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

                            ______________________

                                  FORM 10-KSB
(MARK ONE)
              [X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
                    OF THE SECURITIES EXCHANGE ACT OF 1934
                  For the fiscal year ended December 31, 1998

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

                    For the transition period from      to

                       Commission File Number : 1-11765

                                  MEDJET INC.
             (EXACT NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)

      DELAWARE                                           22-3283541
(STATE OR OTHER JURISDICTION OF                             
 INCORPORATION OR ORGANIZATION)      (I.R.S EMPLOYER IDENTIFICATION  NO.)

                    1090 KING GEORGES POST ROAD, SUITE 301
                           EDISON, NEW JERSEY 08837
                   (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

      Registrant's telephone number, including area code: (732) 738-3990
                                        
          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
                                     NONE
          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
              UNITS, EACH CONSISTING OF ONE SHARE OF COMMON STOCK
                            AND ONE CLASS A WARRANT
                    COMMON STOCK, PAR VALUE $.001 PER SHARE
                               CLASS A WARRANTS

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

     Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB [X].

     Issuer's revenues for the fiscal year ended December 31, 1998 were
$500,000.

     The aggregate market value of the voting stock held by non-affiliates of
the Issuer as of March 31, 1999 was approximately $2,001,084.

      As of March 31, 1999, 3,881,158 shares of the Issuer's Common Stock, par
value $0.001 per share, were outstanding. 

               _________________________________________________
                    
                     DOCUMENTS INCORPORATED BY REFERENCE.

     Proxy Statement for the 1999 Annual Meeting of Stockholders (to be filed
with the Securities and Exchange Commission on or before April 30, 1999) is
incorporated by reference in Part III hereof.

     Transitional Small Business Disclosure Format (check one): Yes____ No X.
                                                                          ---
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                               TABLE OF CONTENTS
                               -----------------

<TABLE> 
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                                                                Page
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PART I                                                                 
<S>                                                             <C>  
ITEM I.  DESCRIPTION OF BUSINESS................................  3
     OVERVIEW...................................................  3
     APPLICATIONS OF COMPANY TECHNOLOGY.........................  4
          OPHTHALMOLOGY.........................................  4
          DENTAL................................................  5
     PATENTS....................................................  9
     FDA REGULATION.............................................  9
     OTHER U.S. GOVERNMENT REGULATION........................... 11
     FOREIGN GOVERNMENT REGULATION.............................. 11
     COMPETITION................................................ 12
     EMPLOYEES.................................................. 13
     PRODUCT LIABILITY INSURANCE................................ 13
ITEM 2.  DESCRIPTION OF PROPERTY................................ 14
ITEM 3.  LEGAL PROCEEDINGS...................................... 14
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.... 15

PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED
         STOCKHOLDER MATTERS.................................... 16
ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
         OPERATION.............................................. 18
ITEM 7.  FINANCIAL STATEMENTS................................... 29
ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
         ACCOUNTING AND FINANCIAL DISCLOSURE.................... 45

PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
         CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF
         THE EXCHANGE ACT....................................... 45
ITEM 10. EXECUTIVE COMPENSATION................................. 45
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
         AND MANAGEMENT......................................... 45
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......... 45
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K....................... 45
</TABLE>

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This annual report contains forward-looking statements within the meaning of the
federal securities laws. These include statements about our expectations,
beliefs, intentions or strategies for the future, which we indicate by words or
phrases such as "anticipate," "expect," "intend," "plan," "will," "we believe,"
"the Company believes," "management believes," and similar language. The
forward-looking statements are based on our current expectations and are
subject to certain risks, uncertainties and assumptions, including those set
forth in the discussion under "Description of Business" and "Management's
Discussion and Analysis or Plan of Operation." Our actual results may differ
materially from results anticipated in these forward-looking statements. We
base our forward-looking statements on information currently available to us,
and we assume no obligation to update them.

                                     PART I
                                        
ITEM I.  DESCRIPTION OF BUSINESS.

OVERVIEW

Medjet Inc. (the "Company"), is engaged in research and development of medical
technology. The plan for the Company has been to develop products based on its
platform technology and then to license these until its income is adequate to
support manufacturing and marketing activities on new products. The initial
emphasis has been on ophthalmic surgical technology and equipment. The Company
has developed a proprietary technology and derivative devices for vision-
correction surgery of the cornea. The Company's technology platform is based on
small-diameter, fluid microjets moving at various speeds above supersonic,
depending on the specific application. For cutting, the beam is scanned across
the tissue to be cut. In each application, the scanned microjet beam substitutes
for conventional, metal, sapphire or diamond oscillating blades, or lasers.

The Company is in the development stage and has not sold any products. To date,
the Company's research and development activities on vision correction have been
limited to constructing and testing experimental versions of microkeratomes for
eye surgery and conducting a limited number of feasibility studies using
porcine, rabbit and human cadaver eyes and live animals to prove that the beam
of water can smoothly incise and shape the anterior surface of the cornea and
that the cornea will heal properly after the surgery. Human blind eye trials are
anticipated to begin in the third quarter of 1999.

On July 23, 1998, the Company entered into an agreement with Nestle S.A.
("Nestle") pursuant to which the Company granted Nestle and its wholly-owned
subsidiary, Alcon Laboratories, Inc. ("Alcon" or "Licensee"), an exclusive,
worldwide license for the use of the Company's proprietary microjet technology
for corneal refractive surgery. Under the terms of the agreement ("Agreement"),
Alcon will register, manufacture, promote and market refractive microjet devices
and consumables developed by the Company. In connection with the execution of
the Agreement, a payment in the amount of $500,000 was made by Alcon to the
Company. The Agreement also provides for future payments based on the attainment
of certain milestones, provides for minimum royalty payments starting in the
year 2000, and provides for royalties upon sales by Alcon of the Company's
products. During March 1999, the Agreement was amended and Alcon agreed to make
additional payments to the Company to cover the cost of the transfer to Alcon of
the Company's technology, some of which will be credited against future
royalties owed to the Company. The transfer process is moving forward.

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The Licensee has not yet obtained clearance or other marketing approval for the
devices covered by the Agreement, and the timing and amount of any future
royalty payments to the Company under the Agreement will depend upon the
Licensee's success in obtaining such clearances or approvals and certain other
events, which cannot be predicted with any certainty. The Company believes the
potential cash flow from royalties should be adequate to support development of
additional products and possibly allow for their manufacture, promotion and
marketing, if that proves to be a better choice than licensing.

The Company has filed a patent application and is evaluating the potential use
of waterjets for treatment of dental caries. Initial feasibility tests have been
promising and the Company believes this development program may yield a product
with significant market potential. See "Management's Discussion And Analysis Or
Plan Of Operation."

The Company was incorporated under the laws of the State of Delaware on December
16, 1993. Its offices are located at 1090 King Georges Post Road, Suite 301,
Edison, New Jersey 08837; its telephone number is (732) 738-3990.

APPLICATIONS OF COMPANY TECHNOLOGY

The Company believes that the microjet produces less tissue trauma and is
potentially more accurate than blades or lasers for tissue separation or
removal. The Company also believes that such microjets will bring new surgical
capability and performance to the clinic or operating room and may become the
standard of care for the treatment of several diseases and conditions. The
Company's current focus has been on applications in ophthalmology but believes
that its proprietary microjet technology has additional surgical applications.
Although only limited studies of such other applications have been carried out
to date, specific applications currently being investigated include
ophthalmology and dentistry. The Company intends to develop additional product
applications, provided adequate funds are generated from the Alcon Agreement or
other sources.

OPHTHALMOLOGY

DISEASES OF THE CORNEA AND THERAPEUTIC TREATMENT. The cornea is the clear window
that, in addition to allowing light into the eye for the purpose of vision,
provides most of the focusing power of the vision system of the eye. The
anterior surface of the cornea is covered with a thin layer called the
epithelium. Although the epithelium has no blood cells, it has nerve cell
endings which can be a source of pain in the cornea.

FIRST PRODUCT; REMOVAL OF EPITHELIUM. The Company has demonstrated that its
technology can be used to remove the epithelium, a procedure called hydro-
epithelial keratoplasty ("HEK"). HEK may be used to treat diseases of the
epithelium or damage to the epithelium that sometimes occurs. Epithelial removal
is often the first step in surgery of the cornea. It may be used beneficially as
the first step in the currently-used laser vision correction or refractive
surgery technique known as photo-refractive keratectomy ("PRK"). Management
believes that the HEK procedure is superior to currently used techniques.
However, interest in PRK has waned along with the growing enthusiasm for a
modified form of the PRK technique. The device to carry out HEK procedures, the
Hydrobrush(TM) Keratome, has been cleared for marketing by the FDA. However, the
Company has decided to postpone indefinitely the introduction of this product

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because of cash constraints (see "Management's Discussion and Analysis or Plan
of Operation") and the limited market currently foreseen for this application.

SECOND PRODUCT; THERAPEUTIC APPLICATION OF THE MICROJET MICROKERATOME.
Approximately 40,000 corneal procedures, primarily full transplants, are
performed annually in the United States. The Company believes that the microjet
microkeratome would allow Hydro Therapeutic Keratoplasty ("HTK"), partial
transplants, which would be more desirable and safer than full transplants. HTK
may also be used to create a uniform thickness flap of corneal tissue as the
first step in a current modification of the PRK technique known as the Laser
Ablation System for In-situ Keratomileusis ("LASIK"). Currently, the flap is
made by blade-based microkeratomes which, in management's view, are somewhat
unsafe, difficult to learn and, despite great success for LASIK, have limited
its use as an alternate to PRK.

The Company's microjet-based microkeratome is known as the HydroBlade(TM)
Keratome. In the therapeutic application of the HTK microkeratome, the thickness
and diameter of the removed tissue can be predetermined. The smooth and precise
cut of the HTK microkeratome allows for relatively simple positioning of the
replacement (donor) tissue after removal of the targeted tissue and relatively
quick healing. Partial transplants greatly reduce rejection effects and allow
use of donors over age 65, thereby increasing the donor pool.

THIRD PRODUCT; REFRACTIVE DISORDERS AND CORRECTION. A subsequent and potentially
more commercially valuable use of the HydroBlade(TM) Keratome is for refractive
surgery through Hydro Refractive Keratoplasty ("HRK"). Subsequent to the
permitted marketing of the HydroBlade(TM) Keratome for HTK, the Licensee intends
to seek FDA clearance to market the device for HRK. Upon clearance or other
marketing approval by the FDA of the HydroBlade(TM) Keratome for HRK, Alcon
would be responsible for marketing this product to individual or affiliated
groups of ophthalmologists for treatment of patients in a clinical setting. The
Company expects to derive its early income from royalties on Licensee's revenue
derived by selling a basic system and disposables.

DENTAL

FOURTH PRODUCT. Based on the Company's product development criteria, the next
area identified for development is treatment of dental caries. The dental caries
is a progressive, infected and decayed portion of a tooth. A break in the enamel
allows the dentin making up the hard portion of the tooth to be infected.
Unchecked, the decayed region enlarges, leading to nerve involvement, pain,
temperature sensitivity, and ultimately loss of the structural integrity of the
tooth. The standard treatment for a dental caries is to remove all the decayed,
infected portion within the dentin and to fill the resulting cavity. The removal
process involves drilling out the affected area of the tooth until only sound
dentin remains. More recently, dental lasers are coming into use.

It is frequently necessary to use local anesthesia to avoid pain or the fear of
pain. Administration of anesthesia takes preparation, requires time and adds to
the cost. The area surrounding the treated tooth is numb following the
procedure. Patient apprehension is frequently high and treatment is sometimes
delayed for that reason. Not all regions of the tooth are readily accessed by
the drill or laser.

Based on its limited experiments to date, the Company believes that the decayed
and infected tissue within the cavity of a tooth, the caries, can be removed
without damage to the surrounding

                                       5
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sound dentin by directing a coherent microjet of the appropriate parameters into
the volume of the caries. The Company has observed that this destroys the caries
and washes it out. Although it has not yet been confirmed on live patients, the
Company believes that the treatment, if perfected, may require no anesthesia in
many circumstances and that the associated time and cost saving and the
perceived advantages of the microjet technique over traditional treatments are
potentially significant.

A patent application has been filed and a preliminary associated handpiece and
pump have been constructed. Based on its own internal market study, the Company
believes that a significant market potentially exists for this procedure and
product.

TECHNOLOGY FOR OPHTHALMOLOGY. A scanned circular beam is used for shaving thin,
shaped layers from the cornea in a procedure known as lamellar keratoplasty or
keratomileusis. The device normally used to perform lamellar keratoplasty is
known as a blade microkeratome. The procedure with the new microjet
microkeratome potentially may be used to treat diseases of the cornea as well as
to correct vision deficiencies such as nearsightedness ("myopia"),
farsightedness ("hyperopia") or astigmatism, eliminating or reducing the need
for spectacles or contact lenses. Internal layers of the cornea, either parallel
or shaped (resembling contact lenses), are excised in order to reshape the
anterior cornea surface to achieve close-to-ideal focusing. In combination with
a template of prescribed dimensions and shape, and setting the scanning speed of
the microjet, the shape of the layer to be removed can be determined in advance.

The Company's HydroBlade(TM) Keratome, which consists of a microjet nozzle and a
globe fixation device, is used with a miniature high pressure system. It
operates at a pressure of 20,000- to 25,000-psi. In this case, scanning across
the cornea is accomplished by sliding the microjet nozzle within the globe
fixation device. The Company believes that the HydroBlade(TM) Keratome, when
used in HTK, would be used similarly to other microkeratomes but would allow for
safe removal of layers of corneal tissue of a predetermined shape and thickness
with a higher degree of accuracy and far less tissue damage. This has already
been demonstrated on cadaver eyes. The licensee, Nestle and its subsidiary Alcon
Laboratories, Inc., intends to perform ease-of-use clinical trials and then to
submit a Section 510(k) notification for a ruling of substantial equivalence to
current microkeratomes, which may result in permission for Alcon to market the
HydroBlade(TM) Keratome for HTK.

In combination with other elements of the Company's devices, a fan shaped
microjet beam is capable of removing the epithelium (the front surface of the
eye), without damaging the underlying Bowman's layer, in a procedure known as
epithelial keratoplasty. Although scalpels are normally used to scrape away the
epithelium in treating disorders or damage to the epithelium, they may damage
the Bowman's layer.

TECHNICAL BACKGROUND. The human eye consists of a hollow, flexible globe
approximately 25 millimeters in diameter, which is filled with a vitreous fluid.
The optical part of the eye functions much like an automatic focus video camera,
incorporating a variable focus lens system (the fixed focus cornea and the
variable focus internal lens) which adjusts the sharpness of the image on the
retina, a variable aperture system (the iris) which regulates the amount of
light falling on the retina, and a sensory array (the retina) which converts the
focused image into electrical signals which are transmitted through the optic
nerve to the brain for image processing and storage to achieve the best image.
Approximately 70% of the focusing power of the eye resides in the cornea. The
precise focusing power of the cornea is a function of the curvature of the
anterior corneal surface. The internal lens of the eye also has focusing power
and the ability to adjust its

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focusing power to achieve the best focus for near or far objects; however, its
ability to so adjust is limited and tends to decrease with age, ultimately
disappearing.

