<PAGE>
 
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    Form 10-K

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

                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

                     OF THE SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 1998

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

                         Commission file number: 0-28420

                               INTEG INCORPORATED
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             (Exact name of registrant as specified in its charter)

                  Minnesota                             41-1670176        
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(State of incorporation                   (I.R.S. Employer Identification No.)
    or organization)                       

 2800 Patton Road, St. Paul, Minnesota                    55113            
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(Address of principal executive offices)               (ZIP Code)

                                 (651) 639-8816
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              (Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:   None

Securities registered pursuant to Section 12(g) of the Act: 

Common Stock, par value $.01 per share
Common Stock purchase rights

Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

         Yes  X     No        
            -----     -----   

The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 19, 1999 was approximately $14,371,056 (based on the last
sale price of $1.50 as reported by The NASDAQ National Market).

As of March 19, 1999, 9,580,704 shares of the registrant's Common Stock, par
value $.01 per share, were issued and outstanding.

Documents Incorporated by Reference: Portions of the Registrant's Proxy
Statement for its 1999 Annual Meeting of Shareholders (the "Proxy Statement"),
are incorporated by reference in Part III.

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

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Cautionary Statement Regarding Forward Looking Statements

     This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. When used in
this Form 10-K and in future filings by the Company with the Securities and
Exchange Commission, in the Company's press releases and in oral statements made
with the approval of an authorized executive officer, the words or phrases
"believes," "anticipates," "expects," "intends," "will likely result,"
"estimates," "projects" or similar expressions are intended to identify such
forward-looking statements, but are not the exclusive means of identifying such
statements. These forward-looking statements involve risks and uncertainties
that may cause the Company's actual results to differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such differences include, but are not limited to, the following: risks
associated with the development of a new technology; dependence on the
LifeGuide(TM) System, which is still under development; risks associated with
the Company's ability to successfully develop a commercial product; history of
operating losses and expectation of future losses; requirement of additional
capital prior to commercial introduction of the LifeGuide(TM)System; limited
clinical testing experience; uncertainty of obtaining Food and Drug
Administration clearances or approvals; heightened competition; risks associated
with the lack of manufacturing capability and dependence on contract
manufacturers and suppliers; and risks associated with the company's dependence
on proprietary technology, including those related to adequacy of patent and
trade secret protection. The Company wishes to caution readers not to place
undue reliance on any such forward-looking statements, which speak only as of
the date made. The Company undertakes no obligation to revise any
forward-looking statements in order to reflect events or circumstances after the
date of such statements. Readers are urged to carefully review and consider the
various disclosures made by the Company in this report and in the Company's
other reports filed with the Securities and Exchange Commission that attempt to
advise interested parties of the risks and factors that may affect the Company's
business. The forward-looking statements herein are qualified in their entirety
by the cautions and risk factors set forth under "Cautionary Statement" filed as
Exhibit 99.1 to this Annual Report on Form 10-K.

                                     Part I

Item 1.  Business

     Integ Incorporated ("Integ" or the "Company") is developing the
LifeGuide(TM) System, a next generation hand-held glucose monitoring product for
use by people with diabetes that avoids the pain and blood associated with
conventional "finger-stick" technologies. Utilizing the Company's proprietary
interstitial fluid ("ISF") sampling technology, the LifeGuide(TM) System will
allow people with diabetes to frequently self-monitor their glucose levels
without repeatedly enduring the pain of lancing their fingers to obtain a blood
sample. The Company believes that the proposed LifeGuide(TM) System represents a
significant technological advance in glucose monitoring and will enable people
with diabetes to manage their disease more effectively and conveniently. The
Company anticipates that it will file a 510(k) premarket notification with the
United States Food and Drug Administration (the "FDA") for the LifeGuide(TM)
System once the development of the LifeGuide(TM) System is complete.

     Based on the results of a large-scale internal study, the Company announced
in August 1998 that it would be replacing the LifeGuide(TM) infrared measurement
system with an alternate proven measurement technology. In connection with this
announcement, the Company restructured to reduce its monthly expenses.
Furthermore, the Company announced that it would explore potential corporate
alliances that could expedite its search for a new measurement system.

     Integ, a Minnesota corporation, was incorporated in April 1990.

Industry Overview

     It is estimated that there are as many as 120 million people with diabetes
worldwide, and nearly 16 million Americans are affected. Diabetes is a chronic
disease affecting overall health, which can lead to severe complications and
requires active disease management on a daily basis.

     The use of personal glucose monitors is a key factor in the management of
diabetes. Glucose levels are dynamic and vary throughout the day depending upon
food intake, insulin availability, exercise, stress and illness. People with
diabetes attempt to maintain their glucose levels within an acceptable range
through the use of insulin 

                                      -2-
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injections, oral hypoglycemic (glucose reducing) agents, diet, exercise or a
combination of these activities. People with diabetes often test their glucose
levels at multiple times during the day, including before eating meals or when
their glucose levels are suspected to be rising or falling faster than desired.

     The Company believes that sales of personal blood glucose monitoring
products have increased significantly in recent years due to technological
innovations, the development of retail distribution channels and increasing
awareness of the benefits of frequent glucose monitoring. Historically,
consumers have selected devices that offer the greatest ease of use while
providing fast and accurate blood glucose measurements, and technological
innovators have tended to capture significant market share rapidly.

     Due to the release in 1993 of the results of the landmark Diabetes Control
and Complications Trial (the "DCCT"), people with diabetes are becoming
increasingly aware of the need for more intensive glucose monitoring. The
purpose of the trial, which studied more than 1,400 people with Type 1
(insulin-dependent) diabetes over an average of six and one half years, was to
determine whether tighter control over glucose levels would prevent the onset or
slow the progression of the serious complications that often accompany diabetes.
Participants in the DCCT were randomly assigned to either intensive or
conventional therapy groups. Conventional therapy consisted of testing glucose
levels once or twice a day with one or two daily insulin injections. Intensive
therapy involved testing glucose levels at least four times a day with at least
three insulin injections, or pump therapy, diet and exercise, and adjustment of
insulin doses in accordance with the measured glucose levels. The DCCT
demonstrated that more intensive treatment of Type 1 diabetes can reduce the
risk of developing various diabetes-related complications by approximately 60%.

     The DCCT panel has recommended that people with Type 1 diabetes follow an
intensive therapy program, including testing their glucose levels at least four
times a day. Similarly, the United Kingdom Prospective Diabetes Study (UKPDS) on
over 5,000 patients with Type 2 diabetes, demonstrated that improved glucose
monitoring and control reduced the incidence of diabetes related complications
such as retinopathy, nephropathy and possibly neuropathy. These clinical
findings encourage health care professionals to recommend more testing for all
patients with diabetes. Currently, however, the majority of people with diabetes
who use insulin monitor their glucose levels at least once each day.

Existing Personal Blood Glucose Monitoring Systems and New Alternative
Technologies

     Commercially available glucose monitoring systems involve obtaining a
patient's blood sample in order to measure glucose. The primary drawbacks to
this approach are the pain associated with lancing a fingertip to produce the
sample and the mess and inconvenience of handling blood. In conventional glucose
monitoring systems, blood samples are taken from the fingertips because of the
high concentration of capillaries at that site and because the blood produced at
the fingertip can most easily be applied directly to the test strips used in
such devices. Since nerve endings are concentrated in the fingertips, however,
this sampling process results in a significant degree of pain. The level of
patient discomfort is compounded because the fingertips offer a limited surface
area from which to obtain a blood sample, requiring the patient to repeatedly
sample from the same site. In addition, many people with diabetes are
uncomfortable with routinely testing glucose levels in the presence of others
because of the negative perceptions associated with visible blood.

     Most currently available personal blood glucose monitoring systems employ a
disposable test strip in conjunction with a battery-powered, hand-held meter,
and a separate lancing device with it's own disposable. These systems usually
require the user to (1) assemble the finger-lancing device, (2) determine the
calibration code from the test strip package and adjust the meter as required to
be properly calibrated to the test strip being used, (3) insert the test strip
into the meter, (4) lance the finger and wait for a drop of blood to form on the
fingertip, and (5) apply the blood sample to the test strip and wait for the
meter to display the results.

     The goal of most recent glucose monitoring research has been to develop an
accurate system to monitor glucose without the pain of a finger lance or the
need to handle blood. Most of this research falls into five categories: 1)
Non-invasive near-infrared spectroscopy, 2) reverse iontophoresis, 3) alternate
site blood sampling techniques, 4) implantable sensors, and 5) ISF technologies.

     Non-invasive near-infrared spectroscopic technology generally attempts to
estimate glucose levels by measuring light absorption when an infrared light
signal is transmitted through or reflected off of a body part. Every 

                                      -3-
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chemical entity that absorbs infrared energy has a characteristic waveband where
that absorption occurs. This absorption is proportional to its concentration. It
is this "signature" that allows a chemical entity to be identified and measured.

     Reverse iontophoretic technology uses electrical current to draw glucose
molecules out of the skin for measurement. Iontophoresis is a process by which
charged molecules are carried through intact skin by applying a small amount of
electrical current. Reversing that current can pull charged molecules from the
body; with those molecules comes fluid, and with that fluid comes uncharged
molecules like glucose. Such fluid can be accumulated in a test chamber, in
which the glucose can be measured using traditional electrochemical means.

     Other approaches in glucose monitoring development continue to involve the
measurement of glucose in blood but attempt to reduce pain by minimizing the
volume of blood required and broadening the sites available for sampling. The
products currently available in this category involve the same steps as current
blood glucose systems, but allow the user to lance their forearm rather than the
fingertip. A blood sample is still required, as is the time and mess associated
with getting that sample.

     Implantable sensors are targeted toward continuous monitoring of a
patient's glucose level. They generally involve implanting a three-day sensor in
the patient, which is attached through electrical leads to a monitoring device
that is worn externally. One such product is expected to be approved by the FDA
in the near future but it's intended use is limited to identifying trends for
the physician retrospectively. The patients must still use traditional
finger-stick methods for monitoring their glucose levels, taking therapeutic
action, and calibrating the implanted sensor.

     ISF technology involves obtaining a sample of ISF from the skin. ISF
technology is the approach being pursued by Integ and others. Illustrative of
other ISF approaches, which are different from the Company's unique approach
described below, would be to create an opening in the skin using a laser or
other means, pull ISF through the opening, and measure the glucose in the ISF
sample using traditional electrochemical means. Another example would be to
enhance the permeability of the skin through chemical means and allow ISF to
flow into a patch, which could then be measured using traditional colorimetric
means.

     No glucose monitor using non-invasive near-infrared spectroscopic, reverse
iontophoretic technologies or ISF technology has yet been cleared or approved
for commercialization by the FDA.

The Integ Solution

     The Company is developing the LifeGuide(TM) System, utilizing the Company's
proprietary ISF sampling technology, to allow people with diabetes to easily and
accurately measure their glucose levels without the pain of a finger lance or
the need to handle blood. The LifeGuide(TM) System consists of two main
components: a sampling technology to collect a sample of ISF and a measuring
technology to measure the level of glucose present in the ISF sample.

     The Integ Technology

     The Company's proposed LifeGuide(TM) System is based on Company research
indicating that ISF glucose levels correlate closely with blood glucose levels.
ISF is an extracellular fluid that is prevalent throughout the body and the
skin. ISF is the means through which proteins and chemicals, including glucose,
pass between capillaries and cells. Since the LifeGuide(TM) System draws this
sample from the outermost layers of the skin, for instance on the forearm, it
avoids the areas of high nerve density and capillaries found in the deeper
layers of the skin, thus reducing the pain and blood associated with
conventional "finger-stick" sampling approaches.

     The Company's proprietary method for ISF sampling involves a simple
procedure that draws an ISF sample from the outermost layers of the skin and
captures that sample for measurement.

     The LifeGuide(TM) System

     The Company's LifeGuide(TM) System will be comprised of (i) the
LifeGuide(TM) Meter, a reusable glucose measuring device, and (ii) the
LifeGuide(TM) Key, a single-use, disposable ISF sample collection device.

                                      -4-
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     The proposed LifeGuide(TM) Meter will be an integrated, compact,
easy-to-use glucose monitoring device. The Company's internally developed
LifeGuide(TM) meter had originally proposed detection and analysis of the ISF
sample via mid-infrared spectroscopic techniques. However, the measurement
performance of pre-production LifeGuide(TM) meters tested in 1998 did not meet
the Company's clinical performance standards. At the same time, the Company's
sampling technology had been improved to collect larger samples, making it
compatible with the more mature electrochemical and colorimetric measurement
technologies that are used with current finger-stick devices. For these reasons,
the Company has decided to incorporate one of these proven commercial
measurement technologies into the LifeGuide(TM) system in place of its IR
measurement system.

     The single-use, disposable LifeGuide(TM) Key is designed to be easily
handled by the user and inserted into the LifeGuide(TM) Meter. The proprietary
design of the LifeGuide(TM) Key will allow for the capture of the required ISF
sample and the retention of the sample during the measurement and disposal
process. The LifeGuide(TM) Key contains a very small needle that is used to
extract a small sample of ISF and present it in a very controlled fashion to the
measurement system. The LifeGuide(TM) Key will be packaged in individual sterile
packages.

     The Company believes the LifeGuide(TM) System will offer significant
advantages over commercially available personal blood glucose monitoring systems
and products based on alternative technologies under development, including the
following:

     o    Eliminates the Pain of Lancing the Fingertips--The LifeGuide(TM)
          System is designed to allow for the accurate measurement of glucose
          levels without the pain of a finger lance. Unlike most commercially
          available glucose monitoring systems which involve penetrating the
          deeper layers of the skin to obtain a blood sample, the LifeGuide(TM)
          System's proprietary sampling method draws from only the outermost
          layers of the skin and avoids the areas of high nerve density. This
          sampling technology eliminates the pain associated with conventional
          "finger-stick" sampling approaches. This has been verified in
          pre-clinical testing with the LifeGuide(TM) System.

     o    Bloodless Approach--The LifeGuide(TM) System is designed to allow for
          the accurate measurement of glucose levels without drawing blood. This
          approach eliminates the mess and inconvenience of handling a blood
          sample and the negative perceptions associated with visible blood.

     o    Sampling Flexibility--The LifeGuide(TM) System is designed to be used
          on skin almost anywhere on the body, staying away from areas (such as
          the fingertips) where blood capillaries and nerve endings are
          concentrated. Initial company efforts are focused on forearm testing.

     o    Ease of Use--The Company's proposed LifeGuide(TM) System will
          eliminate some of the steps required by commercially available
          personal blood glucose monitoring systems. With current systems the
          user requires two disposables, a lancet and a separate test strip.
          After lancing the finger, a drop of blood must be directed to a small
          target zone on a thin strip. The LifeGuide(TM) System requires only
          one disposable, the LifeGuide(TM) Key. The Company has designed the
          LifeGuide(TM) Key to be easily handled and inserted into the
          LifeGuide(TM) Meter. The sampling procedure of the proposed
          LifeGuide(TM) System has been reduced to simply holding the device
          against an area of exposed skin until an adequate sample has been
          obtained (less than 10 seconds, average) and waiting briefly for a
          displayed result.

     o    Cost Competitive--It is anticipated that the proposed LifeGuide(TM)
          Keys will be offered at competitive prices. It will not present a
          significant departure from current consumer buying patterns and
          reimbursement practices with respect to commercially available
          personal glucose monitoring strips or sensors. Given its innovative
          features, it is anticipated that the proposed LifeGuide(TM) Meter will
          be priced at a slight premium to existing personal glucose monitoring
          meters.

