation and employee benefits ...............           --         3,230            --             --          3,230
   Restructuring liabilities ........................           --         6,192            --             --          6,192
   Short-term debt ..................................           --        14,518            --             --         14,518
   Current portion of long-term debt ................           --         3,328            --             --          3,328
                                                         ---------     ---------     ---------      ---------      ---------
 Total current liabilities ..........................            1        60,872         1,421        (13,013)        49,281
 Deferred income ....................................           --         1,000            --             --          1,000
 Long-term liabilities:
   Long-term debt ...................................       50,000        48,292            --             --         98,292
   Senior subordinated notes, net ...................           --            --            --             --             --
   Restructuring liabilities, less current portion ..           --           822            --             --            822
   Other liabilities ................................           --         4,149            --             --          4,149
 Minority interest in consolidated subsidiary .......           --           237            --             --            237
 Stockholders' equity (deficiency) ..................       32,260        30,214        (1,064)       (29,150)        32,260
                                                         ---------     ---------     ---------      ---------      ---------
                                                         $  82,261     $ 145,586     $     357      $ (42,163)     $ 186,041
                                                         =========     =========     =========      =========      =========
</TABLE>





                                      F-29
<PAGE>   57
                       IMAGYN MEDICAL TECHNOLOGIES, INC.

                     CONSOLIDATING STATEMENTS OF OPERATIONS
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                           Year Ended March 31, 1998
                                                      ---------------------------------------------------------------------
                                                                                      Non-
                                                                      Guarantor     Guarantor     Elimination
                                                       Parent       Subsidiaries   Subsidiaries     Entries        Total
                                                      ---------      ---------      ---------      ---------      ---------
<S>                                                   <C>           <C>            <C>            <C>            <C>
Net sales ..........................................  $      --      $ 105,519      $     749      $    (749)     $ 105,519
Cost of sales ......................................         --         59,900            440           (749)        59,591
                                                      ---------      ---------      ---------      ---------      ---------
Gross profit .......................................         --         45,619            309             --         45,928
Operating expenses:
  Selling, general and administrative ..............      2,201         85,519            311             --         88,031
  Research and development .........................         --         11,897             --             --         11,897
  Restructuring charges ............................         --          3,846             --             --          3,846
  Write-off of purchased research and
   development .....................................         --             --             --             --             --
  Direct acquisition costs .........................         --          4,220             --             --          4,220
  Loss recorded by subsidiaries ....................     67,176             --             --        (67,176)            --
                                                      ---------      ---------      ---------      ---------      ---------
Total operating expenses ...........................     69,377        105,482            311        (67,176)       107,994
                                                      ---------      ---------      ---------      ---------      ---------
Loss from operations ...............................    (69,377)       (59,863)            (2)        67,176        (62,066)

Other income (expense):
   Minority interest consisting of accrued
    dividends on preferred stock of subsidiary .....         --             (4)            --             --             (4)
   Interest income .................................         --          2,675              4             --          2,679
   Interest expense ................................    (19,148)        (3,086)            --             --        (22,234)
   Other ...........................................         --            464             --             --            464
                                                      ---------      ---------      ---------      ---------      ---------
Loss from continuing operations before provision
 for income taxes ..................................    (88,525)       (59,814)             2         67,176        (81,161)
Provision for income taxes .........................         --              2             --             --              2
                                                      ---------      ---------      ---------      ---------      ---------
Loss from continuing operations before
  discontinued operations and
  extraordinary item ...............................    (88,525)       (59,816)             2         67,176        (81,163)
                                                      ---------      ---------      ---------      ---------      ---------

Discontinued operations:
  Loss from operations of discontinued
   business ........................................         --         (1,835)            --             --         (1,835)
  Loss from disposal of discontinued
   business ........................................         --         (1,667)            --             --         (1,667)
                                                      ---------      ---------      ---------      ---------      ---------
Net loss before extraordinary item .................    (88,525)       (63,318)             2         67,176        (84,665)
Extraordinary item (early extinguishment of debt) ..         --         (3,860)            --             --         (3,860)
                                                      ---------      ---------      ---------      ---------      ---------
Net loss ...........................................  $ (88,525)     $ (67,178)     $       2      $  67,176      $ (88,525)
                                                      =========      =========      =========      =========      =========
</TABLE>





                                      F-30
<PAGE>   58
                       IMAGYN MEDICAL TECHNOLOGIES, INC.

                     CONSOLIDATING STATEMENTS OF OPERATIONS
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                             Year Ended March 31, 1997
                                                       ---------------------------------------------------------------------
                                                                                      Non-
                                                                      Guarantor     Guarantor     Elimination
                                                        Parent      Subsidiaries   Subsidiaries     Entries          Total
                                                      ----------    ------------   ------------   -----------      ---------
<S>                                                   <C>            <C>            <C>            <C>             <C>
 Net sales .......................................     $      --      $  94,014      $     384      $    (384)     $  94,014
 Cost of sales ...................................            --         40,819            274           (384)        40,709
                                                       ---------      ---------      ---------      ---------      ---------
 Gross profit ....................................            --         53,195            110             --         53,305
 Operating expenses:
   Selling, general and administrative ...........         1,513         62,040            188             --         63,741
   Research and development ......................            --          7,984             --             --          7,984
   Restructuring charges .........................            --         12,000             --             --         12,000
   Write-off of purchased research and
     development .................................        37,134         10,098             --             --         47,232
   Direct acquisition costs ......................            --          3,600             --             --          3,600
   Loss recorded by subsidiaries .................        46,863             --             --        (46,863)            --
                                                       ---------      ---------      ---------      ---------      ---------
 Total operating expenses ........................        85,510         95,722            188        (46,863)       134,557
                                                       ---------      ---------      ---------      ---------      ---------
 Loss from operations ............................       (85,510)       (42,527)           (78)        46,863        (81,252)

