<PAGE>   1
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                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   ----------

                                   FORM 10-KSB
      (MARK ONE)
        [X]       ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 2000

                                       OR

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

             For the transition period from ________ to _________

                         Commission file number 0-20532

                            DEXTERITY SURGICAL, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

          DELAWARE                                    74-2559866
 (STATE OR OTHER JURISDICTION OF                  (I.R.S. EMPLOYER
 INCORPORATION OR ORGANIZATION)                  IDENTIFICATION NO.)

  12961 PARK CENTRAL, SUITE 1300
        SAN ANTONIO, TEXAS                               78216
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)               (ZIP CODE)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (210) 495-8787

                                   ----------

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

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

                          Common Stock, $.001 par value
                                (TITLE OF CLASS)

         INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.  YES  X   NO    .
                                               ---     ---
         INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO
ITEM 405 OF REGULATION S-B 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-KSB OR ANY
AMENDMENT TO THIS FORM 10-KSB   X
                               ---
         REGISTRANT'S REVENUES FOR FISCAL YEAR ENDED DECEMBER 31, 2000:
$6,587,000.

         AT MARCH 15, 2001 (BASED UPON THE LAST REPORTED SALES PRICE OF $.125
PER SHARE), THE AGGREGATE MARKET VALUE OF THE COMMON STOCK, $.001 PAR VALUE, OF
THE REGISTRANT HELD BY NON-AFFILIATES WAS APPROXIMATELY $1,024,895. AT MARCH
15, 2001, THERE WERE OUTSTANDING 11,521,492 SHARES OF COMMON STOCK, $.001 PAR
VALUE, OF THE REGISTRANT.

                       DOCUMENTS INCORPORATED BY REFERENCE

<TABLE>
<CAPTION>
                           DOCUMENT                                                    FORM 10-KSB PART
                           --------                                                    ----------------
<S>                                                                            <C>
Definitive Proxy Statement for 2001 Annual Meeting of Stockholders             Part III, Items 9, 10, 11 and 12

Transitional Small Business Disclosure Format.  YES      NO   X  .
                                                    ----    -----
</TABLE>

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                                     PART I

ITEM 1.  BUSINESS


         Certain statements contained in this Form 10-KSB, including but not
limited to statements made in this Item 1, "Business" and those made in Item 6,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," are "forward-looking statements" within the meaning of Section 27A
of the Securities Act and Section 21E of the Exchange Act. Specifically, all
statements other than statements of historical fact included in this Item 2
regarding Dexterity Surgical, Inc. and its subsidiary's and affiliates'
(collectively, the "Company") financial position, business strategy and plans
and objectives of management of the Company for future operations are
forward-looking statements. These forward-looking statements are based on the
beliefs of the Company's management, as well as assumptions made by and
information currently available to the Company's management. When used in this
report, the words "anticipate," "believe," "estimate," "expect" and "intend" and
words or phrases of similar import, as they relate to the Company or Company's
management are intended to identify forward-looking statements. Such statements
reflect the current view of the Company with respect to future events and are
subject to certain risks, uncertainties and assumptions related to certain
factors including, without limitation, the Company's ability to raise capital,
the Company's dependence on its sole manufacturer and sole distributor, the
Company's ability to distribute safe and effective products on a cost-effective
basis, demand for and acceptance of the Company's products, the level of
competition in the marketplace, the ability of the Company's customers to be
reimbursed by third-party payors, competitive factors, general economic
conditions, customer relations, relationships with vendors, the interest rate
environment, governmental regulation and supervision, technological change,
changes in industry practices, one-time events and other factors described
herein, and in the Company's annual, quarterly and other reports filed with the
SEC (collectively, "cautionary statements"). Although the Company believes that
its expectations are reasonable, it can give no assurance that such expectations
will prove to be correct. Based upon changing conditions, should any one or more
of these risks or uncertainties materialize, or should any underlying
assumptions prove incorrect, actual results may vary materially from those
described herein as anticipated, believed, estimated, expected or intended. All
subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by the applicable cautionary statements. The Company does not intend to
update these forward-looking statements.

CURRENT FINANCIAL CONDITION

         The Company does not believe its revenues and other sources of
liquidity will provide adequate funding for its current capital requirements.
The Company is presently in negotiations to make arrangements to restructure its
cash obligations, including its debentures, line of credit and royalty
obligations. However, there can be no assurance that the Company will be able to
restructure these obligations. The holder of the Company's convertible
debentures has the right to demand immediate repayment of the entire amount
outstanding, which was $2,970,000 at December 31, 2000. In addition, at
December 31, 2000, the current portion of the Company's other long-term
obligations was approximately $3,149,000. There can be no assurance that
additional funding will be available on terms attractive to the Company or at
all. In the event the Company is required to raise additional funds, it does
not believe it will be able to obtain such financing from traditional
commercial lenders. Rather, the Company likely will have to conduct additional
sales of its equity and/or debt securities through public or private
financings, collaborative relationships or other arrangements. Substantial and
immediate dilution to existing stockholders likely would result from any sales
of equity securities or other securities convertible into equity securities.
THERE IS NO ASSURANCE THAT WE WILL BE ABLE TO RAISE ANY ADDITIONAL CAPITAL. IF
ADDITIONAL AMOUNTS CANNOT BE RAISED AND WE ARE UNABLE TO SUBSTANTIALLY REDUCE
OUR EXPENSES AND RESTRUCTURE OUR CASH OBLIGATIONS, WE WOULD SUFFER MATERIAL
ADVERSE CONSEQUENCES TO OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF
OPERATIONS AND WOULD LIKELY BE REQUIRED TO SEEK OTHER ALTERNATIVES UP TO AND
INCLUDING PROTECTION UNDER THE UNITED STATES BANKRUPTCY LAWS.

GENERAL

         Dexterity Surgical, Inc. (the "Company"), is engaged in the
distribution of instruments, equipment and surgical supplies used in and
hand-assisted laparoscopic surgery ("HALS") through an exclusive distribution
agreement with Weck Closure Systems, LLC ("Weck").



                                      -2-
<PAGE>   3



         HALS is a hybrid between open and laparoscopic surgery during which the
surgeon inserts one hand into the abdominal cavity during laparoscopic surgery.
By having his or her hand in the abdomen when performing laparoscopic surgery,
the surgeon has tactile feedback, rapid finger dissection, enhanced retraction
capabilities and simplified hemostasis.

         The Pneumo Sleeve(R) is a device that allows the surgeon to insert one
hand into the abdominal cavity while preserving pneumoperitoneum(1) during
laparoscopic surgery. This new surgical modality, called Hand Assisted
Laparoscopic Surgery (HALS), is a hybrid between open and laparoscopic surgery.
This enabling technology is expected to greatly increase the number of advanced
minimal access surgeries as well as the number of surgeons who perform these
procedures. In addition to being used with the Dexterity(R) Pneumo Sleeve(R),
the Dexterity(R) Protractor(R) is used as a stand-alone product for open
surgery, providing atraumatic retraction and wound protection.

         The Company acquired Dexterity Incorporated, a Delaware corporation
("Dexterity"), in March 1999. Dexterity was located in the Philadelphia,
Pennsylvania metropolitan area and has the exclusive rights of the Pneumo
Sleeve(R) and Protractor(R) proprietary instruments, equipments and supplies
used in HALS. Effective with such acquisition, the Company changed its name from
LifeQuest Medical, Inc. to Dexterity Surgical, Inc.

         The Company was incorporated on December 23, 1988 as a Delaware
corporation and commenced operations on January 1, 1989. In August 1992, the
Company completed its initial public offering of Common Stock, which is
currently traded on the OTC Bulletin Board. The Company's executive offices are
located at 12961 Park Central, Suite 1300, San Antonio, Texas 78216, and its
telephone number is (210) 495-8787.

RECENT DEVELOPMENTS

         Effective October 24, 2000, following the delisting of the Company's
Common Stock from trading on the NASDAQ SmallCap Market, the Company's Common
Stock began trading on the National Association of Securities Dealer's
"Electronic Bulletin Board." Consequently, the liquidity of the Company's Common
Stock may likely be impaired, not only in the number of shares which can be
bought and sold, but also through delays in the timing of the transactions,
reduction in security analysts' and the news media coverage, if any, of the
Company and lower prices for the Company's securities than might otherwise
prevail.

         Pursuant to a private placement which occurred in July and August 2000,
the Company issued to TFX Equities, Inc., a business development subsidiary of
Teleflex, Inc. and Cuda Products Company, whose chief executive officer is a
director of the Company, an aggregate of 400 shares of Series C Cumulative
Convertible Preferred Stock, $.001 par value ("Series C Preferred Stock") for
aggregate proceeds of $400,000. The Company used such proceeds for working
capital. The annual dividends on the Series C Preferred Stock are cumulative at
a rate of $80 per share. The Series C Preferred Stock is currently convertible
into shares of Common Stock at a conversion price of $1.00 per share, for an
aggregate of 400,000 shares of Common Stock. The conversion price for the Series
C Preferred Stock is subject to downward adjustment in the event the Company
sells shares of Common Stock, or securities convertible into shares of Common
Stock, at a per share price less than $1.00. The holders of Series C Preferred
Stock, are entitled to one vote per share on all matters submitted to a vote of
the stockholders of the Company, and the affirmative vote of the holders of
66 2/3% of the votes entitled to be cast by the holders of the Series C
Preferred Stock is required in order to amend the Company's Certificate of
Incorporation or Bylaws to materially affect the rights of the holders of
Series C Preferred Stock, including authorizing and creating a class of stock
having rights prior to or senior to the Series C Preferred Stock. In the event
two quarterly dividends payable on the Series C Preferred Stock are in arrears,
the holders of the Series C Preferred Stock, by a majority vote, shall be
entitled to designate two additional directors to serve on the Company's Board
of Directors.

         On June 29, 2000, the Company announced it had signed an exclusive
agreement under which Weck Closure Systems (WCS) will distribute the
Dexterity(R) Pneumo Sleeve(R) and the Dexterity(R) Protractor(R) in the United
States.

----------

(1) the presence of air or gas in the preperitoneal space; it may occur
spontaneously or be deliberately introduced as an aid to radiologic examination
and diagnosis.



                                      -3-
<PAGE>   4



The agreement also covers international distribution except in those areas for
which Dexterity has signed previous exclusive sales and distribution agreements
still in effect. Under the terms of the agreement, WCS (a unit of Teleflex
Incorporated) is required to purchase certain minimum quantities. Also, per the
agreement, WCS and the Company will combine elements of both sales forces under
the WCS umbrella. The Company and WCS will continue as separate business
entities. The Company believes this agreement will allow it to benefit from a
large, established worldwide sales force and to continue to reduce overhead
expenses. Sales to WCS accounted for 27% of total net sales for the year ended
December 31, 2000.

         In February 2000, the Company's principal supplier, General Surgical
Innovations, Inc. ("GSI"), terminated its distribution agreement with the
Company. GSI supplied products which accounted for 38% of the Company's revenue
in 1999 and 50% of the Company's revenue from May 1, 1999, the effective date of
the distribution agreement, through the termination date. The Company took
several steps in response to this action, including:

         o        restructured its debt obligations;

         o        modified its royalty agreement to provide for non-cash royalty
                  payments;

         o        reduced its general and administrative costs by converting its
                  entire sales force from employees to independent sales
                  representatives;

         o        entered into a long-term agreement with Weck Closure Systems
                  (a unit of Teleflex, Inc.) for the exclusive distribution of
                  the PneumoSleeve and Protractor product lines;

         o        restructured its compensation packages with certain officers;
                  and

         o        eliminated additional administrative staff.

DEXTERITY ACQUISITION

         In January 1998, the Company acquired approximately 20% of the common
stock of Dexterity, which was a business development subsidiary of Teleflex,
Inc. In March 1999, the Company acquired the remaining capital stock of
Dexterity by merging Dexterity into the Company (the "Dexterity Merger"),
pursuant to a Plan of Merger and Acquisition Agreement between the Company and
Dexterity (the "Dexterity Agreement"). Under the terms of the Dexterity
Agreement, which was approved by the stockholders of the Company March 18, 1999,
the Dexterity stockholders, other than the Company (the "Former Dexterity
Stockholders"), received an aggregate of:


         o        $1,500,000 cash;

         o        3,000,000 shares of common stock, $.001 par value ("Common
                  Stock"), of the Company;

         o        warrants to purchase an aggregate of 1,500,000 shares of
                  Common Stock, at an exercise price per share of $2.00 (the
                  "Warrants");

         o        promissory notes in the aggregate amount of $1,000,000 (the
                  "Notes"); and

         o        a royalty for seven years in an amount equal to 15% of all
                  sales of Dexterity products (the "Royalty") pursuant to a
                  royalty agreement (the "Royalty Agreement") among the Company
                  and the Former Dexterity Stockholders. The Royalty is subject
                  to minimum annual payments which aggregate, over the seven
                  years of the Royalty Agreement, approximately $9,695,095.

The Company determined the fair market value of the above consideration to be
approximately $16,000,000. The Company launched distribution of Dexterity's
primary products, the Dexterity(R) Pneumo Sleeve(R) and Dexterity(R)
Protractor(R), in March 1998. Simultaneous with the effectiveness of the
Dexterity Merger, the Company changed its name from LifeQuest Medical, Inc. to
Dexterity Surgical, Inc.

         In March 2000, the Warrants, Notes and Royalty Agreement were
restructured. The maturity date of the Notes was extended by 19 months to
October 18, 2001. The interest payable on the Notes for the year 2000 was paid
in shares of Common Stock at a per share price of $1.00. The Warrants have been
amended to reflect an exercise price per share of Common Stock of $1.00. In
addition, the Royalty Agreement was restructured to allow the Company to pay the
first $400,000 in Royalty due for 2000 in shares of Common Stock, valued at
$1.00 per share. The Company will have a Royalty due on April 30, 2001 of
$414,321.



                                      -4-
<PAGE>   5



INDUSTRY BACKGROUND

         The health care industry continues to undergo change, led primarily by
market forces demanding greater efficiencies and reduced costs. Government
proposed health care mandates in the United States have not occurred, and it is
unclear whether, and to what extent, any future government mandates will affect
the domestic health care market. Industry led changes are expected to continue
irrespective of any governmental efforts toward health care reform. The scope
and timing of any further government sponsored proposals for health care reform
are presently unclear.

         The primary trend in the industry is toward cost containment. Payors
and managed care organizations have been able to exercise greater influence
through managed treatment and hospitalization patterns, including a shift from
reimbursement on a retrospective basis to prospective limits for patient
treatment. Hospitals have been severely impacted by the resulting cost
restraints and are competing for business and becoming more sophisticated in
management and marketing. The increasing use of managed care, centralized
purchasing decisions, consolidations among hospitals and hospital groups, and
integration of health care providers, are continuing to affect purchasing
patterns in the health care system. Purchasing decisions are often shared by a
coalition of surgeons, nursing staff, and hospital administrators, with
purchasing decisions taking into account whether a product reduces the cost of
treatment and/or attracts additional patients to a hospital. All of these
factors, along with competition, have contributed to continuing reductions in
prices for the Company's products and, in the near term, to slower acceptance of
more advanced surgical procedures in which the Company's products are used,
given hospital and surgeon concerns as to the costs of training and
reimbursement by payors. In addition, the primary care physician is expected to
exercise significant influence on referrals of patients for surgical procedures
under managed care.