     Because of these potential advantages, the Company believes that the
proposed LifeGuide(TM) System may facilitate greater compliance with the
recommendations of the DCCT panel. The Company, however, has not yet finalized
the development of its LifeGuide(TM) System, and there can be no assurance that
the Company will be able to successfully develop a commercially acceptable
product.

                                      -5-
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Research and Development

     To date, the Company has been engaged primarily in the research,
development and testing of the LifeGuide(TM) System. Since inception, the
Company has incurred approximately $21.5 million in research and development
expenses. The Company spent approximately $5.4 million, $5.3 million and $4.8
million during fiscal years 1998, 1997 and 1996, respectively, on research and
development, all of which was sponsored by the Company.

     In 1996, the Company conducted studies using handheld prototypes of the
IR-based LifeGuide(TM) System on laboratory control solutions. This testing
identified areas in which the performance of the system needed to be improved.
In 1997, the Company focused on systematic identification and quantification of
error sources in the IR-based LifeGuide(TM) System and making design changes to
address these problems.

     In the past twelve months Integ management has taken several steps to focus
the Company's resources on identifying and resolving the remaining product
development hurdles.

     In March 1998 an in-house study on 94 people with diabetes was conducted
using infrared-based (IR) LifeGuide(TM) prototypes. Analysis of this study
showed an improvement in accuracy and precision over similar studies in 1997,
but system performance did not meet the Company's internal clinical performance
specifications. Additional improvements were made, and another study was
conducted in June 1998. This study involved 455 patients, and confirmed that the
glucose concentration in pooled ISF samples correlated well with that in venous
plasma. It also confirmed that the Company's proprietary ISF collection
technology could reliably collect a microliter or more of ISF. However, the
study demonstrated that the LifeGuide(TM) system still did not meet the
Company's internal clinical performance standards. The Company concluded that it
would take six to nine months, or longer, to develop and test additional
performance improvements with the internally developed IR measurement system.

     In parallel with the IR-based LifeGuide(TM) system development, the Company
initiated a study to identify future product measurement system options. In
January 1998 the Company hired consultants to study the feasibility of using
electrochemical and colorimetric measurement methods in the LifeGuide(TM)
system. The consultants' work analyzed the feasibility of using modified
commercial methods to measure glucose in one-half to one microliter samples of
ISF. This feasibility work was completed in June, and the results indicated that
both electrochemical and colorimetric measurement systems were viable candidates
for small sample ISF glucose monitoring. The Company selected an electrochemical
approach as their method to prove principle on the integration of ISF collection
with a commercially available measurement system. This proof-of-principle
project was initiated in July 1998.

     With the results of the June study indicating that the IR system required
further development, and the feasibility work on alternate measurement systems
complete, the company made a strategic decision in August 1998 to change
measurement systems. The Company restructured to focus internally on integrating
electrochemical measurement with its proprietary ISF collection technology. The
Company also announced in September 1998 that it had hired Piper Jaffray to
assist in exploring possible strategic alliances that would provide access to an
alternate measurement system.

     During the fourth quarter of 1998 the Company completed pre-clinical
testing which demonstrated a significant improvement to their ISF collection
method that cut average ISF collection times almost in half. The Company also
completed integration of its ISF collection technology with a laboratory
electrochemical measurement system and conducted a study on people with
diabetes. The Company is currently in the process of using the information
gained in this study to complete a prototype handheld electrochemical
LifeGuide(TM) System.

The Company's success is entirely dependent upon the successful development,
commercialization and market acceptance of the LifeGuide(TM) System, the
development of which is ongoing and the complete efficacy of which has not yet
been demonstrated. The Company is currently focused on the research and
development activities necessary to modify the current design with an alternate
measurement technology in order for the LifeGuide(TM) System to meet the
Company's product specifications. The LifeGuide(TM) System must deliver
performance that is acceptable both to the FDA and to the users of the product.
The personal glucose monitoring product market is characterized by commercial
products that are manufactured in large quantities at very low cost. As a
result, the present focus of the 

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LifeGuide(TM) Meter development is to finalize the design of the handheld,
battery powered prototype into a product that functions within its performance
specifications and that can be reliably and cost effectively manufactured.

Clinical Testing

     The goal of the Company's clinical testing to date has been to demonstrate
the correlation between ISF glucose levels and blood glucose levels, and to test
various prototypes of the LifeGuide(TM) System for accuracy and precision. All
ISF samples used in this testing have been obtained utilizing the Company's
proprietary sampling method. Past studies to support this goal are described
below.

     In early 1996, clinical studies were conducted at the Mayo Clinic and the
University of Minnesota. Both of these studies used the LifeGuide(TM) System to
draw samples of ISF and a standard laboratory assay for measuring glucose levels
in venous blood and ISF. The Mayo Clinic study provides support for the
conclusion that there is a strong correlation between the glucose levels in ISF
and the glucose levels in blood when the glucose levels are in a relatively
steady state. This study compared the ISF and blood glucose values in 66
individuals and yielded a correlation coefficient of 0.96 (on a 0.0 to 1.0
scale, with 1.0 representing a perfect correlation). This study was published in
the Journal of Diabetes Care (September 1997). The University of Minnesota study
provides support for the conclusion that there is a strong correlation between
the glucose levels in ISF and the glucose levels in blood when the glucose
levels are in a state of rapid change. This study has compared the ISF and blood
glucose values in 17 individuals with Type 1 diabetes over a five-hour period of
rising and falling glucose values. Cumulative data from these 17 subjects has
yielded a correlation coefficient of 0.95. This study was published in the
Journal of Laboratory and Clinical Medicine (October 1997). The data from both
the Mayo clinic study and the University of Minnesota study were presented in
June 1997 at the Annual Scientific Sessions of the American Diabetes Association
in Boston, Massachusetts.

     In 1997, the Company conducted additional studies using a hand-held
prototype of the IR-based LifeGuide(TM) System to compare the glucose values
obtained using the LifeGuide(TM) System to those obtained using a laboratory
measure of glucose in a blood sample. This testing was performed to access the
accuracy and precision of the system as it was being developed.

     The fourth quarter of 1998 brought data from the first in-house clinical
study of the system that reflects Integ's new product strategy. A laboratory
system was developed which incorporated both a new generation of ISF collection
improvements as well as a modified commercial electrochemical strip-based
measurement system. A study was conducted using the lab system on 100 people
with diabetes. The average collection time for a one microliter sample was 7.9
seconds, compared to 23 seconds from a June 1998 study with an earlier system.
In December, 92.8 percent of the participants collected an ISF sample
successfully on the first attempt, compared to 74.3 percent in June and 99.4
percent of the participants collected successfully in two attempts, compared to
94.2 percent in June. In addition, the measurement performance results with this
system were as good as the best achieved with the IR system. In a follow-up
study in 1999, the electrochemical lab system has achieved the Company's best
performance as the planned development and improvement program continues to move
forward.

     The Company plans to conduct at-home and method comparison studies in the
third quarter of 1999 on a handheld pre-clinical version of the electrochemical
LifeGuide(TM) System. This data will be used to complete the development of a
clinical handheld LifeGuide(TM) System.

     If the Company is able to develop clinically acceptable prototypes of the
LifeGuide(TM) System, the Company plans to use these prototypes to obtain
patient-generated clinical data in a three-center, 300 patient trial for use in
the Company's application to the FDA to market the LifeGuide(TM) System. In
addition, at-home clinical trials will also be conducted. The Company currently
plans to submit this application to the FDA as soon as feasible after completing
development of the LifeGuide(TM) Meter.

     To date, testing of the LifeGuide(TM) System has been performed solely by
Company personnel under controlled circumstances. There can be no assurance that
the Company will not continue to encounter problems in completing the
development of the LifeGuide(TM) Meter that would prevent the Company from
initiating clinical testing, and there can be no assurance that the Company will
not encounter problems in clinical testing that would cause the Company to
further delay commercialization of the LifeGuide(TM) System. There also can be
no assurance that a commercial version of the LifeGuide(TM) System, if
developed, will prove to be accurate and reliable on a 

                                      -7-
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consistent basis. Even if accurate and reliable, there can be no assurance that
such testing will show the Company's product to be safe and effective.

Manufacturing

     The LifeGuide(TM) System is designed to be economically produced using
proven manufacturing methods and equipment. As part of its design strategy, the
Company has consulted with component suppliers, automation firms and OEM
electronics manufacturers.

     The Company currently plans to use an outside manufacturer to build the
LifeGuide(TM) Meter and to develop production test methods and equipment for the
Company. This manufacturer will also participate in the prototype builds of the
LifeGuide(TM) Meter for testing. The LifeGuide(TM) Key will be assembled by the
Company at its facilities from components obtained from outside suppliers. In
manufacturing the LifeGuide(TM) Key, the Company will use assembly, test and
packaging equipment employing well-known processes similar to those used for
other high speed assembly applications.

     The Company expects that one of its most significant manufacturing
challenges will be to quickly increase LifeGuide(TM) Key production volumes
after full-scale commercial introduction of the LifeGuide(TM) System. To address
this challenge, the Company successfully installed and qualified an initial
automated manufacturing and packaging line in second quarter 1998. This line is
flexible and can be easily modified for key design changes which will be
required with the new measurement system. This line has a capacity of 20 million
keys per year and will serve as the benchmark for specifying additional higher
volume lines.

     There can be no assurance, however, that the Company will be able to
install and qualify subsequent commercial productions lines on a timely basis or
at all. There also can be no assurance that the Company will be able to achieve
and maintain product quality and reliability when producing the LifeGuide(TM)
System in the quantities required for commercial operations or within a period
that will permit the Company to introduce its products in a timely fashion, or
that the Company will be able to assemble and manufacture its products at an
acceptable cost.

Sales and Marketing

     The Company intends to market and sell the LifeGuide(TM) System through a
corporate partner. The Company has no experience in marketing the LifeGuide(TM)
System and has not yet entered into any marketing or distribution arrangements
for the LifeGuide(TM) System. Many of the Company's potential competitors have
already entered into distribution and marketing agreements with major marketing
partners. There can be no assurance that the Company will be able to build a
suitable sales force or enter into satisfactory marketing arrangements with
third parties when commercial potential develops, or that its sales and
marketing efforts will be successful.

Patents and Proprietary Rights

     The Company's success will depend in part on its ability to obtain patent
protection for its proposed products and processes, to preserve its trade
secrets and to operate without infringing the proprietary rights of third
parties. The Company pursues a policy of seeking patent protection for each of
the areas of invention embodied in the LifeGuide(TM) System. The Company has
three issued United States patents relating to the method of drawing an ISF
sample from the outer layers of the skin, as well as two related US patents. The
Company has four pending United States patent applications directed toward
various aspects of the technologies underlying the LifeGuide(TM) System, for
which two claims have been granted and are awaiting issuance. The Company has
also filed two corresponding PCT foreign patent applications, related to its
sampling methods, in order to seek similar patent protection outside the United
States. The first of these has received a favorable PCT opinion and has been
filed in Europe and three non-European countries. The European application has
been granted and is being filed in selected member states.

     The Company has implemented a strategy of pursuing patent applications to
provide both design freedom and protection from competitors. This strategy
includes evaluating and seeking patent protection both for inventions most
likely to be used in the Company's LifeGuide(TM) System and for related
inventions likely to be used by others as competing alternatives.

                                      -8-
<PAGE>
 
     The Company also relies upon trade secrets and proprietary know-how in its
manufacturing processes. The Company requires each of its employees,
consultants, advisors and certain of its vendors to execute a confidentiality
agreement upon the commencement of their relationship with the Company.

     No assurance can be given that any additional patents will be issued, that
the scope of any patent protection granted to the Company will exclude
competitors or that any of the Company's patents will be held valid or
enforceable if subsequently challenged. Patenting medical devices involves
complex legal and factual questions, and there is no consistent policy regarding
the breadth of claims pertaining to such technologies. The Company also relies
upon unpatented trade secrets, and no assurance can be given that others will
not independently develop or otherwise acquire technologies substantially
equivalent to those of the Company. In addition, even if the patents the Company
has applied for are ultimately issued, others may hold or receive patents that
contain claims covering the products proposed to be sold by the Company and
which may delay or prevent the sale of the LifeGuide(TM) System or require
licenses resulting in the payment of fees or royalties by the Company in order
for the Company to carry on its business. There can be no assurance that needed
or potentially useful licenses will be available in the future on acceptable
terms or at all.

     There has been substantial litigation regarding patent and other
intellectual property rights in the medical device industry. Litigation could
result in substantial costs to and a diversion of effort by the Company, but may
be necessary to enforce any patents issued to the Company, protect trade secrets
or know-how owned by the Company, defend the Company against claimed
infringement of the rights of others or determine the scope and validity of the
proprietary rights of others. The Company is not currently a party to any patent
or other litigation. The Company routinely monitors patent issuance by others in
its industry. An adverse determination in any litigation, could subject the
Company to significant liabilities to third parties, require the Company to seek
licenses from or pay royalties to third parties or prevent the Company from
manufacturing, selling or using its proposed products, any of which could have a
material adverse effect on the Company's business and prospects.

Third Party Reimbursement

     Private insurance companies, self-insured employers, health maintenance
organizations and governmental payors under Medicare and Medicaid programs are a
source of reimbursement to users of blood glucose monitoring systems and related
products, but there is no uniform policy on reimbursement among third-party
payors. Sales of the Company's proposed products in certain markets will be
dependent in part on availability of adequate reimbursement from these
third-party payors. Although the Company believes that current reimbursement
levels are adequate to support the introduction of the LifeGuide(TM) System,
third-party payors are increasingly challenging the pricing of medical products
and services. There can be no assurance that adequate levels of reimbursement
will be available to permit the Company to achieve market acceptance of the
LifeGuide(TM) System or maintain price levels sufficient to realize an
appropriate return on its investment in the development or manufacture of the
LifeGuide(TM) System. Without adequate support from third-party payors, the
market for the Company's products may be limited.