Most common refractive problems result from an inability of the optical system
of the eye to focus images on the retina properly with normal accommodation. The
extent of this inability to focus an image of an object at a distance of 20 feet
is known as refractive error. For instance, in the nearsighted eye, light rays
from an object at a distance of 20 feet focus in front of the retina, because
the curvature of the cornea is too great. People with uncorrected myopia see
nearby objects clearly, but distant objects appear blurry, even with
accommodation. Conversely, in the uncorrected farsighted eye, light rays from an
object at a distance of 20 feet focus behind the retina because the curvature of
the cornea is too low. People with hyperopia see distant objects clearly, but
may need correction so that nearby objects do not appear blurry. In the
astigmatic eye, the curvature of the cornea is not uniform. This lack of uniform
curvature makes it impossible for a person to focus clearly on an object at any
distance without correction.

Refractive power is measured in diopters. The current ophthalmic measurement
technology and the techniques for manufacturing eyeglasses and contact lenses
can at its best produce a refractive correction that is within +/- 1/2 diopter
of the optimum value for ideal vision. This residual error is generally viewed
as acceptable for all purposes by ophthalmologists.

Vision disorders are currently treated primarily by eyeglasses, contact lenses
or surgery, all of which compensate for the existing refractive error. Among the
surgical techniques available to treat vision disorders are radial keratotomy
("RK"), PRK/LASIK and keratomileusis in situ ("KIS"). In RK, PRK/LASIK and KIS,
the object of the surgery is to change the shape of the anterior corneal
surface, thereby eliminating or reducing refractive error. PRK and LASIK are by
far the dominant procedures.

PRK uses energy from a type of ultraviolet laser, known as an "excimer laser,"
to correct various types of refractive disorders by changing the curvature of
the anterior corneal surface. The excimer laser emits ultraviolet light in very
short, high energy pulses and "photo-ablates," or vaporizes, part of the
anterior corneal surface to achieve a new curvature. PRK has been approved for
use in the United States by the FDA for the correction of low to moderate
myopia, hyperopia and astigmatism.

In the LASIK technique, the corneal flap is pulled back, and photo-ablation is
performed directly on the exposed stromal surface to change its curvature. In
both KIS and LASIK, the hinged flap is reset as closely as possible to its
original position, where it adheres to the underlying stroma. Cutting errors in
making the flap, occurring in a substantial fraction of the procedures, are a
disadvantage of LASIK. PRK and LASIK produce corrections that are usually not
optimum, typically leaving the eye within +/- 1 diopter of optimum, but
sometimes worse. The corrections generally are not stable to within 1 diopter.
This leaves the patient able to function without eyeglasses or contact lenses
but not with the best possible vision and not under all conditions. See
"Competition."

In HRK, using the HydroBlade(TM) Keratome, a single, hair-thin, supersonic water
beam with a diameter of approximately 33 microns incises corneal material while
a disposable template supports and shapes the cornea during surgery. Other parts
of the HRK microkeratome include a miniature high pressure water storage element
and related equipment, which together produce the water beam; a scanning
mechanism to move the water beam across the cornea; and a template designed to
support and shape the eye during surgery. The HRK microkeratome will be

                                       7
 
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placed on the patient's eye during the surgical procedure. Once the HRK
microkeratome is placed into position on the eye (directly over the area to be
incised), to which it is attached by a globe fixation device (a suction device
to align and fix the eye in place relative to a defining template and the
microjet parts during surgery), the surgical cut takes less than one second. The
total water volume used during the procedure, including the amount necessary to
check the microjet beam and its performance, is less than a few drops. The
Company believes that the thickness uniformity, the thickness control, and the
roundness of the flap of the microjet microkeratome are substantially superior
to the blade devices.

HRK can be done by four methods. In the first method, HRK1, a shaped slice of
corneal tissue is removed without damage to the rest of the cornea. The shape
and size of the removed portion corresponds to the error in refractive power of
the cornea to be corrected, having the effect of the permanent removal of the
equivalent of a contact lens. This is akin to PRK. In the second method, HRK2, a
hinged flap is cut into the cornea and the underlying tissue is reshaped before
the flap is replaced. The HRK microkeratome may be used to make the second,
shaping cut or PRK may be used for shaping. In the third method, HRK3, the one
the Company intends to exploit, the cut used to make the flap also shapes the
underside of the flap and stromal bed to produce the desired correction. With a
single cut lasting about 1 second, the entire procedure is complete. No laser is
required. The Company believes that the third method is the simplest and safest
and initially intends to seek FDA permission to market, or other approval, with
respect to that method alone. A variation of the HRK3 procedure (HRK4)
potentially allows even higher accuracy. Additional patents have been filed for
these procedures.

PATENTS AND LICENSES. The Company has obtained U.S and international patents on
the method and device for HTK and HRK and other patents, including one relating
to HEK. Other of the Company's patents are pending. To the Company's knowledge,
no other relevant patents have issued to others in this field and the Company
believes that its patent position is strong. See "Legal Proceedings."

Alcon may distribute the Company's products internationally. Distribution of the
Company's products in countries other than the United States may be subject to
regulation in those countries. In some countries, the regulations governing such
distribution are less burdensome than in the United States and Alcon may pursue
marketing its products in such countries prior to receiving permission to market
from the FDA. Alcon will endeavor to obtain the necessary government approvals
in those foreign countries where the Company decides to manufacture, market and
sell its products. See "Foreign Government Regulation."

DETAILED DISCUSSION. Through December 31, 1998, the Company has spent
approximately $7,000,000 in its efforts to make products based on microjet
technology commercially available. Such expenditures include research and
development costs and expenses related to the HydroBrush(TM) Keratome and the
HydroBlade(TM) Keratome. Research and development activities have consisted of
developing, designing and constructing experimental versions of the Company's
keratomes, and, since July 1994, conducting feasibility studies on over 2,000
porcine and rabbit corneas, dozens of human cadaver eyes and dozens of live
rabbits. The purpose of the feasibility studies was to determine if the microjet
beam could smoothly incise and shape the anterior surface of the cornea and to
determine if the incised eye would heal. A second major objective has been to
establish that HRK3 produces a full range of refractive corrections.

The Company has been highly satisfied with the results of the feasibility
studies conducted to date. Specifically, the Company, using light and electron
microscopes, has compared the cuts

                                       8
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made by the microjet scalpel with cuts made by scalpels and lasers in other
refractive surgical procedures. The Company believes that the cuts made by the
microjet scalpel are cleaner and much less damaging than those made by
conventional scalpels and lasers. The Company has found the corneal flaps
created by the HTK microkeratome to be extremely close to parallel, as desired,
and of the desired thickness (approximately 157 +/- 2 microns). The Company also
found the shape of the cut stromal bed to be the desired spherical shape and the
restored flap to fit the stromal bed with no discernable disparity in size or
alignment. A full range of myopic, hyperopic and astigmatic corrections have
been demonstrated. The Company's studies on rabbits have also shown that HRK
incisions heal with much less wound healing response and haze than results from
PRK removals.

The Company has constructed prototypes of a microkeratome designed for use in
surgery on non-human primates and humans in a clinical setting.

PATENTS

The Company has sought to protect its proprietary interest in the HRK
microkeratome by applying for patents in the United States and corresponding
patents abroad. In September 1994, a U.S. patent application was filed in the
name of Dr. Eugene I. Gordon and two employees of the Company, as inventors,
which application was assigned to the Company. See "Legal Proceedings." The U.S.
patent was issued on September 17, 1996 and covers a method and device for use
of the HRK microkeratome, including use of a template for corneal shaping and
holding, during use of a microjet microkeratome device. A corresponding
international application has been filed, pursuant to the Patent Cooperation
Treaty ("PCT"), with designation of all member countries foreign to the United
States, including but not limited to Japan, the members of the European Patent
Office, Canada, Mexico, Australia, Russia, China and Brazil. The PCT filing was
published on October 16, 1996 and separate patent applications have been filed
pursuant to the PCT filing. Some have issued. In addition, for countries not
currently part of the PCT, patent applications have also been filed in Israel,
Taiwan and South Africa. A related U.S. patent has issued on November 10, 1998.
The U.S. patent relating to topographic corneal mapping, which has utility for
surgery utilizing the HRK microkeratome, was issued to the Company on January
19, 1999. A patent application for the HydroBrush(TM) Keratome for HEK use has
issued. Other U.S. patents on HRK3 and templates have been filed. A patent
application has been filed for the treatment of dental caries. There is no
assurance, however, that any additional patents will issue or that any issued
patents will afford significant protection from competition.

FDA REGULATION

The components of the Company's HTK microkeratome and HRK microkeratome are
medical devices. Accordingly, the Company is subject to the relevant provisions
and regulations of the Federal Food, Drug, and Cosmetic Act (the "FD&C Act"),
under which the FDA regulates the manufacturing, labeling, distribution, and
promotion of medical devices in the United States. The FD&C Act provides that,
unless exempted by regulation, medical devices may not be commercially
distributed in the United States unless they have been approved or cleared by
the FDA. There are two review procedures by which medical devices can receive
such approval or clearance. Some products may qualify for clearance under a
510(k) notification. Pursuant to that procedure, the manufacturer submits to the
FDA a pre-market notification that it intends to begin marketing its product.
The notification must demonstrate that the product is substantially equivalent
to another legally marketed product (i.e., that it has the same intended use and
that it

                                       9
<PAGE>
 
is as safe and effective as, and does not raise different questions of safety
and effectiveness than does, a legally marketed device). In some cases, the
510(k) notification must include data from human clinical studies. In March
1995, the FDA issued a draft guidance document in connection with 510(k)
notifications for medical devices, "Addendum: How to Submit a Premarket
Notification [(510(k)]," which states that clinical data is not needed for most
devices cleared by the 510(k) process. However, the Company anticipates that the
FDA will require submission of human clinical trial ease-of-use data in
connection with the Company's 510(k) notifications.

A successful 510(k) notification results in the issuance of a letter from the
FDA in which the FDA acknowledges the substantial equivalence of the reviewed
device to a legally marketed device and clears the reviewed device for marketing
to the public. The Company has received successful 510(k) notification with
respect to its device to carry out HEK procedures. Under FDA regulations, the
FDA has a 90-day period to respond to a 510(k) notification, although such
response has been known to take longer.

Based on a recommendation from the FDA, the Company's Licensee intends to file a
510(k) notification in 1999 in which it will seek to demonstrate that the HTK
microkeratome is substantially equivalent to the currently available
microkeratomes having a metal or diamond scalpel used for two types of lamellar
keratoplasty. Under current FDA regulations, a microkeratome is defined as a
device for shaving thin layers from the cornea and is classified as a Class I
device, for which the simplest and quickest clearance process is available. The
Company and the Licensee will seek to demonstrate that, for the purpose of
making lamellar, or substantially lamellar, corneal incisions, the microjet
scalpel and template included in the HTK microkeratome are substantially similar
to a microkeratome with a metal or diamond scalpel.

The FDA has recommended to the Company that it seek permission to market the HTK
microkeratome through a Section 510(k) notification together with ease-of-use
data resulting from a small clinical trial. An investigational device exemption
(IDE) will not be required. It is the intention of the Licensee to file a
notification with the FDA in the second half of 1999 relating to use of the HTK
microkeratome. Although there can be no assurance that this will prove to be the
case, permission granted for the 510(k) notification should enable the
commencement of marketing efforts shortly thereafter. The time required would be
far less than if the Company or its Licensee had to submit to the FDA a pre-
market approval ("PMA") application. To obtain FDA clearance of a 510(k)
notification, a company must prove its device is substantially similar to a
marketed product and that the device is safe. PMA applications must demonstrate,
among other matters, that the device is safe and effective. Although human
clinical trial data is sometimes required to be submitted with a 510(k)
notification, a PMA application is typically a more complex submission which
usually includes the results of clinical studies, and preparing an application
is a detailed and time-consuming process. Once a PMA application has been
submitted, the FDA's review may be lengthy and may include requests for
additional data.

Although the therapeutic uses described above are the initial intended uses for
its two devices, the Company and its Licensee intend that other uses be made of
the microjet microkeratome. One such use, for which the Company believes the
potential market could be significant, is for refractive surgical correction.
Therefore, the later phase of the FDA strategy relates to the HRK microkeratome.
Although the Company believes that the HRK microkeratome may be considered for
permission to market by the FDA through a 510(k) notification based upon the
similarities of the microkeratome between the HTK use and the HRK use, obtaining
such permission for the HRK microkeratome is likely to be somewhat more
complicated than for HTK. There can be no assurance that either the HTK use or
the HRK use will be permitted for

                                      10
<PAGE>
 
marketing by the FDA. The differences between the two uses are found in the
components, other than the microjet scalpel, which comprise the microkeratome.
For the HRK microkeratome, the Company may be required to show that the
procedure is effective, stable and does not decrease visual acuity to any
significant extent.

The Company believes that, based on two features of the HRK microkeratome, it
may also be considered for 510(k) notification by the FDA. First, based on the
preliminary experimentation conducted with microjet microkeratomes, there are no
known or anticipated physical or chemical processes that would impact on the
safety of the HRK procedure. The microjet microkeratome cuts by mechanisms
similar to that of conventional scalpels (although at speeds of more than 10
times greater), except that the Company believes that HRK would not produce
certain side effects incident to other refractive surgery procedures. Such side
effects include the inferior cut produced by the oscillating blade used in
conventional microkeratomes, and the potential carcinogenic effects, dehydration
from overheating and high amplitude shock waves to the eye resulting from the
high energy, pulsed radiation used in the PRK/LASIK procedure. LASIK could
represent the strongest competition to HRK. As a result of the anticipated
safety issues, the FDA approval process for PRK involved numerous clinical
studies on human eyes and took several years to complete. The Company believes
that the FDA approval process for the HRK microkeratome should be shorter and
entail fewer clinical studies in light of the expected higher level of safety
and lack of anticipated side effects, in comparison to other previously
permitted products, but there can be no assurance that this will be the case.

The second feature of the HRK microkeratome is the benign nature of the microjet
cut. While a conventional scalpel tears the lamellae (layers of the stroma) and
PRK completely or partially destroys the surface lamellae, the microjet beam has
a unique cutting action which separates the various lamellae prior to cutting
the targeted tissue, thereby preserving the integrity of the remaining lamellae
and both localizing and minimizing the damage to the lamellae generally. The
healing process following a microjet cut is expected to be less traumatic than
that following a conventional scalpel cut or a PRK cut, as observed in rabbits,
although the improved healing process has not yet been demonstrated in human
eyes.