         The Company could potentially benefit from this focus on cost
containment and on managed care. Both minimally invasive surgery, or MIS and
HALS decrease operating room time, including anesthesia and patient recovery
time, and is highly cost effective. Doctors, patients, employers and payors all
value decreased patient recovery time. This could lead to potential increases in
volume as minimally invasive procedures are selected over alternative
techniques. However, an undue focus on discrete costs or similar limits which
fail to consider the overall value of these advanced procedures could adversely
impact the Company. Some hospitals may also lose per night revenues through
reduced post-operative care requirements as to procedures performed by MIS and
HALS, which could influence their analysis of acceptance of newer procedures.
The Company is adapting itself to this environment by promoting the cost
effectiveness of its products, by striving to efficiently produce and/or
distribute the highest quality products at the lowest cost, and by assisting
hospitals and payors in achieving meaningful cost reductions for the health care
system while retaining the quality of care permitted by the Company's products.

         MIS refers to surgical procedures which can be accomplished without a
major incision or other traumatization to the patient, in some cases without
general anesthesia. Endoscopy is one of the most important minimally invasive
surgical techniques. In addition to decreasing patient trauma or frequently
avoiding general anesthesia, endoscopy can substantially reduce or eliminate
postoperative hospitalization, thereby decreasing overall costs. The Company
believes that the current pressures for medical cost containment could result in
greater utilization of cost-effective, less invasive procedures. There can be no
assurance, however, that greater utilization of such procedures will result, or,
if greater utilization of such procedures does result, that the Company will
benefit.

         The availability of innovative medical technologies, patient demand and
the motivation of physicians and payors are among the driving forces behind the
movement toward, and the wide acceptance of, minimally invasive surgical
procedures. The Company believes that these minimally invasive techniques are
desired because they benefit all significant participants in the healthcare
system: the patient experiences less pain and trauma and enjoys a more rapid
recovery; surgeons and hospitals or other surgical centers that adopt these
techniques enhance their practices and reputations; and the healthcare payor
incurs lower overall costs. The Company believes that the growing acceptance of
minimally invasive surgical procedures is changing the standards of practice
over a wide range of surgical specialties and that this trend should create
significant business opportunities for manufacturers of minimally invasive
surgical products.



                                      -5-
<PAGE>   6



PROPRIETARY PRODUCTS

         The Company's proprietary products are the Dexterity PneumoSleeve and
the Dexterity Protractor.

DISTRIBUTION

         The Company markets its proprietary products to hospitals, purchasing
groups and surgeons through Weck as its sole distributor. The Company
distributes MIS products of other companies through its independent contractors.

COMPETITION

         The primary market in which the Company competes is the HALS instrument
market. This market is highly competitive and in the current healthcare
environment, cost containment has become a significant factor in purchasing
decisions by hospitals. The Company competes in the HALS market with Applied
Medical and Smith & Nephew. The HALS market also competes the MIS market. The
MIS market is dominated by two large, well-positioned entities that are
intensely competitive and frequently offer substantial discounts as a
competitive tactic. The United States Surgical Corporation ("U.S. Surgical") is
primarily engaged in developing, manufacturing and marketing surgical wound
management products, and has historically been the firm most responsible for
providing products that have led to the growth of the industry. U.S. Surgical
supplies a broad line of products to the MIS industry, including products which
facilitate access, assessment and treatment. Ethicon Endo-Surgery ("Ethicon"), a
Johnson & Johnson company, has made a major investment in the MIS field in
recent years and is one of the leading suppliers of hospital products in the
world. Furthermore, U.S. Surgical and Ethicon each utilize purchasing contracts
that link discounts on the purchase of one product to purchases of other
products in their broad product lines. Substantially all of the hospitals in the
United States have purchasing contracts with one or both of these entities.
Accordingly, customers may be dissuaded from purchasing access products from the
Company rather than U.S. Surgical or Ethicon to the extent it would cause them
to lose discounts on products that they regularly purchase from U.S. Surgical or
Ethicon.

         The Company believes that the primary competitive factors affecting its
business are the safety and effectiveness of the products offered, ease of
product use, product reliability, price, physician familiarity with the
manufacturer and its products, distribution channels, third party reimbursement
policies and the timing of market introduction of its competitors' products.

         All of the Company's competitors and potential competitors have
substantially greater resources, including easier access to capital, research
and development personnel, extensive manufacturing and marketing capabilities,
broad and well established product lines as well as ancillary services, such as
training programs. Some of the Company's competitors have long-term or
preferential supply arrangements with certain hospitals. Such arrangements may
prevent the Company from obtaining access to such hospitals. In addition, it is
possible that other large healthcare companies may enter the MIS device market
in the future. Competing companies may succeed in developing products that are
more efficacious or less costly than any that may be developed or distributed by
the Company and such companies also may be more successful than the Company in
production and marketing. Rapid technological development by others may result
in the Company's products becoming obsolete before the Company recovers a
significant portion of the development and commercialization expenses incurred
with respect to those products.

         The impact of competition will likely have a continuing effect on sales
volumes and on prices charged by the Company. The Company faces a formidable
task in successfully gaining significant revenues within the MIS market. In
order to succeed, management believes that the Company will need to objectively
demonstrate substantial product benefits, and its sales effort must be able to
effectively present such benefits to both clinicians and health care
administrators as well as third party payers.

         There can be no assurance that the Company will be able to successfully
compete in the MIS market, and failure to do so would have a material adverse
effect on the Company's business, financial condition and results of operations.



                                      -6-
<PAGE>   7
DEPENDENCE ON WECK AND MCT

         Because we have no sales, marketing, distribution or manufacturing
capabilities, we will depend on third parties to successfully perform these
functions on our behalf. We rely completely on Weck Closure Systems for our
sales, marketing and distribution of our products. Weck is a subsidiary of our
largest shareholder. Weck may develop and commercialize, either alone or with
others, products that are similar to or competitive with the products we sell.
Our agreement with Weck is subject to termination under various circumstances,
including, in many cases, on short notice. If Weck terminated our distribution
agreement, we would have difficulty arranging for another third party to
distribute our products and our business and financial condition would be
materially impaired.

         We currently rely upon Medical Creative Technologies, Inc., or MCT, to
manufacture our products. MCT and the Company each own certain patents covering
our proprietary products and share ownership of other patents covering these
products. MCT has granted the Company an exclusive license to the patents it
holds covering the Company's proprietary products. We do not currently have a
written manufacturing agreement with MCT. As such, MCT could terminate the oral
manufacturing agreement at any time. If the agreement is terminated, the Company
believes other companies could manufacture its products. However, the transition
from MCT to another manufacturer could cause delays in shipments of our products
and may reduce our revenues. If we are unable to arrange for third party
manufacturing of our products, or to do so on commercially reasonable terms, we
may not be able to market our products. Reliance on third party manufacturers
entails risks to which we would not be subject if we manufactured products
ourselves, including reliance on the third party for regulatory compliance and
quality assurance, the possibility of breach of the manufacturing agreement by
the third party because of factors beyond our control and the possibility of
termination or nonrenewal of the agreement by the third party, based on its own
business priorities, at a time that is costly or inconvenient for us.

DEPENDENCE ON KEY PERSONNEL

         The success of the Company will be largely dependent on the efforts of
Richard A. Woodfield, President and Chief Executive Officer of the Company and
Randall K. Boatright, Executive Vice President, Chief Financial Officer and
Secretary of the Company. The Company has entered into employment agreements
with each of Mr. Boatright and Mr. Woodfield. The Company does not maintain key
man life insurance on either Mr. Boatright or Mr. Woodfield. The loss of the
services of one or more key employees could have an adverse effect on the
Company.

GOVERNMENT REGULATION

         As a developer and distributor of medical devices, the Company is
subject to regulation by, among other governmental entities, the FDA and the
corresponding agencies of states and foreign countries in which the Company
sells its products. These regulations govern the introduction of new medical
devices, the observance of certain standards with respect to the manufacture and
labeling of such devices, the maintenance of certain records and the reporting
of potential product defects and other matters. Failure to comply with such
regulations may have a material adverse effect on the Company.

         With the enactment of the Medical Device Amendments in May 1976 to the
Federal Food, Drug and Cosmetic Act (the "FDC Act"), the FDA classified medical
devices in commercial distribution into three classes, Class I, II or III. This
classification is based on the controls necessary to reasonably ensure the
safety and effectiveness of the medical device. Class I devices are those
devices whose safety and effectiveness can reasonably be ensured through general
controls such as adequate labeling, premarket notification and adherence to Good
Manufacturing Practices ("GMP") regulations. Some Class I devices are further
exempted from some of the general controls. Class II devices are those devices
whose safety and effectiveness can reasonably be ensured through the use of
special controls such as performance standards, post-market surveillance,
patient registries and FDA guidelines. Class III devices are devices which must
receive premarket approval by the FDA pursuant to a Premarket Approval ("PMA")
application to ensure their safety and effectiveness. Generally, Class III
devices are limited to life-sustaining, life-supporting or implantable devices.

         Most medical instruments introduced to the United States market are
required by the FDA, as a condition of marketing, to secure either clearance of
a premarket notification pursuant to Section 510(k) of the FDC Act (a "510(k)
Notification") or an approved PMA. Obtaining a PMA can take several years. In
contrast, the process of obtaining



                                      -7-
<PAGE>   8


a 510(k) Notification clearance requires the submission of substantially less
data and generally involves a shorter review period.

         In general, clearance of a 510(k) Notification may be obtained if a
manufacturer or distributor of medical devices can establish that a new device
is "substantially equivalent" to a legally marketed medical device. The 510(k)
Notification and the claim of substantial equivalence may have to be supported
by various types of information indicating that the device is as safe and
effective for its intended use as a legally marketed predicate device. In
addition to requiring clearance for new products, FDA rules typically require a
filing and a waiting period prior to marketing modified versions of existing
products. The Company anticipates that most of the products it develops will be
eligible for the 510(k) Notification procedure. At this time, the FDA typically
responds to a submission of a 510(k) Notification within 180 to 360 days. Market
clearance may take three to 12 months or longer. In the event that the shorter
510(k) Notification procedure is not available, the Company will be required to
file a PMA.

         Under the Safe Medical Devices Act of 1990 ("SMDA"), the FDA is
directed to adopt new 510(k) Notification regulations which could potentially
make the approval process for the Company's products more time-consuming,
difficult and expensive. The SMDA includes new provisions relating to
post-market surveillance requirements for certain types of devices and
authorizes the FDA to adopt new controls to be applied to certain devices such
as some currently being developed by the Company, including the promulgation of
a performance standard, requirements for patient registries, distributor and
purchaser reporting and imposition of guidelines.

         The process of obtaining necessary government approvals can be
time-consuming and expensive. There can be no assurance that the necessary
approvals will be obtained by the Company or, if they are obtained, that they
will be obtained on a timely basis. Furthermore, the Company or the FDA may
suspend clinical trials at any time upon a determination that the subjects or
patients are being exposed to an unacceptable health risk. The FDA may also
require post-approval testing and surveillance programs to monitor the effects
of the Company's products and the products it distributes as a condition of
approval. Approvals that have been or may be granted are subject to continual
review and surveillance programs required by regulatory agencies, and later
discovery of previously unknown problems may result in product labeling
restrictions or withdrawal of products from marketing.

         Manufacturers of medical devices marketed in the United States are
required to adhere to applicable regulations setting forth detailed GMP
requirements, which include testing, control and documentation requirements.
Manufacturers also must comply with Medical Device Reporting ("MDR")
requirements which require that a firm report to the FDA certain adverse events
associated with the Company's devices. The Company is subject to routine
inspection by the FDA and certain state agencies for compliance with GMP
requirements, MDR requirements and other applicable regulations. The FDA is
using its statutory authority more vigorously during inspections of companies
and in other enforcement matters. The FDA has promulgated new GMP regulations
and MDR regulations, both of which will likely increase the cost of compliance
with GMP requirements. The Company also is subject to numerous federal, state
and local laws relating to matters such as safe working conditions,
manufacturing practices, environmental protection, fire hazard control and
disposal of hazardous or potentially hazardous substances. Changes in existing
requirements or adoption of new requirements could have a material adverse
effect on the Company's business, financial condition or results of operations.
Although the Company believes that it is in compliance with all applicable
regulations of the FDA and the various states in which it operates, current
regulations depend heavily on administrative interpretation and there can be no
assurance that the Company will not incur significant costs to comply with laws
and regulations in the future or that laws and regulations will not have a
material adverse effect upon the Company's business, financial condition or
results of operations. In addition, the potential effects on the Company of
heightened enforcement of federal and state regulations cannot be predicted.

         All of the products manufactured by or on behalf of the Company have
received all regulatory approvals as required, and the Company believes, to its
best knowledge, that all of the products it distributes but does not manufacture
have received all regulatory approvals as required. The Company has no
applications for approval before either the FDA or any similar regulatory body
in other countries nor does the Company anticipate filing any applications in
the near future. The Company has never had any sales in Europe nor has it ever
applied for the CE mark for sales in Europe.



                                      -8-
<PAGE>   9



         In addition to the statutes and regulations enforced by the FDA, the
Company is also subject to regulation under the Occupational Safety and Health
Act, the Environmental Protection Act, the Toxic Substances Control Act, the
Resource Conservation and Recovery Act and other present and potential future
federal, state and local statutes, regulations and ordinances, including those
promulgated by the Environmental Protection Act and the Department of Labor.
Regulations regarding the manufacture and sale of the Company's products are
subject to change. The Company cannot predict what impact, if any, such changes
might have on its business.

THIRD-PARTY REIMBURSEMENT

         The health care industry continues to undergo change, led primarily by
market forces which are demanding greater efficiencies and reduced costs.
Government proposed health care mandates in the United States generally have not
occurred, and it is unclear whether, and to what extent, any government mandate
will affect the domestic health care market. Industry led changes are expected
to continue irrespective of any governmental efforts toward health care reform.
The scope and timing of any further government sponsored proposals for health
care reform are presently unclear.

         The primary trend in the industry is toward consolidation and cost
containment. Third-party payors, principally federal Medicare, state Medicaid
and private health insurance plans, have been able to exercise greater influence
through managed treatment and hospitalization patterns, including a shift from
reimbursement on a cost basis to per capita limits for patient treatment.
Hospitals have been severely impacted by the resulting cost restraints. The
increasing use of managed care, centralized purchasing decisions through group
purchasing organizations, consolidations among hospitals and hospital groups,
and integration of health care providers are continuing to affect purchasing
patterns in the health care system. Purchasing decisions are often shared by a
coalition of surgeons, nursing staff, and hospital administrators, with
purchasing decisions taking into account whether a product reduces the cost of
treatment and/or attracts additional patients to a hospital. Managed care
providers are attempting to control the cost of health care by authorizing fewer
elective surgical procedures. All of these factors have contributed to
reductions in prices for the Company's products, to a reduction in the volume of
hospital purchasing and, in the near term, slower acceptance of more advanced
surgical procedures in which the Company's products are used, given hospital and
surgeon concerns as to the costs of training and reimbursement by payors. While
the Company has implemented programs to assist hospitals in cost containment
through more efficient surgical practices and application of minimally invasive
surgery, there can be no assurance that the Company will not continue to be
adversely affected by these matters. There can be no assurance as to the impact
of cost containment on the Company's future operations.