     The Medicare program reimburses people with diabetes for one meter and for
a one month's supply of test strips at a time as approved by their physicians.
In 1998, the Health Care Financing Administration ("HCFA"), which sets rates for
the Medicare program, set a payment limit of $63.73 for personal blood glucose
monitors and set the maximum reimbursement rates for a box of 50 test strips at
between $31.22 to $36.73, depending on the state in which the reimbursement is
sought. These payment limits and other future initiatives to reduce healthcare
costs may lead to increased pricing pressures among manufacturers of existing
blood glucose meters and test strips. The Company's business, financial
condition and results of operations could be adversely affected by the
continuing efforts of governmental and private payors to reduce the costs of
healthcare by lowering reimbursement rates.

     As a provider of products that are reimbursed by Medicare, Medicaid and
other third-party payors, the Company will be subject to the anti-kickback
provisions of the Medicare and Medicaid fraud and abuse laws and similar state
laws. These laws prohibit the exchange of remuneration for referrals of services
or products reimbursed by Medicare and Medicaid or other third-party payors.
Violations of these prohibitions may result in civil and criminal penalties and
exclusion from the Medicare and Medicaid programs. The Company intends to comply
with the federal anti-kickback statute and related safe harbor regulations
regarding discount disclosures.

                                      -9-
<PAGE>
 
Competition

     The Company believes that its success will depend primarily upon its
ability to create and deliver a glucose monitoring system, on a timely basis and
at a competitive price, that avoids the pain, blood and test steps associated
with current glucose monitoring products. In addition, the Company must
effectively prove the clinical efficacy of ISF glucose monitoring to the FDA and
heath care providers and maintain the proprietary nature of its technologies and
processes. The glucose monitoring industry is characterized by intense
competition and is currently dominated by several companies with established
products and distribution channels. There are currently four significant
competitors in the worldwide blood glucose monitoring market: LifeScan, Inc., a
subsidiary of Johnson & Johnson, Inc.; Roche Diagnostics; Bayer Diagnostics, a
division of Bayer AG; and Medisense, Inc. (a subsidiary of Abbott Laboratories).

     Companies in the glucose monitoring market compete on the basis of
innovative technology, ease of use, price, product reliability and acceptance by
consumers and healthcare professionals. Price competition for the placement of
monitors in the glucose monitoring market is intense and involves marketing
tactics such as rebates, trade-in offers and volume purchase incentive programs.
This competition could result in lower sales prices for the LifeGuide(TM) System
and the use of purchase incentive programs that could adversely affect the
Company's revenues and profitability.

     A number of entities are conducting research on possible non-invasive and
minimally invasive methods of determining glucose levels. Specific information
regarding the precise progress of these companies with respect to these
alternative technologies has not generally been made public.

     There can be no assurance that the Company's competitors and potential
competitors will not succeed in developing or marketing technologies and
products that will be more accepted in the marketplace than the proposed
LifeGuide(TM) System or that would render the Company's technology and proposed
products obsolete or noncompetitive. Most of the Company's competitors and
potential competitors have substantially greater capital resources, research and
development staffs and facilities than the Company. In addition, most of the
Company's competitors and potential competitors have substantially greater
experience than the Company in research and new product development, obtaining
regulatory approvals and manufacturing and marketing medical devices. Many of
the Company's potential competitors have already entered into distribution and
marketing agreements with major marketing partners.

     Numerous researchers are also investigating alternative treatments or cures
for diabetes. If any of these efforts are successful in reducing the
complications associated with diabetes and can be cost-effectively provided to
people with diabetes, the need for the Company's products could be reduced or
eliminated.

Government Regulation

     Government regulation in the United States and other countries is a
significant factor in the Company's business. The Company's medical device
products will be regulated by the FDA under a number of statutes including the
Federal Food, Drug and Cosmetic Act, as amended (the "FDC Act"), the Safe
Medical Devices Act of 1990 (the "SMDA"), the FDA Modernization Act of 1997 (the
"FDAMA"), and certain associated regulations governing the development, testing,
manufacturing, labeling, marketing and distribution of medical devices as well
as the reporting of certain information regarding their safety. Sales of the
Company's medical device products outside the United States are subject to
comparable regulatory requirements.

     The Company plans to eventually support the marketing and sales of the
LifeGuide(TM) System in several foreign markets. No regulatory approvals have
been obtained in any such markets and there can be no assurance that any will be
issued. Requirements pertaining to the LifeGuide(TM) System vary widely from
country to country and involve anything from simple registration to detailed
submissions similar to those required by the FDA. Additionally, new government
regulations may be established that could delay or prevent regulatory approval
of the LifeGuide(TM) System.

     FDA permission must be received to distribute a new medical device in the
United States and can be obtained in one of two ways. If a new or significantly
modified device is "substantially equivalent" to an existing legally marketed
device, the new device can be commercially introduced after filing a 510(k)
premarket notification 

                                      -10-
<PAGE>
 
with the FDA and the subsequent issuance by the FDA of an order permitting
commercial distribution. Changes to existing devices that do not significantly
affect safety of effectiveness of the device may be made without an additional
510(k) notification.

     The second path to market in the United States involves a more
comprehensive approval process known as a Premarket Approval ("PMA"). The PMA
applies to a new medical device that is not substantially equivalent to a
currently marketed device. First, in a PMA application, the Company must conduct
clinical trials in accordance with testing protocols approved by an
Institutional Review Board ("IRB") for the participating research institution
and the investigational device exemption regulations promulgated by the FDA.
Second, the Company must submit a PMA application that contains the clinical
trial results, and other information required under the FDC Act such as a full
description of the device and its components, a full description of the methods,
facilities and controls used for manufacturing and examples of proposed
labeling. Finally, the manufacturing site(s) for the medical device subject to
the PMA process must operate under Good Manufacturing Practices ("GMP") and pass
an FDA Pre-Approval Inspection before the product is approved.

     The time required to obtain regulatory clearance or approval of the
Company's products after filing is uncertain. There can be no assurance that
problems will not arise that may delay or ultimately prevent commercialization
of the Company's products or that the FDA will clear or approve the products.
Further, even if regulatory clearance or approval is obtained, such clearance or
approval may include significant limitations on the intended use under which the
individual product may be marketed. Finally, the Company believes, and has
confirmed with the FDA, that the LifeGuide(TM) System may be submitted as a
510(k), but there can be no assurance that the FDA will accept a 510(k)
submission for the LifeGuide(TM) System. If a 510(k) submission is not accepted
by the FDA, the more time consuming and comprehensive PMA application will be
required. However, the FDA has granted Integ expedited review of its
LifeGuide(TM) System application in either 510(k) or PMA form. Expedited review
may shorten the time between submission of clinical trial data and approval from
the FDA to market the LifeGuide(TM) System.

     The FDA may deny a clearance or approval if the applicable regulatory
criteria are not satisfied or may require additional clinical study testing. The
FDA may, upon review of the requested additional clinical data, ultimately
decide that the submission does not satisfy the regulatory criteria for
clearance or approval. Further, FDA clearance and approval decisions are subject
to continual review and, if the FDA believes that the Company is not in
compliance with the FDC Act, the SMDA, the FDAMA or associated regulations, it
has the power to institute proceedings to detain or seize the Company's
products, require a recall, enjoin future violations and assess civil and
criminal penalties against the Company, its directors, officers or employees.
The FDA may also withdraw market clearance or approval for the Company's
products or require the Company to repair, replace or refund the cost of any
device manufactured or distributed by the Company.

     The FDC Act will regulate the Company's development, quality control and
manufacturing procedures by requiring the Company to demonstrate compliance with
current GMPs as implemented through the Quality System Regulations. The FDA
monitors compliance with these requirements by requiring manufacturers to
register with the FDA, subjecting manufacturers to periodic FDA inspections of
their manufacturing facilities. In order to ensure compliance with these
regulations, the Company will be required to expend time, resources and effort
in the areas of quality assurance and quality control. If violations of the
applicable regulations are noted during FDA inspections, the continued marketing
of any products manufactured by the Company may be adversely affected.

Advisory Boards

     The Company realizes that, if it is to be successful, its products must
meet the needs of the people who will use them. For this reason, the Company
makes an active effort to seek out experts in the field to advise the Company on
product development and marketing issues. A key factor in this process has been
the Company's establishment of a Medical Advisory Board and a Diabetes Educator
Advisory Board. The Medical Advisory Board is comprised of leading physicians in
the fields of endocrinology and laboratory medicine. The members of the Diabetes
Educator Advisory Board are all Certified Diabetes Educators. These boards meet
periodically to discuss relevant issues and are also available for consultation
on an as-needed basis.

                                      -11-
<PAGE>
 
Employees

     As of March 2, 1999, the Company had a total of 26 full-time employees. The
Company also employed nine persons on a temporary or contract basis (full and
part-time). Of this total work force, 18 persons were engaged in research and
development activities, nine persons in manufacturing development, four persons
in clinical, regulatory and quality functions and four persons in
administration. None of the Company's employees is covered by a collective
bargaining agreement. The Company believes that it maintains good relations with
its employees.

Executive Officers of the Registrant

     The following sets forth certain information regarding the executive
officers of the Company:

            Name          Age                  Position
     -------------------- ---  ------------------------------------------------

     Susan L. Critzer.... 43   Interim President and Vice President, Operations
                               Acting Chief Financial Officer

     Richard F. Mussmann. 42   Vice President, Research and Development

     Susan L. Critzer joined the Company in January 1995 as Vice President,
Operations and assumed the role of interim President and acting Chief Financial
Officer in June 1998. Before joining the Company, Ms. Critzer spent six years
with American Cyanamid Corporation's Davis and Geck ("D&G") Division, where she
held a number of management positions. Most recently at D&G, she was Director of
Engineering for D&G's start-up endosurgery division, where she was responsible
for the commercialization of all new laparoscopic products. From 1986 to 1989,
Ms. Critzer was with Becton-Dickinson Corporation where she held management
positions in manufacturing engineering and quality assurance and was involved in
the high volume production of intravenous catheters. Prior to her employment
with Becton-Dickinson, Ms. Critzer held a variety of management, information
systems, quality assurance, and engineering positions with General Motors
Corporation. Ms. Critzer holds an MBA from the University of Michigan, and a
BSME from General Motors Institute.

     Richard F. Mussmann joined the Company in July 1997 as Vice President,
Research and Development. Before joining the Company, Mr. Mussmann served as
Product Management Vice President of Telogy Networks, an embedded communications
software company, where he was responsible for product definition and planning,
marketing programs, and key customer relations. From 1993 to 1995, Mr. Mussmann
was Group Director, New Product Development for Ethicon Endo-Surgery, a
developer and manufacturer of minimally-invasive surgical instruments, where he
was responsible for the successful development and launch of ten new products.
From 1989 to 1993, Mr. Mussmann served as Director of Corporate Accounts and
Research and Development Project Engineering Manager at Boehringer Mannheim
Corporation, where he led the development of several new products, including the
Accu-Chek Advantage(R) Blood Glucose Monitor. Mr. Mussmann also held various
engineering and engineering management positions while employed for 11 years at
AT&T Bell Laboratories. He received his Master's and Bachelor's degrees in
electrical Engineering from Purdue University.

Item 2. Properties

     The Company currently leases approximately 42,000 square feet of space at
2800 Patton Road, St. Paul, Minnesota. The lease expires on September 30, 2000.
The Company believes its facilities will be adequate for its needs through
completion of the development of the LifeGuide(TM) System. A minor space
improvement at its existing location will be required to accommodate increased
warehouse requirements prior to commercial introduction once development of the
LifeGuide(TM) System is complete.

Item 3. Legal Proceedings

     The Company is not a party to any legal proceedings.

                                      -12-
<PAGE>
 
Item 4. Submission of Matters to a Vote of Security Holders

     None.

                                     Part II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

     The Company's common stock is listed and traded on the NASDAQ National
Market under the symbol NTEG. The following table sets forth the high and low
sale prices per share for the Company's common stock as reported by the NASDAQ
National Market for the quarterly periods indicated:

                                                  High              Low
                                                 ------------------------
          First Quarter 1997                     $10.25            $ 6.00
          Second Quarter 1997                    $10.25            $ 2.75
          Third Quarter 1997                     $ 8.75            $ 5.50
          Fourth Quarter 1997                    $ 6.00            $ 3.00

          First Quarter 1998                     $ 7.38            $ 3.25
          Second Quarter 1998                    $ 4.75            $ 2.13
          Third Quarter 1998                     $ 3.25            $ 0.50
          Fourth Quarter 1998                    $ 1.81            $ 0.59

     At March 19, 1998, the Company had 225 shareholders of record.

     The Company has not declared or paid any cash dividends on its capital
stock since its inception. The Company currently intends to invest any earnings
in the development and expansion of its business and does not intend to pay
dividends in the foreseeable future. The payment of dividends, if any, in the
future will be at the discretion of the Board of Directors and will depend on
the Company's earnings, financial condition, capital requirements and other
relevant factors.

     The net proceeds to the Company from its initial public offering in 1996,
after deducting expenses, were approximately $26.1 million. The Company has used
the net offering proceeds in the approximate amounts set forth below:

     Investment in short-term, interest bearing securities,
         primarily investment grade commercial paper  and
         money market funds                                       $10,715,000
     Capital expenditures                                           2,325,000
     Research and development and clinical and regulatory
         preparation                                                8,115,000
     Manufacturing scale-up and marketing activities                3,345,000
     Working capital and other general corporate purposes           1,600,000
         Total use of proceeds                                    $26,100,000

     Except for officer compensation and relocation payments totaling $1,289,571
in the aggregate, director compensation totaling $176,500 in the aggregate, and
consulting fees paid to a director totaling $111,375, none of the net proceeds
from the Company's initial public offering were paid directly or indirectly to
(i) officers or directors of the Company or their affiliates, (ii) persons
owning 10% or more of the Company's equity securities or (iii) affiliates of the
Company.

                                      -13-
<PAGE>
 
Item 6. Selected Financial Data

     The following selected financial data of the Company are qualified by
reference to and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Financial
Statements and the Notes thereto included elsewhere herein. The statements of
operations data for the years ended December 31, 1996, 1997 and 1998 and for the
period from April 3, 1990 (inception) to December 31, 1998, and the balance
sheet data at December 31, 1997 and 1998 are derived from, and are qualified by
reference to, the audited financial statements included elsewhere in this report
and should be read in conjunction with those financial statements and notes
thereto. The statements of operations data for the years ended December 31, 1993
and 1994 and the balance sheet data at December 31, 1994, 1995 and 1996 are
derived from audited financial statements not included herein.