OTHER U.S. GOVERNMENT REGULATION

In addition to laws and regulations enforced by the FDA, the Company's products
may also be subject to labeling laws and regulations enforced by the Federal
Trade Commission. The Company is also subject to government regulations
applicable to all businesses, including, but not limited to, regulations related
to occupational health and safety, workers' benefits and environmental
protection.

FOREIGN GOVERNMENT REGULATION

Sales of medical devices outside the United States are subject to foreign
regulatory requirements that vary widely from country to country. The time
required to obtain approvals required by foreign countries may be longer or
shorter than that required for FDA approval, and requirements for licensing may
differ from FDA requirements. Export sales of investigational devices that have
not received FDA marketing clearance generally are subject to FDA export permit
requirements. Material failure to comply with any applicable regulatory
requirements could have a material adverse effect on the Company.

                                      11
<PAGE>
 
COMPETITION

The Company believes that primary competition for the HydroBlade(TM) Keratome
will be blade-based microkeratomes. Blades are mechanically scraped across the
cornea to accomplish the removal of the epithelium. Mechanical blades cut
diseased tissue intended for removal. The use of such blades requires a high
degree of skill and training and often does not produce satisfactory results.

If permitted or otherwise approved by the FDA and other regulatory authorities,
HRK, using the Company's HydroBlade(TM) Keratome, will compete with other
corrective means for refractive problems, including eyeglasses, contact lenses,
other refractive surgery procedures (such as RK, PRK and ALK), and other
technologies under development, such as LASIK, refractive intraocular lenses
(lenses which are inserted into the eye behind the cornea), intrastromal lenses
(lenses which are inserted into the stroma), corneal rings (transparent circles
of acrylic which are inserted within the cornea outside the vision zone in order
to correct the curvature of the corneal surface) and injection of hydrogel
materials into layers of corneal tissue to change the curvature of the cornea.
The healthcare field is characterized by rapid technological change. At any
time, competitors may develop and bring to market new products or surgical
techniques with vision correction capabilities superior to those of the
Company's products or which would otherwise render the Company's products
obsolete.

Generally, refractive surgical techniques are considered to be "elective"
surgery and are typically not reimbursed under healthcare insurance policies in
the United States. However, in certain countries outside the United States, such
as China, the costs of refractive surgery are paid by the government, because it
is believed that such surgery is, over time, less costly than glasses or contact
lenses. It can be expected that many individuals will choose to forego
refractive surgery, if not reimbursed, and instead obtain eyeglasses or contact
lenses, which are covered under some healthcare insurance plans and are
considerably less expensive than refractive surgery in the short term.

Other companies are engaged in refractive surgery research. Two companies,
Summit Technology, Inc. ("Summit") and VISX Inc. ("VISX"), have received PMA
approval on PRK and are profitable. In addition to Summit and VISX, there are a
number of other large entities that currently market and sell laser systems
overseas for use in refractive surgery, including Aesculap-Meditec GmbH,
Technolas and Schwind, each of Germany, and Nidek of Japan. Many of these
companies have substantially greater financial, technical and human resources
than the Company and may be better equipped to develop, manufacture and market
their technologies. In addition, many of these companies have extensive
experience in preclinical testing and human clinical studies. These
qualifications are not the case with respect to Alcon. Certain of these
companies may develop and introduce products or processes competitive with or
superior to those of the Company.

Furthermore, with respect to any other products the Company may, in the future,
be permitted to commercially sell, it will also be competing with respect to
manufacturing efficiency and marketing capabilities, areas in which the Company
has no experience.

The Company's competition will be determined in part by those refractive surgery
technologies that are ultimately approved for sale by regulatory authorities.
The relative speed at which the Company and Alcon are able to develop the HRK
microkeratome, complete the necessary governmental and regulatory approval
processes, and manufacture and market commercial


                                      12
<PAGE>
 
quantities thereof will be important competitive factors. The Company is aware
of ongoing research at certain companies and institutions into a variety of
procedures for corneal adjustment, as noted above, and refractive surgery,
including microjet technology under development by Visijet (Surgijet) Inc.
Visijet (Surgijet) Inc. holds narrow, apparatus patents for certain microjet
technology utilized in connection with the treatment of cataracts and for HRK.
Although Visijet (Surgijet) Inc. has not yet commercialized any products, it is
possible that Visijet (Surgijet) Inc. or other companies will bring products to
market prior to such time, if ever, that the Company and its Licensee are able
to economically market commercial quantities of products.

Although the HRK microkeratome is still in the early stages of development and
has neither been tested on live human eyes nor received the regulatory approval
necessary for sale, the Company believes that Alcon has the potential to
effectively compete with other refractive surgical techniques because of its
relative simplicity, safety, efficacy and reduced risk of significant pain. In
addition, HRK is expected to be less costly than PRK/LASIK, because of the high
costs of the laser equipment and laser facility necessary for PRK/LASIK, and to
be competitively priced with, or less costly than, other refractive surgery
procedures.

EMPLOYEES

As of December 31, 1998, the Company had ten full-time employees, the majority
of whom were engaged in research and development activities. As of such date,
the Company also had consulting arrangements with one medical consultant and
one marketing consultant. The Company's ability to design, develop, manufacture,
market and sell its products successfully will depend to a large extent on its
ability to attract and retain qualified personnel, for which competition is or
may be intense. None of the Company's employees are represented by a union. The
Company believes that its relations with its employees are satisfactory.

PRODUCT LIABILITY INSURANCE

The use of medical devices, both in clinical and commercial settings, entails
the risk of allegations of product liability, and there can be no assurance that
substantial product liability claims will not be asserted against the Company.
The Company does not now have any product liability insurance, but it expects to
obtain such insurance prior to the commencement of clinical testing. However,
there can be no assurance that adequate insurance coverage will be available at
an acceptable cost, if at all. Consequently, a material product liability claim
or other material claims with respect to uninsured liabilities or in excess of
insured liabilities would have a material adverse effect on the Company.

                                      13
<PAGE>
 
ITEM 2.  DESCRIPTION OF PROPERTY.

The Company had been leasing approximately 7,358 square feet of research and
development, manufacturing and office space in Edison, New Jersey. The base rent
under this lease, which was to expire December 31, 1999, was $93,550 per year.
During February and March 1999, the Company renegotiated the terms of this
lease, returned the manufacturing space and a portion of the office space under
the lease, and entered into a new lease agreement for the approximately 4,982
square feet of research and development and office space remaining. Under the
terms of the new lease, which will expire December 31, 2004, the base rent is
$78,432 per year.

In 1998, the Company began conducting certain pre-clinical research and
development activities in facilities located at the Department of Veterans
Affairs New Jersey Health Care System, East Orange, New Jersey ("VANJHCS"). The
Company has agreed to pay fees to the VANJHCS based on the Company's usage of
the facility.

The Company believes the space currently available to it will be sufficient to
meet the Company's requirements for the foreseeable future.


ITEM 3.  LEGAL PROCEEDINGS.

On April 21, 1998, the Company was served with a complaint by the New Jersey
Institute of Technology ("NJIT") commencing a lawsuit in the United States
District Court for the District of New Jersey ("U.S. District Court"). Each of
the Company, Eugene I. Gordon, Ph.D. (the Company's Chairman and Chief Executive
Officer), a former employee of the Company, certain patent law firms and an
individual patent attorney were named as defendants. The complaint alleged that
the defendants, with deceptive intent, failed to name an NJIT professor and/or
NJIT research associate as a co-inventor on the Company's U.S. Patent No.
5,556,406 on the "Lamellar Surgical Device and Procedure" (the "Patent") and
breached fiduciary duties and contractual obligations owed to NJIT. The
complaint sought monetary damages from the Company and an order directing that
the Company's Patent (and corresponding foreign patents and patent applications)
be assigned and transferred to NJIT. It further sought an order that NJIT has
not infringed any claims of such Patent and a declaratory judgment that all of
the Company's claims under such Patent are invalid and unenforceable against
NJIT.

NJIT's patent application relating to a refractive corrective procedure based on
the use of an isotonic waterjet had previously been denied by the Patent and
Trademark Office as inoperable. NJIT also learned that a similar invention had
been made and disclosed publicly prior to the NJIT invention. NJIT did not
contest the ruling and did not pursue a U.S. patent until October 1996. That
patent has been allowed. The three inventors of the subject of such patent
application, one of which was Dr. Gordon, had assigned such patent application
to NJIT as part of a dispute settlement in which NJIT agreed to grant an
exclusive license to the Company of the patent rights under such patent
application. That license was terminated by the Company because the Company
believed that the device did not operate as claimed and could be harmful to the
patient. NJIT then claimed, without being specific, that the Company's Patent
emanated from the earlier invention. Prior to being served with the complaint by
NJIT, the Company and Dr. Gordon had

                                      14
<PAGE>
 
filed a complaint, on March 27, 1998, against NJIT in the Superior Court of the
State of New Jersey, Middlesex County, seeking a declaratory judgment that NJIT
had no ownership or other interest in the patent rights to the Company's Patent
and seeking certain monetary damages. NJIT removed the Company's lawsuit to the
U.S. District Court, seeking to have it consolidated with its lawsuit. The
Company moved to have its suit remanded to state court and to have the NJIT
lawsuit dismissed on the basis that the federal court lacked jurisdiction over
either action and that NJIT had not been harmed by the Company's Patent and
therefore could not challenge its validity.

During October 1998, the lawsuit brought in U.S. District Court by NJIT was
dismissed on jurisdictional grounds. In addition, the U.S. District Court also
held that NJIT improperly removed the Company's state court action and ordered
that action remanded to the state court. NJIT appealed the remand action and
appealed the dismissal of its lawsuit brought in U.S. District Court. These
appeals have been dismissed. The Company requested discovery in November 1998.
To date, NJIT has produced very few responsive and relevant documents, and only
partial answers to the Company's interrogatories. NJIT has not yet filed
counterclaims. Accordingly, the Company believes the probability of an
unfavorable outcome to be low, and therefore no amounts have been accrued, with
respect to this lawsuit.

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

  None.

                                       15
<PAGE>
 
                                    PART II

ITEM 5.     MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

During the third quarter of 1996, the Company consummated an initial public
offering in which it issued and sold to the public a total of 1,232,143 Units
(the "Units"), each Unit consisting of one share of common stock, $.001 par
value, of the Company (the "Common Stock") and one Class A Redeemable Common
Stock Purchase Warrant (the "Warrants") to purchase one share of Common Stock at
a price of $10.00 per share for a 24-month period commencing on November 6,
1996. Prior to November 6, 1996, there was no market for the Common Stock or the
Warrants. The Units became separable on that date and the Common Stock and the
Warrants began trading separately on November 8, 1996. In July 1998, in
connection with its private placement (described in the following paragraph),
the Company agreed to extend the exercise period of the Warrants for an
additional 12 months. As a result, the Warrants will expire on  November 6,
1999, unless exercised prior to that time.

In January 1998, the Company commenced a private placement of its 10% Cumulative
Convertible Preferred Stock, $.01 par value (the "Preferred Stock"), at a price
of $10 per share. At the closing for this private placement, which was held in
April 1998, the Company sold and issued 110,000 shares of Preferred Stock for an
aggregate price of $1,100,000. The net proceeds of the private placement have
been and will be used to augment the Company's working capital.

The Preferred Stock bore a cumulative annual dividend of 10% (subject to
increase to 12% in certain events) and was convertible into approximately 1.66
shares of Common Stock for each share of Preferred Stock, subject to adjustment
for any stock splits, stock dividends, recapitalizations, reclassifications and
similar events.

The private placement, which was terminated on July 31, 1998, was carried out
pursuant to available exemptions from registration under Section 4(2) of the
Securities Act of 1933 and rules promulgated under that section.

On October 9, 1998, the 110,000 shares of Preferred Stock outstanding were
converted into 182,724 shares of Common Stock. At the same time, a total of
12,154 shares of Common Stock was issued in payment of the cumulative dividends
on the Preferred Stock. The dividend was computed at 10% per annum and totalled
approximately $51,534.

The following table sets forth the range of high and low bid quotations per
share of the Common Stock (symbol MDJT) and the Warrants (symbol MDJTW) for the
periods indicated as reported by the OTC Bulletin Board. These quotations
reflect interdealer prices, without retail mark-up, mark-down or commission, and
may not represent actual transactions.

<TABLE>
<CAPTION>
                                         Range of High and Low Bid Prices
                                         --------------------------------
                                             1998                   1997
                                       -----------------    -----------------
     <S>                               <C>                  <C>
     COMMON STOCK
 
          First Quarter                   $   8.25 - $6.00        $ 7.625 - $6.75                         
          Second Quarter                  $ 7.25 - $6.0625        $8.625 - $7.625                         
          Third Quarter                   $ 7.5625 - $3.00        $ 8.625 - $7.00                         
          Fourth Quarter                  $ 3.00 - $.59375        $8.875 - $7.125                         
</TABLE> 
 

                                       16
<PAGE>
 
<TABLE> 
<CAPTION> 
     WARRANTS
     <S>                                  <C>                     <C> 
          First Quarter                   $ 2.0625 -$1.375        $ 2.375 - $1.50                            
          Second Quarter                  $  2.125 - $1.50        $ 2.375 - $2.25                            
          Third Quarter                   $ 2.125 - $.1875        $2.3125 - $2.00                            
          Fourth Quarter                  $.1875 - $.03125        $2.375 - $1.625                             
</TABLE>

As of March 31, 1999, there were approximately 45 holders of record of the
Common Stock and 10 holders of record of the Warrants.

The Company has never paid a cash dividend on its Common Stock and does not
presently anticipate doing so in the foreseeable future, but expects to retain
earnings, if any, to finance operations.

                                       17
<PAGE>
 
ITEM 6.     MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

This annual report contains forward-looking statements within the meaning of the
federal securities laws. These include statements about our expectations,
beliefs, intentions or strategies for the future, which we indicate by words or
phrases such as "anticipate," "expect," "intend," "plan," "will," "we believe,"
"the Company believes," "management believes," and similar language. The
forward-looking statements are based on our current expectations and are subject
to certain risks, uncertainties and assumptions, including those set forth in
the following discussion and in the previous discussion under "Description of
Business." Our actual results may differ materially from results anticipated in
these forward-looking statements. We base our forward-looking statements on
information currently available to us, and we assume no obligation to update
them.

GENERAL

The Company is engaged in research and development of medical technology, with a
current emphasis on ophthalmic surgical technology and equipment and has
developed a proprietary technology and derivative devices for corneal surgery
based on microjets. The Company expects, during 1999, to continue its research
and development activities focusing principally on ophthalmic surgical
technology and equipment and to commence early exploratory work on dental
applications of microjet technology. The Company is a development-stage company.