 Other income (expense):
   Minority interest consisting of accrued
    dividends on preferred stock of subsidiary ...            --            (25)            --             --            (25)
   Interest income ...............................            --          2,652              4             --          2,656
   Interest expense ..............................        (3,864)        (4,279)            --             --         (8,143)
   Other .........................................            --             --             --             --             --
                                                       ---------      ---------      ---------      ---------      ---------
 Loss from continuing operations before provision
  (benefit) for income taxes .....................       (89,374)       (44,179)           (74)        46,863        (86,764)
 Provision (benefit) for income taxes ............            --           (225)            --             --           (225)
                                                       ---------      ---------      ---------      ---------      ---------
 Loss from continuing operations before
   discontinued operations and
   extraordinary item ............................       (89,374)       (43,954)           (74)        46,863        (86,539)

 Discontinued operations:
   Loss from operations of discontinued
     business ....................................            --         (2,028)            --             --         (2,028)
   Loss from disposal of discontinued
      business ...................................            --             --             --             --             --
                                                       ---------      ---------      ---------      ---------      ---------
 Net loss before extraordinary item ..............       (89,374)       (45,982)           (74)        46,863        (88,567)
 Extraordinary item (early extinguishment
      of debt) ...................................        (2,166)          (807)            --             --         (2,973)
                                                       ---------      ---------      ---------      ---------      ---------
 Net loss ........................................     $ (91,540)     $ (46,789)     $     (74)     $  46,863      $ (91,540)
                                                       =========      =========      =========      =========      =========
</TABLE>





                                      F-31
<PAGE>   59
                       IMAGYN MEDICAL TECHNOLOGIES, INC.

                     CONSOLIDATING STATEMENTS OF OPERATIONS
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                      Nine Months Ended March 31, 1996
                                                      ----------------------------------------------------------------
                                                                                   Non-
                                                                    Guarantor    Guarantor    Elimination
                                                        Parent    Subsidiaries  Subsidiaries     Entries        Total
                                                      --------    ------------  ------------    --------      --------
<S>                                                  <C>           <C>           <C>           <C>           <C>
Net sales .......................................     $     --      $ 43,768      $    447      $    (84)     $ 44,131
Cost of sales ...................................           --        16,031            84           (84)       16,031
                                                      --------      --------      --------      --------      --------
Gross profit ....................................           --        27,737           363            --        28,100
Operating expenses:
  Selling, general and administrative ...........           87        39,785           443            --        40,315
  Research and development ......................           --         4,459            --            --         4,459
  Restructuring charges .........................           --         5,456            --            --         5,456
  Write-off of purchased research and
   development ..................................           --            --            --            --            --
  Direct acquisition costs ......................           --         4,232            --            --         4,232
  Loss recorded by subsidiaries .................       23,724            --            --       (23,724)           --
                                                      --------      --------      --------      --------      --------
Total operating expenses ........................       23,811        53,932           443       (23,724)       54,462
                                                      --------      --------      --------      --------      --------
Loss from operations ............................      (23,811)      (26,195)          (80)       23,724       (26,362)

Other income (expense):
  Minority interest consisting of accrued
   dividends on preferred stock of subsidiary ...           --           (55)           --            --           (55)
  Interest income ...............................           --           341            24            --           365
  Interest expense ..............................         (652)         (572)           (3)           --        (1,227)
  Other .........................................           --         3,475            --            --         3,475
                                                      --------      --------      --------      --------      --------
Loss from continuing operations before provision
 for income taxes ...............................      (24,463)      (23,006)          (59)       23,724       (23,804)
Provision for income taxes ......................           --           435            --            --           435
                                                      --------      --------      --------      --------      --------
Loss from continuing operations before
  discontinued operations and
  extraordinary item ............................      (24,463)      (23,441)          (59)       23,724       (24,239)
                                                      --------      --------      --------      --------      --------

Discontinued operations:
  Loss from operations of discontinued
   business .....................................           --          (224)           --            --          (224)
  Loss from disposal of discontinued
   business .....................................           --            --            --            --            --
                                                      --------      --------      --------      --------      --------
Net loss before extraordinary item ..............      (24,463)      (23,665)          (59)       23,724       (24,463)
Extraordinary item (early extinguishment of
  debt) .........................................           --            --            --            --            --
                                                      --------      --------      --------      --------      --------
Net loss ........................................     $(24,463)     $(23,665)     $    (59)     $ 23,724      $(24,463)
                                                      ========      ========      ========      ========      ========
</TABLE>





                                      F-32
<PAGE>   60
                       IMAGYN MEDICAL TECHNOLOGIES, INC.