                     SELECTED STATEMENTS OF OPERATIONS DATA
                      (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                                                        Period from  
                                                                                                         April 3,    
                                                                                                           1990      
                                                                                                        (Inception)  
                                                         Year Ended December 31,                      to December 31,
                                      ------------------------------------------------------------    ---------------
                                         1998         1997         1996        1995        1994            1998
                                     -------------------------------------------------------------    ---------------
<S>                                   <C>          <C>           <C>          <C>        <C>           <C>      
Operating loss                        $(10,871)    $(12,462)     $(9,920)     $(5,281)   $(2,522)      $(43,324)
Net loss                              $(11,086)    $(11,564)     $(9,083)     $(5,049)   $(2,492)      $(41,524)
Net loss per share:
    Basic and diluted                 $  (1.17)    $  (1.24)     $  1.86      $(11.65)   $ (7.72)      $ (14.34)
Weighted average number of
  common shares outstanding:
    Basic and diluted                    9,477        9,305        4,889          433        323          2,896 

</TABLE>







                           SELECTED BALANCE SHEET DATA
                      (in thousands, except employee data)
<TABLE>
<CAPTION>

                                                           December 31,
                                     --------------------------------------------------------
                                       1998        1997        1996        1995        1994
                                     --------    --------    --------    --------    --------
<S>                                  <C>         <C>         <C>         <C>         <C>     
Current assets                       $ 11,308    $ 21,914    $ 34,151    $ 15,860    $    569

Current liabilities                     2,411       2,340       1,574         523         354

Working capital                         8,897      19,574      32,577      15,337         215

Total assets                           18,155      29,216      37,716      17,376       1,247

Long-term obligations                   2,686       3,030       1,298         447         499

Shareholders' equity (deficiency)      13,058      23,846      34,844      16,405      (4,738)

Number of full time employees              26          79          63          45          19

</TABLE>

                                      -14-
<PAGE>
 
Item 7. Management's Discussion and Analysis of Financial Condition 
        and Results of Operations

General

     Integ, a development stage company, was incorporated on April 3, 1990 to
develop the LifeGuide(TM) System, a next generation, hand-held glucose
monitoring product for use by people with diabetes that avoids the pain and
blood associated with conventional "finger-stick" technologies. Utilizing the
Company's proprietary interstitial fluid sampling technology, the LifeGuide(TM)
System will allow people with diabetes to frequently self-monitor their glucose
levels without repeatedly enduring the pain of lancing their fingers to obtain a
blood sample.

     From inception through December 31, 1998, the Company has incurred losses
totaling $41.5 million, consisting of $21.5 million of research and development
expenses, $8.5 million of general and administrative expenses, $7.2 million of
manufacturing development expenses and $4.3 million of other expenses, net of
interest income. The Company's activities have consisted primarily of research
and product development, product design, and development of the manufacturing
equipment and processes and marketing strategies needed for the introduction of
the LifeGuide(TM) System. The Company has generated no revenue and has sustained
significant operating losses each year since inception. The Company expects such
losses to continue for the next several years.

     Based on the results of a large-scale internal study, the Company announced
in August 1998 that it would be replacing the LifeGuide(TM) infrared measurement
system with an alternate proven measurement technology. Furthermore, the Company
announced that it would explore potential corporate alliances that could
expedite this change. As a result of this decision, the Company restructured in
August and reduced its workforce. In connection with this restructuring, the
Company recorded a one-time charge of $689,000, all of which is attributable to
costs incurred to reduce the workforce.

     The Company's future success is entirely dependent upon the successful
development, commercialization and market acceptance of the LifeGuide(TM)
System, the development of which is ongoing and the complete efficacy of which
has not yet been demonstrated. The Company is currently focused on the research
and development activities necessary to modify the current design in order for
the LifeGuide(TM) System to meet the Company's product specifications. The
Company has also announced a search for a corporate partner to provide access to
a replacement measurement technology.

Results of Operations

     General: The Company's net loss totaled $11.1 million during 1998 from
$11.6 million during 1997 and $9.1 million during 1996. The Company expects net
losses to continue for the next several years.

     Research and development expenses: Research and development expenses
increased to $5.5 million during 1998 from $5.3 million in 1997 and $4.8 million
from 1996. The increase in research and development expense in 1998 was
primarily due to increases in the amount of pilot plant costs allocated to
research and development ($665,000) and a one-time charge for the workforce
reduction ($188,000), which were partially offset by decreased staffing costs
($220,000), prototype expenses ($346,000), employee relocation costs ($107,000),
and lab supply expenses ($60,000). The increase in research and development
expense in 1997 when compared to 1996 is primarily attributable to increases in
staffing costs ($504,000) and consulting and contractor expenses ($400,000),
which were partially offset by lower licensing fees ($200,000) and facility
costs ($166,000).

     Manufacturing development expenses: Manufacturing development expenses
decreased to $2.2 million during 1998 from $2.5 million in 1997 and $1.6 million
in 1996. The decrease in manufacturing development expenses during 1998 is
primarily attributable to decreased staffing costs ($208,000), the allocation of
pilot plant costs to research and development ($665,000) and decreases in
prototype tooling expenses ($108,000), travel expenses ($93,000) and the
occupancy allocation ($66,000), which were partially offset by increases in
depreciation expense ($347,000), samples and prototype expenses ($364,000) and a
one-time charge for workforce reduction ($78,000). The increase in manufacturing
development expenses in 1997 as compared to 1996 is primarily attributable to
increases in pre-manufacturing expenses, consisting of facility costs associated
with the additional space being allocated to manufacturing for setting up the
initial automated assembly line for the LifeGuide(TM) Key ($381,000), staffing
costs ($346,000), prototype materials and tooling expenses ($198,000), and
higher travel costs associated

                                      -15-
<PAGE>
 
with the development of the automated assembly line ($76,000), which were
partially offset by lower consulting expenses ($196,000).

     Clinical and regulatory expenses: Clinical and regulatory expenses
decreased to $1.1 million during 1998 from $1.2 million in 1997 and $791,481
during 1996. The decrease in clinical and regulatory expenses during 1998 is
primarily attributable to decreased staffing costs ($133,000), recruitment costs
($55,000), travel costs ($33,000), clinical studies expenses ($28,000) and
consulting expenses ($9,000), which were partially offset by the one-time charge
for workforce reduction ($222,000). The increase in clinical and regulatory
expenses in 1997 when compared to 1996 is primarily attributed to increases in
staffing costs ($427,000) which were partially offset by decreases in consulting
expenses ($95,000).

     General and administrative expenses: General and administrative expenses
decreased to $1.7 million during 1998 from $2.7 million in 1997 and $1.7 million
in 1996. The decrease in general and administrative expenses in 1998 is
primarily attributable to decreased staffing costs ($482,000) and a special
charge in 1997 for the resignation of the Company's President and Chief
Executive Officer effective in 1998 ($654,000), which were partially offset by
increases in legal and audit expenses ($100,000), recruitment expenses ($51,000)
as well as the one-time charge for workforce reduction ($28,000). The increase
in general and administrative expenses in 1997 when compared to 1996 is
primarily attributable to the special charge in 1997 for the resignation of
Company's President and Chief Executive Officer effective in 1998 ($654,000) as
well as increases in staffing costs ($126,000) and various insurance, investor
and director costs associated with being a public company ($219,000), which were
partially offset by lower consulting expenses ($76,000).

     Sales and marketing expenses: Sales and marketing expenses decreased to
$405,000 during 1998 from $780,000 in 1997 and $953,000 in 1996. The decrease in
sales and marketing expenses in 1998 was the result of decreases in staffing
costs ($297,000), advertising and promotion expenses ($97,000), website
development expense ($55,000), consulting expenses ($33,000), product
development expenses ($35,000) and travel expenses ($17,000), which were
partially offset by a one-time charge for the workforce reduction ($173,000).
The decrease in sales and marketing expenses in 1997 as compared to 1996 is
primarily attributable to lower staffing costs.

     Interest income: Interest income decreased to $890,000 during 1998 from
$1.6 million in 1997 and $1.3 million during 1996. The decrease in interest
income in 1998 resulted from lower average balances of cash and cash
equivalents. The increase in interest income in 1997 when compared to 1996
resulted from higher average balances of cash and cash equivalents.

     Interest expense: Interest expense increased to $1.2 million during 1998
compared to $684,000 in 1997 and $227,000 in 1996. The increase in interest
expense during 1998 is attributable to increased borrowings under the equipment
loan agreement signed in 1996 ($5.5 million was borrowed in 1998 as compared to
$3 million in 1997). The increase in interest expense during 1997 as compared to
1996 is attributable to increased borrowings under the line of credit agreement
($3 million was borrowed in 1997 as compared to $1.3 million in 1996).

     Other income: Other income totaled $98,000 in 1998. Other income primarily
consisted of a receivable written off in a prior year which was paid in full
($26,000) and money received from the state of Minnesota for a sales tax refund
claim filed for prior years ($66,000).

Liquidity and Capital Resources

     The Company's operations since inception have been funded by net proceeds
from the sale of Common and Preferred Stock totaling approximately $52 million
and proceeds from borrowings under an equipment loan agreement totaling $5.5
million. As of December 31, 1998 the Company had cash and cash equivalents of
$11.2 million and working capital of $8.9 million.

     The equipment loan agreement contains covenants that place restrictions on
sales of assets, transactions with affiliates, creation of additional debt, and
other customary covenants. Borrowings under the equipment loan agreement are
collateralized by a large part of the company's assets.

     Financing activities in 1998, 1997 and 1996 consisted of the incurrance of
long-term debt. The Company had a $12.5 million equipment loan agreement which
expired on December 31 1998. The company borrowed a total of 

                                      -16-
<PAGE>
 
$5.5 million under the agreement. Borrowings under the equipment loan agreement
mature at various times between April 2000 and May 2002, with interest rates
ranging from 10.15% to 10.90%

     The Company believes that its current cash balances, after taking into
account cost savings resulting from the August 1998 restructuring, will be
sufficient to fund its operations until the first half of the year 2000. The
Company cannot predict whether additional capital will be available on favorable
terms, if at all. The Company's future liquidity and capital requirements will
depend on numerous factors, including when or if the performance of the
LifeGuide(TM) System meets the required performance specifications, the ability
of the Company to form a strategic alliance, the extent to which the Company's
LifeGuide(TM) System gains market acceptance, the timing of regulatory actions
regarding the LifeGuide(TM) System, the costs and timing of expansion of sales,
marketing and manufacturing activities and the results of clinical trials and
competition. See Exhibit 99.1 to this Form 10-K for a more detailed description
of the factors that may affect the Company's future liquidity and capital
requirements.

General Description of the Year 2000 Issue and the Nature and Effects of the
Year 2000 on Information Technology (IT) and non-IT Systems

     The Year 2000 Issue is the result of computer programs that were written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs or hardware that have date-sensitive software or
embedded chips may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.

     The Company's plan to resolve the Year 2000 Issue involves the following
four phases: assessment, remediation, testing and implementation. To date, the
Company has completed the assessment of all of its systems that could be
significantly affected by the Year 2000. The completed assessments indicated
that one of the Company's network servers needed upgrading to be compliant. The
Company's phone system as well as the shipping computer system will also need to
be upgraded.

     For its information technology (IT) exposures, the Company completed the
remediation phase in 1998. Testing is underway for all IT systems. The
remediation of operating equipment (non-IT) is expected to be completed by April
15, 1999, followed by verification testing which the Company expects to complete
by June 30, 1999.

     The Company is in the process of gathering information about the Year 2000
compliance status of its significant suppliers and subcontractors (external
agents). This assessment will be completed during the second quarter. The
inability of external agents to complete their Year 2000 resolution process in a
timely fashion could materially impact the Company. The potential effect on the
Company of non-compliance by external agents has not yet been determined.

     The Company will utilize both internal and external resources to reprogram
or replace, test and implement its software and operating equipment for Year
2000 modifications. The total cost of the Year 2000 project has not yet been
determined. To date, the Company has incurred approximately $5,000 in expenses
related to the Year 2000 project, and expects to incur, approximately, an
additional $15,000 in 1999 to complete all upgrades. All Year 2000 related
expenses are being funded through operations.

     Management of the Company believes it has an effective program in place to
resolve the Year 2000 issue in a timely manner. As noted above, the Company has
not yet completed all necessary phases of its Year 2000 program. In the event
that the Company does not complete any additional phases, the Company would be
unable to take customer orders or manufacture and ship products after January 1,
2000. In addition, disruptions in the economy generally resulting from Year 2000
issues could also materially adversely affect the Company.

     The Company currently has no contingency plans in place in the event it
does not complete all phases of its Year 2000 program. The Company plans to
evaluate the status of its efforts in June 1999 to determine whether such a plan
is necessary.

                                      -17-
<PAGE>
 
Item 7A. Quantitative and Qualitative Disclosures About Market Risk

     The Company has no derivative financial instruments or derivative commodity
instruments in its cash and cash equivalents investments. The Company's cash and
cash equivalents are invested in highly liquid vehicles, including money market
accounts and high-grade commercial paper as guided by the company's investment
policy. As a result of the Company's investment policy, a decrease in the
interest rate earned would not be material to the Company's results. All of the
Company's transactions are conducted in US dollars. Accordingly, the Company is
not exposed to foreign currency risk.

Item 8. Financial Statements and Supplementary Data

     The Company's financial statements and notes thereto are included on pages
F-1 to F-25 of this report. See Index to Financial Statements at page F for a
listing of the financial information filed with this report.

Item 9. Changes in and Disagreements with Accountants on Accounting 
        and Financial Disclosure

     None.

                                    Part III

Item 10. Directors and Executive Officers of the Registrant

     The information contained under the heading "Election of Directors" in the
Proxy Statement is incorporated by reference. Information with respect to the
Company's executive officers is provided under the heading "Executive Officers
of the Registrant" in Part I, Item 1.

Item 11. Executive Compensation

     The information contained under the headings "Compensation of Directors"
and "Executive Compensation" in the Proxy Statement is incorporated by
reference, except that the information set forth under the caption "Report of
Compensation Committee on Executive Compensation" and the "Comparative Stock
Performance" graph are not incorporated by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

     The information contained under the heading "Principal Shareholders" in the
Proxy Statement is incorporated by reference.

Item 13. Certain Relationships and Related Transactions

     The information contained under the heading "Certain Transactions" in the
Proxy Statement is incorporated by reference.

                                     Part IV

Item 14. Exhibits, Financial Statements, Financial Statement 
         Schedules, and Reports on Form 8-K

          (a)  Exhibits, Financial Statements and Financial Statement Schedules

               1.   Financial Statements

               The Company's financial statements are attached hereto beginning
          at page F-1. See Index to Financial Statements at page F-1.

               2.   Financial Statement Schedules

                                      -18-
<PAGE>
 
               All financial statement schedules are omitted since the required
          information is not represented or is not present in amounts sufficient
          to require submission of such schedules, or because the information
          required is included in the financial statements and notes thereto.