OVERVIEW. Since its inception in December 1993, the Company has been engaged in
developing a technology suitable for surgery of the eye, in particular, vision
correction surgery. The cost of entry into this market with a medical device is
typically large and being a fledgling company, the Company initially focused on
developing the technology to a point that it could license it. Using the
technology already developed for ophthalmic applications, the Company believes
that microjets can be used in a variety of other medical markets. Hence,
management believes that it might be possible, using the income resulting from
royalties on its initial products, to develop new devices, and potentially to
manufacture and market these. A license vs. make and sell decision would be made
in each case. Management exercises the following algorithm for choice of new
areas for development:

     .    A broad or blocking patent could result.
     .    The size of the conservatively estimated market could justify the
          development expense.
     .    The new device could satisfy an unmet need.

In 1998, the Company licensed its refractive surgery technology to Nestle S.A.
and its Alcon Laboratories ophthalmic division ("Alcon"). While continuing the
technology transfer efforts associated with having licensed its refractive
surgery technology, the Company has initiated a new product area associated with
treatment of dental caries.

THE PAST YEAR. The year 1998 has been a difficult year for the Company as a
result of limited working capital. The last period has been one of paring
personnel to a minimum, consistent with completing the technology transfer to
Alcon and allowing development of a new technology option. The overriding
constraint has been cash flow. Consequently, and as a result of the limited

                                       18
<PAGE>
 
market currently foreseen for this application, the Company chose to postpone
indefinitely introduction of its Hydrobrush(TM) Keratome for treatment of
pterygium. The current rate of expenditures for staff and direct expenses, with
current cash flow projections, is expected to allow the Company to manage until
year-end 1999. This cash flow includes anticipated technology transfer payments
by Alcon for the vision correction technology and the sale of NJ tax losses as
described under "Liquidity and Capital Resources" below.

Starting in 2000, the Company anticipates receiving scheduled minimum royalties
and milestone payments under its Agreement with Alcon. Assuming FDA clearance of
the microkeratome devices and commercial marketing by Alcon, additional royalty
payments are called for under the Agreement. Although there can be no assurances
in this regard, management believes these payments will substantially relieve
the Company's cash flow problems.

REFRACTIVE SURGERY. The Company's initial product under the licensing agreement,
expected to be introduced next year, is a microkeratome for producing hinged
flaps. Management of the Company believes this product has certain advantages
compared to blade microkeratomes for producing flaps for the popular vision
correction surgery using lasers known as LASIK. Management believes it should
increase surgeon interest in performing this type of surgery and reduce the
potential for patient complications. The perceived advantages of the waterjet
microkeratome include:

     .    It produces uniform and precise thickness flaps.
     .    It operates at normal IOP.
     .    The flap is circular every time, with the desired vertical-edge shape.
     .    The procedure is quick and relatively easy.
     .    Tissue damage is minimal.

The basic microkeratome can be modified to make it suitable for vision
correction surgery without the need for the laser. This should have a major
                   -------                                                 
impact on the vision correction market in terms of cost of the procedure and
quality of the result. The Company anticipates that this product will be
available in 2001.

Alcon is the foremost ophthalmologic company in the world and has current strong
positions in cataract and vitrectomy surgery, but only nominal presence in
vision correction surgery. Alcon is moving aggressively to transfer the
Company's technology and to offer for sale a microkeratome and associated
disposables. The waterjet product is expected to become the cornerstone of the
refractive surgery products offered by Alcon.

The year 2000 income stream, assuming it materializes, is expected to support
substantial development effort in new areas.

DENTAL CARIES. The Company's next proposed product development area is for
waterjet treatment of dental caries. The Company has filed a patent application
for this use. The waterjet product has the potential for treating dental caries
and preparation of the tooth for filling.

                                       19
<PAGE>
 
FUTURE PRODUCTS. The Company has made an excellent start in its ophthalmic
products. There are new product areas that build on the same technology platform
that are under development, e.g., arthroscopic surgery. The Company's limited
resources currently restrict its product development efforts. Nevertheless,
management is optimistic about the Company's ability to move forward and patents
are being filed.

RESULTS OF OPERATIONS

The Company has not yet initiated sales of its products and, consequently, had
no sales revenues during the year ended December 31, 1998. In connection with
the execution of the license agreement (as described under "Description of
Business" above), a payment in the amount of $500,000 was made by Alcon to the
Company and has been reflected as license fee income in the accompanying
financial statements.

Total expenses during the year ended December 31, 1998 increased by $159,822 to
$2,879,806 from $2,719,984 for the prior year. This was primarily due to the net
increase in staff during the year (from an average of fifteen full-time
employees in 1997 to an average of seventeen full-time employees in 1998, with
ten full-time employees at December 31, 1998) and an increase in professional
fees as the Company continued its research and development and clinical trials
activities, offset in part by a reduction in the use of outside consultants
(their duties being assumed by the staff). Expenses were also higher during 1998
due to increased purchases for materials, testing and analysis and greater
insurance and occupancy costs reflecting additional office and laboratory space
for pre-clinical research and development activities. Total expenses for the
year ended December 31, 1998 also included approximately $400,000 in legal fees.

Other income/expense consists of interest income and interest expense. Net
interest income decreased by $86,477 to $55,259 in 1998 from $141,736 in 1997.
This decrease principally results from income earned on the Company's short-term
investments which were lower in 1998, reflecting the utilization of these funds
to continue the Company's research and development activities.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 1998, the Company's working capital was $79,352.

In January 1998, the Company commenced a private placement of its convertible
Preferred Stock at a price of $10 per share. Pursuant to the private placement,
the Company sold and issued 110,000 shares of Preferred Stock for an aggregate
price of $1,100,000, the net proceeds of which were released to the Company
following a closing in April 1998 and added to the Company's working capital.
The private placement was terminated on July 31, 1998. On October 8, 1998, the
Preferred Stock was converted into 182,724 shares of Common Stock and the
Company paid the applicable dividend on the Preferred Stock by issuing a total
of 12,154 shares of Common Stock.

Throughout the second half of 1998, the Company had been seeking additional
capital to finance its 1999 business plan. Pending obtaining additional
financing, the Company made the decision to curtail several operational
activities as well as to downsize its employee base in order to husband and
stretch its existing capital to the next financing. In October and November,
1998, the Company dismissed 9 of its 19 employees. It also significantly reduced
the salary of the 

                                       20
<PAGE>
 
management group, in some cases by up to 50%. The specific goal was to reduce
the Company's monthly expenditures by 60%, to approximately $100,000. The
Company currently is focused on fulfilling its commitments with respect to the
Agreement with Alcon, although the Company may seek to license the
HydroBrush(TM) Keratome to a third party at some future date. The Company will
also consider submitting proposals to the government and to industrial
organizations to fund some of the costs of the study of other medical
applications of its technology platform. Finally, as its financial resources
permit, the Company will continue explorations and analyses of potential new
medical applications of its microjet technology.

In January 1998, the State of New Jersey enacted legislation allowing emerging
technology and/or biotechnology companies to sell their unused New Jersey Net
Operating Loss ("NOL") Carryover and Research and Development Tax Credits ("R&D
Credits") to corporate taxpayers in New Jersey. During 1999, the Company entered
into an agreement under which it retained a third party broker to identify a
buyer for the Company's NOL Carryover and R&D Credits. The anticipated net
proceeds of this transaction ($594,209) have been recorded as a non-current
deferred tax asset in the accompanying financial statements. There can be no
assurances, however, that this proposed sale will occur. To the extent that the
NOL Carryover and R&D Credits are sold, they will be unavailable to the Company
to offset future New Jersey state taxes.

During March 1999, Dr. Gordon agreed to make available to the Company a loan of
up to $250,000. Under the terms of this agreement, which has yet to be
finalized, it is anticipated that the Company will pay a market interest rate
and issue to Dr. Gordon warrants to purchase up to 50,000 shares of the
Company's Common Stock. To date, no funds have been advanced under this
agreement.

The Company anticipates that its cash on hand, together with the payments
received and to be received by the Company in connection with the license
agreement, plus the proposed loan from Dr. Gordon and the sale of its New Jersey
State NOL Carryover and R&D Credits, will be sufficient to meet the Company's
1999 working capital and planned capital expenditure requirements. If, however,
the Company incurs unexpected expenses, or if the New Jersey NOL Carryover and
R&D Credits are not sold as anticipated, the Company may require additional
financing prior to the end of 1999 in order to maintain its current operations.
Although minimum royalty payments under the licensing agreement are anticipated
to begin in early 2000, if the Company and Alcon fail to obtain FDA approval of
the Company's HydroBlade(TM) Keratome device or Alcon's manufacturing and
marketing of the device is otherwise delayed, the Company will need to raise
additional capital to maintain its current scope of operations beyond the second
quarter of 2000. The Company currently has no commitment or arrangement for any
capital, and there can be no assurance whether or on what terms it will be able
to obtain any needed capital. If additional financing is not available, the
Company would be materially adversely affected and be required to further
curtail or cease altogether its current operations.

The Company's current strategy is to exclusively license its products. As of the
date of filing of this Annual Report on Form 10-KSB, the Company has entered
into one such agreement, the Alcon Agreement, covering corneal refractive
surgery. To the extent the Company does not enter into licensing arrangements,
it may undertake the marketing and sale of its own products. In such event, the
Company would be subject to the risks and uncertainties described below under
"Additional Factors That May Affect Future Results - No Manufacturing
Experience; Dependence on Third Parties."

                                       21
<PAGE>
 
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS

NO REVENUES; UNCERTAIN PROFITABILITY; DEVELOPMENT STAGE COMPANY; HISTORY OF
LOSSES.  Since its inception, the Company has been principally engaged in
developmental and organizational activities. To date, the Company has not yet
initiated sales of its products and, consequently, had no sales revenues. In
connection with the execution of the Alcon Agreement (as described under
"Description of Business" above), a payment in the amount of $500,000 was made
by Alcon to the Company. The Agreement also provides for future payments based
on the attainment of certain milestones, minimum royalty payments starting in
the year 2000, and royalties upon sales by Alcon of the Company's products.

No sales revenues are expected until, and only if, Alcon or the Company begins
commercial marketing of the Company's microkeratomes or other products. In
addition, commercial marketing of the Company's products in the U.S. will be
contingent upon obtaining FDA permission or approval and possibly the approval
of other governmental agencies. To date, only the Company's HydroBrush(TM)
Keratome has been granted 510(k) notification from the FDA and is the Company's
only product which has received the regulatory approvals required prior to the
commencement of commercial marketing.  The Company and Alcon are currently
planning to seek FDA clearance of the HydroBlade(TM) Keratome device.
Regulatory clearance procedures are often extremely time consuming, expensive
and uncertain. Accordingly, there can be no assurance that the Company and Alcon
will be successful in obtaining marketing clearance of the HydroBlade(TM)
Keratome or other devices or that, if such devices are cleared, it will be able
to generate sufficient revenues to operate on a profitable basis.

The Company, which was founded in December 1993, is in the development stage,
and its business is subject to all of the risks inherent in the establishment of
a new business enterprise. The likelihood of success of the Company must be
considered in light of the problems, expenses, complications and delays
frequently encountered in connection with the formation of a new business, the
development of new products, the competitive and regulatory environment in which
the Company is operating and the possibility that its activities will not result
in the development of any commercially viable products. There can be no
assurance that the Company's activities will ultimately result in the
development of commercially saleable or useful products.

The Company has experienced annual operating losses and negative operating cash
flow since inception. At December 31, 1998, the Company had an accumulated
deficit of approximately $5,000,000, excluding approximately $1,500,000 which
was applied to additional paid-in capital when the Company converted from a
subchapter S corporation to a C corporation for federal income tax purposes in
connection with its initial public offering during August 1996. Unless and until
the Company's product development and marketing activities are successful and
its products are sold, of which there can be no assurance, the Company will not
have any revenues to apply to operating expenses and the Company will continue
to incur losses.

LICENSE AGREEMENT. Assuming FDA clearance of the Company's products can be
obtained, the Company expects to receive significant future revenue from the
Alcon Agreement (See "Description of Business"). There can be no assurance,
however, that the Company will be able to fulfill its obligations under the
Agreement, or that the Company will receive significant future revenue pursuant
to the Agreement. Furthermore, the amount of royalties, if any, received by the
Company will be largely dependent on the effort and success of Alcon in
marketing and selling the licensed products. If the Company does not receive
significant revenue from the Agreement, 

                                       22
<PAGE>
 
the Company's business, financial condition, and results of its operations may
be materially adversely affected.

NEED FOR FUTURE FINANCING. The Company currently is focusing on its efforts
pursuant to the Alcon license agreement and has suspended other product
development efforts. To proceed with its planned research and development and
possible marketing activities, the Company believes that it will require
additional capital before, if ever, it reaches profitability and positive cash
flow. As a result, the Company will be required to raise additional funds
through public or private financing including grants that may be available for
its research and development. In connection with a private placement offering
(the "Private Placement") of the Company's Series A Convertible Preferred Stock,
par value $.01 per share (the "Preferred Stock"), commenced in the first quarter
of 1998, the Company, through its placement agent, raised $1,100,000 in the
second quarter of 1998. There can, however, be no assurance that the Company
will be able to obtain additional financing on terms favorable to it, if at all.
If adequate funds are not available to satisfy short-term or long-term capital
requirements, the Company may be required to reduce substantially, or eliminate,
certain areas of its product development activities, limit its operations
significantly, or otherwise modify its business strategy. The failure of the
Company to obtain any other acceptable financing would have a material adverse
effect on the operations of the Company. Without additional financing or the
exercise of the Company's outstanding warrants or otherwise, the Company would
become unable to maintain its current operations and would be unable to carry
out its business plan. Except for currently outstanding warrants and options,
the Company has no current plans, understandings or commitments to obtain any
additional financing from the sale of its securities or otherwise. Additional
financing from the sale of its securities may result in dilution of the
Company's then current stockholders.
 
DEPENDENCE UPON A KEY OFFICER; ATTRACTION AND RETENTION OF KEY PERSONNEL. The
business of the Company is highly dependent upon the active participation of its
founder and Chief Executive Officer, Dr. Eugene I. Gordon. The loss or
unavailability to the Company of Dr. Gordon would have a material adverse effect
on the Company's business prospects and potential earning capacity. The
recruitment of skilled scientific personnel is critical to the Company's
success. There can be no assurance that it will be able to continue to attract
and retain such personnel in the future. In addition, the Company's anticipated
growth and expansion into areas and activities requiring additional expertise,
clinical testing, governmental approvals, production and marketing of the
Company's products (which would be required if the Company does not enter into
licensing arrangements) is expected to place increased demands upon the
Company's financial resources and corporate structure. The Company expects to
satisfy such demands, if they arise, through the hiring of additional management
personnel and the development of additional expertise by existing management.