         The Company's products are purchased by hospitals, physicians, and
other health care providers, which bill various third-party payors, such as
government health programs, private health insurance plans, managed care
organizations and other similar programs, for the health care goods and services
provided to their patients. Third-party payors may deny reimbursement if they
determine that a product was not used in accordance with established payor
protocol regarding cost-effective treatment methods, or was used for an
unapproved treatment. Increasingly, third-party payors are also contesting the
prices charged for medical products and services and, in some instances, have
put pressure on medical device suppliers to lower their prices. There is no
assurance that reimbursement for the Company's products will be available or, if
available, that payors' reimbursement levels will not adversely affect the
Company's ability to sell its products on a profitable basis. Failure by
hospitals and other users of the Company's products to obtain reimbursement from
third-party payors, and changes in third-party payors' policies towards
reimbursement for procedures using the Company's products, could have a material
adverse effect on the Company's financial position, results of operations and
cash flows.

PRODUCT LIABILITY AND INSURANCE

         The sale of HALS products by the Company entails the risk of product
liability claims, involving both potential financial exposure and associated
adverse publicity. The Company's current product liability insurance coverage
limits are $1,000,000 per occurrence and $2,000,000 in the aggregate, and there
can be no assurance that such coverage limits are adequate to protect the
Company from any liabilities it might incur in connection with the development,
manufacture and sale of its current and potential products. In addition, the
insurance is expensive and may not be available in the future on acceptable
terms, or at all. In addition, if such insurance is available, there can be no
assurance that the limits



                                      -9-
<PAGE>   10



of coverage of such policies will be adequate. A successful product liability
claim in excess of the Company's insurance coverage could have a material
adverse effect on the Company's business, financial condition or results of
operations.

         The Company's products are purchased by hospitals, physicians, and
other health care providers, which in turn bill various third-party payors, such
as government health programs, private health insurance plans, managed care
organizations and other similar programs, for the health care goods and services
provided to their patients. Third-party payors may deny reimbursement if they
determine that a product was not used in accordance with established payor
protocol regarding cost-effective treatment methods, or was used for an
unapproved treatment. Increasingly, third-party payors are also contesting the
prices charged for medical products and services and, in some instances, have
put pressure on medical device suppliers to lower their prices. There is no
assurance that reimbursement for procedures performed by healthcare providers
utilizing the Company's products will be available or, if available, that the
third- party payors' reimbursement levels will not adversely affect the
Company's ability to sell its products on a profitable basis. Failure by
hospitals and other users of the Company's products to obtain reimbursement from
third-party payors, and changes in third-party payors' policies towards
reimbursement for procedures utilizing the Company's products, could have a
material adverse effect on the Company's financial position, results of
operations and cash flows.

ADDITIONAL BUSINESS RISKS

         HISTORY OF LOSSES; PROFITABILITY UNCERTAIN. The Company has experienced
operating losses since its inception on January 1, 1989. At December 31, 2000,
the Company had an accumulated deficit of approximately $28.7 million, including
losses applicable to common stockholders of $5.9 million and $3.3 million in
2000 and 1999, respectively. Prior to 1996 the Company was a development stage
company focused primarily on obtaining FDA approval of two medical devices.
However, the Company determined not to initiate any further work on obtaining
FDA approval of the devices and in 1998, sold their rights to such devices for a
cash payment and a royalty on all future sales of such devices. The Company
generated revenues of approximately $6.6 million during the year ended December
31, 2000.

         In the future, the Company expects to have increased cash outflow
requirements as a result of expenditures related to the expansion of sales and
marketing activity, expansion of manufacturing capacity, compliance with
regulatory requirements, and possible investment in or acquisition of additional
complementary products, technologies or businesses. The cash needs of the
Company have changed significantly as a result of the acquisitions completed
during the last two years and the support requirements of the added business
focus areas. There can be no assurance that the Company will not continue to
incur losses, that the Company will be able to raise cash as necessary to fund
operations or that the Company will ever achieve profitability.

         FUTURE ADDITIONAL CAPITAL REQUIREMENTS; NO ASSURANCE FUTURE CAPITAL
WILL BE AVAILABLE. The Company's capital requirements will depend on numerous
factors, including its ability to restructure its cash obligations, market
acceptance and demand for its products and the Company's ability to control its
expenses. The timing and amount of such capital requirements cannot be
accurately predicted. The holder of the Company's convertible debentures has the
right to demand immediate repayment of the entire amount outstanding, which was
$2,970,000 at December 31, 2000. In addition, at December 31, 2000, the current
portion of the Company's other long-term obligations was approximately
$3,149,000. The Company does not believe its revenues and other sources of
liquidity will provide adequate funding for its current capital requirements.
The Company is presently in negotiations to make arrangements to restructure its
cash obligations, including its Debentures, line of credit and royalty
obligations. However, there can be no assurance that the Company will be able to
restructure these obligations. There can be no assurance that such additional
funding will be available on terms attractive to the Company or at all. In the
event the Company is required to raise additional funds, it does not believe it
will be able to obtain such financing from traditional commercial lenders.
Rather, the Company likely will have to conduct additional sales of its equity
and/or debt securities through public or private financings, collaborative
relationships or other arrangements. Substantial and immediate dilution to
existing stockholders likely would result from any sales of equity securities or
other securities convertible into equity securities. THERE IS NO ASSURANCE THAT
WE WILL BE ABLE TO RAISE ANY ADDITIONAL CAPITAL. IF ADDITIONAL AMOUNTS CANNOT BE
RAISED AND WE ARE UNABLE TO SUBSTANTIALLY REDUCE OUR EXPENSES AND RESTRUCTURE
OUR CASH OBLIGATIONS, WE WOULD SUFFER MATERIAL ADVERSE CONSEQUENCES TO OUR
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND WOULD LIKELY BE
REQUIRED TO SEEK OTHER ALTERNATIVES UP TO AND INCLUDING PROTECTION UNDER THE
UNITED STATES BANKRUPTCY LAWS.



                                      -10-
<PAGE>   11



         BECAUSE WE HAVE NO SALES, MARKETING, DISTRIBUTION OR MANUFACTURING
CAPABILITIES, WE WILL DEPEND ON THIRD PARTIES TO SUCCESSFULLY PERFORM THESE
FUNCTIONS ON OUR BEHALF. WE HAVE NO SALES, MARKETING, DISTRIBUTION OR
MANUFACTURING CAPABILITIES. We rely completely on Weck Closure Systems for our
sales, marketing and distribution of our products. Weck is a subsidiary of our
largest shareholder. Weck may develop and commercialize, either alone or with
others, products that are similar to or competitive with the products we sell.
Our agreement with Weck is subject to termination under various circumstances,
including, in many cases, on short notice. If Weck terminated our distribution
agreement, we would have difficulty arranging for another third party to
distribute our products and our business and financial condition would be
materially impaired.

         We currently rely upon Medical Creative Technologies, Inc., or MCT, to
manufacture our products. MCT and the Company equally own the patent covering
our products. We do not currently have a written agreement with MCT. As such,
MCT could terminate the oral agreement at any time. If the agreement is
terminated, the Company believes other companies could manufacture its products.
However, the transition from MCT to another manufacturer could cause delays in
shipments of our products and may reduce our revenues. If we are unable to
arrange for third party manufacturing of our products, or to do so on
commercially reasonable terms, we may not be able to market our products.
Reliance on third party manufacturers entails risks to which we would not be
subject if we manufactured products ourselves, including reliance on the third
party for regulatory compliance and quality assurance, the possibility of breach
of the manufacturing agreement by the third party because of factors beyond our
control and the possibility of termination or nonrenewal of the agreement by the
third party, based on its own business priorities, at a time that is costly or
inconvenient for us.

         PRIVATE PLACEMENTS. Pursuant to a private placement which occurred in
July and August 2000, the Company issued to TFX Equities, Inc., a business
development subsidiary of Teleflex, Inc. and Cuda Products Company, whose chief
executive officer is a director of the Company, an aggregate of 400 shares of
Series C Cumulative Convertible Preferred Stock, $.001 par value ("Series C
Preferred Stock") for aggregate proceeds of $400,000. The Company used such
proceeds for working capital. The annual dividends on the Series C Preferred
Stock are cumulative at a rate of $80 per share. The Series C Preferred Stock is
currently convertible into shares of Common Stock at a conversion price of $1.00
per share, for an aggregate of 400,000 shares of Common Stock. The conversion
price for the Series C Preferred Stock is subject to downward adjustment in the
event the Company sells shares of Common Stock, or securities convertible into
shares of Common Stock, at a per share price less than $1.00. The holders of
Series C Preferred Stock, are entitled to one vote per share on all matters
submitted to a vote of the stockholders of the Company, and the affirmative vote
of the holders of 66 2/3% of the votes entitled to be cast by the holders of the
Series C Preferred Stock is required in order to amend the Company's Certificate
of Incorporation or Bylaws to materially affect the rights of the holders of
Series C Preferred Stock, including authorizing and creating a class of stock
having rights prior to or senior to the Series C Preferred Stock. In the event
two quarterly dividends payable on the Series C Preferred Stock are in arrears,
the holders of the Series C Preferred Stock, by a majority vote, shall be
entitled to designate two additional directors to serve on the Company's Board
of Directors.

         Pursuant to a private placement which occurred in November 1998, the
Company issued to two affiliates of Renaissance Capital Group, Inc.
(collectively, "Renaissance") and one individual, who is an officer and director
of the Company, an aggregate of 1,025 shares of Series B Cumulative Convertible
Preferred Stock, $.001 par value ("Series B Preferred Stock") for aggregate
proceeds of $1,025,000. The Company used such proceeds for working capital. The
annual dividends on the Series B Preferred Stock are cumulative at a rate of $80
per share. The Series B Preferred Stock is currently convertible into shares of
Common Stock at a conversion price of $1.54 per share, for an aggregate of
665,584 shares of Common Stock. The conversion price for the Series B
Preferred Stock is subject to downward adjustment in the event the Company sells
shares of Common Stock, or securities convertible into shares of Common Stock,
at a per share price less than $1.54. The holders of Series B Preferred Stock
are entitled to one vote per share on all matters submitted to a vote of the
stockholders of the Company, and the affirmative vote of the holders of 66 2/3%
of the votes entitled to be cast by the holders of the Series B Preferred Stock
is required in order to amend the Company's Certificate of Incorporation or
Bylaws to materially affect the rights of the holders of Series B Preferred
Stock, including authorizing and creating a class of stock having rights prior
to or senior to the Series B Preferred Stock. In the event two quarterly
dividends payable on the Series B Preferred Stock are in arrears, the holders of
Series B Preferred Stock, by a majority vote, shall be entitled to designate two
additional directors to serve on the Company's Board of Directors.



                                      -11-
<PAGE>   12



         In August 1998, pursuant to a private placement, the Company issued to
Renaissance and two individuals, including one who is an officer and director of
the Company, an aggregate of 1,170 shares of 8% Series A Cumulative Convertible
Preferred Stock, $.001 par value ("Series A Preferred Stock"), for aggregate
proceeds of $1,170,000. The Company used such proceeds for working capital. In
March 2000, 150 shares of Series A Preferred Stock were converted into 93,750
shares of Common Stock. Annual dividends on the Series A Preferred Stock are
cumulative at a rate of $80 per share. The Series A Preferred Stock is currently
convertible into shares of Common Stock at a conversion price of $1.54 per
share, for an aggregate of 662,338 shares of Common Stock. The conversion price
for the Series A Preferred Stock is subject to downward adjustment in the event
the Company sells shares of Common Stock, or securities convertible into shares
of Common Stock, at a per share price less than $1.54. The holders of Series A
Preferred Stock are entitled to one vote per share on all matters submitted to a
vote of the stockholders of the Company, and the affirmative vote of the holders
of 66 2/3% of the votes entitled to be cast by the holders of the Series A
Preferred Stock is required in order to amend the Company's Certificate of
Incorporation or Bylaws to materially affect the rights of the holders of Series
A Preferred Stock, including authorizing and creating a class of stock having
rights prior to or senior to the Series A Preferred Stock. In the event two
quarterly dividends payable on the Series A Preferred Stock are in arrears, the
holders of Series A Preferred Stock, by a majority vote, shall be entitled to
designate two additional directors to serve on the Company's Board of Directors.

         In December 1997, the Company sold 250,000 shares of Common Stock to
Renaissance in a private placement for aggregate proceeds of $1,000,000 and
placed $3,000,000 in 9% Convertible Debentures (the "Debentures") with
Renaissance. The proceeds from the private placement were used to repay the
Company's line of credit with another financial institution, to make the January
1998 equity investment in Dexterity, and for working capital purposes. The
Debentures are secured by substantially all of the assets of the Company and
require monthly payments of interest and, unless sooner paid, redeemed or
converted, require monthly principal payments commencing in December 2000 of $10
per $1000 of the then remaining principal amount. In March 2000, the Debentures
were modified to provide that the interest payable between February 1, 2000
through January 31, 2001 shall be paid in shares of Common Stock, valued at
$1.00 per share. The remaining principal balance will mature in December 2004.
The Debentures currently require the Company to comply with the following
financial covenants: (i) a Debt to Net Worth Ratio of no greater than .99:1;
(ii) an Interest Coverage Ratio of at least .60:1; (iii) a Debt Coverage Ratio
of at least .10:1; and (iv) a Current Ratio of at least .68:1. The Company is
currently not in compliance and therefore, is in technical default under the
Debentures. Accordingly, the holders have the right to demand the immediate
repayment of the entire amount outstanding. Although the Company is current on
its interest and principal repayment obligations under the Debentures, the
Company currently does not have sufficient resources to fund such amounts in the
event of acceleration of the entire amount outstanding. The holders of the
Debentures have the option to convert at any time all or a portion of the
Debentures into shares of Common Stock at an initial price of $1.00 per share of
Common Stock. The conversion price is subject to downward revision if the
Company sells shares of its Common Stock, or securities convertible into Common
Stock, at a price less than $1.00 per share of Common Stock, subject to certain
allowed exceptions, during the term of the Debentures. The Debentures are
currently convertible for an aggregate of 3,000,000 shares of Common Stock;
however, since the conversion price is subject to downward adjustment as
described above, and there is no minimum conversion price, the maximum number of
shares of Common Stock which may be issued pursuant to the Debentures is
undeterminable. The provisions of the Debentures provide that the holders of the
Debentures have an option to redeem the Debentures, in an amount equal to an 18
percent annual yield on the principal balance, upon the occurrence of certain
events, including the delisting of Common Stock from the NASDAQ SmallCap Market
and certain "change of control" provisions, as defined in the Debentures, as
they relate to the Company. As the Common Stock was delisted from the NASDAQ
SmallCap Market on October 24, 2000, the holder now has the option to redeem the
Debentures for the entire amount outstanding, which was $2,970,000 at December
31, 2000. The Company may redeem the Debentures at its option subject to certain
share price and market activity levels being obtained. The Company's right of
redemption is subject to the holder's prior right of conversion of the
Debenture.