                     CONSOLIDATING STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                              Year Ended March 31, 1998
                                                      ------------------------------------------------------------------
                                                                    Guarantor   Non-Guarantor  Elimination
                                                        Parent     Subsidiaries  Subsidiaries    Entries        Total
                                                      ---------     ---------     ---------     ---------     --------- 
<S>                                                  <C>           <C>           <C>           <C>           <C>
OPERATING ACTIVITIES
  Loss from continuing operations before
    discontinued operations and
    extraordinary item ...........................    $ (88,525)    $ (59,816)    $       2     $  67,176     $ (81,163)
  Non-cash items included in net loss:
  Write-off of purchased research and
    development ..................................           --            --            --            --            --
  Depreciation and amortization ..................        2,201         8,251            31            --        10,483
  Loss recorded by subsidiaries ..................       67,176            --            --       (67,176)           --
  Loss on retirement/write-off of assets .........           --         1,993            --            --         1,993
  Deferred income taxes ..........................           --            --            --            --            --
  Amortization of deferred debt issuance costs ...        1,363           380            --            --         1,743
  Provision for doubtful accounts ................           --         2,671            --            --         2,671
  Accretion and accrued interest on
   convertible notes .............................           --            --            --            --            --
  Accrued dividends on preferred stock of
   subsidiary ....................................           --             4            --            --             4
  Non-cash interest income on officer loan .......                       (137)           --                        (137)
  Non-cash interest expense on bridge financing
    warrants .....................................           --            --            --            --            --
  Compensation related to stock options vesting ..           --           615            --            --           615
  Other non-cash item ............................           --            --            --            --            --
  Changes in operating assets and liabilities ....      (87,974)       71,540           (56)           --       (16,490)
                                                      ---------     ---------     ---------     ---------     ---------
  Net cash used in continuing operating activities     (105,759)       25,501           (23)           --       (80,281)
  Non cash used in extraordinary item ............           --          (526)           --                        (526)
  Non cash used in discontinued operations .......           --        (1,832)           --            --        (1,832)
                                                      ---------     ---------     ---------     ---------     ---------
  Net cash used in operating activities ..........     (105,759)       23,143           (23)           --       (82,639)
INVESTING ACTIVITIES
  Purchases of investments .......................           --       (26,561)                                  (26,561)
  Sale of investments ............................           --        50,547            --            --        50,547
  Purchases of property and equipment, net .......           --       (10,688)                         --       (10,688)
  Payments for acquisition of businesses,                                                              
   net of cash acquired ..........................           --       (15,836)                         --       (15,836)
  Proceeds from disposal of property and .........           --                                        
   equipment .....................................           --            --                          --            --
  Purchases of technology ........................           --          (323)                         --          (323)
  Decrease (increase) in restricted cash .........           --       (13,541)                         --       (13,541)
  Loans and advances to officers .................           --        (1,305)                         --        (1,305)
                                                      ---------     ---------     ---------     ---------     ---------
  Net cash provided by (used in) investing
   activities ....................................           --       (17,707)           --            --       (17,707)
FINANCING ACTIVITIES .............................           --            --            --
  Issuance of common shares ......................           --            --            --            --            --
  Secondary offering of common stock .............           --            --            --            --            --
  Exercise of stock options and warrants .........          628            --            --            --           628
  Issuance of preferred stock by subsidiary ......           --            --            --            --            --
  Issuance of equity securities by pooled company            --            --            --            --            --
  Issuance of warrants ...........................           --            --            --            --            --
  Proceeds from bridge financing notes ...........           --            --            --            --            --
  Proceeds from sale of convertible preferred                                                                          
  stock ..........................................           --            --            --            --            --
  Repayment of convertible subordinated note .....           --        (5,268)           --            --        (5,268)
  Proceeds from long-term debt ...................      110,000         2,301            --            --       112,301
  Revolving lines of credit, net .................           --        25,212            --            --        25,212
  Principal payments on long-term debt ...........           --       (46,205)           --            --       (46,205)
  Repurchase of preferred stock ..................           --          (174)           --            --          (174)
  Deferred debt issuance costs ...................       (4,869)       (3,151)           --            --        (8,020)
                                                      ---------     ---------     ---------     ---------     ---------
  Net cash provided by financing activities ......      105,759       (27,285)           --            --        78,474
                                                      ---------     ---------     ---------     ---------     ---------
  Net increase (decrease) in cash and equivalents            --       (21,849)          (23)           --       (21,872)
  Cash and equivalents, beginning of year ........            3        22,533            38            --        22,574
                                                      ---------     ---------     ---------     ---------     ---------
  Cash and equivalents, end of year ..............    $       3     $     684     $      15     $      --     $     702
                                                      =========     =========     =========     =========     =========
</TABLE>





                                      F-33
<PAGE>   61
                       IMAGYN MEDICAL TECHNOLOGIES, INC.

                     CONSOLIDATING STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                              Year Ended March, 31, 1997
                                                        ----------------------------------------------------------------------
                                                                                       Non-
                                                                       Guarantor     Guarantor      Elimination
                                                         Parent      Subsidiaries   Subsidiaries      Entries         Total
                                                        ---------    ------------   ------------     ---------      --------- 
<S>                                                    <C>            <C>            <C>            <C>             <C>
OPERATING ACTIVITIES
  Loss from continuing operations before
   discontinued operations and
   extraordinary item .............................     $ (89,374)     $ (43,954)     $     (74)     $  46,863      $ (86,539)
  Non-cash items included in net loss:
  Write-off of purchased research and
    development ...................................        37,134          3,848             --             --         40,982
  Depreciation and amortization ...................         1,513          3,932             31             --          5,476
  Loss recorded by subsidiaries ...................        46,863             --             --        (46,863)            --
  Loss on retirement/write-off of assets ..........            --            354             --             --            354
  Deferred income taxes ...........................            --             --             --             --             --
  Amortization of deferred debt issuance costs ....           645            168             --             --            813
  Provision for doubtful accounts .................            --            (39)            --             --            (39)
  Accretion and accrued interest on
   convertible notes ..............................           445             --             --             --            445
  Accrued dividends on preferred stock of
   subsidiary .....................................            --             25             --             --             25
  Non-cash interest income on officer loan ........            --             (8)            --             --             (8)
  Non-cash interest expense on bridge financing
    warrants ......................................            --             --             --             --             --
  Compensation related to stock options vesting ...            --            350             --             --            350
  Other non-cash item .............................            --             --             --
  Changes in operating assets and liabilities .....       (33,968)        12,393             24             --        (21,551)
                                                        ---------      ---------      ---------      ---------      ---------
  Net cash used in continuing operating activities        (36,742)       (22,931)           (19)            --        (59,692)
  Net cash used in extraordinary item .............            --           (540)            --             --           (540)
  Net cash used in discontinued operations ........            --         (1,044)            --             --         (1,044)
                                                        ---------      ---------      ---------      ---------      ---------
  Net cash used in operating activities ...........       (36,742)       (24,515)           (19)            --        (61,276)
INVESTING ACTIVITIES
  Purchases of investments ........................            --        (19,463)            --             --        (19,463)
  Sale of investments .............................            --            243             --             --            243
  Purchases of property and equipment, net ........            --        (13,025)            --             --        (13,025)
  Payments for acquisition of businesses,
   net of cash acquired ...........................       (28,962)        (9,199)            --             --        (38,161)
  Proceeds from disposal of property and
   equipment ......................................            --             --             --             --             --
  Purchases of technology .........................            --         (1,207)            --             --         (1,207)
  Decrease (increase) in restricted cash ..........            --             48             --             --             48
  Loans and advances to officers ..................            --           (664)            --             --           (664)
                                                        ---------      ---------      ---------      ---------      ---------
  Net cash provided by (used in) investing
   activities .....................................       (28,962)       (43,267)            --             --        (72,229)
FINANCING ACTIVITIES
  Issuance of common shares .......................            --         47,832             --             --         47,832
  Secondary offering of common stock ..............        18,817             --             --             --         18,817
  Exercise of stock options and warrants ..........         1,453             --             --             --          1,453
  Issuance of preferred stock by subsidiary .......            --             --             --             --             --
  Issuance of equity securities by pooled company .            --             --             --             --             --
  Issuance of warrants ............................            --             --             --             --             --
  Proceeds from bridge financing notes ............            --             --             --             --             --
  Proceeds from sale of convertible preferred stock            --             --             --             --             --
  Repayment of convertible subordinated note ......            --             --             --             --             --
  Proceeds from long-term debt ....................        50,000         60,184             --             --        110,184
  Revolving lines of credit, net ..................            --          1,977             --             --          1,977
  Principal payments on long-term debt ............            --        (19,888)            --             --        (19,888)
  Repurchase of preferred stock ...................            --             --             --             --             --
  Deferred debt issuance costs ....................        (4,566)        (6,456)            --             --        (11,022)
                                                        ---------      ---------      ---------      ---------      ---------
  Net cash provided by financing activities .......        65,704         83,649             --             --        149,353
                                                        ---------      ---------      ---------      ---------      ---------
  Net increase (decrease) in cash and equivalents .            --         15,867            (19)            --         15,848
  Cash and equivalents, beginning of year .........             3          6,666             57             --          6,726
                                                        ---------      ---------      ---------      ---------      ---------
  Cash and equivalents, end of year ...............     $       3      $  22,533      $      38      $      --      $  22,574
                                                        =========      =========      =========      =========      =========
</TABLE>