               3.   Exhibits

         Exhibit
          Number    Description
         -------    -----------

           3.1      Amended and Restated Articles of Incorporation of the
                    Company (incorporated by reference to Exhibit 3.2 to the
                    Company's Registration Statement on Form S-1 (SEC File No.
                    333-4352)).

           3.2      Amended Bylaws of the Company (incorporated by reference to
                    Exhibit 3.3 to the Company's Registration Statement on Form
                    S-1 (SEC File No. 333-4352)).

           4.1      Amended and Restated Articles of Incorporation of the
                    Company (incorporated by reference to Exhibit 3.2 to the
                    Company's Registration Statement on Form S-1 (SEC File No.
                    333-4352)).

           4.2      Form of Stock Warrant for Shares of Common Stock
                    (incorporated by reference to Exhibit 4.2 to the Company's
                    Registration Statement on Form S-1 (SEC File No. 333-4352)).

           4.3      Form of Stock Warrant for Shares of Series D Convertible
                    Preferred Stock (incorporated by reference to Exhibit 4.3 to
                    the Company's Registration Statement on Form S-1 (SEC File
                    No. 333-4352)).

           4.4      Form of Purchase Warrant for Shares of Series E-2
                    Convertible Preferred Stock (incorporated by reference to
                    Exhibit 4.4 to the Company's Registration Statement on Form
                    S-1 (SEC File No. 333-4352)).

           4.5      Warrant to Purchase Shares of Common Stock, dated March 27,
                    1996, to Venture Lending & Leasing, Inc. (incorporated by
                    reference to Exhibit 4.5 to the Company's Registration
                    Statement on Form S-1 (SEC File No. 333-4352)).

           4.6      Registration Rights Provisions applicable to shares of
                    Preferred Stock (which were automatically converted into
                    Common Stock upon the closing of the Company's initial
                    public offering on July 1, 1996) (incorporated by reference
                    to Exhibit 4.6 to the Company's Registration Statement on
                    Form S-1 (SEC File No. 333-4352)).

           4.7      Rights Agreement, dated November 26, 1996, between the
                    Company and Norwest Bank Minnesota, N.A., as Rights Agent
                    (incorporated by reference to Exhibit 1 to the Company's
                    Registration Statement on Form 8-A, dated December 6, 1996
                    (SEC file number 0-28420)).

           10.1     Real Property Lease Agreement dated June 14, 1994 between
                    the Company and Commers-Klodt III, and Amendment thereto
                    dated November 6, 1995 (incorporated by reference to Exhibit
                    10.1 to the Company's Registration Statement on Form S-1
                    (SEC File No. 333-4352)).

           10.2     Equipment Sublease Agreement dated August 15, 1992, between
                    the Company and FIM, Inc. (incorporated by reference to
                    Exhibit 10.2 to the Company's Registration Statement on Form
                    S-1 (SEC File No. 333-4352)).

           10.3     Equipment Sublease Agreement dated July 14, 1994, between
                    the Company and FIM II, Inc. (incorporated by reference to
                    Exhibit 10.3 to the Company's Registration Statement on Form
                    S-1 (SEC File No. 333-4352)).

                                      -19-
<PAGE>
 
           10.4     Loan Agreement dated March 27, 1996, between the Company and
                    Venture Lending & Leasing, Inc. (incorporated by reference
                    to Exhibit 10.4 to the Company's Registration Statement on
                    Form S-1 (SEC File No. 333-4352)).

           10.5     Amendment dated August 7, 1997 to the Loan Agreement dated
                    March 27, 1996, between the Company and Venture Lending &
                    Leasing, Inc. (incorporated by reference to Exhibit 10.1 to
                    the Company's Quarterly Report on Form 10-Q for the fiscal
                    quarter ended June 30, 1997 (SEC file number 0-28420)).

           10.6     *1990 Incentive and Stock Option Plan, including form of
                    option agreement (incorporated by reference to Exhibit 10.5
                    to the Company's Registration Statement on Form S-1 (SEC
                    File No. 333-4352)).

           10.7     *1991 Incentive and Stock Option Plan, including form of
                    option agreement (incorporated by reference to Exhibit 10.1
                    to the Company's Quarterly Report Form 10-Q for the fiscal
                    quarter ended September 30, 1998 (SEC File No. 0-28420)).

           10.8     *1994 Long-Term Incentive and Stock Option Plan (as revised
                    and restated) (incorporated by reference to Exhibit 10.1 to
                    the Company's Quarterly Report on Form 10-Q for the fiscal
                    quarter ended September 30, 1998 (SEC File No. 0-28420)).

           10.9     *Form of option agreement under 1994 Long-Term Incentive and
                    Stock Option Plan (incorporated by reference to Exhibit 10.7
                    to the Company's Registration Statement on Form S-1 (SEC
                    File No. 333-4352)).

           10.10    *1996 Directors' Stock Option Plan (incorporated by
                    reference to Exhibit 10.2 to the Company's Quarterly Report
                    on Form 10-Q for the fiscal quarter ended September 30, 1998
                    (SEC File No. 0-28420)).

           10.11    *Form of Option agreements under 1996 Directors' Stock 
                    Option Plan.

           10.12    Form of Stock Option from the Company to Medical Innovation
                    Fund (for options granted outside of the Stock Option Plans)
                    (incorporated by reference to Exhibit 10.10 to the Company's
                    Registration Statement on Form S-1 (SEC File No. 333-4352)).

           10.13    *Consulting Agreement dated March 14, 1997 between the
                    Company and Mark B. Knudson (incorporated by reference to
                    Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
                    for the fiscal quarter ended March 31, 1997 (SEC file number
                    0-28420)).

           10.14    Separation Agreement dated February 2, 1998 between the
                    Company and Frank A. Solomon (incorporated by reference to
                    Exhibit 10.1 to the Company's Quarterly Report Form 10-Q for
                    the fiscal quarter ended March 31, 1998 (SEC File No.
                    0-28420)).

           10.15   *Form of Employment Agreement dated April 1998 between the
                    Company and its Vice Presidents (incorporated by reference
                    to Exhibit 10.1 to the Company's Quarterly Report on Form 
                    10-Q for the fiscal quarter ended June 30, 1998 (SEC File 
                    No. 0-28420), (Exhibit I previously incorporated by 
                    reference to Exhibit 10.14 to the Company's Registration
                    Statement on Form S-1 (SEC File No. 333-4352)).

           10.16    Separation Agreement and General Release between Katia P.
                    Breslawec and the Company (incorporated by reference to
                    Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q
                    for the fiscal quarter ended September 30, 1998 (SEC File
                    No. 0-28420)).

           23       Consent of Ernst & Young LLP

           24       Powers of Attorney

                                      -20-
<PAGE>
 
           27       Financial Data Schedules

           99.1     Cautionary Statement for Purposes of the "Safe Harbor"
                    Provisions of the Private Securities Litigation Reform Act
                    of 1995

--------------------
*    Denotes management contracts and compensatory plans, contracts, and
     arrangements.

     (b)  Reports on Form 8-K.

          No reports on Form 8-K were filed by the Company during the fourth
          quarter of 1998.

                                      -21-
<PAGE>
 
                                    Signature

     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.

Date: March 25, 1999                     INTEG INCORPORATED

                                         By:  /s/ Susan L. Critzer
                                            --------------------------------
                                            Susan L. Critzer
                                            Interim President
                                            Acting Chief Financial Officer

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 25, 1999.

   /s/ Susan L. Critzer        Interim President                  March 25, 1999
---------------------------    Acting Chief Financial Officer
     Susan L. Critzer          


             *             
---------------------------
   Mark B. Knudson,Ph.D        Director                           March 25, 1999


             *             
---------------------------
     Frank B. Bennett          Director                           March 25, 1999


             *             
---------------------------
    Terrance G. McGuire       Director                            March 25, 1999


             *             
---------------------------
     Robert R. Momsen         Director                            March 25, 1999


             *             
---------------------------
    Robert S. Nickoloff       Director                            March 25, 1999


             *             
---------------------------
Walter L. Sembrowich, Ph.D    Director                            March 25, 1999


             *             
---------------------------
     Winston R. Wallin        Director                            March 25, 1999


*By:  /s/ Susan L. Critzer        
     ---------------------------- 
          Susan L. Critzer
          Attorney-in-Fact

                                      -22-
<PAGE>
 
                               Integ Incorporated

                          Index to Financial Statements

                                                                   Page Number
                                                                   -----------

 Report of Independent Auditors                                         F-1

 Balance Sheets as at December 31, 1998 and December 31, 1997           F-2

 Statements of Operations for the Years Ended December 31,
 1998, F-3 1997 and 1996 and for the period from April 3, 1990
 (inception) to December 31, 1998                                       F-3

 Statements of Shareholders' Equity from April 3, 1990 (inception)  F-4 to F-9 
   to December 31, 1998

 Statements of Cash Flows for the Years Ended December 31,         F-10 to F-11
 1998, 1997 and 1996 and for the period from April 3, 1990 
 (inception) to December 31, 1998

 Notes to Financial Statements                                     F-12 to F-25
<PAGE>
 
                       [LETTERHEAD OF ERNST & YOUNG LLP]



                         Report of Independent Auditors


Board of Directors
Integ Incorporated

We have audited the accompanying balance sheets of Integ Incorporated (a
development stage company) as of December 31, 1998 and 1997 and the related
statements of operations, changes in shareholders' equity (deficiency) and cash
flows for each of the three years in the period ended December 31, 1998, and for
the period from April 3, 1990 (inception) to December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Integ Incorporated at December
31, 1998 and 1997 and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1998, and for the period
from April 3, 1990 (inception) to December 31, 1998, in conformity with
generally accepted accounting principles.

                                                       /s/ Ernst & Young

February 12, 1999

                                      F-1
<PAGE>
 
                               Integ Incorporated
                          (A Development Stage Company)

                                 Balance Sheets

<TABLE>
<CAPTION>
                                                                      December 31
                                                             ----------------------------
                                                                 1998            1997
                                                             ----------------------------
<S>                                                          <C>             <C>         
Assets
Current assets:
   Cash and cash equivalents                                 $ 11,175,695    $ 21,776,757
   Prepaid expenses                                               132,229         137,037
                                                             ----------------------------
Total current assets                                           11,307,924      21,913,794
                                                             ----------------------------


Furniture and equipment                                         9,538,478       8,464,943
Less accumulated depreciation                                  (2,715,684)     (1,644,051)
                                                             ----------------------------
                                                                6,822,794       6,820,892
Other assets                                                       23,883         481,607
                                                             ----------------------------
Total assets                                                 $ 18,154,601    $ 29,216,293
                                                             ============================

Liabilities and shareholders' equity
Current liabilities:
   Accounts payable                                          $    195,148    $    577,913
   Accrued employee compensation and related expenses             726,077         692,919
   Other accrued expenses                                          92,356         113,719
   Current portion of capital lease obligations                   145,761         155,901
   Current portion of long-term debt                            1,251,247         799,913
                                                             ----------------------------
Total current liabilities                                       2,410,589       2,340,365
                                                             ----------------------------

Long-term liabilities:
   Capital lease obligations, less current portion                 14,178         159,673
   Long-term debt, less current portion                         2,672,018       2,870,061
                                                             ----------------------------
Total long-term liabilities                                     2,686,196       3,029,734
                                                             ----------------------------

Shareholders' equity:
   Common Stock, par value $.01 per share:
     Authorized shares - 21,000,000
     Issued and outstanding shares - 9,580,704 in 1998 and
       9,366,666 in 1997                                           95,807          93,667
   Additional paid-in capital                                  54,616,721      54,518,671
   Deficit accumulated during the development stage           (41,524,253)    (30,438,348)
                                                             ----------------------------
                                                               13,188,275      24,173,990
   Deferred compensation                                         (130,459)       (327,796)
                                                             ----------------------------
Total shareholders' equity                                     13,057,816      23,846,194
                                                             ----------------------------
Total liabilities and shareholders' equity                   $ 18,154,601    $ 29,216,293
                                                             ============================
</TABLE>

See accompanying notes.

                                      F-2
<PAGE>
 
                               Integ Incorporated
                          (A Development Stage Company)

                            Statements of Operations

<TABLE>
<CAPTION>
                                                                                           Period from
                                                                                          April 3, 1990
                                                      Year ended December 31             (Inception) to
                                          --------------------------------------------     December 31,
                                                1998            1997           1996           1998
                                          ---------------------------------------------- --------------
<S>                                       <C>             <C>             <C>              <C>         
Operating expenses:                                                                      
   Research and development               $  5,455,999    $  5,318,900    $  4,802,773     $ 21,542,148
   Manufacturing development                 2,171,087       2,513,224       1,623,122        7,168,276
   Clinical and regulatory                   1,127,448       1,168,187         791,481        3,496,822
   General and administrative                1,711,848       2,681,615       1,749,467        8,516,032
   Sales and marketing                         404,605         779,732         953,112        2,600,455
                                          ---------------------------------------------- --------------
                                            10,870,987      12,461,658       9,919,955       43,323,733
                                          ---------------------------------------------- --------------
                                                                                         
Operating loss                             (10,870,987)    (12,461,658)     (9,919,955)     (43,323,733)
                                                                                         
Other income (expense):                                                                  
   Interest income                             890,120       1,564,190       1,306,460        4,428,998
   Interest expense                         (1,203,218)       (684,001)       (226,959)      (2,501,798)
   Other                                        98,180          17,078        (242,978)        (127,720)
                                          ---------------------------------------------- --------------
                                              (214,918)        897,267         836,523        1,799,480
                                          ---------------------------------------------- --------------
Net loss for the period and deficit                                                      
   accumulated during development stage   $(11,085,905)   $(11,564,391)   $ (9,083,432)    $(41,524,253)
                                          ============================================== ==============
                                                                                         
                                                                                         
Net loss per share                                                                       
     Basic and diluted                    $      (1.17)   $      (1.24)   $      (1.86)    $     (14.34)
                                          ============================================== ==============
                                                                                         
Weighted average number of common                                                        
   shares outstanding                                                                    
     Basic and diluted                       9,477,390       9,305,332       4,889,245        2,895,925
                                          ============================================== ==============
</TABLE>

See accompanying notes.