         POTENTIAL ADVERSE EFFECTS OF CONVERSION OF DEBENTURES AND PREFERRED
STOCK AND EXERCISE OF WARRANTS. The Company cannot predict what effect, if any,
(i) the conversion of the Debentures or Preferred Stock or exercise of warrants
into Common Stock or (ii) the payment of interest and the Royalty in shares of
Common Stock and/or the sale of such Common Stock into the public market will
have on the market price of the Company's Common Stock. Offers or sales of
significant quantities of the Company's Common Stock, or the perception that
such sales may occur or have occurred, could adversely affect the market price.
The conversion features of the Debentures and Preferred Stock operates such that
the holders thereof receive more shares of the Common Stock upon conversion if
the conversion price



                                      -12-
<PAGE>   13


is adjusted downward as described above. The issuance of shares of Common Stock
upon the conversion of the Preferred Stock or the Debentures will substantially
dilute the voting rights and other interests of stockholders of the Company. As
the number of shares of Common Stock issuable upon the conversion of the
Preferred Stock and the Debentures is indeterminate, the Company is unable to
predict to what extent the Company's stockholders' rights will be diluted. Such
uncertainty creates downward pressure on the public market price of the
Company's Common Stock. In the event such holders convert their Debentures or
shares of Preferred Stock, as applicable, and sell a large number of shares of
Common Stock into the public market over a short time, the market price for the
Common Stock could decline. Such a decline may make future equity financings
more difficult for the Company to obtain on an acceptable basis, if at all.

         EFFECTS OF DELISTING FROM NASDAQ SMALLCAP MARKET; LACK OF LIQUIDITY OF
LOW PRICED STOCKS. On October 24, 2000, the Company's Common Stock was delisted
from the Nasdaq SmallCap Market. Trading in the Common Stock is now be conducted
in the National Association of Securities Dealer's "Electronic Bulletin Board."
Consequently, the liquidity of the Company's Common Stock has been impaired, not
only in the number of shares which could be bought and sold, but also through
delays in the timing of the transactions, reduction in security analysts' and
the news media's coverage of the Company and lower prices for the Company's
securities.

         In addition, trading in the Common Stock is also subject to the
requirements of certain rules promulgated under the Exchange Act, which require
additional disclosures by broker-dealers in connection with any trades involving
a stock defined as a penny stock (generally, any non-Nasdaq equity security that
has a market price of less than $5.00 per share, subject to certain exceptions).
Such rules require the delivery, prior to any penny stock transaction, of a
disclosure schedule explaining the penny stock market and the risks associated
therewith, and impose various sales practice requirements on broker-dealers who
sell penny stock to persons other than established customers and accredited
investors (which are generally institutions). For these types of transactions,
the broker-dealer must make a special suitability determination for the purchase
and have received the purchaser's written consent to the transaction prior to
the sale. The additional burdens imposed upon broker-dealers by such
requirements may discourage broker-dealers from effecting transactions in the
Common Stock which could severely limit the market liquidity of Common Stock and
the ability of stockholders to sell their shares of Common Stock in the
secondary market.

         STOCK PRICE VOLATILITY. The stock market in general, and stocks of
medical device companies and stocks traded on the "Bulletin Board" in
particular, have from time to time experienced significant price and volume
fluctuations that are unrelated to the operating performance of particular
companies. These broad market fluctuations have in the past and may continue in
the future to adversely affect the market price of the Company's Common Stock.
In addition, the market price of the Common Stock has been and is likely to
continue to be highly volatile. Factors such as fluctuations in the Company's
operating results, announcements of technological innovations or new products by
the Company or its competitors, the FDA and international regulatory actions,
actions with respect to reimbursement matters, developments with respect to
patents of proprietary rights, public concern as to the safety of products
developed or marketed by the Company or others, changes in health care policy in
the United States and internationally, changes in stock market analyst
recommendations regarding the Company, or the medical device industry generally
or general market conditions may have a significant effect on the market price
of the Company's Common Stock.

         SHARES ELIGIBLE FOR FUTURE SALE OR ISSUANCE. Sales of shares of Common
Stock by existing stockholders under Rule 144 of the Securities Act, or through
the exercise of outstanding vested options or the conversion of the Debentures
or Preferred Stock, could have an adverse effect on the price of the Common
Stock. At March 15, 2001, virtually all of the 11.5 million shares of Common
Stock outstanding are eligible for sale in the public market. In addition, at
December 31, 2000 there were outstanding options to acquire up to approximately
1,572,100 shares of Common Stock, warrants to acquire 1,697,500 shares of Common
Stock, 3,000,000 shares of Common Stock issuable upon conversion of the
Debentures, 662,338 shares of Common Stock issuable upon conversion of Series A
Preferred Stock, 665,584 shares of Common Stock issuable upon conversion of the
Series B Preferred Stock and 400,000 shares of Common Stock issuable upon
conversion of Series C Preferred Stock. In the event a large number of shares
are sold in the public market over a short period of time, the market price for
Common Stock could decline.

         RIGHTS AGREEMENT. On June 21, 1995, the Board of Directors of the
Company declared a dividend of one Common Stock purchase right (a "Right") for
each share of Common Stock outstanding. Each Right entitles the holder



                                      -13-
<PAGE>   14



to purchase one share of the Company's Common Stock at an initial exercise price
of $7.00 per share, subject to adjustment, upon the terms and subject to the
conditions set forth in a Rights Agreement dated as of June 20, 1995, between
the Company and American Stock Transfer & Trust Company, as the Rights Agent.
The Rights trade with the Common Stock and will not detach from the Common Stock
or become exercisable until the earlier of (i) ten business days after a public
announcement that a person or group of affiliated or associate persons
("Acquiring Person") has acquired beneficial ownership of 15% or more of the
Company's Common Stock (a "Shares Acquisition Date") and (ii) ten business days
after the commencement of, or the first public announcement of an intention to
make, a tender offer or exchange offer for the Common Stock, the consummation of
which would result in beneficial ownership by a person or group.

         If any person or group acquires beneficial ownership of 15% or more of
the outstanding shares of the Company's Common Stock, each Right (other than the
Rights held by the Acquiring Person, which shall be void), will entitle its
holder to purchase at the exercise price an additional number of shares of
Common Stock equal to the amount determined by dividing the exercise price by
50% of the then current market price of the Common Stock.

         In addition, if following the Shares Acquisition Date, the Company is
acquired in a merger or other business-combination transaction, or sells more
than 50% of its assets or earning power to any person, each Right (other than
those beneficially held by an Acquiring Person) will entitle its holder to
purchase at the existing exercise price a number of shares of common stock of
the acquiring company having twice the value of the exercise price.

         The Company may redeem the Rights at $.02 per Right at any time on or
prior to the tenth business day following the first public announcement of the
acquisition by a person of 15% or more of its Common Stock or the commencement
of a tender offer or exchange offer for such 15% ownership.

         The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group who attempts to acquire the Company
without conditioning the offer on a substantial number of Rights being acquired.
The Rights may also deter a person or group from attempting to acquire the
Company and therefore may inhibit the ability of stockholders of the Company to
sell their shares of Common Stock at a premium price in a takeover situation.
The Rights should not interfere with any merger or other business combination
approved by the Board of Directors of the Company since the Board of Directors
may, at its option, at any time prior to the close of business on the tenth
business day after the Shares Acquisition Date, redeem all the then outstanding
Rights at a price of $.02 per Right.

         CERTAIN ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF
INCORPORATION AND DELAWARE LAW. Certain provisions of the Delaware General
Corporation Law ("DGCL") and the Company's Certificate of Incorporation could
have the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from acquiring, control of the Company. Such
provisions could limit the price that certain investors might be willing to pay
in the future for shares of Common Stock. These provisions of the DGCL and
provisions of the Company's Certificate of Incorporation may also have the
effect of discouraging or preventing certain types of transactions involving an
actual or threatened change of control of the Company (including unsolicited
takeover attempts), even though such a transaction may offer the Company's
stockholders the opportunity to sell their stock at a price above the prevailing
market price. The Company is subject to the provisions of Section 203 of the
DGCL. In general, Section 203 prohibits a publicly held Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date that the person became an interested
stockholder unless (with certain exceptions) the business combination or the
transaction in which the person became an interested stockholder is approved in
a prescribed manner. Generally, a "business combination" includes a merger,
asset or stock sale, or other transaction resulting in a financial benefit to
the stockholder. Generally, an "interested stockholder" is a person who,
together with affiliates and associates, owns (or within three years prior to
such transaction, did own) 15% or more of the corporation's voting stock.

         The Company's Certificate of Incorporation authorizes the issuance of
preferred stock with designations, rights and preferences determined from time
to time by its Board of Directors. The Board of Directors may issue one or more
series of preferred stock, without any action on the part of the stockholders of
the Company, the terms of which may adversely affect the rights of holders of
Common Stock. Issuance of preferred stock, which may be accomplished through a
public offering or a private placement, may dilute the voting power of holders
of Common Stock (such as by



                                      -14-
<PAGE>   15



issuing preferred stock with super voting rights) and may render more difficult
the removal of current management, even if such removal may be in the
stockholders' best interests.

         The issuance of preferred stock, for example, could decrease the amount
of earnings or assets available for distribution to the holders of Common Stock
or could adversely affect the rights and powers, including voting rights, of the
holders of Common Stock. In certain circumstances, such issuance could have the
effect of decreasing the market price of the Common Stock, as well as having the
anti-takeover effect discussed above. Further, the issuance of preferred stock
may be used as an "anti-takeover" device without further action on the part of
the stockholders. Although the Company issued 1,170 shares of preferred stock in
August 1998, 1,000 shares of preferred stock in November 1998 and 25 shares of
preferred stock in January 1999, it has no present intention to issue any
additional shares of its preferred stock; however, there can be no assurance
that it will not do so in the future.

         NON-PAYMENT OF DIVIDENDS. The Company has never declared or paid
dividends on Common Stock and does not anticipate paying dividends on Common
Stock at any time in the foreseeable future. The terms of the convertible
debentures and certain of the Company's loan agreements restrict the payment of
dividends on Common Stock.

EMPLOYEES

         As of March 15, 2001, the Company employed 7 persons, of which 6 were
full-time and 1 was part-time. None of the Company's employees are represented
by a union for collective bargaining purposes. The Company considers its
relations with its employees to be satisfactory.

EXECUTIVE OFFICERS OF THE REGISTRANT

         The executive officers of the Company as of March 15, 2001 and their
names, ages, positions and tenure with the Company are as follows:


<TABLE>
<CAPTION>
                                                                                                                        OFFICER
        NAME                                   AGE                           POSITION                                    SINCE
        ----                                   ---                           --------                                    -----
<S>                                            <C>       <C>                                                             <C>
Richard A. Woodfield                           58        President and Chief Executive Officer                            1998

Randall K. Boatright                           52        Executive Vice President, Chief Financial                        1992
                                                         Officer and Secretary

Frederic C.  Feiler, Jr.                       41        Vice President                                                   1999
</TABLE>


         There are no arrangements or understandings pursuant to which any of
the officers listed were elected as officers. Officers are elected annually by
the Board of Directors at its first meeting following the Annual Meeting of
Stockholders, each to hold office until the corresponding meeting of the Board
in the next year or until his successor shall have been elected or shall have
been qualified.




                                      -15-
<PAGE>   16



ITEM 2.  PROPERTIES

         The Company currently leases corporate headquarters in San Antonio,
Texas, under a lease expiring in May 2002. The Company currently leases office
and distribution facilities in Atlanta, Georgia, under a lease in March 2002.
During 2000 the Company paid aggregate rentals of approximately $154,000.


ITEM 3.  LEGAL PROCEEDINGS

         The Company filed a lawsuit for breach of contract on September 11,
2000 in the Superior Court of the State of California, City and County of San
Francisco, against General Surgical Innovations, Inc. and United States Surgical
Corporation. The lawsuit relates to the unilateral termination of the Company's
distribution agreement with GSI

         The Company had a $359,940.80 judgment entered against it in February
2001 as a result of a lawsuit filed against it in Georgia state court alleging
breach of contract. The Company has filed a motion for a new trial and, in the
event the motion is denied, the Company intends to appeal the judgment. The
Company believes it has meritorious defenses to the lawsuit and intends to
vigorously defend itself. In the event of an unfavorable outcome, the Company
believes that it is entitled to indemnification from the former shareholders of
Val-U-Med, Inc. for 42% of any ultimate judgment.

         The Company is a party to claims and legal proceedings arising in the
ordinary course of business. The Company believes it is unlikely that the final
outcome of any of the claims or proceedings to which the Company is a party,
including the case described above, would have a material adverse effect on the
Company's financial statements; however, due to the inherent uncertainty of
litigation, the range of possible loss, if any, cannot be estimated with a
reasonable degree of precision and there can be no assurance that the resolution
of any particular claim or proceeding would not have an adverse effect on the
Company's results of operations for the interim period in which such resolution
occurred.


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

         Not applicable.



                                      -16-
<PAGE>   17



                                     PART II

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

         The Common Stock, $.001 par value ("Common Stock"), of the Company
trades on the OTC Bulletin Board under the symbol "DEXT." The Common Stock
traded under the symbol "LQMD" from August 1992 until March 1999. The Common
Stock is traded on the OTC Bulletin Board. The Common Stock was traded on the
NASDAQ SmallCap Market until October 24, 2000. The following table presents the
range of high and low sales prices for the Common Stock as reported by the
Nasdaq Stock Market for the periods indicated. The quotations represent prices
in the over-the-counter market between dealers in securities, do not include
retail mark-up, mark-down or commissions and may not necessarily represent
actual transactions.



<TABLE>
<CAPTION>
QUARTER ENDED                   HIGH         LOW
-------------                   ----         ---
<S>                           <C>         <C>
Fiscal 2000:

Fourth Quarter                $ .5000     $ .0938
Third Quarter                   .8438       .3125
Second Quarter                 1.6250       .6250
First Quarter                  3.7500       .6875

Fiscal 1999:

Fourth Quarter                $1.7500     $ .8750
Third Quarter                  1.8750       .8438
Second Quarter                 1.8750      1.0625
First Quarter                  2.1250       1.800
</TABLE>


         At March 15, 2001, there were approximately 172 record holders of
Common Stock and approximately 2,487 beneficial holders of Common Stock.

         The Company has not in the past declared any cash dividends on the
Common Stock, and does not anticipate paying dividends on the Common Stock at
any time in the foreseeable future.