                                      F-34
<PAGE>   62
                       IMAGYN MEDICAL TECHNOLOGIES, INC.

                     CONSOLIDATING STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                       Nine Months Ended March 31, 1996
                                                         ----------------------------------------------------------------
                                                                                       Non-
                                                                       Guarantor     Guarantor    Elimination
                                                          Parent     Subsidiaries   Subsidiaries    Entries        Total
                                                         --------    ------------   ------------   --------      --------
<S>                                                     <C>           <C>           <C>           <C>           <C>
 OPERATING ACTIVITIES
   Loss from continuing operations before
    discontinued operations and
    extraordinary item .............................     $(24,463)     $(23,441)     $    (59)     $ 23,724      $(24,239)
   Non-cash items included in net loss:
   Extraordinary item ..............................           --            --            --            --            --
   Write-off of purchased research and
     development ...................................           --            --            --            --            --
   Depreciation and amortization ...................           87         1,743            23            --         1,853
   Loss recorded by subsidiaries ...................       23,724            --            --       (23,724)           --
   Loss on retirement/write-off of assets ..........           --           664            --            --           664
   Deferred income taxes ...........................           --          (152)           --            --          (152)
   Amortization of deferred debt issuance costs ....          637            --            --            --           637
   Provision for doubtful accounts .................           --         1,126            --            --         1,126
   Accretion and accrued interest on
    convertible notes ..............................           15            --            --            --            15
   Accrued dividends on preferred stock of
    subsidiary .....................................           --            55            --            --            55
   Non-cash interest income on officer loan ........           --            --            --            --            --
   Non-cash interest expense on bridge financing
    warrants .......................................           --           141            --            --           141
   Compensation related to stock options vesting ...           --           180            --            --           180
   Other non-cash item .............................           --             1            --            --             1
   Changes in operating assets and liabilities .....       (3,255)        4,940           117            --         1,802
                                                         --------      --------      --------      --------      --------
   Net cash used in continuing operating activities        (3,255)      (14,743)           81            --       (17,917)
   Net cash used in discontinued operations ........           --          (198)           --            --          (198)
                                                         --------      --------      --------      --------      --------
   Net cash used in operating activities ...........       (3,255)      (14,941)           81            --       (18,115)
 INVESTING ACTIVITIES
   Purchases of investments ........................           --        (6,024)           --            --        (6,024)
   Sale of investments .............................           --         2,282            --            --         2,282
   Purchases of property and equipment, net ........           --        (3,172)           --            --        (3,172)
   Payments for acquisition of businesses,
    net of cash acquired ...........................           --            --            --            --            --
   Proceeds from disposal of property and
    equipment ......................................           --           788            --            --           788
   Purchases of technology .........................           --          (333)           --            --          (333)
   Decrease (increase) in restricted cash ..........           --            --            --            --            --
   Loans and advances to officers ..................           --            --            --            --            --
                                                         --------      --------      --------      --------      --------
   Net cash provided by (used in) investing
    activities .....................................           --        (6,459)           --            --        (6,459)
 FINANCING ACTIVITIES
   Issuance of common shares .......................           --            --            --            --            --
   Secondary offering of common stock ..............           --            --            --            --            --
   Exercise of stock options and warrants ..........          754            --            --            --           754
   Issuance of preferred stock by subsidiary .......        1,831            --            --            --         1,831
   Issuance of equity securities by pooled
    company.........................................           --         4,149            --            --         4,149
   Issuance of warrants ............................          670            --            --            --           670
   Proceeds from bridge financing notes ............           --           880            --            --           880
   Proceeds from sale of convertible preferred
    stock...........................................           --         7,879            --            --         7,879
   Repayment of convertible subordinated note ......           --         7,913            --            --         7,913
   Proceeds from long-term debt ....................           --         5,433            --            --         5,433
   Revolving lines of credit, net ..................           --          (868)           --            --          (868)
   Principal payments on long-term debt ............           --            --            --            --            --
   Repurchase of preferred stock ...................           --            --            --            --            --
   Deferred debt issuance costs ....................           --          (221)           --            --          (221)
                                                         --------      --------      --------      --------      --------
   Net cash provided by financing activities .......        3,255        25,165            --            --        28,420
                                                         --------      --------      --------      --------      --------
   Net increase (decrease) in cash and
    equivalents.....................................           --         3,765            81            --         3,846
   Cash and equivalents, beginning of year .........            3         2,901           (24)           --         2,880
                                                         --------      --------      --------      --------      --------
   Cash and equivalents, end of year ...............     $      3      $  6,666      $     57      $     --      $  6,726
                                                         ========      ========      ========      ========      ========
</TABLE>





                                      F-35
<PAGE>   63
                                   SIGNATURES

  Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized in the City of
Newport Beach, State of California on July 14, 1998.