UNCERTAINTY OF MARKET ACCEPTANCE; RELIANCE ON SINGLE TECHNOLOGY.  Acceptance of
the Company's products is difficult to predict and will require substantial
marketing efforts and the expenditure of significant funds by a licensee or by
the Company. There can be no assurance that the products will be accepted by the
medical community once they are permitted or approved.  Market acceptance of the
Company's products will depend in large part upon the Company's ability to
demonstrate the operational advantages, safety and cost-effectiveness of its
products compared to other comparable surgical techniques. Failure of the
products to achieve market acceptance will have a material adverse effect on the
Company's financial condition and results of operations.

                                       23
<PAGE>
 
At present, the Company's only products (although still in development stage)
are its microkeratomes, and the Company expects that its microkeratomes will be,
if and when commercially available, its sole products for an indefinite period
of time. The Company's present narrow focus on particular products makes the
Company vulnerable to the development of superior competing products and changes
in technology that could eliminate the need for the Company's products. There
can be no assurance that significant changes in the foreseeable future in the
need for the Company's products or the desirability of those products will not
occur.

DEPENDENCE ON PATENTS AND PROPRIETARY RIGHTS. The Company's success will depend
in part on whether it successfully obtains and maintains patent protection for
its products, preserves its trade secrets and operates without infringing the
proprietary rights of third parties.

The Company has sought to protect its proprietary interest in its products by
applying for patents in the United States and corresponding patents abroad. The
Company has three issued U.S. patents and one issued foreign patent. The Company
has four U.S. patents pending, one of which has been allowed, and a large number
of foreign patents in process. There can be no assurance that any other patent
will be issued to the Company, that any patents owned by or issued to the
Company, or that may issue to the Company in the future, will provide a
competitive advantage or will afford protection against competitors with similar
technology, or that competitors of the Company will not circumvent, or challenge
the validity of, any patents issued to the Company. There also can be no
assurance that any patents issued to or licensed by the Company will not be
infringed upon or designed around by others or would prevail in a legal
challenge, that others will not obtain patents that the Company will need to
license or design around, that the microkeratomes or any other potential product
of the Company will not inadvertently infringe upon the patents of others, or
that others will not manufacture the Company's patented products upon expiration
of such patents. There can be no assurance that existing or future patents of
the Company will not be invalidated. Additionally, patent applications filed in
foreign countries and patents granted in such countries are subject to laws,
rules and procedures which differ from those in the United States. Patent
protection in such countries may be different from patent protection provided by
United States laws and may not be as favorable to the Company.

Also, there can be no assurance that the Company's non-disclosure agreements and
other safeguards will protect its proprietary information and trade secrets or
provide adequate remedies for the Company in the event of unauthorized use or
disclosure of such information, or that others will not be able to independently
develop such information. As is the case with the Company's patent rights, the
enforcement by the Company of its non-disclosure agreements can be lengthy and
costly, with no guarantee of success. There can be no assurance that the
Company's program of patent protection, internal security of its proprietary
information and non-disclosure agreements will be sufficient to protect the
Company's proprietary technology from competitors.

INFRINGEMENT CLAIMS; LITIGATION. If any of the Company's products are found to
infringe upon the patents or proprietary rights of another party, the Company
may be required to obtain licenses under such patents or proprietary rights of
such other party. No assurance can be given that any such licenses would be made
available on terms acceptable to the Company, if at all. If required licenses
were to be unavailable, the Company could be prohibited from using, marketing or
selling certain technology and devices and such prohibition could have a
material adverse effect on the Company.

                                       24
<PAGE>
 
On April 21, 1998, the Company was served with a complaint by the New Jersey
Institute of Technology ("NJIT") commencing a lawsuit in the United States
District Court for the District of New Jersey ("U.S. District Court"). Each of
the Company, Eugene I. Gordon, Ph.D. (the Company's Chairman and Chief Executive
Officer), a former employee of the Company, certain patent law firms and an
individual patent attorney were named as defendants. The complaint alleged that
the defendants, with deceptive intent, failed to name an NJIT professor and/or
NJIT research associate as a co-inventor on the Company's U.S. Patent No.
5,556,406 on the "Lamellar Surgical Device and Procedure" (the "Patent") and
breached fiduciary duties and contractual obligations owed to NJIT. The
complaint sought monetary damages from the Company and an order directing that
the Company's Patent (and corresponding foreign patents and patent applications)
be assigned and transferred to NJIT. It further sought an order that NJIT has
not infringed any claims of such Patent and a declaratory judgment that all of
the Company's claims under such Patent are invalid and unenforceable against
NJIT.

NJIT's patent application relating to a refractive corrective procedure based on
the use of an isotonic waterjet had previously been denied by the Patent and
Trademark Office as inoperable. NJIT also learned that a similar invention had
been made and disclosed publicly prior to the NJIT invention. NJIT did not
contest the ruling and did not pursue a U.S. patent until October 1996. That
patent has been allowed. The three inventors of the subject of such patent
application, one of which was Dr. Gordon, had assigned such patent application
to NJIT as part of a dispute settlement in which NJIT agreed to grant an
exclusive license to the Company of the patent rights under such patent
application. That license was terminated by the Company because the Company
believed that the device did not operate as claimed and could be harmful to the
patient. NJIT then claimed, without being specific, that the Company's Patent
emanated from the earlier invention. Prior to being served with the complaint by
NJIT, the Company and Dr. Gordon had filed a complaint, on March 27, 1998,
against NJIT in the Superior Court of the State of New Jersey, Middlesex County,
seeking a declaratory judgment that NJIT had no ownership or other interest in
the patent rights to the Company's Patent and seeking certain monetary damages.
NJIT removed the Company's lawsuit to the U.S. District Court, seeking to have
it consolidated with its lawsuit. The Company moved to have its suit remanded to
state court and to have the NJIT lawsuit dismissed on the basis that the federal
court lacked jurisdiction over either action and that NJIT had not been harmed
by the Company's Patent and therefore could not challenge its validity.

During October 1998, the lawsuit brought in U.S. District Court by NJIT was
dismissed on jurisdictional grounds. In addition, the U.S. District Court also
held that NJIT improperly removed the Company's state court action and ordered
that action remanded to the state court. NJIT appealed the remand action and
appealed the dismissal of its lawsuit brought in U.S. District Court. These
appeals have been dismissed. The Company requested discovery in November 1998.
To date, NJIT has produced very few responsive and relevant documents, and only
partial answers to the Company's interrogatories. NJIT has not filed
counterclaims.

Accordingly, the Company believes the probability of an unfavorable outcome to
be low, and therefore no amounts have been accrued, with respect to this
lawsuit.

The Company intends to vigorously prosecute the suit it has commenced against
NJIT. The litigation between NJIT and the Company may be lengthy in duration and
expensive in nature 

                                       25
<PAGE>
 
and will divert certain resources of the Company from other expected uses. An
outcome in this matter that is adverse to the Company would have a material
adverse effect on the Company.

COMPETITIVE TECHNOLOGIES, PROCEDURES AND COMPANIES. The Company is engaged in a
rapidly evolving field. There are many companies, both public and private,
universities and research laboratories engaged in research activities relating
to other vision correction alternatives.  Competition from these companies,
universities and laboratories is intense and is expected to increase. The
Company's initial products will compete with other presently existing forms of
treatment for vision disorders, including eyeglasses, contact lenses, corneal
transplants, other refractive surgery procedures and other technologies under
development. There can be no assurance that persons whose vision can be
corrected with eyeglasses or contact lenses will elect to undergo the surgical
procedures with the Company's products when non-surgical vision correction
alternatives are available.

The Company is aware of ongoing research at certain companies and institutions
into a variety of procedures for corneal adjustment and refractive surgery,
including waterjet technology under development by Visijet (Surgijet) Inc. Some
of these companies and institutions, which may in the future become competitors
of the Company, have substantially greater resources, research and development
staffs and facilities, as well as greater experience in research and
development, obtaining regulatory approval and manufacturing and marketing
medical device products than the Company.

Additionally, there can be no assurance that the Company's competitors will not
succeed in developing technologies, procedures or products that are more
effective or economical than those being developed by the Company or that would
render the Company's technology and proposed products obsolete or
noncompetitive. Furthermore, in connection with the commercial sale of its
products, the Company will also be competing with respect to manufacturing
efficiency and marketing capabilities, areas in which the Company has no
experience.

NO MANUFACTURING EXPERIENCE; DEPENDENCE ON THIRD PARTIES. The Company's current
strategy is to exclusively license its ophthalmology products. As of the date of
this Annual Report, the Company has entered into only one such agreement to
license or otherwise commercially market any of its products. To the extent the
Company does not enter into such licensing arrangements, it will need to engage
in the manufacture and marketing of its products. The Company has no volume
manufacturing capacity or experience in manufacturing medical devices or other
products. To be successful, the Company's proposed products must be manufactured
in commercial quantities in compliance with regulatory requirements at
acceptable costs. Production in clinical or commercial-scale quantities will
involve technical challenges for the Company. If the Company is unable or elects
not to pursue collaborative arrangements with other companies to manufacture
certain of its potential products, the Company will be required to establish
manufacturing capabilities. Establishing its own manufacturing capabilities
would require significant scale-up expenses and additions to facilities and
personnel. There can be no assurance that the Company will be able to obtain
necessary regulatory approvals on a timely basis or at all. Delays in receipt of
or failure to receive such approvals or loss of previously received approvals
would have a material adverse effect on the Company. There can be no assurance
that the Company will be able to develop clinical or commercial-scale
manufacturing capabilities at acceptable costs or enter into agreements with
third parties with respect to these activities. The Company's dependence upon
third parties for the manufacture of its products may adversely affect the
Company's profit margins and the Company's ability to develop and deliver such
products on a timely basis. Moreover, there can be no assurance that such
parties will 

                                       26
<PAGE>
 
perform adequately, and any failures by third parties may delay the submission
of products for regulatory approval, impair the Company's ability to deliver
products on a timely basis, or otherwise impair the Company's competitive
position and any such failure could have a material adverse effect on the
Company.

NO MARKETING OR SALES EXPERIENCE. If the Company does not enter into any
additional licensing arrangements, it will undertake the marketing and sale of
its own products. In such event, the Company intends to market and sell its
products in the United States and certain foreign countries, if and when
regulatory approval is obtained, through a direct sales force or a combination
of a direct sales force and distributors. The Company currently has no marketing
organization and has never sold a product. Establishing sufficient marketing and
sales capability will require significant resources. There can be no assurance
that the Company will be able to recruit and retain skilled sales management,
direct salespersons or distributors, or that the Company's marketing or sales
efforts will be successful. To the extent that the Company enters into
distribution arrangements for the sale of its products, the Company will be
dependent on the efforts of third parties. There can be no assurance that such
efforts will be successful.
 
RISK OF PRODUCT LIABILITY LITIGATION; POTENTIAL UNAVAILABILITY OF INSURANCE. The
testing, manufacture, marketing and sale of medical devices entails the inherent
risk of liability claims or product recalls. As a result, the Company faces a
risk of exposure to product liability claims and/or product recalls in the event
that the use of its current or future potential products are alleged to have
caused injury. There can be no assurance that the Company will avoid significant
liability in spite of the precautions taken to minimize exposure to product
liability claims. Prior to the commencement of clinical testing, the Company
intends to procure product liability insurance. After any commercialization of
its products, the Company will seek to obtain an appropriate increase in its
coverage. There can, however, be no assurance that adequate insurance coverage
will be available at an acceptable cost, if at all. Consequently, a product
liability claim, product recall or other claims with respect to uninsured
liabilities or in excess of insured liabilities could have a material adverse
effect on the Company.

SURGICAL RISKS. There can be no assurance that the Company's products will be
successful in providing reliable surgical corrections. As with all surgical
procedures, the procedures for which the Company's products are intended entail
certain inherent risks, including defective equipment or human error, infection
or other injury resulting in partial or total loss of vision. Such injury could
expose the Company to product liability or other claims. The Company believes
competing products have the same risks and have experienced a small number of
these situations without undue impact on the commercial prospects of such
products. There can be no assurance that the Company's product liability
insurance in effect from time to time will be sufficient to cover any such claim
in part or in whole. Any such claim could adversely impact the commercialization
of the Company's products and could have a material adverse effect on the
Company.
 
NO ASSURANCE OF FDA AND OTHER REGULATORY APPROVAL. As medical devices, the
Company's microkeratomes are subject to regulation by the FDA under the Federal
Food, Drug, and Cosmetic Act (the "FD&C Act") and implementing regulations.
Pursuant to the FD&C Act, the FDA regulates, among other things, the
development, manufacture, labeling, distribution, and promotion of
microkeratomes in the United States. If the Company fails to enter into
licensing arrangements, it will be required to pursue FDA approval of or
clearance to market its products at its own cost.
 

                                       27
<PAGE>
 
The process of obtaining required regulatory clearances or approvals can be
time-consuming and expensive, and compliance with the FDA's Good Manufacturing
Practices regulations and other regulatory requirements can be burdensome.
Moreover, there can be no assurance that the required regulatory clearances will
be obtained, and such clearances, if obtained, may include significant
limitations on the uses of the product in question. In addition, changes in
existing regulations or guidelines or the adoption of new regulations or
guidelines could make regulatory compliance by the Company more difficult in the
future. The failure to comply with applicable regulations could result in fines,
delays or suspensions of clearances, seizures or recalls of products, operating
restrictions and criminal prosecutions, and would have a material adverse effect
on the Company.

OTHER MATTERS. The Company has been assessing its "Year 2000" computer readiness
and exposure to Year 2000 issues. In connection with such assessment, the
Company initiated a review of all information technology systems utilized by the
Company. The Company uses no internally-developed systems, only those available
from commercial software vendors. As part of its review, the Company has
received confirmation from its principal software vendors that such systems are
Year 2000 compliant. Based on its review to date, the Company believes there are
no major Year 2000 compliance issues with respect to its information technology
systems, and, therefore, the Company has not and does not intend to prepare a
contingency plan for these systems. The Company anticipates that the total cost
for its Year 2000 compliance efforts will not exceed $5,000.

In addition, although the Company has not yet initiated commercial production of
any of its products, the list of component parts used in those products was
reviewed and it was determined that multiple vendors, parts suppliers or
contract manufacturers are available to the Company for all of the critical
component parts of these products. Although there are no vendors currently
engaged by the Company for products to be manufactured, when engaging vendors,
the Company will ascertain that they are compliant. Based on its review to date,
the Company believes, in the most likely worst case scenario, that Year 2000
issues would have only a minimal impact on the Company.

                                       28
<PAGE>
 
ITEM 7.    FINANCIAL STATEMENTS.