                                      -17-
<PAGE>   18



ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

         Certain statements contained in this Item 2, "Management's Discussion
and Analysis of Financial Condition and Results of Operations," are
"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. Specifically, all statements other than statements of historical
fact included in this Item 2 regarding Dexterity Surgical, Inc. and its
subsidiary's and affiliates' (collectively, the "Company") financial position,
business strategy and plans and objectives of management of the Company for
future operations are forward-looking statements. These forward-looking
statements are based on the beliefs of the Company's management, as well as
assumptions made by and information currently available to the Company's
management. When used in this report, the words "anticipate," "believe,"
"estimate," "expect" and "intend" and words or phrases of similar import, as
they relate to the Company or Company's management are intended to identify
forward-looking statements. Such statements reflect the current view of the
Company with respect to future events and are subject to certain risks,
uncertainties and assumptions related to certain factors including, without
limitation, the Company's ability to raise capital, the Company's dependence on
its sole manufacturer and sole distributor, the Company's ability to distribute
safe and effective products on a cost-effective basis, demand for and acceptance
of the Company's products, the level of competition in the marketplace, the
ability of the Company's customers to be reimbursed by third-party payors,
competitive factors, general economic conditions, customer relations,
relationships with vendors, the interest rate environment, governmental
regulation and supervision, technological change, changes in industry practices,
one-time events and other factors described herein, and in the Company's annual,
quarterly and other reports filed with the SEC (collectively, "cautionary
statements"). Although the Company believes that its expectations are
reasonable, it can give no assurance that such expectations will prove to be
correct. Based upon changing conditions, should any one or more of these risks
or uncertainties materialize, or should any underlying assumptions prove
incorrect, actual results may vary materially from those described herein as
anticipated, believed, estimated, expected or intended. All subsequent written
and oral forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by the applicable
cautionary statements. The Company does not intend to update these
forward-looking statements.

OVERVIEW

         In February 2000, the Company's principal supplier, General Surgical
Innovations, Inc. ("GSI"), terminated its distribution agreement with the
Company. As background, Origin Medsystems ("Origin") products accounted for 52%
of the Company's revenues during the first quarter of 1999. However, as a result
of the outcome of a patent infringement lawsuit between Origin and GSI in April
1999, the Company made the decision to discontinue distributing Origin products
and begin distributing GSI products. Subsequent to that decision, U. S. Surgical
Corporation ("Surgical") purchased the Origin product line and also announced
their acquisition of GSI. Then, in February 2000, GSI terminated its
distribution agreement with the Company. GSI supplied products which accounted
for 38% of the Company's revenue in 1999 and 50% of the Company's revenue from
May 1, 1999 (the effective date of the distribution agreement) through February
2000, the termination month. In response to this unilateral action by GSI, the
Company filed a lawsuit in September 2000 against Surgical and GSI. It is
management's belief the fee arrangement with its legal counsel will not
adversely affect the Company's cash flow as the case progresses toward
resolution, as legal fees will be based on results, if any, obtained. The
Company took several additional steps in response to this action. The Company
restructured its debt obligations, modified its royalty agreement to provide for
partial non-cash royalty payments, reduced its general and administrative costs
by converting its entire sales force from employees to independent sales
representatives and eliminated additional administrative staff. In aggregate,
the Company reduced its number of employees from 66 at December 31, 1999 to 6 at
March 15, 2001. In addition, certain officers of the Company agreed to
restructure their compensation packages to increase short term cash flow. As a
further consequence of the cancelled GSI agreement, accounts receivable declined
75% to $730,000 at December 31, 2000, from $2,866,000 at December 31, 1999.

         From inception through December 31, 1995, the Company was a development
stage enterprise whose efforts and resources were devoted primarily to research
and development activities related to its initial products. During this
development stage, the Company generated minimal operating revenues and, thus,
was unprofitable. In 1996, the Company reduced investment in research and
development related to such technologies and focused its efforts on



                                      -18-
<PAGE>   19



acquiring and distributing minimally invasive surgical devices. Accordingly,
during the last five fiscal years, the Company has continued to decrease its
engagement in Company sponsored research and development. As of December 31,
2000, the Company had an accumulated deficit of approximately $28,664,000. There
can be no assurance that the Company will not continue to incur losses, that the
Company will be able to raise cash as necessary to fund operations or that the
Company will ever achieve profitability.

         The Company's future operating results will depend on many factors,
including the Company's ability to distribute safe and effective products on a
cost-effective basis, demand for and acceptance of the Company's products, the
level of competition in the marketplace, the ability of the Company to maintain
scientifically advanced technology, the ability of the Company's customers to be
reimbursed by third-party payors and other factors described in this Annual
Report on Form 10-KSB.

         Effective October 24, 2000, following the delisting of the Company's
Common Stock from trading on the NASDAQ SmallCap Market, the Company's Common
Stock began trading on the National Association of Securities Dealer's
"Electronic Bulletin Board." Consequently, the liquidity of the Company's Common
Stock may likely be impaired, not only in the number of shares which can be
bought and sold, but also through delays in the timing of the transactions,
reduction in security analysts' and the news media's coverage, if any, of the
Company and lower prices for the Company's securities than might otherwise
prevail.

         As the Company's Common Stock was delisted from trading on the Nasdaq
SmallCap Market and the trading price of the Common Stock is below $5.00 per
share, trading in the Common Stock is subject to the requirements of certain
rules promulgated under the Exchange Act, which require additional disclosures
by broker-dealers in connection with any trades involving a stock defined as a
penny stock (generally, any non-Nasdaq equity security that has a market price
of less than $5.00 per share, subject to certain exceptions). Such rules require
the delivery, prior to any penny stock transaction, of a disclosure schedule
explaining the penny stock market and the risks associated therewith, and impose
various sales practice requirements on broker-dealers who sell penny stock to
persons other than established customers and accredited investors (which are
generally institutions). For these types of transactions, the broker-dealer must
make a special suitability determination for the purchase and have received the
purchaser's written consent to the transaction prior to the sale. The additional
burdens imposed upon broker-dealers by such requirements may discourage
broker-dealers from effecting transactions in the Common Stock which could
severely limit the market liquidity of Common Stock and the ability of
stockholders to sell their shares of Common Stock in the secondary market.

         In January 1998, the Company acquired approximately 20% of the common
stock of Dexterity Incorporated ("Dexterity"), a business development subsidiary
of Teleflex, Inc. In March 1999, the Company acquired the remaining common stock
of Dexterity by merging Dexterity into the Company (the "Dexterity Merger")
pursuant to a Plan of Merger and Acquisition agreement between the Company and
Dexterity (the "Dexterity Agreement"). Simultaneous with the effectiveness of
the Dexterity Merger, the Company changed its name to Dexterity Surgical, Inc.
Under the terms of the Dexterity Agreement, which was approved by the
stockholders of the Company at a special meeting held March 18, 1999, the
Dexterity stockholders, other than the Company, received an aggregate of:

         o        $1,500,000 cash;

         o        3,000,000 shares of Common Stock;

         o        warrants to purchase an aggregate of 1,500,000 shares of
                  Common Stock, at an exercise price per share of $2.00 (the
                  "Warrants");

         o        promissory notes in the aggregate amount of $1,000,000 (the
                  "Notes"); and

         o        a royalty for seven years in an amount equal to 15% of all
                  sales of Dexterity products (the "Royalty") pursuant to a
                  royalty agreement (the "Royalty Agreement") among the Company
                  and the Dexterity stockholders, other than the Company. The
                  Royalty is subject to minimum annual payments which aggregate,
                  over the seven years of the Royalty Agreement, approximately
                  $9,695,095.

         The Company determined the fair market value of the above consideration
to be approximately $16,000,000. The Company launched distribution of
Dexterity's primary products, the Dexterity(R) Pneumo Sleeve and Dexterity(R)
Protractor, in March 1998. The Dexterity Merger was accounted for using the
purchase method of accounting.



                                      -19-
<PAGE>   20



         On June 29, 2000, the Company announced it had signed an exclusive
agreement under which Weck Closure Systems (WCS) will distribute the
Dexterity(R) Pneumo Sleeve(R) and the Dexterity(R) Protractor(R) in the United
States. The agreement also covers international distribution except in those
areas for which Dexterity has signed previous exclusive sales and distribution
agreements still in effect. Under the terms of the agreement, WCS (a unit of
Teleflex Incorporated) is required to purchase certain minimum quantities. Also,
per the agreement, WCS and the Company will combine elements of both sales
forces under the WCS umbrella. The Company and WCS will continue as separate
business entities. The Company believes this agreement will allow it to benefit
from a large, established worldwide sales force and to continue to reduce
overhead expenses. Sales to WCS accounted for 27% of total net sales for the
year ended December 31, 2000.

LIQUIDITY AND CAPITAL RESOURCES

         Pursuant to a private placement which occurred in July and August 2000,
the Company issued to TFX Equities, Inc., a business development subsidiary of
Teleflex, Inc., and Cuda Products Company, whose chief executive officer is a
director of the Company, an aggregate of 400 shares of Series C Cumulative
Convertible Preferred Stock, $.001 par value ("Series C Preferred Stock") for
aggregate proceeds of $400,000. The Company used such proceeds for working
capital. The annual dividends on the Series C Preferred Stock are cumulative at
a rate of $80 per share. The Series C Preferred Stock is currently convertible
into shares of Common Stock at a conversion price of $1.00 per share, for an
aggregate of 400,000 shares of Common Stock. The conversion price for the Series
C Preferred Stock is subject to downward adjustment in the event the Company
sells shares of Common Stock, or securities convertible into shares of Common
Stock, at a per share price less than $1.00. The holders of Series C Preferred
Stock, are entitled to one vote per share on all matters submitted to a vote of
the stockholders of the Company, and the affirmative vote of the holders of
66 2/3% of the votes entitled to be cast by the holders of the Series C
Preferred Stock is required in order to amend the Company's Certificate of
Incorporation or Bylaws to materially affect the rights of the holders of
Series C Preferred Stock, including authorizing and creating a class of stock
having rights prior to or senior to the Series C Preferred Stock. In the event
two quarterly dividends payable on the Series C Preferred Stock are in arrears,
the holders of the Series C Preferred Stock, by a majority vote, shall be
entitled to designate two additional directors to serve on the Company's Board
of Directors.

         In March 2000, the Warrants, Notes and Royalty Agreement were
restructured. The maturity date of the Notes was extended by 19 months to
October 18, 2001. The interest expense on the Notes for the year 2000 was paid
in shares of Common Stock at a per share price of $1.00. The Warrants were
amended to reflect an exercise price per share of Common Stock of $1.00. In
addition, the Royalty Agreement was restructured to allow the Company to pay the
first $400,000 in Royalty due for 2000 in shares of Common Stock, valued at
$1.00 per share. The Company will have a cash royalty due on April 30, 2001 of
$414,321.

         At December 31, 2000, the Company had current assets of $2,077,000 and
current liabilities of $9,391,000 resulting in a working capital deficit of
$7,314,000. This compares to a working capital deficit of $743,000 at December
31, 1999. The increase in working capital deficit is primarily due to the
operating losses incurred during 2000 as well as the classification of
convertible debentures in default as current.

         In April 1999, the Company acquired a new maximum $5,000,000 revolving
line of credit from a financial institution whereby all inventories, accounts
receivable and intangibles of the Company are pledged as collateral. At December
31, 2000, the outstanding balance due on such line of credit was $754,000 and an
additional $217,000 was available under the current borrowing base.

         Pursuant to a private placement which occurred in November 1998, the
Company issued to two affiliates of Renaissance Capital Group, Inc.
(collectively, "Renaissance") and one individual, who is an officer and director
of the Company, an aggregate of 1,025 shares of Series B Cumulative Convertible
Preferred Stock, $.001 par value ("Series B Preferred Stock") for aggregate
proceeds of $1,025,000. The Company used such proceeds for working capital. The
annual dividends on the Series B Preferred Stock are cumulative at a rate of $80
per share. The Series B Preferred Stock is currently convertible into shares of
Common Stock at a conversion price of $1.54 per share, for an aggregate of
665,584 shares of Common Stock. The conversion price for the Series B Preferred
Stock is subject to downward adjustment in the event the Company sells shares of
Common Stock, or securities convertible into shares of Common



                                      -20-
<PAGE>   21



Stock, at a per share price less than $1.54. The holders of Series B Preferred
Stock, are entitled to one vote per share on all matters submitted to a vote of
the stockholders of the Company, and the affirmative vote of the holders of
66 2/3% of the votes entitled to be cast by the holders of the Series B
Preferred Stock is required in order to amend the Company's Certificate of
Incorporation or Bylaws to materially affect the rights of the holders of
Series B Preferred Stock, including authorizing and creating a class of stock
having rights prior to or senior to the Series B Preferred Stock. In the event
two quarterly dividends payable on the series B Preferred Stock are in arrears,
the holders of Series B Preferred Stock, by a majority vote, shall be entitled
to designate two additional directors to serve on the Company's Board of
Directors.

         In August 1998, pursuant to a private placement, the Company issued to
Renaissance and two individuals, including one who is an officer and director of
the Company, an aggregate of 1,170 shares of series A Cumulative Convertible
Preferred Stock, $.001 par value ("Series A Preferred Stock"), for aggregate
proceeds of $1,170,000. The Company used such proceeds for working capital.
During March 2000, 150 shares of Series A Preferred stock were converted to
93,750 shares of Common Stock. Annual dividends on the Series A Preferred Stock
are cumulative at a rate of $80 per share. The Series A Preferred Stock is
currently convertible into share of Common Stock at a conversion price of $1.54
per share, for an aggregate of 662,338 shares of Common Stock. The conversion
price for the Series A Preferred Stock is subject to downward adjustment in the
event the Company sells shares of Common Stock, or securities convertible into
shares of common Stock, at a per share price less than $1.54. The holders of
Series A Preferred Stock are entitled to one vote per share on all matters
submitted to a vote of the stockholders of the Company, and the affirmative vote
of the holders of 66 2/3% of the votes entitled to be cast by the holders of the
Series A Preferred Stock is required in order to amend the Company's Certificate
of Incorporation or Bylaws to materially affect the rights of the holders of
Series A Preferred Stock, including authorizing and creating a class of stock
having rights prior to or senior to the Series A Preferred Stock. In the event
two quarterly dividends payable on the Series A Preferred Stock are in arrears,
the holders of Series A Preferred Stock, by a majority vote, shall be entitled
to designate two additional directors to serve on the Company's Board of
Directors.

         In December 1997, the Company sold 250,000 shares of Common Stock to
Renaissance in a private placement for aggregate proceeds of $1,000,000 and
placed $3,000,000 in 9% Convertible Debentures (the "Debentures") with
Renaissance. The proceeds from the private placement were used to repay the
Company's line of credit with another financial institution, to make the January
1998 equity investment in Dexterity, and for working capital purposes. The
Debentures are secured by substantially all of the assets of the Company and
require monthly payments of interest and also require monthly principal
payments, which commenced in December 2000 of $10 per $1000 of the then
remaining principal amount. The remaining principal balance will mature in
December 2004. In March 2000, the Debentures were modified to provide that the
interest payable between February 1, 2000 through January 31, 2001 shall be paid
in shares of Common Stock, valued at $1.00 per share. Upon modification, 270,000
shares of Common Stock valued at $270,000 were issued in advance of interest due
through January 31, 2001.