                                      F-3
<PAGE>
 
                               Integ Incorporated
                          (A Development Stage Company)

            Statement of Changes in Shareholders' Equity (Deficiency)

<TABLE>
<CAPTION>
                                                                                             Deficit
                                                                                           Accumulated
                                     Convertible Preferred   Common Stock     Additional   During the
                                     ---------------------------------------    Paid-In    Development    Deferred
                                        Shares   Amount    Shares     Amount    Capital       Stage     Compensation      Total
                                       ------------------------------------------------------------------------------------------
<S>                                      <C>     <C>       <C>       <C>       <C>        <C>            <C>          <C>
Founders' Common Stock issued during
   April 1990 at $.015 per share            --   $   --    250,000   $ 2,500   $  1,250   $      --      $    --      $     3,750
Net loss for the period                     --       --       --        --         --        (290,900)        --         (290,900)
                                       ------------------------------------------------------------------------------------------
Balance at December 31, 1990                --       --    250,000     2,500      1,250      (290,900)        --         (287,150)
Net loss for the year                       --       --       --        --         --        (622,016)        --         (622,016)
                                       ------------------------------------------------------------------------------------------
Balance at December 31, 1991                --       --    250,000     2,500      1,250      (912,916)        --         (909,166)
Net loss for the year                       --       --       --        --         --        (653,934)        --         (653,934)
                                       ------------------------------------------------------------------------------------------
Balance at December 31, 1992                --       --    250,000     2,500      1,250    (1,566,850)        --       (1,563,100)
Net loss for the year                       --       --       --        --         --        (682,725)        --         (682,725)
                                       ------------------------------------------------------------------------------------------
Balance at December 31, 1993                --       --    250,000     2,500      1,250    (2,249,575)        --       (2,245,825)
Deferred compensation related to
   restricted stock grant                   --       --    183,333     1,833    149,417          --       (151,250)          --
Net loss for the year                       --       --       --        --         --      (2,492,220)        --       (2,492,220)
                                       ------------------------------------------------------------------------------------------
Balance at December 31, 1994
   (carried forward)                        --       --    433,333     4,333    150,667    (4,741,795)    (151,250)    (4,738,045)

</TABLE>

                                      F-4
<PAGE>
 
                               Integ Incorporated
                          (A Development Stage Company)

      Statement of Changes in Shareholders' Equity (Deficiency) (continued)

<TABLE>
<CAPTION>
                                               Convertible Preferred    Common Stock    Additional 
                                               ----------------------------------------   Paid-In  
                                                Shares      Amount    Shares    Amount    Capital  
                                               ----------------------------------------------------
<S>                                             <C>        <C>       <C>       <C>      <C>
Balance at December 31, 1994
   (brought forward)                                --     $    --   433,333   $ 4,333  $  150,667 
Previously issued redeemable convertible
   preferred stock; all shareholders agreed
   to cancel their respective redemption
   privileges during June 1995:
     Series A Convertible Preferred,
       authorized 928,571 shares, liquidating
       preference of $.56 per share, sold
       during April and November 1990            928,571       9,286    --        --       510,714 
     Series B Convertible Preferred,
       authorized 800,000 shares, liquidating
       preference of $1.00 per share, sold
       during May 1991                           800,000       8,000    --        --       792,000 
     Series C Convertible Preferred,
       authorized 356,000 shares, liquidating
       preference of $2.50 per share, sold
       during January 1992 to
       May 1993                                  346,000       3,460    --        --       861,540 
     Series D Convertible Preferred,
       authorized 1,209,731 shares,
       liquidating preference of $2.75 per
       share, less offering expenses of
       $7,245, sold during February and
       May 1994                                1,074,372      10,743    --        --     2,936,534 

</TABLE>

                       [WIDE TABLE CONTINUED FROM ABOVE]

<TABLE>
<CAPTION>
                                                 Deficit                                 
                                               Accumulated                               
                                                During the                               
                                                Development    Deferred                  
                                                   Stage      Compensation     Total     
                                               ----------------------------------------- 
<S>                                             <C>           <C>           <C>          
Balance at December 31, 1994                                                             
   (brought forward)                            $(4,741,795)  $  (151,250)  $(4,738,045) 
Previously issued redeemable convertible                                                 
   preferred stock; all shareholders agreed                                              
   to cancel their respective redemption                                                 
   privileges during June 1995:                                                          
     Series A Convertible Preferred,                                                     
       authorized 928,571 shares, liquidating                                            
       preference of $.56 per share, sold                                                
       during April and November 1990                  --            --         520,000  
     Series B Convertible Preferred,                                                     
       authorized 800,000 shares, liquidating                                            
       preference of $1.00 per share, sold                                               
       during May 1991                                 --            --         800,000  
     Series C Convertible Preferred,                                                     
       authorized 356,000 shares, liquidating                                            
       preference of $2.50 per share, sold                                               
       during January 1992 to                                                            
       May 1993                                        --            --         865,000  
     Series D Convertible Preferred,                                                     
       authorized 1,209,731 shares,                                                      
       liquidating preference of $2.75 per                                               
       share, less offering expenses of                                                  
       $7,245, sold during February and                                                  
       May 1994                                        --            --       2,947,277  

</TABLE>

                                      F-5
<PAGE>
 
                               Integ Incorporated
                          (A Development Stage Company)

      Statement of Changes in Shareholders' Equity (Deficiency) (continued)

<TABLE>
<CAPTION>
                                                 Convertible Preferred    Common Stock      Additional 
                                                ----------------------------------------     Paid-In  
                                                   Shares      Amount    Shares   Amount     Capital  
                                                -------------------------------------------------------
<S>                                               <C>        <C>         <C>      <C>       <C>
     Series E Convertible Preferred Class 1,
       authorized 5,879,655, liquidating
       preference of $4.00 per share, less
       offering expenses of $1,861,168, sold
       during June 1995                           5,604,655   $ 56,047      --    $  --    $ 20,501,405   
Value of warrants to purchase Preferred
   Stock issued in connection with bridge
   loan financing                                      --         --        --       --         179,800   
Value of stock options to purchase Common
   Stock issued for consulting services
                                                       --         --        --       --          24,000   
Value of options and warrants to purchase
   Common Stock issued in connection with
   guarantee of leases                                 --         --        --       --         104,841   
Value related to the extension of the
   exercise period of certain stock options
   previously granted to individuals                   --         --        --       --           6,750   
Deferred compensation related to stock
   options                                             --         --        --       --         960,208   
Amortization of deferred compensation                  --         --        --       --            --     
Net loss for the year                                  --         --        --       --            --     
                                               -----------------------------------------------------------
Balance at December 31, 1995
   (carried forward)                              8,753,598     87,536   433,333    4,333    27,028,459   

</TABLE>

                       [WIDE TABLE CONTINUED FROM ABOVE]

<TABLE>
<CAPTION>
                                                 Deficit                                 
                                               Accumulated                               
                                                During the                               
                                                Development    Deferred                  
                                                   Stage      Compensation     Total     
                                               ----------------------------------------- 
<S>                                             <C>           <C>           <C>          
     Series E Convertible Preferred Class 1,
       authorized 5,879,655, liquidating    
       preference of $4.00 per share, less  
       offering expenses of $1,861,168, sold
       during June 1995                         $      --     $    --     $ 20,557,452 
Value of warrants to purchase Preferred                                                
   Stock issued in connection with bridge                                              
   loan financing                                      --          --          179,800 
Value of stock options to purchase Common                                              
   Stock issued for consulting services                                                
                                                       --          --           24,000 
Value of options and warrants to purchase                                              
   Common Stock issued in connection with                                              
   guarantee of leases                                 --          --          104,841 
Value related to the extension of the                                                  
   exercise period of certain stock options                                            
   previously granted to individuals                   --          --            6,750 
Deferred compensation related to stock                                                 
   options                                             --      (960,208)          --   
Amortization of deferred compensation                  --       187,106        187,106 
Net loss for the year                            (5,048,730)       --       (5,048,730)
                                                -------------------------------------- 
Balance at December 31, 1995                                                           
   (carried forward)                             (9,790,525)   (924,352)    16,405,451 

</TABLE>

                                      F-6
<PAGE>
 
                               Integ Incorporated
                          (A Development Stage Company)

      Statement of Changes in Shareholders' Equity (Deficiency) (continued)

<TABLE>
<CAPTION>
                                                                                                                   
                                                                                                                   
                                                  Convertible Preferred          Common Stock          Additional  
                                               ------------------------------------------------------   Paid-In    
                                                   Shares        Amount       Shares       Amount       Capital    
                                               --------------------------------------------------------------------
<S>                                              <C>            <C>           <C>        <C>           <C>         
Balance at December 31, 1995
   (brought forward)                             8,753,598      $87,536       433,333    $  4,333      $27,028,459 
Value of warrants to purchase Common Stock
   issued in connection with equipment loan
   agreement                                           --           --            --          --           874,416 
Shares issued in connection with initial
   public offering less offering expenses
   of $2,375,706                                       --           --      3,000,000      30,000       26,094,294 
Conversion of preferred stock                   (8,753,598)     (87,536)    5,835,705      58,357           29,179 
Shares issued pursuant to exercise of stock
   options                                             --           --          6,666          67            7,056 
Deferred compensation related to stock                                    
   options                                             --           --            --          --            56,329 
Value of options granted to purchase Common                               
   Stock issued for consulting services                                   
                                                       --           --            --          --           179,600 
Amortization of deferred compensation                  --           --            --          --               -- 
Net loss for the year                                  --           --            --          --               -- 
                                             ---------------------------------------------------------------------
Balance at December 31, 1996
   (carried forward)                                   --           --      9,275,704      92,757       54,269,333 

</TABLE>

                       [WIDE TABLE CONTINUED FROM ABOVE]

<TABLE>
<CAPTION>
                                                    Deficit                                         
                                                  Accumulated                                       
                                                   During the                                       
                                                  Development        Deferred                       
                                                     Stage         Compensation         Total       
                                             ----------------------------------------------------
<S>                                              <C>                 <C>             <C>            
Balance at December 31, 1995                                                                        
   (brought forward)                             $  (9,790,525)      $(924,352)      $16,405,451    
Value of warrants to purchase Common Stock                                                          
   issued in connection with equipment loan                                                         
   agreement                                               --              --            874,416    
Shares issued in connection with initial                                                           
   public offering less offering expenses                                                          
   of $2,375,706                                           --              --         26,124,294    
Conversion of preferred stock                              --              --                --    
Shares issued pursuant to exercise of stock                                                        
   options                                                 --              --              7,123    
Deferred compensation related to stock                                                             
   options                                                 --          (56,329)              --    
Value of options granted to purchase Common                                                        
   Stock issued for consulting services                                                            
                                                           --         (179,600)              --    
Amortization of deferred compensation                      --          515,939           515,939    
Net loss for the year                               (9,083,432)            --         (9,083,432)   
                                             ----------------------------------------------------
Balance at December 31, 1996                                                                        
   (carried forward)                               (18,873,957)       (644,342)       34,843,791    

</TABLE>

                                      F-7
<PAGE>
 
                               Integ Incorporated
                          (A Development Stage Company)

      Statement of Changes in Shareholders' Equity (Deficiency) (continued)

<TABLE>
<CAPTION>
                                                                                                      
                                                                                                      
                                           Convertible Preferred      Common Stock        Additional  
                                           --------------------------------------------    Paid-In    
                                            Shares        Amount     Shares    Amount      Capital    
                                           -----------------------------------------------------------
<S>                                          <C>         <C>       <C>         <C>       <C>
Balance at December 31, 1996
   (brought forward)                            --        $  --    9,275,704   $92,757   $54,269,333  
Shares issued pursuant to employee stock
   purchase plan and exercise of stock
   options                                      --           --       69,154       692       111,624  
Shares issued pursuant to exercise of
   warrants, net of 9,303 redeemed              --           --       21,808       218        66,444  
Amortization of deferred compensation           --           --          --        --            --   
Deferred compensation adjustment for
   cancellation of stock options                --           --          --        --        (22,062) 
Value related to the acceleration of
   vesting and extension of the exercise
   period of certain stock options
   previously granted to an officer and         --           --          --        --         93,332  
   director
Net loss for the year                           --           --          --        --            --   
                                           -----------------------------------------------------------
Balance at December 31, 1997
   (carried forward)                            --           --    9,366,666    93,667    54,518,671  

</TABLE>

                       [WIDE TABLE CONTINUED FROM ABOVE]

<TABLE>
<CAPTION>
                                            Deficit                                     
                                          Accumulated                                   
                                           During the                                   
                                           Development       Deferred                   
                                              Stage        Compensation        Total    
                                        ----------------------------------------------- 
<S>                                       <C>               <C>           <C>           
Balance at December 31, 1996                                                            
   (brought forward)                      $(18,873,957)     $(644,342)    $ 34,843,791  
Shares issued pursuant to employee stock                                                
   purchase plan and exercise of stock                                                  
   options                                         --             --           112,316  
Shares issued pursuant to exercise of                                                   
   warrants, net of 9,303 redeemed                 --             --            66,662  
Amortization of deferred compensation              --         294,484          294,484  
Deferred compensation adjustment for                                                    
   cancellation of stock options                   --          22,062              --   
Value related to the acceleration of                                                    
   vesting and extension of the exercise                                                
   period of certain stock options                                                      
   previously granted to an officer and            --             --            93,332  
   director                                                                             
Net loss for the year                      (11,564,391)           --       (11,564,391) 
                                        ----------------------------------------------- 
Balance at December 31, 1997                                                            
   (carried forward)                       (30,438,348)      (327,796)      23,846,194  

</TABLE>

                                      F-8
<PAGE>
 
                               Integ Incorporated
                          (A Development Stage Company)

      Statement of Changes in Shareholders' Equity (Deficiency) (continued)

<TABLE>
<CAPTION>
                                             Convertible Preferred        Common Stock        Additional  
                                            -----------------------------------------------    Paid-In    
                                              Shares        Amount      Shares     Amount      Capital    
                                            --------------------------------------------------------------
<S>                                            <C>          <C>       <C>          <C>       <C>
Balance at December 31, 1997
   (brought forward)                             --         $  --     9,366,666    $93,667   $54,518,671  
Shares issued pursuant to employee stock                       
   purchase plan and exercise of stock                         
   options                                       --            --       211,351      2,113       237,648  
Shares issued pursuant to exercise of                          
   warrants, net of 6,201 redeemed               --            --         2,687         27           (27) 
Amortization of deferred compensation            --            --           --         --            --   
Deferred compensation adjustment for                           
   cancellation of stock options                 --            --           --         --       (139,571) 
Net loss for the year                            --                         --         --            --   
                                            --------------------------------------------------------------
Balance at December 31, 1998                     --         $  --     9,580,704    $95,807   $54,616,721  
                                            ==============================================================

</TABLE>

                       [WIDE TABLE CONTINUED FROM ABOVE]

<TABLE>
<CAPTION>
                                            Deficit                                       
                                           Accumulated                                    
                                           During the                                     
                                           Development      Deferred                      
                                              Stage       Compensation        Total       
                                         ---------------------------------------------    
<S>                                       <C>              <C>           <C>              
Balance at December 31, 1997                                                              
   (brought forward)                      $(30,438,348)    $(327,796)    $ 23,846,194     
Shares issued pursuant to employee stock                                                  
   purchase plan and exercise of stock                                                    
   options                                         --        (35,425)         204,336     
Shares issued pursuant to exercise of                                                     
   warrants, net of 6,201 redeemed                 --            --               --      
Amortization of deferred compensation              --         93,191           93,191     
Deferred compensation adjustment for                                                      
   cancellation of stock options                   --        139,571              --      
Net loss for the year                      (11,085,905)          --       (11,085,905)   
                                         -----------------------------------------------
Balance at December 31, 1998              $(41,524,253)    $(130,459)     $13,057,816     
                                         ===============================================  

</TABLE>

See accompanying notes.