                              Page No.
                              --------
<TABLE>
<S>                                                                                <C>
Independent Auditors' Report....................................................   30
 
Balance Sheet as of December 31, 1998...........................................   31
 
Statements of Operations for the years ended December 31, 1997 and 1998,
 and for the period from inception to December 31, 1998.........................   32
 
Statement of Stockholders' Equity for the period from inception to
 December 31, 1998..............................................................   33
 
Statements of Cash Flows for the years ended December 31, 1997 and 1998,
 and for the period from inception to December 31, 1998.........................   35
 
Notes to Financial Statements...................................................   36
</TABLE> 
 
                                      29
<PAGE>
 
                         INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Stockholders of
Medjet Inc. (A Development Stage Company):


     We have audited the accompanying balance sheet of Medjet Inc. (A
Development Stage Company) as of December 31, 1998 and the related statements of
operations, stockholders' equity and cash flows for the years ended December 31,
1998 and 1997. 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 an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Medjet Inc. (A Development
Stage Company) as of December 31, 1998 and the results of its operations and its
cash flows for the years ended December 31, 1998 and 1997 in conformity with
generally accepted accounting principles.

 
                                           ROSENBERG RICH BAKER BERMAN & COMPANY


Bridgewater, New Jersey
January 28, 1999, except for the "COMMITMENTS AND
CONTINGENCIES" and "EMPLOYMENT AGREEMENTS"
notes to the financial statements which are dated March 19, 1999.

                                      30
<PAGE>
 
                                  MEDJET INC.
                         (A Development Stage Company)
                                 Balance Sheet
                               December 31, 1998


<TABLE> 
<CAPTION> 
                                    Assets
<S>                                                                                        <C> 
Current Assets:
     Cash and cash equivalents                                                             $    343,594
     Prepaid expenses                                                                            31,072
                                                                                           ------------       
              Total Current Assets                                                              374,666
                                                                                           ------------         

Property and Equipment - less accumulated depreciation of $266,233                              205,143
Organization Costs - less accumulated amortization of $35,091                                     2,296
Patents and Trademarks - less accumulated amortization of $17,935                               137,245
Deferred tax asset                                                                              594,209
Security deposits                                                                                 7,050
                                                                                           ------------        

              Total Assets                                                                 $  1,320,609
                                                                                           ============

                     Liabilities and Stockholders' Equity

Current Liabilities:
     Accounts payable and accrued liabilities                                               $   291,466
     Deferred rental obligation                                                                   3,698 
     Income taxes payable                                                                           150 
                                                                                            -----------
              Total Liabilities                                                                 295,314
                                                                                            ----------- 
                                                                                                       
Stockholders' Equity:                                                                                  
     Common stock, $.001 par value, 7,000,000 shares authorized,                                       
        3,914,947 shares issued and 3,881,158 shares outstanding                                  3,915
     Preferred stock, $.01 par value, 1,000,000 shares authorized,                                     
        no shares issued                                                                              -
     Additional paid-in capital                                                               6,066,049
     Accumulated deficit (including deficit accumulated during development                             
        stage of $6,547,639 of which $1,556,204 was applied to additional                              
        paid-in capital upon conversion from an "S" to a "C" corporation                     (5,042,969)
     Less: Treasury stock, 33,789 shares, at cost                                                (1,700) 
                                                                                            -----------   
              Total Stockholders' Equity                                                      1,025,295
                                                                                            ----------- 
                                                                                                       
Total Liabilities and Stockholders' Equity                                                  $ 1,320,609
                                                                                            =========== 
</TABLE> 

                    See notes to the financial statements.

                                      31
<PAGE>
 
                                  MEDJET INC.
                         (A Development Stage Company)
                           Statements of Operations

<TABLE> 
<CAPTION> 
                                                                               December     
                                                                               16, 1993     
                                            Year Ended December 31,         (Inception) to  
                                           -------------------------           December     
                                             1998           1997              31, 1998       
                                         -----------     -----------       --------------- 
<S>                                      <C>             <C>               <C> 
 Revenues:                                                                         
 License Fee Income                        $  500,000      $       -         $   500,000        
                                         ------------   ------------        ------------        
      Total Revenues                          500,000              -             500,000       
                                         ------------   ------------        ------------        

 Expenses:
 Research, development,
    general and administrative              2,879,806      2,719,984           7,907,690
                                         ------------   ------------        ------------        
      Total Expenses                        2,879,806      2,719,984           7,907,690
                                         ------------   ------------        ------------        

 Loss from Operations                      (2,379,806)    (2,719,984)         (7,407,690)
                                         ------------   ------------        ------------                           
 Other Income/(Expense):                                                      
 Net Interest Income                           55,259        141,736             266,892
                                         ------------   ------------        ------------
        Loss Before Income Tax             (2,324,547)    (2,578,248)         (7,140,798)

           Federal Income Tax                                                 
                                                    -              -                   -
           State Income Tax                  (594,009)           200            (593,159)
                                         ------------   ------------        ------------                           
     Total Income Tax                        (594,009)           200            (593,159)
                                         ------------   ------------        ------------                           

 Net Loss                                  (1,730,538)    (2,578,448)         (6,547,639)

 Dividends on Preferred Stock                 184,923              -             184,923
                                         ------------   ------------        ------------  
 Net Loss Attributable to
  Common Shareholders                    $ (1,915,461)  $ (2,578,448)       $ (6,732,562)
                                         ============   ============        ============

         Net Loss Per Share              $      (0.51)  $      (0.70)       $      (2.24)
                                         ============   ============        ============
       Weighted Average Common
         Shares Outstanding                 3,728,594      3,660,609           3,006,242
                                         ============   ============        ============
</TABLE> 

                    See notes to the financial statements.

                                      32
<PAGE>
 
                                   MEDJET INC.
                          (A Development Stage Company)
                        Statement of Stockholders' Equity
     Period From December 16, 1993 (Date of Inception) to December 31, 1998

<TABLE> 
<CAPTION> 
                                                                                      Total         Common                   
                                                Preferred    Common        Price    Consider-       Stock         Paid-      
                                                 Shares      Shares         Per       ation         ($.001          In       
                       Date/Description          Issued      Issued        Share       Paid       Par Value)     Capital     
---------------------------------------------  ---------    ---------   --------    ----------    ---------     ----------     
<S>                                            <C>          <C>         <C>         <C>          <C>            <C> 
March 12, 1994            Share Issuance             -        800,000     $ 0.10      $ 80,000     $   800        $ 79,200   
April 21, 1994            Share Issuance             -         15,000       0.10         1,500          15           1,485   
May 1, 1994               Share Issuance             -         63,000       0.10         6,300          63           6,237   
May 25, 1994              Share Issuance             -         50,000       1.00        50,000          50          49,950   
May 31, 1994              Share Issuance             -         25,000       1.00        25,000          25          24,975   
June 6, 1994              Share Issuance             -         50,000       1.00        50,000          50          49,950   
June 7, 1994              Share Issuance             -         50,000       1.00        50,000          50          49,950   
June 13, 1994             Share Issuance             -         25,000       1.00        25,000          25          24,975   
June 20, 1994             Share Issuance             -         25,000       1.00        25,000          25          24,975   
July 28, 1994             Share Issuance             -         25,000       1.00        25,000          25          24,975   
September 23, 1994        Share Issuance             -         45,002       6.00       270,012          45         269,967   
October 20, 1994          Share Issuance             -         20,501       6.00       123,008          21         122,987   
October 28, 1994          Share Issuance             -          2,500       6.00        15,000           2          14,998   
November 10, 1994         Share Issuance             -         14,500       6.00        87,000          15          86,985   
November 16, 1994         Share Issuance             -          2,501       6.00        15,004           2          15,002   
Net Loss, Year Ended December 31, 1994               -            -          -             -           -               -     
                                               ---------    ---------   --------     ---------     -------      ----------     
Balance, December 31, 1994                           -      1,213,004                  847,824       1,213         846,611   

August 8, 1995            Share Issuance             -          5,000     $ 6.00        30,000           5          29,995   
August 28, 1995           Share Issuance             -          4,000       6.00        24,000           4          23,996   
September 21, 1995        Share Issuance             -          5,000       6.00        30,000           5          29,995   
September 29, 1995        Share Issuance             -          5,000       6.00        30,000           5          29,995   
December 31, 1995         Share Issuance             -            833       6.00         5,000           1           4,999   
December 31, 1995         Stock Split:
                            1.987538926-to-1
                            Share Outstanding        -      1,217,475        -             -         1,217          (1,217) 
Net Loss, Year Ended December 31, 1995               -            -          -             -           -               - 
                                               ---------    ---------   ========    ----------     -------      ----------   
Balance, December 31, 1995                           -      2,450,312                $ 966,824     $ 2,450      $  964,374 
                                               ---------    ---------               ----------     -------      ----------

<CAPTION> 
                                                 Paid-In                                                    
                                                 Capital      Accum-                                     
                                               (Beneficial    ulated      Treasury                    
                       Date/Description        Conversion)    Deficit       Stock                     
---------------------------------------------  -----------  ----------    ---------  
<S>                                            <C>          <C>           <C>       
March 12, 1994            Share Issuance       $     -      $     -       $    -                   
April 21, 1994            Share Issuance             -            -            -    
May 1, 1994               Share Issuance             -            -            -    
May 25, 1994              Share Issuance             -            -            -    
May 31, 1994              Share Issuance             -            -            -     
June 6, 1994              Share Issuance             -            -            -    
June 7, 1994              Share Issuance             -            -            -     
June 13, 1994             Share Issuance             -            -            -     
June 20, 1994             Share Issuance             -            -            -       
July 28, 1994             Share Issuance             -            -            -    
September 23, 1994        Share Issuance             -            -            -    
October 20, 1994          Share Issuance             -            -            -    
October 28, 1994          Share Issuance             -            -            -    
November 10, 1994         Share Issuance             -            -            -    
November 16, 1994         Share Issuance             -            -            -    
Net Loss, Year Ended December 31, 1994               -        (287,291)        -    
                                               -----------  ----------    ---------                               
Balance, December 31, 1994                           -        (287,291)        -                           

August 8, 1995            Share Issuance             -            -            -    
August 28, 1995           Share Issuance             -            -            -    
September 21, 1995        Share Issuance             -            -            -    
September 29, 1995        Share Issuance             -            -            -    
December 31, 1995         Share Issuance             -            -            -     
December 31, 1995         Stock Split:                                              
                            1.987538926-to-1                                        
                            Share Outstanding        -            -            -    
Net Loss, Year Ended December 31, 1995               -        (677,385)        -    
                                               -----------  ----------    ---------  
Balance, December 31, 1995                     $     -      $ (964,676)    $    -                        
                                               -----------  ----------    ---------  
</TABLE> 

                    See notes to the financial statements.

                                      33
<PAGE>
 
                             MEDJET INCMEDJET INC.
                         (A Development Stage Company)
                       Statement of Stockholders' Equity
    Period From December 16, 1993 (Date of Inception) to December 31, 1998
 
<TABLE> 
<CAPTION> 
                                                                                                        Total          Common 
                                                            Preferred        Common        Price       Consider-       Stock      
                                                              Shares         Shares         Per         ation          ($.001    
           Date/Description                                   Issued         Issued        Share         Paid        Par Value)
---------------------------------------------------         ---------     ----------      -------      ----------    ----------
<S>                                                         <C>           <C>             <C>          <C>           <C> 
Balance, December 31, 1995, brought forward                        -       2,450,312                   $  966,824       $ 2,450    
                                                                                                                            
August 6, 1996      Share Issuance                                 -       1,071,429       $ 5.60       6,000,002         1,071    
    "               Reclassification of deferred                                                                                 
                      offering costs                               -               -            -               -             -    
    "               Reclassification of accumulated                                        
                      deficit for change from an S to                                                                   
                      a C corporation                              -               -            -               -             -    
September 3, 1996   Share Issuance                                 -         160,714         5.60         899,998           161    
December 30, 1996   Acquisition of treasury shares                 -               -            -               -             -    
Net Loss, Year Ended December 31, 1996                             -               -            -               -             -    
                                                            --------      ----------      =======      ----------    ----------
                                                                                                                            
Balance, December 31, 1996                                         -       3,682,455                    7,866,824         3,682    
                                                                                                                            
July 18, 1997       Share Issuance                                 -          21,800       $ 0.05           1,097            22    
July 24, 1997       Share Issuance                                 -           4,464         5.60          24,998             5    
Net Loss, Year Ended December 31, 1997                             -               -            -               -             -    
                                                            --------      ----------      =======      ----------    ----------
                                                                                                                            
Balance, December 31, 1997                                         -       3,708,719                    7,892,919         3,709    
                                                                                                                            
January 27, 1998    Share Issuance                                 -           1,350       $ 5.60           7,560             1    
March 31, 1998      Share Issuance                                 -          10,000         3.02          30,188            10    
April 20, 1998      Share Issuance                           110,000               -        10.00       1,100,000             -    
    "               Placement Agent Warrants                       -               -            -               -             -    
October 9, 1998     Preferred Conversion                    (110,000)        182,724         6.02               -           183    
    "               Preferred Dividend                             -          12,154         4.24          51,534            12    
Net Loss, Year Ended December 31, 1998                             -               -            -               -             -    
                                                            --------      ----------      =======      ----------    ----------

Balance, December 31, 1998                                         -       3,914,947                   $9,082,201       $ 3,915    
                                                            ========      ==========                   ==========    ==========
<CAPTION> 
                                                                                   Paid-In
                                                                 Paid-             Capital          Accum-
                                                                 In             (Beneficial        ulated        Treasury
               Date/Description                                Capital           Conversion)       Deficit        Stock
--------------------------------------------------           -----------        ------------     -----------     --------  
<S>                                                          <C>                <C>              <C>             <C> 
Balance, December 31, 1995, brought forward                  $   964,374        $       -        $  (964,676)    $      -
                                                      
August 6, 1996      Share Issuance                             5,998,931                -                  -            -
    "               Reclassification of deferred                                                           
                      offering costs                          (1,436,052)               -                  -            -
    "               Reclassification of accumulated                     
                      deficit for change from an                                        
                      S to a C corporation                    (1,556,204)               -          1,556,204            -
September 3, 1996   Share Issuance                               899,838                -                  -            -
December 30, 1996   Acquisition of treasury shares                     -                -                  -       (1,700)
Net Loss, Year Ended December 31, 1996                                 -                -         (1,273,977)           -
                                                             -----------        ---------        -----------     --------  
                                                      
Balance, December 31, 1996                                     4,870,887                -           (682,449)      (1,700)
                                                      
July 18, 1997       Share Issuance                                 1,075                -                  -            -
July 24, 1997       Share Issuance                                24,993                -                  -            -
Net Loss, Year Ended December 31, 1997                                 -                -         (2,578,448)           -
                                                             -----------        ---------        -----------     --------  
                                                      
Balance, December 31, 1997                                     4,896,955                -         (3,260,897)      (1,700)
                                                      
January 27, 1998    Share Issuance                                 7,559                -                  -            -
March 31, 1998      Share Issuance                                30,178                -                  -            -
April 20, 1998      Share Issuance                               945,511          133,389                  -            -
    "               Placement Agent Warrants                          18                -                  -            -
October 9, 1998     Preferred Conversion                         184,911         (133,389)                 -            -
    "               Preferred Dividend                               917                -            (51,534)           -
Net Loss, Year Ended December 31, 1998                                 -                -         (1,730,538)           -
                                                             -----------        ---------        -----------     --------  

Balance, December 31, 1998                                   $ 6,066,049        $       -        $(5,042,969)    $ (1,700)
                                                             ===========        =========        ===========     ========  
</TABLE> 
 
                    See notes to the financial statements.