         The Debentures currently require the Company to comply with the
following financial covenants: (i) a Debt to Net Worth Ratio of no greater than
 .99:1; (ii) an Interest Coverage Ratio of at least .60:1; (iii) a Debt Coverage
Ratio of at least .10:1; and (iv) a Current Ratio of at least .68:1. The Company
is currently not in compliance and therefore, is in technical default under the
Debentures. Accordingly, the holders have the right to demand the immediate
repayment of the entire amount outstanding which was $2,970,000 at December 31,
2000. Although the Company is current on its interest and principal repayment
obligations under the Debentures, the Company currently does not have sufficient
resources to fund such amounts in the event of acceleration of the entire amount
outstanding.

         The holders of the Debentures have the option to convert at any time
all or a portion of the Debentures into shares of Common Stock at an initial
price of $1.00 per share of Common Stock. The conversion price is subject to
downward revision if the Company sells shares of its Common Stock, or securities
convertible into Common Stock, at a price less than $1.00 per share of Common
Stock, subject to certain allowed exceptions, during the term of the Debentures.
The Debentures are currently convertible for an aggregate of 3,000,000 shares of
Common Stock; however, since the conversion price is subject to downward
adjustment as described above, and there is no minimum conversion price, the
maximum number of shares of Common Stock which may be issued pursuant to the
Debentures is undeterminable. The provisions of the Debentures provide that the
holders of the Debentures have an option to redeem the Debentures, in an amount
equal to an 18 percent annual yield on the principal balance, upon the
occurrence of



                                      -21-
<PAGE>   22


certain events, including the delisting of Common Stock from the NASDAQ SmallCap
Market and certain "change of control" provisions, as defined in the Debentures,
as they relate to the Company. As the Common Stock was delisted from the NASDAQ
SmallCap Market on October 24, 2000, the holder now has the option to exercise
these redemption rights. The Company may redeem the Debentures at its option
subject to certain share price and market activity levels being obtained. The
Company's right of redemption is subject to the holder's prior right of
conversion of the Debenture.

         For the year ended December 31, 2000, operating activities provided
cash of $987,000. Investment activities during the period utilized cash of
$36,000. During the period, the Company's financing activities used cash of
$1,023,000 primarily from the net decrease in the outstanding balance of the
line of credit.

         For the year ended December 31, 1999, operating activities utilized
cash of $1,484,000. Investment activities during the period utilized cash of
$1,072,000, primarily due to the acquisition of Dexterity. During 1999, the
Company's financing activities provided $1,025,000 primarily from new
borrowings.

         The Company does not believe its revenues and other sources of
liquidity will provide adequate funding for its current capital requirements.
The Company is presently in negotiations to make arrangements to restructure its
cash obligations, including its Debentures, line of credit and royalty
obligations. However, there can be no assurance that the Company will be able to
restructure these obligations. The holder of the Company's convertible
debentures has the right to demand immediate repayment of the entire amount
outstanding, which was $2,970,000 at December 31, 2000. In addition, at December
31, 2000, the current portion of the Company's other long-term obligations was
approximately $3,149,000. There can be no assurance that such additional funding
will be available on terms attractive to the Company or at all. In the event the
Company is required to raise additional funds, it does not believe it will be
able to obtain such financing from traditional commercial lenders. Rather, the
Company likely will have to conduct additional sales of its equity and/or debt
securities through public or private financings, collaborative relationships or
other arrangements. Substantial and immediate dilution to existing stockholders
likely would result from any sales of equity securities or other securities
convertible into equity securities. THERE IS NO ASSURANCE THAT WE WILL BE ABLE
TO RAISE ANY ADDITIONAL CAPITAL. IF ADDITIONAL AMOUNTS CANNOT BE RAISED AND WE
ARE UNABLE TO SUBSTANTIALLY REDUCE OUR EXPENSES AND RESTRUCTURE OUR CASH
OBLIGATIONS, WE WOULD SUFFER MATERIAL ADVERSE CONSEQUENCES TO OUR BUSINESS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND WOULD LIKELY BE REQUIRED TO
SEEK OTHER ALTERNATIVES UP TO AND INCLUDING PROTECTION UNDER THE UNITED STATES
BANKRUPTCY LAWS.

RESULTS OF OPERATIONS FOR YEAR ENDING DECEMBER 31, 2000

         On February 19, 2001, in Andrieni vs. LifeQuest Medical, Inc., et al,
Civil Action File No. E-71617 in Fulton County (Georgia) Superior Court, the
jury rendered a verdict in favor of plaintiffs in the amount of $297,000 plus
statutory interest. The Company intends to file a motion for new trial in the
matter and, in the event such motion is denied, to appeal the judgment. In the
event of an unfavorable outcome, the Company believes that it is entitled to
indemnification from the former shareholders of Val-U-Med, Inc. for 42-100% of
any ultimate judgment. The Company recorded an expense and accrued liability of
approximately $360,000 as of December 31, 2000.

         In February 2000, the Company's principal supplier, GSI, terminated its
distribution agreement with the Company. As background, Origin products
accounted for 52% of the Company's revenues during the first quarter of 1999.
However, as a result of the outcome of a patent infringement lawsuit between
Origin and GSI in April 1999, the Company made the decision to discontinue
distributing Origin products and begin distributing GSI products. Subsequent to
that decision, Surgical purchased the Origin product line and also announced
their acquisition of GSI. Then, in February 2000, GSI terminated its
distribution agreement with the Company. GSI supplied products which accounted
for 38% of the Company's revenue in 1999 and 50% of the Company's revenue from
May 1, 1999 (the effective date of the distribution agreement) through February
2000, the termination month. In response to this unilateral action by GSI, the
Company filed a lawsuit in September 2000 against Surgical and GSI. It is
management's belief the fee arrangement with its legal counsel will not
adversely affect the Company's cash flow as the case progresses toward
resolution, as legal fees will be based on results, if any, obtained. The
Company took several additional steps in response to this action. The Company
restructured its debt obligations, modified its royalty agreement to provide for
partial non-cash royalty payments, reduced its general and administrative costs
by converting its entire sales force form employees to independent sales
representatives and eliminated additional administrative staff.



                                      -22-
<PAGE>   23



In addition, certain officers of the Company agreed to restructure their
compensation packages to increase short term cash flow.

         For the year ended December 31, 2000, the Company reported a loss from
operations of $4,384,000 as compared with a loss from operations of $2,079,000
for the year ended December 31, 1999. For the year ended December 31, 2000, the
Company reported a net loss applicable to common stock of $5,923,000 or $.53 per
basic and diluted share. This compares with a net loss applicable to common
stock of $3,273,000 or $.34 per basic and diluted share for the year ended
December 31, 1999. The increased loss is primarily due to the aforementioned
loss of the GSI contract, as well as the unfavorable judgment in the Andrieni
litigation. Also, the loss includes the impairment loss related to the licensed
rights to the impact mount technology of $427,000 and the Apollo clip applier
technology of $200,000.

         Net sales decreased 69% in 2000 as compared with 1999. Net sales were
$6,587,000 for 2000 and $21,013,000 for 1999. These declines were primarily due
to the cancelled GSI agreement.

         Gross profit from net sales was $3,325,000 in 2000 versus $9,198,000 in
1999. The corresponding gross profit margins were 50% in 2000 and 44% in 1999.
The improvement in margins is primarily due to the increased proportion of the
Company's proprietary products, the Dexterity(R) Pneumo Sleeve(R) and the
Dexterity(R) Protractor(R), within the sales mix. Margins for 2000 would have
been higher except for a $550,000 addition to the inventory reserve for
discontinued product lines.

         In 2000, selling, general and administrative expenses, which consist
primarily of sales commissions, salaries and other costs necessary to support
the Company's infrastructure, decreased 47% to $5,094,000 from $9,630,000 in
1999. The decline in these expenses was primarily due to the previously
discussed cost cutting actions taken by the Company in response to the
cancellation of the GSI agreement. However, as a percentage of net sales,
selling, general and administrative expenses have increased: 77% for 2000 versus
46% for 1999. This percentage increase is due to fixed expenses and the sales
decline. The Company continues to strive to reduce fixed costs whenever
possible. In May 2000, the Company subleased approximately 65% of the San
Antonio facility at a savings of $8,000 per month. Also, in March 2001, the
Company closed the Atlanta facility and anticipates an expense savings of
approximately $15,000 per month.

         Depreciation and amortization expense increased 26% to $1,982,000 in
2000 from $1,577,000 in 1999. This increase is due to a full year of
amortization of the licensed technology rights acquired in conjunction with
Dexterity.

         Interest expense was $1,439,000 in 2000 and $1,104,000 in 1999, an
increase of 30%. Interest expense includes the non-cash accretion of the minimum
royalty obligation, interest on the line of credit and interest on the note
payable due to the former stockholders of Dexterity.

RESULTS OF OPERATIONS FOR YEAR ENDING DECEMBER 31, 1999

         The Company reported a loss from operations of $2,079,000 for the year
ended December 31, 1999 as compared with a loss from operations of $2,046,000
for the year ended December 31, 1998. For the year ended December 31, 1999, the
Company reported a net loss applicable to common stock of $3,273,000 or $.34 per
basic and diluted share. This compares with a net loss applicable to common
stock of $2,114,000 or $.30 per basic and diluted share for the year ended
December 31, 1998. While loss from operations was virtually flat, reported
results for 1999 were adversely impacted by increased noncash amortization
expense (see below) and the transition of the Company from distributing products
of Origin Medsystems ("Origin") to distributing products of General Surgical
Innovations ("GSI"). Origin products accounted for 52% of the Company's revenues
during the first quarter of 1999. However, as a result of the outcome of a
patent infringement lawsuit between Origin and GSI in April 1999, the Company
made the decision to discontinue distributing Origin products and begin
distributing GSI products. Subsequent to that decision, U. S. Surgical
("Surgical") purchased the Origin product line and also announced their
acquisition of GSI. Then, in February 2000, GSI terminated its distribution
agreement with the Company. GSI supplied products which accounted for 38% of the
Company's revenue in 1999 and 50% of the Company's revenue from May 1, 1999 (the
effective date of the distribution agreement) through February 2000, the
termination month.



                                      -23-
<PAGE>   24



         The Company is continually monitoring non-profitable divisions and
non-performing assets. Accordingly, during 1999, the Company closed the
Technologies division and the Surgical Systems division at an approximate cost
of $30,000.

         Net sales increased 14% in 1999 as compared with 1998. Net sales were
$21,013,000 for 1999 and $18,492,000 for 1998. These increases were due to
continued sales growth throughout the Company within existing product lines.

         Gross profit from net sales was $9,198,000 in 1999 versus $8,178,000 in
1998. The corresponding gross profit margins were 44% in 1999 and 1998.
Improvement in margins due to the increased proportion of the Company's
proprietary products, the Dexterity(R) Pneumo Sleeve(R) and the Dexterity(R)
Protractor(R), within the sales mix was offset by a decrease in commissions
earned in 1999 of approximately $502,000 or 43% from 1998 due to the closing of
the Surgical Systems division.

         In 1999, selling, general and administrative expenses, which consist
primarily of sales commissions, salaries and other costs necessary to support
the Company's infrastructure, decreased 2% to $9,630,000 from $9,820,000 in
1998. The decline in these expenses reflects the closing of non-performing
divisions and a decrease in administrative personnel. As a percentage of net
sales, selling, general and administrative expenses have also decreased: 46% for
1999 versus 53% for 1998.

         Depreciation and amortization expense increased 290% to $1,577,000 in
1999 from $405,000 in 1998. This increase is due to the amortization of the
licensed technology rights acquired in conjunction with Dexterity.

         Interest expense was $1,104,000 in 1999 and $331,000 in 1998, an
increase of 234%. The increase is due to the accretion of the minimum royalty
obligation, interest on the line of credit acquired in 1999 and interest on the
note payable due to the former stockholders of Dexterity.


ITEM 7.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The financial statements and supplementary data described in Item 13(a)
herein are attached hereto.


ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

         Previously Reported.

                                    PART III

ITEM 9.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         Information required under this Item will be contained in the Company's
Proxy Statement for 2001 Annual Meeting, which is incorporated herein by
reference.

         See also "Executive Officers of the Registrant" under Part I, Item 1,
herein.

ITEM 10. EXECUTIVE COMPENSATION

         Information required under this Item will be contained in the Company's
Proxy Statement for 2001 Annual Meeting, which is incorporated herein by
reference.


ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT



                                      -24-
<PAGE>   25



         Information required under this Item will be contained in the Company's
Proxy Statement for 2001 Annual Meeting, which is incorporated herein by
reference.


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Information required under this Item will be contained in the Company's
Proxy Statement for 2001 Annual Meeting, which is incorporated herein by
reference.



                                      -25-
<PAGE>   26



                                     PART IV

ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) 1. CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>

                                                                                                        Page
                                                                                                        ----
<S>                                                                                                     <C>
Report of Independent Auditors......................................................................     F-1

Consolidated Balance Sheets at December 31, 2000 and 1999..........................................      F-2

Consolidated Statements of Operations for the years ended December 31, 2000 and 1999 ...............     F-4

Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000 and 1999 .....     F-5

Consolidated Statements of Cash Flows for the years ended December 31, 1999 and 1998 ...............     F-6

Notes to Consolidated Financial Statements .........................................................     F-8
</TABLE>


2. EXHIBIT INDEX

EXHIBIT
NUMBER            IDENTIFICATION OF EXHIBIT

2.1               Plan of Merger and Acquisition Agreement dated December 18,
                  1998 between Dexterity Incorporated and the Company
                  (incorporated by reference herein to Exhibit 2.8 to the
                  Company's Annual Report on Form 10-KSB for the year ended
                  December 31, 1998).

3.1*              Restated Certificate of Incorporation, as amended

3.2               Bylaws of the Registrant (incorporated by reference herein to
                  Exhibit 3.2 to the Company's Registration Statement on Form
                  S-1 filed on August 19, 1992, Registration No. 33-49196).

4.1               Convertible Loan Agreement among the Company, Renaissance
                  Capital Growth and Income Fund III, Inc., Renaissance US
                  Growth and Income Trust PLC and Renaissance Capital Group,
                  Inc. dated December 19, 1997.

10.1              1989 Stock Option Plan of LifeQuest Medical, Inc.
                  (incorporated by reference herein to Exhibit 4.4 to the
                  Company's Registration Statement on Form S-8 filed on October
                  12, 1993, Registration No. 33-70174).

10.2              Incentive Stock Option Agreement dated October 17, 1994,
                  between LifeQuest Medical, Inc. and Randall K. Boatright
                  (incorporated herein by reference to Exhibit 10.16 to the
                  Company's Annual Report on Form 10-K for the fiscal year ended
                  December 31, 1994).

10.3              1994 Non-Employee Director Stock Option Plan (incorporated
                  herein by reference to Exhibit 10.19 to the Company's Annual
                  Report on Form 10-K for the fiscal year ended December 31,
                  1994).

10.4              Non-Qualified Stock Option Agreement dated October 17, 1994,
                  between LifeQuest Medical, Inc. and Robert B. Johnson
                  (incorporated herein by reference to Exhibit 10.21 to the
                  Company's Annual Report on Form 10-K for the fiscal year ended
                  December 31, 1994).