                                      F-9
<PAGE>
 
                               Integ Incorporated
                          (A Development Stage Company)

                            Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                                                  Period from
                                                                                                 April 3, 1990
                                                            Year ended December 31              (Inception) to
                                                ---------------------------------------------    December 31,
                                                     1998            1997             1996           1998
                                                ------------------------------------------------------------
<S>                                             <C>             <C>             <C>             <C>          
Operating activities:
   Net loss                                     $(11,085,905)   $(11,564,391)   $ (9,083,432)   $(41,524,253)
   Adjustments to reconcile net loss to
     cash used in operating activities:
        Depreciation                               1,072,299         824,348         543,717       2,752,515
        Deferred compensation amortization            93,191         294,484         515,939       1,090,720
        Amortization of loan commitment fee             --            77,463         172,611         250,074
        Loss on sale of equipment and
          deposit write-off                             --            27,436          68,209          95,645
        Value of options and warrants
          related to debt financing, lease
          guarantee, extension of options
          and consulting services                       --           116,334          23,321         371,136
        Changes in operating assets and
          liabilities:
            Receivables                                 --            84,425         (72,261)        (28,829)
            Prepaid expenses and other assets        462,532          (7,213)        (90,682)        232,525
            Accounts payable and accrued
               expenses                             (370,970)        148,203         860,535       1,013,581
                                                ------------------------------------------------------------
Net cash used in operating activities             (9,828,853)     (9,998,911)     (7,062,043)    (35,746,886)
                                                ------------------------------------------------------------

Investing activities:
   Purchase of furniture and equipment            (1,075,312)     (4,756,243)     (2,095,773)     (8,870,027)
   Proceeds from sale of furniture and
     equipment                                         1,111           3,750          18,500          47,940
                                                ------------------------------------------------------------
   Net cash used in investing activities          (1,074,201)     (4,752,493)     (2,077,273)     (8,822,087)
                                                ------------------------------------------------------------

Financing activities:
   Proceeds from sale of Convertible
     Preferred Stock                                    --              --              --        22,789,732
   Proceeds from bridge loan debt                       --              --              --         2,900,000
   Proceeds from borrowings under loan
     agreement                                     1,138,293       2,995,879       1,352,274       5,486,446
   Payments on long-term debt                       (885,002)       (383,533)       (147,330)     (1,415,865)
   Payments on capital lease obligations            (155,635)       (142,771)        (81,575)       (534,126)
   Proceeds from sale of Common Stock                204,336         178,978      26,131,417      26,518,481
                                                ------------------------------------------------------------
   Net cash provided by financing activities         301,992       2,648,553      27,254,786      55,744,668
                                                ------------------------------------------------------------

   (Decrease) increase in cash and cash
     equivalents                                 (10,601,062)    (12,102,851)     18,115,470      11,175,695
   Cash and cash equivalents at beginning
     of period                                    21,776,757      33,879,608      15,764,138            --
                                                ------------------------------------------------------------
   Cash and cash equivalents at end of period   $ 11,175,695    $ 21,776,757    $ 33,879,608    $ 11,175,695
                                                ============================================================
</TABLE>

                                      F-10
<PAGE>
 
                               Integ Incorporated
                          (A Development Stage Company)

                      Statements of Cash Flows (continued)

<TABLE>
<CAPTION>
                                                                                          Period from
                                                                                         April 3, 1990
                                                          Year ended December 31         (Inception) to
                                                --------------------------------------    December 31,
                                                    1998           1997        1996           1998
                                                -------------------------------------------------------
1<S>                                               <C>          <C>            <C>          <C>       
Supplemental disclosure of cash flow
   information
Fixed assets capitalized under capital lease
   and loan agreements                            $   --       $   11,182     $   --       $  141,442

The Company converted $2,900,000 of debt
   into Series E Convertible Preferred Stock      $   --       $     --       $   --       $2,900,000

</TABLE>

See accompanying notes.

                                      F-11
<PAGE>
 
                               Integ Incorporated
                          (A Development Stage Company)

                          Notes to Financial Statements

                                December 31, 1998


1. Description of Business

Integ Incorporated was formed in April 1990 and is a development stage company
engaged in the development of a hand-held glucose monitoring product for use by
people with diabetes that avoids the pain and blood associated with conventional
"finger stick" technology. Utilizing the Company's proprietary interstitial
fluid sampling technology, the Lifeguide System will allow people with diabetes
to frequently monitor their glucose levels without repeatedly enduring the pain
of lancing their fingers to obtain a blood sample.

2. Summary of Significant Accounting Policies

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with a maturity of
three months or less when purchased to be cash equivalents. At December 31, 1997
and 1998, the Company's cost of investments in government securities
approximated market value, with no resulting unrealized gains and losses
recognized. The cash equivalents are considered available-for-sale.

Furniture and Equipment

Furniture and equipment are recorded at cost and depreciated primarily on a
straight-line basis over estimated useful lives of three to five years.

Income Taxes

The Company accounts for income taxes under the liability method. Deferred
income taxes are provided for temporary differences between the financial
reporting and tax bases of assets and liabilities.

Stock Compensation Plans

The Company follows Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees ("APB 25"), and related interpretations in accounting
for its stock options. Under APB 25, when the exercise price of stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.

                                      F-12
<PAGE>
 
                               Integ Incorporated
                          (A Development Stage Company)

                    Notes to Financial Statements (continued)


2. Summary of Significant Accounting Policies (continued)

The Company follows the disclosure only provisions of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation ("Statement 123").
Accordingly, the Company has made pro forma disclosures of what net loss and
loss per share would have been had the provisions of Statement 123 been applied
to the Company's stock options.

Net Loss Per Share

Basic net loss per share is computed using the weighted average number of shares
of common stock outstanding during the periods presented. Diluted loss per share
is the same as basic loss because the effect of all options and warrants is
anti-dilutive.

Automatic Conversion of Preferred Stock

Upon the closing of the initial public offering on July 1, 1996, all outstanding
shares of convertible preferred stock were automatically converted into an
aggregate of 5,835,705 shares of common stock.

Reclassifications

Certain amounts in the 1996 and 1997 financial statements have been reclassified
to conform with the 1998 presentation.

Use of Estimates

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

                                      F-13
<PAGE>
 
                               Integ Incorporated
                          (A Development Stage Company)

                    Notes to Financial Statements (continued)


3. Capital and Operating Leases

The Company leases its office facility and certain office equipment under
operating leases. Rent expense of $369,880, $432,686 and $377,485 was recorded
for noncancelable operating leases and sub-leases for the years ended December
31, 1996, 1997 and 1998, respectively. Future minimum lease commitments for
operating leases with remaining terms in excess of one year, excluding executory
costs such as real estate taxes, insurance and maintenance expense, are payable
as follows:

   Year ending December 31:
     1999                                           $399,611
     2000                                            299,171
                                                ----------------
                                                    $698,782
                                                ================

The Company leases certain furniture and laboratory and office equipment under
other leases which are accounted for as capital leases for financial statement
purposes. The cost of furniture and equipment in the accompanying balance sheets
includes the following amounts under capital leases:

                                                     December 31
                                               1998              1997
                                            ------------------------------

   Cost                                        $665,499         $665,499
   Less accumulated amortization               (575,436)        (471,566)
                                            ------------------------------
                                              $  90,063         $193,933
                                            ==============================

Future minimum lease payments required under capital leases together with the
present value of the net future minimum lease payments at December 31, 1998 are
as follows:

   Year ending December 31:
     1999                                                       $153,675
     2000                                                         14,537
                                                             --------------
   Total minimum lease payments                                  168,212
   Less amount representing interest                              (8,273)
                                                             --------------
   Present value of net minimum payments                         159,939
   Less current portion                                         (145,761)
                                                             --------------
   Capital lease obligations, net of current portion           $  14,178
                                                             ==============

                                      F-14
<PAGE>
 
                               Integ Incorporated
                          (A Development Stage Company)

                    Notes to Financial Statements (continued)


4. Long-Term Debt

During 1996, the Company entered into an equipment loan agreement which provides
for borrowings up to $12.5 million to finance the purchase of equipment and
fixtures including automated manufacturing equipment and tooling. Loans are paid
back monthly over a four year period. The obligation of the lender to make
additional loans expired December 31, 1998. The Company borrowed $2,995,879 and
$1,138,293 in 1997 and 1998, respectively, under this agreement.

<TABLE>
<CAPTION>
                                                                                   December 31
                                                                               1998            1997
                                                                          ----------------------------
<S>                                                                         <C>            <C>       
   10.65% note payable for equipment loan, due in monthly installments
     of $26,495 through February 2000, and $138,962 due April 2000          $  430,881     $  643,577

   10.65% note payable for equipment loan, due in monthly installments
     of $12,082 through November 2000, and $63,879 due January 2001            268,585        347,912

   10.65% note payable for equipment loan, due in monthly installments
     of $49,636 through February 2001, and $262,439 due April 2001           1,196,551      1,530,634

   10.90% note payable for equipment loan, due in monthly installments
     of $35,507 through August 2001, and $186,943 due October 2001             974,044      1,147,851

   10.20% note payable for equipment loan, due in monthly installments of
     $21,510 through January 2002, $35,507 due February 2002, and
     $113,248 due April 2002                                                   670,756             --

   10.15% note payable for equipment loan, due in monthly installments
     of $11,443 through May 2002, and $60,976.71 due July 2002                 382,448             --
                                                                          ----------------------------
                                                                             3,923,265      3,669,974
   Less current portion                                                     (1,251,247)      (799,913)
                                                                          ----------------------------
   Long-term debt, net of current portion                                   $2,672,018     $2,870,061
                                                                          ============================
</TABLE>

Aggregate maturities of long-term are as follows:

   1999                                                     $1,251,247
   2000                                                      1,398,098
   2001                                                      1,025,633
   2002                                                        248,287
                                                          --------------
                                                            $3,923,265
                                                          ==============

                                      F-15
<PAGE>
 
                               Integ Incorporated
                          (A Development Stage Company)

                    Notes to Financial Statements (continued)


5. Redeemable Convertible Preferred Stock and Preferred Stock

During June 1995, the Company received net proceeds of $20,557,452 from the sale
of 5,604,655 shares of its Series E Convertible Preferred Stock, Class 1. During
January 1995, in anticipation of this pending offering, the Company received
proceeds of $2,900,000 and issued one-year, 8.5% promissory notes under a bridge
loan arrangement with certain investors, including $1,500,000 received from
Medical Innovation Fund II (MIF II) and $500,000 received from Artesian
Management, Inc. (Artesian), both significant shareholders of the Company. Upon
consummation of the offering in June 1995, these promissory notes and all
accrued interest thereon totaling $2,987,620 were automatically converted into
746,905 shares of Series E Convertible Preferred Stock, Class 1, at $4.00 per
share. In connection with such bridge financing, investors received warrants for
the purchase of 429,630 shares of Series E Convertible Preferred Stock, Class 2,
at $3.375 per share (convertible into 286,420 shares of Common Stock at $5.06
per share), including warrants for 222,222 shares issued to MIF II and warrants
for 74,074 shares issued to Artesian. The liquidating preference of the Series E
Convertible Preferred Stock, Class 2, is $3.375 per share. The Company included
$179,800 as additional interest expense during the year ended December 31, 1995
which represented the value of the warrants issued in connection with the bridge
loan (see Note 7).

Series A, B, C, D and E Convertible Preferred Shares issued in 1995 were
automatically converted three shares of preferred into two shares of common
stock upon the closing of the public offering of the Company's securities on
July 1, 1996.

6. Reverse Stock Split

On April 24, 1996, the Board of Directors approved a reverse stock split of
2-for-3 for the Company's common stock. Accordingly, all share, per share,
weighted average share, and stock option information were restated to reflect
the split. The reverse stock split impacted the conversion prices of the
preferred stock and the numbers of shares of common stock into which the
preferred stock would convert but had no effect upon the numbers of preferred
stock warrants and shares of preferred stock issued and outstanding.
Accordingly, all preferred stock and preferred stock price amounts have not been
adjusted for the reverse stock split.

                                      F-16
<PAGE>
 
                               Integ Incorporated
                          (A Development Stage Company)

                    Notes to Financial Statements (continued)


7. Stock Options and Warrants

Stock Options and Restricted Stock Grant

The Company has 1990, 1991 and 1994 stock option plans which provide for the
issuance of incentive and nonqualified stock options and restricted stock grants
to employees and consultants. Under the plans, the exercise price of options
granted is determined by the Company's Board of Directors, but incentive stock
options must be granted at exercise prices greater than or equal to the fair
market value of the Company's stock as of the grant date. A total of 3,213,333
shares of the Company's common stock have been reserved for issuance under all
three plans as of December 31, 1998.

During 1998, the Company repriced all outstanding employee options and those
held by consultants who were actively engaged in consulting activities as of
September 22, 1998 to an exercise price of $.81 per share. The Company valued
the repricing of the consultant options at $35,425 and is recognizing the
expense over the vesting period of the options.