                                      34
<PAGE>
 
                                  MEDJET INC.
                         (A Development Stage Company)
                           Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                                                    Period from
                                                                      For the Year Ended            December 16,
                                                                          December 31,           1993 (Inception) to
                                                                 ---------------------------
                                                                     1998           1997          December 31, 1998
                                                                 ------------   ------------      ----------------- 
<S>                                                              <C>            <C>              <C> 
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net Loss                                                         $(1,730,538)   $(2,578,448)         $(6,547,639)

Adjustments to Reconcile Net Loss to
  Net Cash (Used) by Operating Activities:
     Depreciation and amortization                                   102,723         90,435              319,259
     (Increase) Decrease in accounts receivable                          -            2,083                  -
     (Increase) Decrease in prepaid expenses                          32,651        (17,131)             (31,072)
     (Increase) Decrease in deferred tax asset                      (594,209)           -               (594,209)
     Increase (Decrease) in accounts payable
       and accrued expenses                                           72,717         41,227              291,466
     Increase (Decrease) in accrued interest payable                     -           (7,167)                 -
     Increase (Decrease) in deferred rental obligation                (1,594)         5,292                3,698
     Increase (Decrease) in income taxes payable                         -              -                    150
                                                                 ------------   ------------         ------------ 
  Net Cash (Used) by Operating Activities                         (2,118,250)    (2,463,709)          (6,558,347)
                                                                 ------------   ------------         ------------ 
CASH FLOWS FROM
INVESTING ACTIVITIES:

Cash redemptions of marketable securities                                -              -                320,605
Cash (purchases) of marketable securities                                -              -               (320,605)
Cash purchases of property, plant & equipment                       (102,282)       (94,542)            (471,376)
Cash purchase of organization costs                                      -              -                (37,387)
Cash payments for patents and trademarks                             (45,280)       (53,789)            (155,180)
Cash receipts (payments) for security deposits                           600            -                 (7,050)
                                                                 ------------   ------------         ------------  
  Net Cash (Used) by Investing Activities                           (146,962)      (148,331)            (670,993)
                                                                 ------------   ------------         ------------ 

CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock                          1,080,018            -             1,080,018
Proceeds from issuance of common stock
  and initial public offering                                         37,748         26,095            6,494,616
Purchase of treasury stock                                               -              -                 (1,700)
Proceeds from officer notes payable                                      -              -                321,000
Repayment of officer notes payable                                       -         (165,000)            (321,000)
Proceeds from notes payable                                              -              -                400,000
Repayment of notes payable                                               -              -               (400,000)
                                                                 ------------   ------------         ------------  
  Net Cash Provided (Used) by Financing Activities                 1,117,766       (138,905)           7,572,934
                                                                 ------------   ------------         ------------  

NET INCREASE (DECREASE) IN CASH                                   (1,147,446)    (2,750,945)             343,594

Cash and Cash Equivalents - Beginning of Period                    1,491,040      4,241,985                  -
                                                                 ------------   ------------         ------------  
Cash and Cash Equivalents - End of Period                        $   343,594    $ 1,491,040          $   343,594
                                                                 ============   ============         ============    


SUPPLEMENTAL DISCLOSURES OF
  CASH FLOW INFORMATION:

Cash paid for:
  Income taxes                                                   $       200    $       200          $       400
                                                                 ============   ============         ============    
  Interest expense                                               $       521    $    13,000          $    13,521
                                                                 ============   ============         ============    
</TABLE>

                    See notes to the financial statements.

                                      35
<PAGE>
 
                                  MEDJET INC.
                         (A DEVELOPMENT STAGE COMPANY)
                       NOTES TO THE FINANCIAL STATEMENTS


SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Nature of Organization
     Medjet Inc. (the "Company") is a development stage company incorporated in
     the State of Delaware on December 16, 1993. The Company was organized as a
     medical device company with the goal of developing, manufacturing and
     selling new cutting, drilling, layer removal and shaping tools for a
     variety of surgical procedures. The core technology is based on small-
     diameter, fluid microjets moving at high speeds. The Company believes that
     such jets will bring new surgical capability and performance to the clinic
     or operating room. The initial product area is devices for surgical use in
     ophthalmology.

     During the third quarter of 1996, the Company consummated an initial public
     offering (the "Offering") in which it issued and sold to the public a total
     of 1,232,143 Units (the "Units"), each Unit consisting of one share of
     common stock, $.001 par value, of the Company (the "Common Stock") and one
     Class A Redeemable Common Stock Purchase Warrant (the "Warrants") to
     purchase one share of Common Stock at a price of $10.00 per share for a 24-
     month period commencing on November 6, 1996. The Units became separable on
     that date and the Common Stock and the Warrants began trading separately on
     November 8, 1996. In July 1998, in connection with its private placement
     described below, the Company agreed to extend the exercise period of the
     Warrants for an additional 12 months. As a result, the Warrants will expire
     on  November 6, 1999, unless exercised prior to that time.

     In January 1998, the Company commenced a private placement of its 10%
     Cumulative Convertible Preferred Stock, $.01 par value (the "Preferred
     Stock"), at a price of $10 per share. At the closing for this private
     placement, which was held in April 1998, the Company sold and issued
     110,000 shares of Preferred Stock for an aggregate price of $1,100,000. The
     net proceeds of the private placement have been and will be used to augment
     the Company's working capital.

     On October 9, 1998, the 110,000 shares of Preferred Stock outstanding were
     converted into 182,724 shares of Common Stock. At the same time, a total of
     12,154 shares of Common Stock was issued in payment of the cumulative
     dividends on the Preferred Stock. The dividend was computed at 10% per
     annum and totalled approximately $51,534.

     The private placement, which was terminated on July 31, 1998, was carried
     out pursuant to available exemptions from registration under Section 4(2)
     of the Securities Act of 1933 and rules promulgated under that section.

                                      36
<PAGE>
 
     The Company has continued to incur losses since its inception and at
     December 31, 1998 has accumulated deficits. Management has implemented a
     program to reduce costs and to reduce the break-even point necessary for
     continuing operations. Management believes that its 1999 operating plan,
     which anticipates the program to reduce costs as well as certain funding
     sources, is reasonable and attainable and will provide sufficient cash to
     sustain operations during 1999. In addition, a principal stockholder of the
     Company has committed to provide additional working capital, if necessary.

Cash and Cash Equivalents
     For the purpose of the statements of cash flows, cash equivalents include
     all highly liquid instruments with original maturities of three months or
     less.

Property and Equipment
     Equipment and leasehold improvements are recorded at cost. Depreciation is
     computed using primarily accelerated methods based upon the estimated
     useful lives of the assets which range from 5 to 7 years for equipment and
     39 years for leasehold improvements. Repairs and maintenance which do not
     extend the useful lives of the related assets are expensed as incurred.

Amortization
     Organization costs are being amortized over sixty months on a straight-line
     basis. Total amortization for the years ended December 31, 1998 and 1997
     was $7,477 in both years.

     Patents are being amortized over seventeen years on a straight-line basis.
     These costs will be expensed if and when it is concluded that non-approval
     or no future economic benefits are probable. Total amortization for the
     years ended December 31, 1998 and 1997 was $9,038 and $6,373, respectively.

Net Loss Per Share
     Net loss per share, in accordance with the provisions of Financial
     Accounting Standards No. 128, "Earnings Per Share," is computed by dividing
     net loss by the weighted average number of shares of Common Stock
     outstanding during the period. Common stock equivalents have not been
     included in this computation as the effect would be anti-dilutive.

                                      37
<PAGE>
 
Income Taxes
     In accordance with the provisions of Financial Accounting Standards No.
     109, "Accounting for Income Taxes," deferred taxes are recognized for
     operating losses that are available to offset future taxable income.
     Valuation allowances are established when necessary to reduce deferred tax
     assets to the amount expected to be realized. The Company incurred net
     operating losses for financial-reporting and tax-reporting purposes.
     Accordingly, the benefit for federal income taxes has been offset entirely
     by a valuation allowance against the related deferred tax asset for the
     year ended December 31, 1998. Since the sale of the Company's state net
     operating losses and research and development credits is now available, the
     net estimated proceeds from the sale of these assets has been recorded as a
     deferred tax benefit.

     Pursuant to the Offering (see "Nature of Organization" note), the Company's
     status changed from an "S" corporation to a "C" corporation for federal
     income tax purposes. Accordingly, the deficits accumulated during the
     development stage were charged against additional paid-in capital.

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.

CONCENTRATIONS OF CREDIT RISK

     The Company maintains cash balances in several financial institutions.
     Accounts at each institution are insured by the Federal Deposit Insurance
     Corporation up to $100,000, of which the Company's accounts may, at times,
     exceed the federally insured limits.

DEVELOPMENT STAGE OPERATIONS

     The Company was formed December 16, 1993. Operations since then have
     consisted primarily of raising capital, locating and acquiring equipment,
     obtaining qualified staff, installing and testing equipment and
     experimenting, testing and developing the procedures necessary to produce
     positive results and to lay the foundation for specific development for
     manufacturing and various regulatory approvals.

                                      38
<PAGE>
 
STOCKHOLDERS' EQUITY

Stock Option Plan
     On October 31, 1994, the Company adopted its 1994 Stock Option Plan (the
     "Plan"). The Plan provides that certain options to purchase the Company's
     common stock granted thereunder are intended to qualify as "incentive stock
     options" within the meaning of Section 422A of the United States Internal
     Revenue Code of 1986, while non-qualified options may also be granted under
     the Plan. The initial plan and subsequent amendments provide for
     authorization of up to 449,688 shares at December 31, 1998 and 1997. The
     option price per share of stock purchasable under an Incentive Stock Option
     shall be determined at the time of grant but shall not be less than 100% of
     the Fair Market Value of the stock on such date, or, in the case of a 10%
     Stockholder, the option price per share shall be no less than 110% of the
     Fair Market Value of the stock on the date an Incentive Stock Option is
     granted to such 10% Stockholder.

<TABLE>
<CAPTION>
                                                      Qualified and Non-Qualified Shares                 
                                                        Under Option as of December 31,                  
                                                        -------------------------------                  
                                                              1998            1997                       
                                                         -------------   -------------                   
          <S>                                         <C>                <C>                             
          Outstanding, beginning of year                     96,220          87,520                      
          Granted during the year                           412,025          67,500                      
          Canceled during the year                         (119,345)        (37,000)                     
          Exercised during the year:                                                                     
               At $.05 per share                                -           (21,800)                     
               At $3.02 per share                           (10,000)            -                        
               At $5.60 per share                            (1,350)            -                        
                                                           --------        --------                      
          Outstanding, end of year                          377,550          96,220                      
                                                           ========        ========                      
          Eligible, end of year, for exercise                67,550          23,091                      
                                                           ========        ========                      
          Range of exercise price per share              $.05 to $7.63   $.05 to $8.47                   
                                                         =============   =============                    
</TABLE>
 
     At December 31, 1998, the weighted average exercise price and weighted
     average remaining contractual life is $4.15 per share and 9 years 6 months,
     respectively.

     At December 31, 1998 and 1997, there were 38,988 and 331,668 shares,
     respectively, reserved for future grants.

                                      39
<PAGE>
 
Warrants
     The Company issued common stock purchase warrants separately and as a part
     of both the Offering and the preferred stock private placement (see "Nature
     of Organization") as follows:

<TABLE>
<CAPTION>
                              
                              Exercise        Exercise Term
     Date of       No. of     Price Per       ------------- 
      Grant        Shares       Share      Start    Expiration    Vesting Rights
     -------       ------     ---------    -----    ----------    --------------
     <S>         <C>          <C>         <C>        <C>         <C>
     05/20/96       97,389      $ 3.37    05/20/96   05/20/01     25% per year
     08/14/96    1,071,429       10.00    11/06/96   11/06/99    100% on 11/06/96
     08/14/96      107,143       10.00    08/06/97   08/06/99    100% on 8/06/97
     09/13/96      160,714       10.00    11/06/96   11/06/99    100% on 11/06/96
     04/20/98       18,272        4.34    04/20/98   04/20/02    100% on 4/20/98
                 ---------
                 1,454,947    Outstanding at December 31, 1998
                 =========
</TABLE>
 
     There were no warrants exercised during 1998. At December 31, 1998 and
     1997, there were 1,406,253 and 1,363,633 shares eligible for exercise at
     prices ranging from $3.37 to $10.00 per share.

Pro Forma Information
     In 1996, the Company adopted the disclosure only provisions of Statement of
     Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock Based
     Compensation". Accordingly, no compensation expense has been recognized for
     stock options and warrants issued. Had compensation expense for the options
     and the warrants which vested in 1998 and 1997 been determined based on the
     fair value at the grant date commensurate with the provisions of SFAS No.
     123, the Company's net loss and net loss per share for 1998 and 1997,
     respectively, would have been increased to the pro forma amounts indicated
     below:

<TABLE>
<CAPTION>
                                                 1998           1997
                                                 ----           ----
          <S>                                <C>            <C>
          Net loss:
               As reported                   $(1,915,461)   $(2,578,448)
               Pro forma                     $(2,065,689)   $(3,832,171)
 
               Basic loss per share:
               As reported                   $     (0.51)   $     (0.70)
               Pro forma                     $     (0.55)   $     (1.05)
</TABLE>

                                      40
<PAGE>
 
     The fair value of each option and warrant grant is estimated on the date of
     grant using the Black-Scholes pricing model with the following weighted
     average assumptions for grants in 1998 and 1997, respectively: dividend
     yield of 0% and 0%; expected volatility of 44% in both years; risk-free
     interest rate of 4.5% in both years and expected lives of 5 and 10 years.
 
RETIREMENT PLAN

     The Company sponsors a qualified 401(k) plan covering substantially all
     full time employees under which eligible employees can defer a portion of
     their annual compensation. The Company currently makes no matching
     contribution to the plan.