                                       IMAGYN MEDICAL TECHNOLOGIES, INC.

                                       By: /s/ CHARLES A. LAVERTY
                                          ------------------------------------
                                          Charles A. Laverty
                                          Chairman and Chief Executive Officer

                               POWER OF ATTORNEY

  Each person whose signature appears below hereby authorizes and appoints
Charles A. Laverty, Michael A. Montevideo and Kevin M. Higgins, jointly and
severally, as attorneys-in-fact and agents, each acting alone, with full powers
of substitution, to sign on his or her behalf, individually and in the
capacities stated below, and to file any and all amendments, to this report and
exhibits and other documents in connection therewith, with Securities and
Exchange Commission, granting to said attorneys-in-fact and agents full power
and authority to perform any other act on behalf of the undersigned required to
be done in the premises.

  Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
                  SIGNATURE                                              TITLE                                DATE
                  ---------                                              -----                                ----
<S>                                                         <C>                                          <C>
             /s/ CHARLES A. LAVERTY                          Chairman of the Board and                    July 14, 1998
------------------------------------------------             Chief Executive Officer
               Charles A. Laverty                            (Principal Executive Officer)
                                                 
            /s/ MICHAEL A. MONTEVIDEO                        Sr. Vice President and
------------------------------------------------             Chief Financial Officer
              Michael A. Montevideo                          (Principal Financial and Accounting          July 14, 1998
                                                             Officer)                                     
                                                 
                                                 
              /s/ JOHN CHAMBERLIN                            Director                                     July 13, 1998
------------------------------------------------ 
                 John Chamberlin                 
                                                 
                                                             Director                                     July __, 1998
------------------------------------------------ 
                Robert N. Elkins                 
                                                 
              /s/ LAWRENCE GOELMAN                           Director                                     July 13, 1998
------------------------------------------------ 
                Lawrence Goelman                 
                                                 
             /s/ PHILIP D. GREEN                             Director                                     July 13, 1998
------------------------------------------------ 
                 Philip D. Green                 
                                                 
              /s/ Michael S. Gross                           Director                                     July 13, 1998
------------------------------------------------ 
                Michael S. Gross                 
                                                 
            /s/ RICHARD R. NEWHAUSER                         Director                                     July 13, 1998
------------------------------------------------ 
              Richard R. Newhauser               
                                                 
             /s/ FRANCIS J. TEDESCO                          Director                                     July  9, 1998
------------------------------------------------ 
               Francis J. Tedesco                
</TABLE>





                                      II-1


<PAGE>   64

                         REPORT OF INDEPENDENT AUDITORS


Stockholders and Board of Directors
UROHEALTH Systems, Inc.

We have audited the consolidated financial statements of UROHEALTH Systems,
Inc. (before giving effect to the business combination with Imagyn Medical,
Inc. which occurred on September 29, 1997 and was accounted for as a pooling of
interests) as of March 31, 1996 and 1997, and the related consolidated
statements of operations, stockholders' equity (deficiency) and cash flows for
the nine months ended March 31, 1996 and the year ended March 31, 1997, and
have issued our report thereon dated July 8, 1997 (included elsewhere in this
report).  Our audits also included the financial statement schedule listed in
Item 14 (a) (2) of this report.  This schedule is the responsibility of the
Company's management.  Our responsibility is to express an opinion based on our
audits.  We did not audit the financial statements of certain wholly- owned
subsidiaries, which statements reflect total assets constituting 16.5% and 3.9%
of consolidated total assets as of March 31, 1996 and 1997, respectively, and
net sales constituting 8% and 8% of consolidated net sales for the nine months
ended March 31, 1996 and the year ended March 31, 1997, respectively.  Those
statements were audited by other auditors whose reports have been furnished to
us, and our opinion, insofar as it relates to data included in the consolidated
financial statements for such entities, is based solely on the reports of other
auditors.

In our opinion, based on our audits and reports of other auditors, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein for the nine months ended
March 31, 1996 and the year ended March 31, 1997.


                                          /s/ Ernst & Young LLP

Orange County, California
July 8, 1997





                                      S-1





<PAGE>   65
                       IMAGYN MEDICAL TECHNOLOGIES, INC.

                                   SCHEDULE I
                CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY



                       IMAGYN MEDICAL TECHNOLOGIES, INC.
                            CONDENSED BALANCE SHEET
                                 (In thousands)

<TABLE>
<CAPTION>
                                                               MARCH 31,
                                                                 1998
                                                              ---------
<S>                                                          <C>
        ASSETS
        Current assets:
          Cash and equivalents ..........................     $       3
         Advance receivable - subsidiaries ..............       105,549
                                                              ---------
        Total current assets ............................       105,552
        Investments in subsidiaries .....................       (37,475)
        Deferred debt issuance costs ....................         7,654
        Goodwill ........................................        33,746
                                                              ---------
                                                              $ 109,477
                                                              =========
        LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
        Current liabilities:
          Accounts payable and accrued liabilities ......     $   1,094
          Current portion of long-term debt .............        50,000
                                                              ---------
        Total current liabilities .......................        51,094
          Senior subordinated notes, net ................       108,306
        Stockholders' equity (deficiency) ...............       (49,923)
                                                              ---------
                                                              $ 109,477
                                                              =========
</TABLE>