                                      -26-
<PAGE>   27



10.5              Non-Qualified Stock Option Agreement dated March 2, 1995,
                  between LifeQuest Medical, Inc. and Jeffrey H. Berg, Ph.D.
                  (incorporated herein by reference to Exhibit 10.22 to the
                  Company's Annual Report on Form 10-K for the fiscal year ended
                  December 31, 1994).

10.6              Employment Agreement dated December 27, 1996, between
                  Val-U-Med Acquisition Co. and K.C. Fadem (incorporated by
                  reference herein to Exhibit 10.1 to the Company's Current
                  Report on Form 8-K filed January 10, 1997).

10.7              Non-Qualified Stock Option Agreement dated December 27, 1996,
                  between LifeQuest Medical, Inc. and K.C. Fadem (incorporated
                  by reference herein to Exhibit 10.2 to the Company's Current
                  Report on Form 8-K filed January 10, 1997).

10.8              Employment Agreement dated December 27, 1996, between
                  Val-U-Med Acquisition Co. and Robert Fadem (incorporated by
                  reference herein to Exhibit 10.3 to the Company's Current
                  Report on Form 8-K filed January 10, 1997).

10.9              Non-Qualified Stock Option Agreement dated December 27, 1996,
                  between LifeQuest Medical, Inc. and Robert Fadem (incorporated
                  by reference herein to Exhibit 10.4 to the Company's Current
                  Report on Form 8-K filed January 10, 1997).

10.10             Lease Agreement dated April 28, 1997, between Interpark Jack
                  Limited Partnership and LifeQuest Medical, Inc. (incorporated
                  by reference herein to Exhibit 10.1 to the Company's Quarterly
                  Report on Form 10-Q for the quarterly period ended June 30,
                  1997).

10.11             Lease Agreement dated March 1, 1997, between Williams North
                  Fulton Group and the Company (incorporated by reference herein
                  to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
                  for the quarterly period ended June 30, 1997).

10.12             Employment Agreement dated September 30, 1997, between William
                  H. Bookwalter and the Company (incorporated by reference
                  herein to Exhibit No. 10.1 to the Company's Quarterly Report
                  on Form 10-Q for the quarterly period ended September 30,
                  1997).

10.13             Distribution Agreement dated May 1, 1997 between LifeQuest
                  Medical, Inc. and Origin MedSystems, Inc. (incorporated by
                  reference herein to Exhibit No. 10.27 to the Company's Annual
                  Report on Form 10-KSB/A for the year ended December 31, 1997).

10.14             Employment Agreement dated April 1, 1998 between the Company
                  and Randall K. Boatright (incorporated herein by reference to
                  Exhibit 10.1 to the Company's Form 10-Q for the quarter ended
                  June 30, 1998).

10.15             Series A Cumulative Convertible Stock Purchase Agreement dated
                  August 11, 1998, among the Company, Renaissance Capital Growth
                  & Income Fund III, Inc. and Renaissance U.S. Growth & Income
                  Trust, PLC (incorporated herein by reference to Exhibit 10.5
                  to the Company's Form 10-Q for the quarter ended June 30,
                  1998).

10.16             Series A Cumulative Convertible Preferred Stock Purchase
                  Agreement dated August 11, 1998, among the Company, Richard A.
                  Woodfield and R. Michael Yates (incorporated herein by
                  reference to Exhibit 10.6 to the Company's Form 10-Q for the
                  quarter ended June 30, 1998).

10.17             Series B Convertible Stock Purchase Agreement dated November
                  19, 1998, among the Company, Renaissance Capital Growth &
                  Income Trust Fund III, Inc. and Renaissance U.S. Growth &
                  Income Trust, PLC. (incorporated by reference herein to
                  Exhibit 10.18 to the Company's Annual Report on Form 10-KSB
                  for the year ended December 31, 1998).



                                      -27-
<PAGE>   28



10.18             Amended Employment Agreement between the Company and Richard
                  A. Woodfield dated December 15, 1998. (incorporated by
                  reference herein to Exhibit 10.19 to the Company's Annual
                  Report on Form 10-KSB for the year ended December 31, 1998).

10.19             Amended Stock Option Agreement between the Company and Richard
                  A. Woodfield dated December 15, 1998. (incorporated by
                  reference herein to Exhibit 10.20 to the Company's Annual
                  Report on Form 10-KSB for the year ended December 31, 1998).

10.20             Series B Convertible Preferred Stock Purchase agreement dated
                  January 21, 1999 between the Company and Richard A. Woodfield
                  (incorporated by reference herein to Exhibit 10.1 to the
                  Company's Quarterly Report on Form 10-QSB filed May 14, 1999).

10.21             Consulting Agreement between the Company and Christopher Black
                  dated March 18, 1999 (incorporated by reference herein to
                  Exhibit 10.2 to the Company's Quarterly Report on Form 10-QSB
                  filed May 14, 1999).

10.22             Royalty Agreement among the Company and TFX Equities
                  Incorporated dated March 18, 1999 (incorporated by reference
                  herein to Exhibit 10.3 to the Company's Quarterly Report on
                  Form 10-QSB filed May 14, 1999).

10.23             Registration Rights Agreement among the Company and Dexterity
                  Stockholders dated March 18, 1999 (incorporated by reference
                  herein to Exhibit 10.4 to the Company's Quarterly Report on
                  Form 10-QSB filed May 14, 1999.

10.24             Exclusive Distribution Agreement between the Company and Weck
                  Closure Systems, LLC dated July 1, 2000 (incorporated herein
                  by reference to Exhibit 99.2 to the Company's Current Report
                  on Form 8-L filed September 13, 2000).

10.25*            Amended Employment Agreement between the Company and Randall
                  K. Boatright dated December 1, 2000.

10.26*            Series C Convertible Preferred Stock Purchase Agreement dated
                  July 31, 2000.

22                Subsidiaries

<TABLE>
<CAPTION>
                                                                     Name Under Which
               Name                   State of Incorporation         Doing Business
               ----                   ----------------------         ----------------
<S>                                    <C>                            <C>
               ValQuest Medical, Inc.        Nevada                  ValQuest Medical, Inc.
</TABLE>



23.1*             Consent of Ernst & Young LLP


* Filed herewith

(b) REPORTS ON FORM 8-K

         The Company filed a Current Report on Form 8-K on January 12, 2000
which announced the attempted cancellation by the United States Surgical
Innovations, Inc. distribution agreement with the Company.

         The Company filed a Current Report on Form 8-K on September 13, 2000
reporting the Exclusive Distribution Agreement between Dexterity Surgical, Inc.
and Weck Closure Systems, LLC.



                                      -28-

<PAGE>   29


                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                DEXTERITY SURGICAL, INC.


March 30, 2001                  By         /s/ Richard A. Woodfield
                                  ---------------------------------------------
                                               Richard A. Woodfield
                                       President and Chief Executive Officer

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

<TABLE>
<CAPTION>
SIGNATURE                                               TITLE                                    DATE
---------                                               -----                                    ----
<S>                                     <C>                                                 <C>
/s/ Richard A. Woodfield                President, Chief Executive Officer                  March 30, 2001
----------------------------------      and Director (Principal Executive
Richard A. Woodfield                    Officer)

/s/ Randall K. Boatright                Executive Vice President, Chief                     March 30, 2001
----------------------------------      Financial Officer and Director
Randall K. Boatright                    (Principal Financial and
                                        Accounting Officer)

/s/ Jeffrey H. Berg, Ph.D.              Director                                            March 30, 2001
----------------------------------
Jeffrey H. Berg, Ph.D.

/s/ Robert L. Evans                     Director                                            March 30, 2001
----------------------------------
Robert L. Evans

/s/ William H. Bookwalter               Director                                            March 30, 2001
----------------------------------
William H. Bookwalter

/s/ Christopher K. Black                Director                                            March 30, 2001
----------------------------------
Christopher K. Black
</TABLE>





                                       S-1

<PAGE>   30
                         Report of Independent Auditors



Board of Directors and Stockholders
Dexterity Surgical, Inc.

We have audited the accompanying consolidated balance sheets of Dexterity
Surgical, Inc. (the Company), formerly LifeQuest Medical, Inc. (a Delaware
corporation), and subsidiaries as of December 31, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the two years in the period ended December 31, 2000. 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 auditing standards generally accepted
in the United States. 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 consolidated financial position of Dexterity
Surgical, Inc. and subsidiaries at December 31, 2000 and 1999, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States.

The accompanying financial statements have been prepared assuming that Dexterity
Surgical, Inc. will continue as a going concern. As more fully described in Note
1, the Company has incurred recurring net losses and has an accumulated deficit.
In addition, the Company has not complied with certain covenants associated with
its convertible debentures. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.

                                                            /s/ERNST & YOUNG LLP
San Antonio, Texas
March 9, 2001


                                      F-1
<PAGE>   31

                    Dexterity Surgical, Inc. and Subsidiaries

                           Consolidated Balance Sheets

<TABLE>
<CAPTION>

                                                                      DECEMBER 31
                                                                2000            1999
                                                            -----------     -----------
<S>                                                         <C>             <C>
ASSETS
Current assets:
   Cash and cash equivalents                                $    42,085     $   113,384
   Accounts receivable (net of allowance for doubtful
     accounts of $46,418 and $105,000 in 2000 and 1999,
     respectively)                                              730,306       2,865,824
   Accounts receivable from related parties                      15,000          41,066
   Inventories, net                                           1,050,927       2,315,875
   Prepaid and other assets                                     238,923         120,006
                                                            -----------     -----------
Total current assets                                          2,077,241       5,456,155

Property, plant, and equipment                                1,345,864       1,324,699
Less accumulated depreciation                                   812,128         677,525
                                                            -----------     -----------
Net property, plant, and equipment                              533,736         647,174

Deferred finance charges                                        215,494         290,326

Investments                                                   1,202,500       1,202,500

Intangible assets:
   Licensed technology rights and other, less
     accumulated amortization of $2,679,609 and
     $1,138,798 in 2000 and 1999, respectively               15,160,883      17,030,212
   Goodwill, net, less accumulated amortization of
     $839,150 and $629,738 in 2000 and 1999,
     respectively                                             1,293,082       1,464,406
                                                            -----------     -----------
Net intangible assets                                        16,453,965      18,494,618
                                                            -----------     -----------
Total assets                                                $20,482,936     $26,090,773
                                                            ===========     ===========
</TABLE>



                                      F-2
<PAGE>   32


<TABLE>
<CAPTION>

                                                                          DECEMBER 31
                                                                   2000                 1999
                                                               ------------         ------------
<S>                                                            <C>                  <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                            $  2,732,846         $  2,847,579
   Accrued liabilities                                              539,379              782,359
   Current portion of long-term obligations, including
     debt in default of $2,970,000 at December 31, 2000
                                                                  6,119,039            2,569,378
                                                               ------------         ------------
Total current liabilities                                         9,391,264            6,199,316
Minority interest                                                    47,248              106,544

Long-term notes payable                                                  --            1,000,000
Convertible debentures                                                   --            2,970,000
Royalty obligation                                                4,992,864            5,432,382
Commitments and contingencies
Stockholders' equity:
   Preferred stock, $.001 par value; 2,000,000 shares
     authorized; 2,445 (2000) and 2,195 (1999) shares
     issued and outstanding                                               2                    2
   Common stock, $.001 par value; 50,000,000 shares
     authorized; 11,521,492 (2000) and 10,212,742
     (1999) shares issued and outstanding
                                                                     11,522               10,213
   Additional paid-in capital                                    32,333,504           30,742,313
   Warrants                                                       2,370,900            2,370,900

   Accumulated deficit                                          (28,664,368)         (22,740,897)
                                                               ------------         ------------
Total stockholders' equity                                        6,051,560           10,382,531
                                                               ------------         ------------
Total liabilities and stockholders' equity                     $ 20,482,936         $ 26,090,773
                                                               ============         ============
</TABLE>


See accompanying notes.


                                      F-3
<PAGE>   33

                    Dexterity Surgical, Inc. and Subsidiaries

                      Consolidated Statements of Operations

<TABLE>
<CAPTION>

                                                                   YEAR ENDED DECEMBER 31
                                                                  2000                1999
                                                             ------------         ------------
<S>                                                          <C>                  <C>
Net sales                                                    $  6,586,678         $ 21,012,550

Cost and expenses:
   Cost of sales                                                3,261,533           11,814,270
   Research and development                                         6,265               69,755
   Selling, general, and administrative                         5,093,637            9,630,401
   Depreciation and amortization                                1,982,332            1,577,091
   Impairment of intangible assets                                627,273                   --
                                                             ------------         ------------
                                                               10,971,040           23,091,517
                                                             ------------         ------------
Loss from operations                                           (4,384,362)          (2,078,967)

Other income (expense):
   Interest expense                                            (1,438,548)          (1,104,471)
   Gain on sale of assets, net                                         --               61,878
   Investment and other income                                     17,463               53,619
   Loss on investment in affiliate                                     --              (30,000)
                                                             ------------         ------------
Net loss before minority interest                              (5,805,447)          (3,097,941)

Minority interest in net loss of consolidated
   subsidiary                                                      58,909                   --
                                                             ------------         ------------
Net loss                                                       (5,746,538)          (3,097,941)

Less: dividend requirement on cumulative
   convertible preferred stock                                    176,933              175,480
                                                             ------------         ------------

Net loss applicable to common stock                          $ (5,923,471)        $ (3,273,421)
                                                             ============         ============

Basic and diluted loss per share of common stock             $       (.53)        $       (.34)
                                                             ============         ============
Weighted average shares outstanding used in computing
   basic and diluted loss per share of common stock            11,130,368            9,571,075
                                                             ============         ============
</TABLE>

See accompanying notes.