INCOME TAXES

     The income tax provision is comprised of the following:

<TABLE> 
<CAPTION> 
                                             Year Ended December 31,
                                             -----------------------
                                                1997          1998
                                             ---------      --------
               <S>                           <C>            <C>  
               State current provision       $     200        $ 200
               State deferred provision       (594,209)          -
                                             ---------        -----
                                             $(594,009)       $ 200
                                             =========        =====
</TABLE> 

     In 1998, the State of New Jersey enacted legislation allowing emerging
     technology and/or biotechnology companies to sell their unused New Jersey
     Net Operating Loss ("NOL") Carryover and Research and Development Tax
     Credits ("R&D Credits") to corporate taxpayers in New Jersey. Although the
     provisions of this legislation are currently being modified, the Company
     entered into an agreement under which it retained a third party broker to
     identify a buyer for its NOL Carryover and R&D Credits. The anticipated net
     proceeds of this transaction ($594,209) have been recorded as a non-current
     deferred tax asset in the accompanying financial statements.

     The Company's total deferred tax asset and valuation allowance at December
     31, 1998 are as follows:

          Total deferred tax asset                $ 2,063,279
          Less valuation allowance                 (1,469,070)
                                                  -----------
          Net deferred tax asset                  $   594,209
                                                  ===========

                                      41
<PAGE>
 
     At December 31, 1998, the Company has available approximately $5,082,403 of
     net operating losses to carryforward and which may be used to reduce future
     federal taxable income through December 31, 2011.

COMMITMENTS AND CONTINGENCIES

     The Company leases its building and office space and automobiles.

     The following is a schedule by years of future minimum lease payments as of
     December 31, 1998 under operating leases that have initial or remaining
     non-cancelable lease terms in excess of one year:

<TABLE>
<CAPTION>
 
          Year Ended December 31,
          <S>                                <C>
                    1999                     $6,117
                    2000                      3,874
                                             ------
               Total Minimum Lease
               Payments Required             $9,991
                                             ======
</TABLE>

     Rent expense under the operating leases totaled $100,446 and $98,148 for
     the years ended December 31, 1998 and 1997, respectively.

     Beginning in 1997, the lease for the building and office space has an
     annual escalation factor. The above rental commitments reflect the periods
     during which the actual obligations arise (per the lease agreement). Rental
     expense has been charged to operations on a straight-line basis. The
     associated deferred rental obligation liability of $3,698 is presented in
     the balance sheet as a current liability at December 31, 1998.

     The Company had been leasing approximately 7,358 square feet of research
     and development, manufacturing and office space in Edison, New Jersey. The
     base rent under this lease, which was to expire December 31, 1999, was
     $93,550 per year. During February and March 1999, the Company renegotiated
     the terms of this lease, returned the manufacturing space and a portion of
     the office space under the lease, and entered into a new lease agreement
     for the approximately 4,982 square feet of research and development and
     office space remaining. Under the terms of the new lease, which will expire
     December 31, 2004, the base rent is $78,432 per year.

                                      42
<PAGE>
 
     In 1998, the Company began conducting certain pre-clinical research and
     development activities in facilities located at the Department of Veterans
     Affairs New Jersey Health Care System, East Orange, New Jersey ("VANJHCS").
     The Company has agreed to pay fees to the VANJHCS based on the Company's
     usage of the facility.

     The Company believes the space currently available to it will be sufficient
     to meet the Company's requirements for the foreseeable future.

     During 1998, the Company instituted litigation regarding certain patent
     rights issues. The Company intends to vigorously prosecute this litigation.

FAIR VALUE OF FINANCIAL INSTRUMENTS

     Cash, accounts payable and accrued expenses:
          The carrying amount approximates fair value because of the short term
          maturity of these instruments.

     Limitations
          Fair value estimates are made at a specific point in time, based on
          relevant information and information about the financial instrument.
          These estimates are subjective in nature and involve uncertainties and
          matters of significant judgment and therefore cannot be determined
          with precision. Changes in assumptions could significantly affect
          these estimates.

EMPLOYMENT AGREEMENTS

     In 1996, the Company and its Chairman and Chief Executive Officer entered
     into an employment agreement which expired on March 15, 1999. The
     agreement, which was amended effective as of January 1, 1997, provided for
     a base compensation of $160,000 per year, bonuses aggregating a maximum of
     $75,000 for 1997 based upon the attainment of certain goals and other
     additional compensation as may be determined by the Board of Directors
     (without his participation) in its sole discretion. The Board of Directors
     (without his participation) could also increase such base compensation in
     its sole discretion. In conjunction with a voluntary reduction in his base
     compensation, beginning November 1998, to $85,000 per year, the Chairman
     and Chief Executive Officer was issued a total of 42,500 options to
     purchase the common stock of the Company. Vesting of these options is
     contingent on the number of months such base compensation is reduced.

                                      43
<PAGE>
 
     The expired agreement could be terminated for cause and contained
     proprietary information, invention and non-competition provisions which
     prohibited disclosure of any of the Company's proprietary information and
     precluded competition with the Company for two years after termination of
     employment. Although a new agreement has not yet been finalized, it is
     anticipated that its terms will include these provisions.

     The Company has procured life insurance in the amount of $1 million to
     compensate it for the loss, through death or disability, of the Company's
     Chairman and Chief Executive Officer.

     Effective March 16, 1996, the Company entered into an employment agreement
     with its Vice President - Finance and Human Resources, for an indefinite
     term. The agreement, which was amended effective as of January 1, 1997,
     provides for a base compensation of $101,100 per year. The agreement may be
     terminated by either party at any time upon two weeks' prior notice and
     contains proprietary information, invention and non-competition provisions
     which prohibit disclosure of any of the Company's proprietary information
     and preclude competition with the Company for two years after termination
     of employment. In conjunction with a voluntary reduction in his base
     compensation, beginning November 1998, to $80,000 per year, the Vice
     President - Finance and Human Resources was issued a total of 10,000
     options to purchase the common stock of the Company. Vesting of these
     options is contingent on the number of months such base compensation is
     reduced.

                                      44 
<PAGE>
 
ITEM 8.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURE.

None.


                                   PART III
                                        

ITEM 9.   DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
          COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.

In March 1999, the Board of Directors, as a further cost reduction measure,
determined to combine the offices of Chief Operating Officer and Chief Executive
Officer. As a result, Terence A. Walts, the Company's President and Chief
Operating Officer, will be leaving the employ of the Company effective April 19,
1999. Eugene I. Gordon, the Company's Chairman and Chief Executive Officer, will
also assume the duties of Chief Operating Officer.

The other information required by this item will be contained in the Company's
definitive Proxy Statement for its 1999 Annual Meeting of Stockholders, and is
incorporated herein by reference.


ITEM 10.  EXECUTIVE COMPENSATION.

The information required by this item will be contained in the Company's
definitive Proxy Statement for its 1999 Annual Meeting of Stockholders, and is
incorporated herein by reference.


ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item will be contained in the Company's
definitive Proxy Statement for its 1999 Annual Meeting of Stockholders, and is
incorporated herein by reference.


ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information required by this item will be contained in the Company's
definitive Proxy Statement for its 1999 Annual Meeting of Stockholders, and is
incorporated herein by reference.


ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K.
 
(A)  Reports on Form 8-K.

     None.

                                      45
<PAGE>
 
(B)  Index to Exhibits

     The following is a list of all Exhibits filed as part of this Report:
 
          EXHIBIT                            DESCRIPTION OF
           NUMBER                               DOCUMENT
           ------                               --------  

              3.1   Amended and Restated Certificate of Incorporation of the
                    Registrant (incorporated herein by reference to Exhibit 3.1
                    to the Registrant's Registration Statement on Form SB-2,
                    Registration No. 333-3184).

              3.2   By-Laws of the Registrant (incorporated herein by reference
                    to Exhibit 3.2 to the Registrant's Registration Statement on
                    Form SB-2, Registration No. 333-3184).

            +10.1   Employment Agreement between the Registrant and Eugene I.
                    Gordon, dated as of March 15, 1996 (incorporated herein by
                    reference to Exhibit 10.1 to the Registrant's Registration
                    Statement on Form SB-2, Registration No. 333-3184).

            +10.2   Employment Agreement between the Registrant and Thomas M.
                    Handschiegel, dated as of March 18, 1996 (incorporated
                    herein by reference to Exhibit 10.2 to the Registrant's
                    Registration Statement on Form SB-2, Registration No. 333-
                    3184).

             10.3   Consulting Agreement between the Registrant and Joseph F.
                    Carroll, III, dated as of April 1994 (incorporated herein by
                    reference to Exhibit 10.3 to the Registrant's Registration
                    Statement on Form SB-2, Registration No. 333-3184).

             10.4   Consulting Agreement between the Registrant and Joseph P.
                    Calderone, Jr., dated as of April 1, 1994 (incorporated
                    herein by reference to Exhibit 10.4 to the Registrant's
                    Registration Statement on Form SB-2, Registration No. 333-
                    3184).

            +10.6   The Medjet Inc. 1994 Stock Option Plan, as amended
                    (incorporated herein by reference to Exhibit 10.6 to the
                    Registrant's Registration Statement on Form SB-2,
                    Registration No. 333-3184).

            +10.7   Amendment, dated January 1, 1997, to the Employment
                    Agreement between the Registrant and Eugene I. Gordon, dated
                    as of March 15, 1996 (incorporated herein by reference to
                    Exhibit 10.7 to the Registrant's Form 10-KSB for the year
                    ended December 31, 1996).

            +10.8   Amendment, dated January 1, 1997, to the Employment
                    Agreement between the Registrant and Thomas M. Handschiegel,
                    dated as of March 18, 1996 (incorporated herein by reference
                    to Exhibit 10.8 to the Registrant's Form 10-KSB for the year
                    ended December 31, 1996).

             10.9   Agreement of Lease between the Registrant and Linpro Edison
                    Land Limited, dated May 13, 1994 (incorporated herein by
                    reference to Exhibit 10.16 to the Registrant's Registration
                    Statement on Form SB-2, Registration No. 333-3184).

            10.10   First Amendment to Lease between the Registrant and BCE
                    Associates, L.P., dated February 28, 1996 (incorporated
                    herein by reference to Exhibit 10.17 to the Registrant's
                    Registration Statement on Form SB-2, Registration No. 333-
                    3184).

                                      46
<PAGE>
 
          EXHIBIT                            DESCRIPTION OF
           NUMBER                               DOCUMENT
           ------                               --------  

            10.11   Second Amendment to Lease between the Registrant and BCE
                    Associates, L.P., dated December 13, 1996 (incorporated
                    herein by reference to Exhibit 10.11 to the Registrant's
                    Form 10-KSB for the year ended December 31, 1996).

            10.12   Consulting Agreement between the Registrant and Steven G.
                    Cooperman, dated as of May 20, 1996 (incorporated herein by
                    reference to Exhibit 10.20 to the Registrant's Registration
                    Statement on Form SB-2, Registration No. 333-3184).

            10.13   Consulting Agreement between the Registrant and Sanford J.
                    Hillsberg, dated as of May 20, 1996 (incorporated herein by
                    reference to Exhibit 10.21 to the Registrant's Registration
                    Statement on Form SB-2, Registration No. 333-3184).

            10.14   Promissory Note from the Registrant in favor of Eugene I.
                    Gordon in the principal amount of $100,000, dated May 28,
                    1996 (incorporated herein by reference to Exhibit 10.22 to
                    the Registrant's Registration Statement on Form SB-2,
                    Registration No. 333-3184).

            10.15   Promissory Note from the Registrant in favor of Eugene I.
                    Gordon in the principal amount of $65,000, dated June 26,
                    1996 (incorporated herein by reference to Exhibit 10.23 to
                    the Registrant's Registration Statement on Form SB-2,
                    Registration No. 333-3184).

            10.16   Consulting Agreement between the Registrant and Ophthalmic
                    Research Associates, Inc., dated as of July 1, 1996
                    (incorporated herein by reference to Exhibit 10.16 to the
                    Registrant's Form 10-KSB for the year ended December 31,
                    1996).

            10.17   Exclusive License Agreement, effective as of July 22, 1998,
                    between the Company and Nestle S.A. (incorporated herein by
                    reference to Exhibit 10 to the Registrant's Form 10-QSB for
                    the quarter ended September 30, 1998).

           *10.18   Amendment to the Exclusive License Agreement, effective as
                    of July 22, 1998, between the Company and Nestle S.A.

              *11   Computation of Net (Loss) Per Common Share.

              *23   Consent of Rosenberg Rich Baker Berman & Company.

            *24.1   Power of Attorney (included on signature page).

            *27.1   Financial Data Schedule - December 31, 1998.

            *27.2   Financial Data Schedule - December 31, 1997 (Restated).

_______________
+ Management contract or compensatory plan or arrangement.
* Filed herewith.

                                      47
<PAGE>
 
                                  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 Edison,
State of New Jersey, on the 13th day of April, 1999.

                                             MEDJET INC.
 
                                             By: /s/  Eugene I. Gordon
                                                 ----------------------------
                                                      Eugene I. Gordon,
                                                  Chairman of the Board and
                                                    Chief Executive Officer

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Eugene I. Gordon and Thomas M. Handschiegel, and each
of them individually, his true and lawful attorney-in-fact, proxy and agent,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to act on, sign any and all
amendments to this Annual Report on Form 10-KSB, and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact,
proxies and agents, and each of them individually, full power and authority to
do and perform each and every act and thing necessary and appropriate to be done
in and about the premises, as fully as he might or could do in person, hereby
approving, ratifying and confirming all that said attorneys-in-fact, proxies and
agents or any of his or their substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on the 13th day of April, 1999.

               SIGNATURE                              TITLE(S)
               ---------                              --------


     /s/  Eugene I. Gordon                   Chairman of the Board and
     --------------------------------
     Eugene I. Gordon                           Chief Executive Officer


     /s/  Thomas M. Handschiegel             Vice President - Finance and
     --------------------------------
     Thomas M. Handschiegel                     Human Resources


     /s/  Edward E. David, Jr.               Director
     --------------------------------
     Edward E. David, Jr.


     /s/  Sanford J. Hillsberg               Director
     --------------------------------
     Sanford J. Hillsberg


     /s/  Malcolm R. Kahn                    Director
     --------------------------------
     Malcolm R. Kahn

                                      48
<PAGE>
 
                                 EXHIBIT INDEX


  EXHIBIT                             DESCRIPTION OF
  NUMBER                                DOCUMENT
  -------                               --------

    10.18  Amendment to the Exclusive License Agreement, effective as of July
           22, 1998, between the Company and Nestle S.A.
       11  Computation of Net (Loss) Per Common Share.
       23  Consent of Rosenberg Rich Baker Berman & Company.
     24.1  Power of Attorney (included on signature page).
     27.1  Financial Data Schedule - December 31, 1998.
     27.2  Financial Data Schedule - December 31, 1997 (Restated).

                                      49