                        IMAGYN MEDICAL TECHNOLOGIES, INC.
                        CONDENSED STATEMENT OF OPERATIONS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                              YEAR ENDED
                                                                MARCH
                                                              31, 1998
                                                              --------
<S>                                                          <C>
         Operating expenses:
         Selling, general and administrative ............     $  2,201
          Loss recorded by subsidiaries .................       67,176
                                                              --------
         Total operating expenses .......................       69,377
                                                              --------
         Loss from operations ...........................      (69,377)

         Other income (expense):
            Interest expense ............................      (19,148)
                                                              --------
         Loss from continuing operations before provision
          for income taxes ..............................      (88,525)
         Provision for income taxes .....................           --
                                                              --------
         Net loss .......................................     $(88,525)
                                                              ========
</TABLE>





                                      S-2





<PAGE>   66

                       IMAGYN MEDICAL TECHNOLOGIES, INC.
                       CONDENSED STATEMENT OF CASH FLOWS
                                 (In thousands)


<TABLE>
<CAPTION>
                                                              YEAR ENDED
                                                               MARCH 31,
                                                                 1998
                                                              ---------
<S>                                                          <C>
       OPERATING ACTIVITIES
         Loss from continuing operations before
         discontinued operations and extraordinary
         item ..........................................      $ (88,525)
         Depreciation and amortization ..................         2,201
         Loss recorded by subsidiaries ..................        67,176
         Amortization of deferred debt issuance costs ...         1,363
         Changes in operating assets and liabilities ....       (87,974)
                                                              ---------
         Net cash used in continuing operating activities      (105,759)
         Non cash used in extraordinary item ............            --
         Non cash used in discontinued operations .......            --
                                                              ---------
         Net cash used in operating activities ..........      (105,759)
       FINANCING ACTIVITIES
         Exercise of stock options and warrants .........           628
         Proceeds from long-term debt ...................       110,000
         Deferred debt issuance costs ...................        (4,869)
                                                              ---------
         Net cash provided by financing activities ......       105,759
                                                              ---------
         Net increase (decrease) in cash and equivalents             --
         Cash and equivalents, beginning of year ........             3
                                                              ---------
         Cash and equivalents, end of year ..............     $       3
                                                              =========
</TABLE>


                       IMAGYN MEDICAL TECHNOLOGIES, INC.

           NOTES TO CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY

     Imagyn Medical Technologies, Inc. is a holding company with no material 
tangible assets or operations other than investments in its subsidiaries. For 
further information, reference should be made to the accompanying Notes to 
Consolidated Financial Statements of Imagyn Medical Technologies, Inc.




                                      S-3





<PAGE>   67
                       IMAGYN MEDICAL TECHNOLOGIES, INC.

                                  SCHEDULE II
                        CONSOLIDATED VALUATION ACCOUNTS
                                 (in thousands)


<TABLE>
<CAPTION>
                                              BALANCE AT
                                               BEGINNING                                           BALANCE AT
             DESCRIPTION                      OF PERIOD    ADDITIONS   ACQUISITION   WRITE OFFS   END OF PERIOD
-----------------------------------------     ---------    ---------   -----------   ----------   -------------
 <S>                                              <C>         <C>           <C>         <C>             <C>
Year ended March 31, 1998:
     Allowance for doubtful accounts ....      $ 1,899      $ 2,671      $    --       (1,211)      $ 3,359
     Allowance for inventory obsolescence        1,778        2,238           --         (321)        3,695
                                               -------      -------      -------      -------       -------
          Total .........................      $ 3,677      $ 4,909      $    --      $(1,532)      $ 7,054
                                               =======      =======      =======      =======       =======


Year ended March 31, 1997:
     Allowance for doubtful accounts ....      $ 1,747      $    82      $   232      $  (162)      $ 1,899
     Allowance for inventory obsolescence        2,101          157          451         (931)        1,778
                                               -------      -------      -------      -------       -------
          Total .........................      $ 3,848      $   239      $   683      $(1,093)      $ 3,677
                                               =======      =======      =======      =======       =======


Nine month period ended March 31, 1996:
     Allowance for doubtful accounts ....      $   621      $ 1,126      $    --      $    --       $ 1,747
     Allowance for inventory obsolescence          602        1,545           --          (46)        2,101
                                               -------      -------      -------      -------       -------
          Total .........................      $ 1,223      $ 2,671      $    --      $   (46)      $ 3,848
                                               =======      =======      =======      =======       =======
</TABLE>





                                      S-4





<PAGE>   68
                                 EXHIBIT INDEX
<TABLE>
<CAPTION>
                                                                   SEQUENTIALLY
EXHIBIT                                                              NUMBERED
NUMBER                      DESCRIPTION                                PAGE
-------                     -----------                                ----
<S>     <C>                                                         <C>
  2.1    Agreement and Plan of Merger, dated April 19, 1997,
         among the Company, Urohealth Acquisition Corporation and
         Imagyn Medical, Inc. Incorporated by reference to
         Exhibit 2.1 of the Company's Annual Report on Form 10-K
         for the year ended March 31, 1997 (the "1997 Form
         10-K").

  2.2    Agreement and Plan of Merger, dated March 11, 1997 among
         Urohealth Systems, Inc., Urohealth, Inc. (California)
         and Microsurge, Inc. Incorporated by reference to
         Exhibit 2.0 of the Company's Current Report on Form 8-K
         dated April 14, 1997.

  2.3    Agreement and Plan of Merger, dated February 28, 1997,
         among Urohealth Systems, Inc., Urohealth, Inc.
         (California) and X-Cardia Corporation. Incorporated by
         reference to Exhibit 2 of the Company's Current Report
         on Form 8-K dated March 14, 1997.

  2.4    Agreement and Plan of Merger, dated July 5, 1996, among
         Urohealth Systems, Inc., Urohealth, Inc. (California)
         and Richard-Allan Medical Industries, Inc. Incorporated
         by reference to Exhibit 2.3 of the Company's Current
         Report on Form 8-K dated July 1, 1996.