Options outstanding were granted as follows:

<TABLE>
<CAPTION>
                                                                           Weighted Average
                                    Shares          Plan        Non-Plan      Exercise
                                   Available      Options        Options        Price
                                   for Grant    Outstanding    Outstanding    Per Share
                                  ---------------------------------------------------------
<S>                               <C>           <C>              <C>            <C>  
   Balance at December 31, 1995   $   83,048    $  646,952       $42,993        $0.98
     Shares reserved               1,300,000             -             -           -
     Granted at market price        (452,745)      452,745             -         9.63
     Granted below market price      (81,747)       81,747             -         8.81
     Exercised                             -        (6,666)            -         1.07
     Canceled                         15,000       (15,000)            -         9.88
                                  -----------------------------------------
   Balance at December 31, 1996      863,556     1,159,778        42,993         4.66
     Granted at market price        (618,625)      618,625             -         6.26
     Exercised                             -       (47,953)            -         0.84
     Canceled                         15,483       (15,483)            -         3.01
                                  -----------------------------------------
   Balance at December 31, 1997      260,414     1,714,967        42,993         5.34
     Shares reserved               1,000,000             -             -           -
     Granted at market price        (922,012)      922,012             -         1.54
     Exercised                             -      (166,923)            -         0.98
     Canceled                        922,504      (922,504)            -         5.93
                                  -----------------------------------------
   Balance at December 31, 1998   $1,260,906    $1,547,552       $42,993        $3.06
                                  =========================================
</TABLE>

                                      F-17
<PAGE>
 
                               Integ Incorporated
                          (A Development Stage Company)

                    Notes to Financial Statements (continued)


7. Stock Options and Warrants (continued)

The following table summarizes information about the stock options outstanding
at December 31, 1998:

<TABLE>
<CAPTION>
                                 Options Outstanding              Options Exercisable
                    -----------------------------------------  ----------------------------
                                   Weighted
                                    Average
                                   Remaining      Weighted                     Weighted
 Range of Exercise     Number     Contractual      Average        Number        Average
       Prices        Outstanding     Life      Exercise Price   Exercisable  Exercise Price
-------------------------------------------------------------  ----------------------------
<S>                   <C>          <C>             <C>            <C>           <C>  
  $  .81 - $  1.88    1,090,713    8.12 years      $  .88         421,490       $ .88
    2.78 -    5.75      162,000    9.05 years        4.55          16,250        4.81
    6.25 -    8.63       40,750    8.40 years        6.64          40,083        6.64
    9.00 -   10.50      297,082    7.57 years        9.77         195,860        9.81
                    -------------                               -----------
                      1,590,545    8.12 years       $3.06         673,683       $3.00
                    =============                               ===========
</TABLE>

During 1991 and 1993, the Company granted options outside the plans to purchase
42,993 shares of the Company's common stock at $.83 per share to Medical
Innovation Fund ("MIF"), a significant shareholder of the Company (see Note 10).

Options outstanding expire at various dates during the period from October 2000
through December 2007. The number of options exercisable as of December 31,
1996, 1997 and 1998 were 481,736, 710,982 and 703,093, respectively, at weighted
average prices of, $2.38, $3.92 and $3.00 per share, respectively.

The weighted average grant date fair value of options granted at market prices
during the years ended December 31, 1996, 1997 and 1998 was $7.18, $4.92 and
$1.43 per share, respectively. The weighted average grant date fair value of
options granted below market prices during the years ended December 31, 1995 and
1996 was $4.01 and $6.93 per share, respectively.

The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25") and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
Accounting for Stock-Based Compensation ("Statement 123"), requires use of
option valuation models that

                                      F-18
<PAGE>
 
                               Integ Incorporated
                          (A Development Stage Company)

                    Notes to Financial Statements (continued)


7. Stock Options and Warrants (continued)

were not developed for use in valuing employee stock options. Under APB 25, if
the exercise price of the Company's employee stock options equals or exceeds the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.

Pro forma information regarding net loss per share is required by Statement 123,
and has been determined as if the Company had accounted for its employee stock
options under the fair value method of Statement 123. The fair value for these
options was estimated at the date of grant using the Black-Scholes option
pricing model with the following weighted-average assumptions for 1996, 1997 and
1998: risk free interest rates of 6.59%, 6.33% and 5.31%, respectively; no
dividend yield; volatility factor of the expected market price of the Company's
common stock of .562, .656 and 1.047, respectively; and a weighted-average life
of the option of 10 years.

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

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows:

                                         1998           1997           1996
                                    -------------------------------------------

   Pro forma net loss               $(12,151,311)   $(13,535,200)   $(9,662,422)
   Pro forma net loss per common
     share-basic and diluted              $(1.28)         $(1.45)        $(1.82)

                                      F-19
<PAGE>
 
                               Integ Incorporated
                          (A Development Stage Company)

                    Notes to Financial Statements (continued)


7. Stock Options and Warrants (continued)

The pro forma effect on net loss for 1996, 1997 and 1998 is not representative
of the pro forma effect on net loss in future years because it does not take
into consideration pro forma compensation expense related to grants made prior
to 1995.

Deferred Compensation

During August 1994, the Company issued a restricted stock grant under the
Company's stock option plans to its then President and Chief Executive Officer
for 183,333 shares of common stock at a fair market value determined to be $.83
per share in exchange for two promissory notes. The Company recognized $151,250
as deferred compensation and is amortizing this amount ratably over the
restriction period of three years and, during the year ended December 31, 1996
and 1997, $38,863 and $2,450, was expensed, respectively. In addition to the
shares being held by the Company until the restriction lapse occurs, the
President and Chief Executive Officer signed two notes in the amount of the fair
market value of the stock grant. In 1995 and 1996, $24,291 and $102,892,
respectively, of principal and accrued interest was forgiven and the Company
awarded this individual an additional bonus adequate to cover related income
taxes due on this debt forgiveness.

During 1995 and 1996 options were granted to purchase a total of 433,710 shares
of the Company's common stock at exercise prices below the current market price.
The Company recognized $960,208 and $56,329 during the years ended 1995 and
1996, respectively, as deferred compensation for the excess of the deemed value
for accounting purposes of the common stock issuable upon exercise of such
options over the aggregate exercise price of such options. The deferred
compensation is amortized ratably over the vesting period of the options. For
the years ended 1996, 1997 and 1998, $477,076, $314,096 and $229,171,
respectively, was expensed.

During 1996, the Company granted 30,000 options to certain advisors of the
Company. In accordance with FASB 123, the Company recognized $179,600 as
deferred compensation. The deferred compensation is amortized ratably over the
vesting period of the options. In 1996, 1997 and 1998, $65,279, $87,835 and
$24,940 was charged to expense, respectively.

                                      F-20
<PAGE>
 
                               Integ Incorporated
                          (A Development Stage Company)

                    Notes to Financial Statements (continued)


7. Stock Options and Warrants (continued)

The remaining unamortized deferred compensation is expected to be charged to
operations as follows:

   1999                                                 $32,565
   2000                                                  10,254
   2001                                                  10,183
   2002                                                  10,183
   2003                                                  10,183
   Thereafter                                            17,667
                                                      -----------
                                                        $91,035
                                                      ===========

Warrants

In connection with the sale of Series C Convertible Preferred Stock during 1992
and 1993, the Company issued warrants to the holders for the purchase of 46,665
shares (including warrants for 13,333 shares issued to MIF (see Note 10), and
warrants for 17,778 shares issued to Artesian Capital Limited Partnership) of
its common stock exercisable immediately at a price of $3.75 per share. These
MIF and Artesian Capital Limited Partnership warrants were exercised in 1997,
and 8,888 of the remaining warrants were exercised and 6,666 expired at various
dates during the period from January 1998 through May 1998. During May 1994 the
Company issued warrants which expire during May 1999 to a consultant/stockholder
for the purchase of 6,666 shares of common stock exercisable immediately at a
price of $4.13 per share. The value of these warrants was determined to be
$24,000, based on the value of the services received and was expensed. In
addition, during March and December of 1994 and June 1995 the Company issued
warrants for the purchase of 159,042 shares of Series D Convertible Preferred
Stock (convertible into 106,027 shares of common stock at $4.13 per share) to
MIF II, exercisable immediately at $2.75 per share (see Note 10). Warrants for
the purchase of 27,273 shares expire during February 1999, warrants for the
purchase of 108,085 shares expire during December 2004, and warrants for the
purchase of 23,684 shares expire during June 2005.

In connection with the bridge loan arrangement during January 1995 discussed in
Note 5, the Company issued warrants to investors for the purchase of 429,630
shares of Series E Convertible Preferred Stock, Class 2, at $3.375 per share
(convertible into 286,414 shares

                                      F-21
<PAGE>
 
                               Integ Incorporated
                          (A Development Stage Company)

                    Notes to Financial Statements (continued)


7. Stock Options and Warrants (continued)

of common stock at $5.06 per share). These warrants expire in January 2005. The
value of these warrants was determined to be $179,800 based on the difference
between the stated interest rate and the Company's estimated effective borrowing
rate for the term of the notes and was expensed as additional interest expense
during 1995.

In consideration of the equipment loan agreement discussed in Note 4, the
Company has agreed to issue warrants for the purchase of common stock equal to
8.8% of the total dollar value of the credit line available under the agreement.
Warrants are to be issued as the line is funded, or at the expiration date of
the line in December 1998 for any unfunded portion of the credit line. The value
of these warrants was determined to be $874,416 and will be expensed over the
term of the loan agreement. Each warrant is exercisable initially at $6.00 per
share or, subsequent to any equity financing, at 80% of the per share price of
each subsequent financing, if such occurs. Warrants for the purchase of 34,689
and 94,390 shares of common stock were issued in 1997 and 1998, respectively.
The weighted average exercise price of these warrants was $7.60. These warrants
expire in December 2003.

8. Employee Stock Purchase Plan

The 1997 Employee Stock Purchase Plan (the Purchase Plan), as approved by the
shareholders on June 4, 1997, is a qualified plan pursuant to Internal Revenue
Code Section 423. The Purchase Plan allows eligible employees an opportunity to
purchase an aggregate of 300,000 shares of the Company's common stock through a
series of annual offerings for each calendar year (except for the initial
purchase period of the Purchase Plan which was for a six month period beginning
July 1, 1997). Payroll deductions between 1% and 10% of an employee's eligible
compensation may be used to purchase stock at a price per share equal to 85% of
the lesser of the fair market value of the Company's common stock at the
beginning or end of each purchase period. Under terms of the Purchase Plan, no
participant may acquire more than 10,000 shares of the Company's common stock or
more than $10,000 in aggregate fair market value of common stock (as determined
at the beginning of each purchase period) during any purchase period. Common
shares sold to employees under the Purchase Plan in 1997 and 1998 totaled 21,201
and 44,428, respectively.

                                      F-22
<PAGE>
 
                               Integ Incorporated
                          (A Development Stage Company)

                    Notes to Financial Statements (continued)


8. Employee Stock Purchase Plan (continued)

The fair value of the employees' rights under the Purchase Plan is estimated at
the beginning of each purchase period (July 1 in 1997 and January 1 in 1998)
using the Black-Scholes model with the following assumptions: no dividend yield;
an expected life of six months and twelve months, respectively; expected
volatility of .656 and 1.047, respectively; and risk free interest rate of 6.50%
and 5.65%, respectively. The fair market value of each purchase right granted
for the six month period ended December 31, 1997 and the year ended December 31,
1998 was $4.12 and $3.28, respectively.

9. Income Taxes

The Company has incurred net operating losses since inception. As of December
31, 1998, the Company had net operating losses (NOL) and research and
development tax credit carryforwards of approximately $15,392,000 and $907,000,
respectively, available to offset its future income tax liability. The NOL and
tax credit carryforwards begin to expire in the year 2005. No benefit has been
recorded for such loss carryforwards, and utilization in future years may be
limited, if significant ownership changes have occurred.

Components of deferred tax assets at December 31 are as follows:

                                                          December 31
                                                      1998            1997
                                                ------------------------------

   Net operating loss and credit carryforward    $  6,530,000    $  4,757,000
   Start-up costs                                   9,025,000       6,825,000
   Valuation allowance                            (15,555,000)    (11,582,000)
                                                ------------------------------
   Net deferred tax assets                       $         --    $         --
                                                ==============================

10. Related Party Transactions

Laboratory and office furniture and equipment used by the Company with an
original cost of approximately $801,000 as of December 31, 1997 and 1998 are
leased under sublease arrangements with FIM, Inc. and FIM II, Inc., both
entities related to the Company through MIF and MIF II, which are significant
shareholders of the Company. These leases

                                      F-23
<PAGE>
 
                               Integ Incorporated
                          (A Development Stage Company)

                    Notes to Financial Statements (continued)


10. Related Party Transactions (continued)

are accounted for as capital leases for financial statement purposes. In
addition, MIF and MIF II have guaranteed future lease payments, of which
approximately $154,128 is payable as of December 31, 1998. In consideration of
such guarantee by MIF, the Company issued nonqualified options to MIF for the
purchase of 42,993 shares of common stock exercisable immediately at a price of
$.83 per share. Options for 30,523 shares expire during May 2001 and options for
12,470 shares expire during April 2003. The value of these options was
determined to be $20,878 based on the difference between the stated interest
rate and the Company's estimated effective borrowing rate for the term of the
lease. Approximately $633, $313 and $78 was charged to interest expense during
the years ended December 31, 1996, 1997 and 1998, respectively, and the
remainder will be amortized over the term of the lease. In consideration of such
guarantee by MIF II, the Company issued warrants to MIF II for the purchase of
131,769 shares of Series D Convertible Preferred Stock exercisable immediately
at a price of $2.75 per share which are convertible into 87,845 shares of common
stock at $4.13 per share. These warrants expire during the period from December
2004 through June 2005. The value of these warrants was determined to be $83,962
based on the difference between the stated interest rate and the Company's
estimated effective borrowing rate for the term of the lease. Approximately
$22,688, $22,689 and $18,267 was charged to interest expense during the year
ended December 31, 1996, 1997 and 1998, respectively, and the remainder will be
amortized over the term of the lease.

In consideration of a bridge loan arrangement during 1993, the Company issued to
MIF II warrants for the purchase of 27,273 shares of Series D Convertible
Preferred Stock exercisable immediately at a price of $2.75 per share. These
warrants, which are convertible into 18,182 shares of common stock at $4.13 per
share, expire during February 1999.

In consideration of the bridge loan arrangement during January 1995 discussed in
Note 7, the Company issued to MIF II warrants for the purchase of 222,222 shares
of Series E Convertible Preferred Stock, Class 2, exercisable immediately at a
price of $3.375 per share which are convertible into 148,148 shares of common
stock at $5.06 per share. The value of these warrants was determined to be
$93,000 of the $179,800 total discussed in Note 7. These warrants expire during
January 2005.

                                      F-24
<PAGE>
 
                               Integ Incorporated
                          (A Development Stage Company)

                    Notes to Financial Statements (continued)


10. Related Party Transactions (continued)

From inception through December 31, 1995, the Company made payments under
consulting agreements with two directors, one of which is a limited partner of
MIF's general partner, and one shareholder. In 1995, the total expense under
these agreements was $129,000. In 1996, 1997 and 1998, the Company made payments
under a consulting agreement with a director who is a limited partner of MIF's
general partner totaling $81,000 per year.

                                      F-25
<PAGE>
 
                               Integ Incorporated

                                Index of Exhibits

                           Annual Report on Form 10-K
                      For the Year Ended December 31, 1998

Exhibit                                                         Page
Number    Description                                          Number
------    -----------                                          ------
 10.11     Form of Non-Incentive Stock Option           Filed Electronically
           Agreements

  23       Consent of Ernst & Young LLP                 Filed Electronically

  24       Powers of Attorney                           Filed Electronically
  27       Financial Data Schedules                     Filed Electronically

  99.1     Cautionary Statement for Purposes of the     Filed Electronically
           "Safe Harbor" Provisions of the Private 
           Securities Litigation Reform Act of 1995