  3.1    Certificate of Incorporation of the Company, as amended.
         Incorporated by reference to Exhibit 3.1 of the
         Company's Form S-3 Registration Statement No. 333-12723
         ("Form S-3 Registration Statement No. 333-12723").

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

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

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

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

  4.4    Indenture, dated April 10, 1997, among Urohealth
         Systems, Inc., the Guarantors named therein and The Bank
         of New York, as trustee. Incorporated by reference to
         Exhibit 4.1 of the Company's Current Report on Form 8-K,
         dated April 28, 1997 (the "April 28, 1997 Form 8-K").

  4.5    Registration Rights Agreement, dated April 10, 1997,
         among Urohealth Systems, Inc., the Guarantors named
         therein and the Initial Purchaser. Incorporated by
         reference to Exhibit 4.3 of the April 28, 1997 Form 8-K.

  4.6    Warrant Agreement, dated April 10, 1997, between
         Urohealth Systems, Inc. and The Bank of New York, as
         warrant agent. Incorporated by reference to Exhibit 4.4
         of the Company's April 28, 1997 Form 8-K.

  4.7    Warrant Registration Rights Agreement, dated April 10,
         1997, between Urohealth Systems, Inc. and Bear Stearns &
         Co., as initial purchaser. Incorporated by reference to
         Exhibit 4.5 to the Company's April 28, 1997 Form 8-K.

  4.8    Indenture, dated May 13, 1996, between Urohealth
         Systems, Inc. and Bankers Trust Company, as trustee.
         Incorporated by reference to Exhibit 10.55 of the
         Company's 1996 Form 10-K.
</TABLE>




<PAGE>   69

<TABLE>
<CAPTION>
                                                                   SEQUENTIALLY
EXHIBIT                                                              NUMBERED
NUMBER                      DESCRIPTION                                PAGE
-------                     -----------                                ----
<S>     <C>                                                         <C>
  4.9    Debenture Registration Rights Agreement, dated May 13,
         1996, between Urohealth Systems, Inc. and the Investors
         identified therein. Incorporated by reference to Exhibit
         10.56 of the Company's 1996 Form 10-K.

  4.10   Warrant Agreement, dated May 13, 1996, between Urohealth
         Systems, Inc. and Bankers Trust Company, as warrant
         agent. Incorporated by reference to Exhibit 10.57 of the
         Company's 1996 Form 10-K.

  10.1   Amended and Restated Credit Agreement, dated April 10,
         1997, between Urohealth Systems, Inc. and Banque
         Indosuez, as agent for the banks named therein.
         Incorporated by reference to Exhibit 10.1 of the
         Company's April 28, 1997 Form 8-K.

  10.2   Purchase Agreement, dated April 3, 1997, between
         Urohealth Systems, Inc. and Bear, Stearns & Co., as
         initial purchaser of the Company's 12 -1/2% Senior
         Subordinated Notes due 2004. Incorporated by reference
         to Exhibit 4.2 of the Company's April 28, 1997 Form 8-K.

  10.3   Securities Purchase Agreement, dated May 3, 1996, among
         Urohealth Systems, Inc. and the Investors identified
         therein, relating to the sale of the Company's 8.75%
         Convertible Subordinated Debentures due 2006.
         Incorporated by reference to Exhibit 10.52 of the
         Company's 1996 Form 10-K.

  10.4   Registration Rights Agreement, dated May 13, 1996, among
         Urohealth Systems, Inc. and the stockholders identified
         therein. Incorporated by reference to Exhibit 10.53 of
         the Company's 1996 Form 10-K.

  10.5   Conversion Agreement, dated May 10, 1996, between
         Urohealth Systems, Inc. and FoxMeyer Corporation.
         Incorporated by reference to Exhibit 10.49 of the
         Company's 1996 Form 10-K.

  10.6   Warrant to Purchase Common Stock of Urohealth Systems,
         Inc. issued to FoxMeyer Corporation entitling the holder
         to purchase 800,000 shares of Common Stock of the
         Company at $6.875 per share. Incorporated by reference
         to Exhibit 10.50 of the Company's 1996 Form 10-K.

  10.7   Warrant to Purchase Common Stock of Urohealth Systems,
         Inc. issued to FoxMeyer Corporation entitling the holder
         to purchase 250,000 shares of Common Stock of the
         Company at $10.00 per share. Incorporated by reference
         to Exhibit 10.51 of the Company's 1996 Form 10-K.

  10.8   Warrant issued to Banque Indosuez, New York Branch, on
         November 12, 1995, to purchase 366,667 shares of Common
         Stock of the Company at an exercise price of $9.15 per
         share, subject to adjustment, expiring November 22,
         2000. Incorporated by reference to Exhibit 10.16 of the
         Company's Quarterly Report on Form 10-Q for the period
         ended December 31, 1995.

  10.9   Warrant issued to Silicon Valley Bank on October 19,
         1995 to purchase 50,000 shares of Common Stock of the
         Company at an exercise price of $10.50 per share.
         Incorporated by reference to Exhibit 10.29 of the
         Company's Registration Statement on Form S-4 (No.
         33-99976).

  10.10  Warrant issued to Silicon Valley Bank on April 25, 1995
         to purchase 16,667 shares of Common Stock of the Company
         at an exercise price of $6.00 per share. Incorporated by
         reference to Exhibit 10.7 of the Company's Quarterly
         Report on Form 10-Q for the period ended March 31, 1995.

  10.11  Registration Rights Agreement, dated October 19, 1995,
         between Urohealth Systems, Inc. and Silicon Valley Bank.
         Incorporated by reference to Exhibit 10.30 of the
         Company's Registration Statement on Form S-4 (No.
         33-99976).
</TABLE>






<PAGE>   70
<TABLE>
<CAPTION>
                                                                   SEQUENTIALLY
EXHIBIT                                                              NUMBERED
NUMBER                      DESCRIPTION                                PAGE
-------                     -----------                                ----
<S>     <C>                                                         <C>
  10.12  Antidilution Agreement, dated October 19, 1995, between
         Urohealth Systems, Inc. and Silicon Valley Bank.
         Incorporated by reference to Exhibit 10.31 of the
         Company's Registration Statement on Form S-4 (No.
         33-99976).

  10.13  Promissory Note, dated November 27, 1996, from Charles
         A. Laverty in favor of Urohealth Systems, Inc. Incorporated  
         by reference to the Company's Quarterly Report on Form 10-Q 
         for the period ended December 31, 1996.

  10.14  Commercial Lease, dated February 1, 1995, between
         Urohealth Systems, Inc. and Osbon Partnership relating
         to urology division operations in Augusta, Georgia.
         Incorporated by reference to Exhibit 10.12 of the
         Company's Quarterly Report on Form 10-Q for the period
         ended December 31, 1995.

  10.15  Office Space Lease, dated January 27, 1996, between
         Urohealth Systems, Inc. and The Irvine Company with
         respect to the corporate offices of the Company in
         Newport Beach, California. Incorporated by reference to
         Exhibit 10.58 of the Company's 1996 Form 10-K.

  10.16  First Amendment to Lease, dated April 25, 1997, between
         Urohealth Systems, Inc. and The Irvine Company.
         Incorporated by reference to Exhibit 10.16 of the
         Company's 1997 Form 10-K.

  10.17  Standard Industrial/Commercial Single Tenant Lease, dated
         December 6, 1993 between a wholly-owned subsidiary of the
         Company and Redhill-Fischer Business Park relating to
         Costa Mesa manufacturing facility. Incorporated by
         reference to Exhibit 19 of the Company's Quarterly Report
         on Form 10-Q for the period ended December 31, 1993.

  10.18  Urohealth 1994 Stock Incentive Plan, as amended through
         August 9, 1996.* Incorporated by reference to Exhibit
         10.18 of the Company's 1997 Form 10-K.

  10.19  1996 Directors' Stock Incentive Plan* Incorporated by
         reference to Exhibit 10.19 of the Company's 1997 Form
         10-K.

  10.20  Non-Employee Directors Stock Option Plan, as amended on
         December 29,1995.* Incorporated by reference to Exhibit
         10.2 of the Company's Quarterly Report on Form 10-Q for
         the period ended December 31, 1995.

  10.21  1992 Employee Stock Option Plan. * Incorporated by
         reference to Exhibit 4 of the Company's Registration
         Statement on Form S-8 (No. 33-59916).

  10.22  1992 Stock Plan of Advanced Surgical, Inc.* Incorporated
         by reference to Exhibit 10.3 of the Company's Quarterly
         Report on Form 10-Q for the period ended December 31,
         1995.

  10.23  Amended and Restated Employment Agreement, dated April
         1, 1996, between Urohealth Systems, Inc. and Charles A.
         Laverty.* Incorporated by reference to Exhibit 10.7 of
         the Company's 1996 Form 10-K.

  10.24  Employment Agreement, dated November 30, 1995, between
         Urohealth Systems, Inc. and M. Cassandra Hoag.*
         Incorporated by reference to Exhibit 10.8 of the
         Company's 1996 Form 10-K.

  10.25  Employment Agreement, effective as of November 30, 1995,
         between Urohealth Systems, Inc. and Bruce A. Hazuka.*
         Incorporated by reference to Exhibit 10.9 of the
         Company's Quarterly Report on Form 10-Q for the period
         ended December 31, 1995.

  10.26  Employment Agreement, effective as of November 30, 1995,
         between Urohealth Systems, Inc. and Kevin M. Higgins.*
         Incorporated by reference to Exhibit 10.10 of the
         Company's Quarterly Report on Form 10-Q for the period
         ended December 31, 1995.
</TABLE>






<PAGE>   71
<TABLE>
<CAPTION>
                                                                   SEQUENTIALLY
EXHIBIT                                                              NUMBERED
NUMBER                      DESCRIPTION                                PAGE
-------                     -----------                                ----
<S>     <C>                                                         <C>
  10.27  Employment Agreement, dated January 2, 1996, between
         Urohealth Systems, Inc. and Michael Schuler.*
         Incorporated by reference to Exhibit 10.29 of the
         Company's 1997 Form 10-K.

  10.28  Employment Agreement, dated August 14, 1996, between
         Urohealth Systems, Inc. and Richard Newhauser.
         Incorporated by reference to Exhibit 10.31 of the
         Company's 1997 Form 10-K.

  10.29  Consulting Agreement, dated August 14, 1996, between
         Urohealth Systems, Inc. and Richard Newhauser.
         Incorporated by reference to Exhibit 10.32 of the
         Company's 1997 Form 10-K.

  10.30  Purchase Money Secured Promissory Note, dated August 15,
         1996, of Urohealth Systems, Inc., as amended, in favor
         of Newhauser Associates. Incorporated by reference to
         Exhibit 10.33 of the Company's 1997 Form 10-K.

  10.31  Promissory Note, dated April 2, 1997, between Charles A.
         Laverty and Urohealth Systems, Inc. Incorporated by
         reference to Exhibit 10.35 of the Company's 1997 Form
         10-K.

  10.32  Credit Agreement, dated December 31, 1997, between BT
         Commercial Corporation, as agent, and the Company and
         its subsidiaries. Incorporated by reference to Exhibit
         10.1 of the Company's Quarterly Report on Form 10-Q for
         the quarter ended December 31, 1997, as filed with SEC
         on February 13, 1998.

  10.33  Employment Agreement, dated October 13, 1997 between the
         Company and Michael A. Montevideo*

  10.34  Employment Agreement, dated November 12, 1997, between the
         Company and Randall L. Condie*

  21.1   Subsidiaries

  23.1   Consent of Deloitte & Touche LLP

  23.2   Consent of Ernst & Young LLP

  23.3   Consent of PricewaterhouseCoopers LLP

  23.4   Consent of PricewaterhouseCoopers LLP

  24.1   Power of Attorney (included on signature pages)

  27.1   Financial Data Schedule
</TABLE>

----------

 * Management or compensatory plan