                                      F-4
<PAGE>   34

                    Dexterity Surgical, Inc. and Subsidiaries

                 Consolidated Statements of Stockholders' Equity

<TABLE>
<CAPTION>

                                             PREFERRED STOCK                 COMMON STOCK
                                   -------------------------------    ------------------------------
                                   SHARES ISSUED                      SHARES ISSUED                      ADDITIONAL
                                        AND            $.001 PAR           AND           $.001 PAR         PAID-IN
                                    OUTSTANDING          VALUE         OUTSTANDING          VALUE          CAPITAL
                                   -------------      ------------    -------------     ------------     ------------
<S>                                <C>                <C>             <C>               <C>              <C>

Balance, December 31, 1998                 2,170      $          2        7,212,742     $      7,213     $ 25,095,313
   Issuance of stock,
     Dexterity purchase                       --                --        3,000,000            3,000        5,622,000
   Issuance of warrants,
     Dexterity purchase                       --                --               --               --               --
   Compensation expense                       --                --               --               --               --
   Sale of preferred stock                    25                --               --               --           25,000
   Preferred stock dividends                  --                --               --               --               --
   Warrants issued for services               --                --               --               --               --
   Net loss                                   --                --               --               --               --
                                    ------------      ------------     ------------     ------------     ------------
Balance, December 31, 1999                 2,195                 2       10,212,742           10,213       30,742,313
   Conversion of preferred
     stock into common stock                (150)               --           93,750               94              (94)
   Issuance of stock, interest
     and royalty obligations                  --                --          790,000              790          789,210
   Issuance of stock,
     acquisition of MedWorks
     assets                                   --                --          400,000              400          399,600
   Sale of preferred stock                   400                --               --               --          400,000
   Issuance of common stock
     for services                             --                --           25,000               25            2,475
   Preferred stock dividends                  --                --               --               --               --
   Net loss                                   --                --               --               --               --
                                    ------------      ------------     ------------     ------------     ------------
Balance, December 31, 2000                 2,445      $          2       11,521,492     $     11,522     $ 32,333,504
                                    ============      ============     ============     ============     ============


<CAPTION>

                                      DEFERRED                         ACCUMULATED
                                    COMPENSATION        WARRANTS         DEFICIT             TOTAL
                                    ------------      ------------     ------------      ------------
<S>                                 <C>               <C>              <C>               <C>
Balance, December 31, 1998          $     (6,857)     $         --     $(19,467,476)     $  5,628,195
   Issuance of stock,
     Dexterity purchase                       --                --               --         5,625,000
   Issuance of warrants,
     Dexterity purchase                       --         2,310,000               --         2,310,000
   Compensation expense                    6,857                --               --             6,857
   Sale of preferred stock                    --                --               --            25,000
   Preferred stock dividends                  --                --         (175,480)         (175,480)
   Warrants issued for services               --            60,900               --            60,900
   Net loss                                   --                --       (3,097,941)       (3,097,941)
                                    ------------      ------------     ------------      ------------
Balance, December 31, 1999                    --         2,370,900      (22,740,897)       10,382,531
   Conversion of preferred
     stock into common stock                  --                --               --                --
   Issuance of stock, interest
     and royalty obligations                  --                --               --           790,000
   Issuance of stock,
     acquisition of MedWorks
     assets                                   --                --               --           400,000
   Sale of preferred stock                    --                --               --           400,000
   Issuance of common stock
     for services                             --                --               --             2,500
   Preferred stock dividends                  --                --         (176,933)         (176,933)
   Net loss                                   --                --       (5,746,538)       (5,746,538)
                                    ------------      ------------     ------------      ------------
Balance, December 31, 2000          $         --      $  2,370,900     $(28,664,368)     $  6,051,560
                                    ============      ============     ============      ============
</TABLE>


See accompanying notes.



                                      F-5
<PAGE>   35



                    Dexterity Surgical, Inc. and Subsidiaries

                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                     YEAR ENDED DECEMBER 31
                                                                       2000            1999
                                                                  -----------      -----------
<S>                                                               <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss                                                          $(5,746,538)     $(3,097,941)
Adjustments to reconcile net loss to net cash provided by
   (used in) operating activities:
     Depreciation                                                     232,110          228,882
     Amortization                                                   1,750,222        1,348,209
     Accretion of royalty obligation                                  747,786          550,134
     Amortization of deferred finance charges                          74,832           60,445
     Deferred compensation expense                                         --            6,857
     Noncash interest expense                                         367,500               --
     Noncash consulting expense                                        42,375            9,625
     Gain on disposal of fixed assets                                      --          (61,878)
     Impairment of intangible assets                                  627,273               --
     Loss on investment in affiliate                                       --           30,000
     Minority interest in net loss of consolidated subsidiary
                                                                      (58,909)              --
     Changes in operating assets and liabilities:
       Decrease in accounts receivable, net                         2,135,518          122,886
       Decrease in accounts receivable from related parties            26,066           15,553
       Decrease (increase) in inventories, net                      1,283,337         (615,376)
       Increase in prepaid and other assets                          (136,292)         (30,266)
       (Decrease) increase in accounts payable                       (114,733)         213,153
       Decrease in accrued liabilities                               (243,367)        (264,547)
                                                                  -----------      -----------
Net cash provided by (used in) operating activities                   987,180       (1,484,264)

CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant, and equipment                           (49,318)        (154,125)
Proceeds on disposal of property, plant, and equipment
                                                                       13,500          154,835
Additions to licensed technology rights and other                          --          (40,126)
Acquisitions and investments, net of cash received                         --       (2,016,030)
Sales of short-term investments                                            --          983,714
                                                                  -----------      -----------
Net cash used in investing activities                                 (35,818)      (1,071,732)
</TABLE>



                                      F-6
<PAGE>   36


                    Dexterity Surgical, Inc. and Subsidiaries

                Consolidated Statements of Cash Flows (continued)

<TABLE>
<CAPTION>

                                                                                        YEAR ENDED DECEMBER 31
                                                                                      2000                 1999
                                                                                  --------------       --------------
<S>                                                                               <C>                  <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term debt - net                                                     $   (30,000)        $  (116,310)
Net (payments) proceeds on line of credit                                             (1,068,219)          1,822,452
Proceeds from issuance of preferred stock                                                400,000              25,000
Payments for deferred finance charges                                                         --            (184,382)
Payments on royalty obligation                                                          (147,509)           (346,435)
Payments of preferred stock dividends                                                   (176,933)           (175,480)
                                                                                     -----------         -----------
Net cash (used in) provided by financing activities                                   (1,022,661)          1,024,845
                                                                                     -----------         -----------
Net decrease in cash and cash equivalents                                                (71,299)         (1,531,151)
Cash and cash equivalents, beginning of year                                             113,384           1,644,535
                                                                                     -----------         -----------
Cash and cash equivalents, end of year                                               $    42,085         $   113,384
                                                                                     ===========         ===========

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
   AND FINANCING ACTIVITIES
Common stock issued in connection with interest obligations                          $   390,000         $        --
Common stock issued for minimum royalty obligation                                       400,000                  --
Common stock issued in connection with acquisitions/investments                          400,000           5,625,000
Fair value of warrants issued in connection with acquisitions                                 --           2,310,000
Present value of minimum royalty obligation assumed in acquisitions                           --           5,945,609
Notes payable issued in connection with acquisitions                                          --           1,000,000
Liabilities assumed in connection with acquisitions                                           --             402,695
Fair value of common stock and warrants issued for professional services                   2,500              60,900
</TABLE>

See accompanying notes.


                                      F-7
<PAGE>   37


                    Dexterity Surgical, Inc. and Subsidiaries

                   Notes to Consolidated Financial Statements

                           December 31, 2000 and 1999


1.  ORGANIZATION AND DESCRIPTION OF THE COMPANY AND RISK FACTORS

Dexterity Surgical, Inc., a Delaware corporation (Dexterity or the Company),
formerly LifeQuest Medical, Inc. (LifeQuest) (see Note 6), was incorporated on
December 23, 1988, and commenced operations on January 1, 1989. The Company is
engaged in the development, commercialization, and distribution of proprietary
and nonproprietary medical devices. Effective January 1, 1998, the Company
merged each of its wholly owned subsidiaries, LifeQuest Endoscopic Technologies,
Inc. (LQET), Klein Medical, Inc. (Klein), and Val-U-Med, Inc., into the Company.
The Company also owns 82% of ValQuest Medical, Inc. (Valquest). The accompanying
consolidated financial statements include the accounts of Dexterity and its
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation. Certain amounts in the prior year have been
reclassified to conform to the 2000 presentation.

In February 2000, the United States Surgical Corporation (U.S. Surgical), a
division of Tyco Healthcare Group LP, terminated its General Surgical
Innovations, Inc. (GSI) distribution agreement with the Company related to
balloon dissector, blunt tip trocar, and tacker products associated with
minimally invasive hernia surgery. These products accounted for approximately
50% of sales and 44% of gross profit of Dexterity from the effective date of the
distribution agreement, which was May 1, 1999, through February 2000, the
termination month. The Company does not believe that U.S. Surgical has any right
to cancel the agreement and is currently vigorously pursuing legal negotiations
and remedies.

At December 31, 2000, the Company had an accumulated deficit of approximately
$28.7 million. During the years ended December 31, 2000 and 1999, the Company
incurred net losses of approximately $5.7 million and $3.1 million,
respectively. The Company's cumulative losses have been funded primarily through
the Company's initial public offering of common stock, private sales of common
stock and preferred stock, debt financing, and the sale of convertible
debentures. As discussed in Note 9, the Company is in violation of certain
affirmative financial covenant requirements associated with its convertible
debentures. Also, certain redemption rights of the holder associated with its
convertible debentures were triggered by the delisting of the Company's common
stock from the NASDAQ SmallCap Market. Therefore, the Company is in technical
default under the convertible debentures, and the holder has the right to demand
immediate repayment of the entire amount outstanding, which is $2,970,000 at
December 31, 2000. Although the Company is current on its interest and principal
repayment obligations


                                      F-8
<PAGE>   38


                    Dexterity Surgical, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

                           December 31, 2000 and 1999


1.  ORGANIZATION AND DESCRIPTION OF THE COMPANY AND RISK FACTORS (CONTINUED)

under the convertible debentures, the Company currently does not have sufficient
resources to fund such amounts in the event of acceleration of the entire amount
outstanding. Additionally, the current portion of other long-term obligations
due in 2001 totals approximately $3,149,000 at December 31, 2000. In the event
the Company is required to raise additional funds, it does not believe it will
be able to obtain such financing from traditional commercial lenders. Rather,
the Company likely will have to conduct additional sales of its equity and/or
debt securities through public or private financings, collaborative
relationships, or other arrangements. Substantial and immediate dilution to
existing stockholders likely would result from any sales of equity securities or
other securities convertible into equity securities.

The Company has taken steps to improve its 2001 operating results and
anticipated cash flows. Steps to improve operating results include reductions in
selling, general, and administrative costs and increased sales of Dexterity
products. During 2000 the Company executed agreements with the debt and
obligation holders allowing the Company to fund interest on the convertible
debentures and Dexterity note and a portion of the royalty obligation with
stock, in lieu of cash. The Company is attempting to negotiate similar
agreements to satisfy certain 2001 obligations with equity instruments. Based on
current projections for 2001, management believes that the Company's operating
results for 2001 will generate sufficient working capital, along with available
cash and available borrowings under a revolving line of credit, to sustain its
operations throughout the year, assuming the Company is successful in its
negotiations with the holders of its debt and other obligations. However, there
can be no assurances that these events will occur, that the Company can achieve
all of the planned operating improvements, or that ultimately the projections of
operating results will be achieved.

The medical devices industry in which the Company competes is highly competitive
and dominated by a relatively small number of competitors with financial and
other resources much greater than those possessed by the Company. The Company's
ability to achieve increases in sales or to sustain current sales levels depends
in part on the ability of the Company's suppliers to provide products in the
quantities the Company requires. While the Company has written distribution
agreements with certain of its suppliers, these agreements in certain instances
provide for nonexclusive distribution rights and often include territorial
restrictions that limit the geographical area in which the Company is



                                      F-9

<PAGE>   39


                    Dexterity Surgical, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

                           December 31, 2000 and 1999


1.  ORGANIZATION AND DESCRIPTION OF THE COMPANY AND RISK FACTORS (CONTINUED)

permitted to distribute the products. The agreements are also generally
short-term, are subject to periodic renewal, and often contain provisions
permitting termination by either party without cause upon relatively short
notice.

These, and other factors which are beyond the control of the Company, provide no
assurances that the Company will be able to successfully raise additional funds
as needed or compete in the medical devices market. Failure to do so would have
a material adverse effect on the Company's business, financial condition,
results of operations, and ability to continue operations.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

REVENUE RECOGNITION

The Company recognizes revenue when each of the following four criteria are met:
1) a contract or sales arrangement exists; 2) products have been shipped or
services have been rendered; 3) the price of the products or services is fixed
or determinable; and 4) collectibility is reasonably assured.

Product sales are recognized upon the shipment of products to the customer.
Commissions earned are recognized when customer orders are placed with product
suppliers. Customers may return products in the event of product defect or
inaccurate order fulfillment. The Company maintains an allowance for sales
returns based upon a historical analysis of returns. Substantially all returns
relate to inaccurate order fulfillment.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with an original maturity of
ninety days or less to be cash equivalents.

INVENTORIES

Inventories consist of raw materials, work in process, and finished goods which
are stated at the lower of cost (determined on an average-cost basis which
approximates the first-in, first-out basis) or market.


                                      F-10
<PAGE>   40


                    Dexterity Surgical, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

                           December 31, 2000 and 1999


2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

RESEARCH AND DEVELOPMENT

Research and development costs are expensed as incurred.

FIXED ASSETS AND DEPRECIATION

Fixed assets are recorded at cost less accumulated depreciation. Depreciation is
provided utilizing the straight-line method over the estimated useful lives of
the respective assets (three to seven years). Additions and improvements that
extend the useful life of an asset are capitalized. Repairs and maintenance are
charged to expense as incurred.

LICENSED TECHNOLOGY RIGHTS

Licensed technology rights are amortized upon the commencement of commercial
sales of the underlying products. The amortization periods range from 7 to 17
years.

The carrying value of licensed technology rights, as well as related goodwill,
is periodically reviewed by the Company for indicators of impairment.
Impairments are recognized when the expected future operating cash flows derived
from such licensed technology rights are less than their carrying value, and are
measured by comparing the carrying value of the asset to discounted future cash
flows. In 2000, the Company recognized impairments of approximately $627,000 on
certain licensed technology rights due to a lack of expected future cash flows
from the development of these technologies.

GOODWILL

The Company records the assets and liabilities of businesses acquired at fair
value as of the purchase date. The excess of the purchase price over the net
tangible and intangible assets acquired is recorded as goodwill and is being
amortized over 10 years.



                                      F-11
<PAGE>   41


                    Dexterity Surgical, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

                           December 31, 2000 and 1999


2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

SEGMENT DISCLOSURE

In 1998, the Company adopted Statement of Financial Accounting Standards (SFAS)
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
(FAS 131). FAS 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and interim financial reports. FAS 131 also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. The adoption of FAS 131 did not affect results of operations or
financial position. The Company currently manages its medical devices business
as one operating segment.

STOCK-BASED COMPENSATION

SFAS No. 123, "Accounting for Stock-Based Compensation" (FAS 123), establishes
the use of the fair value-based method of accounting for stock-based
compensation arrangements, under which compensation cost is determined as of the
grant date and is recognized over the periods in which the related services are
rendered. FAS 123 also permits companies to elect to continue using the
intrinsic value accounting method specified in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), to account
for stock-based compensation related to option grants to employees and
directors. The Company accounts for its stock-based award plans in accordance
with APB 25, and related interpretations, under which compensation expense is
recorded to the extent that the current market price of the underlying stock
exceeds the exercise price. Note 12 provides pro forma net loss and pro forma
loss per share disclosures as if the stock-based awards had been accounted for
using the provisions of FAS 123.

Awards granted to nonemployees for goods and services are accounted for using
the Black-Scholes method prescribed by FAS 123 in accordance with Emerging
Issues Task Force Consensus No. 96-18, "Accounting for Equity Instruments That
Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services." These awards are subject to periodic revaluation
over their vesting terms. Any compensation is recognized over the vesting
period, which is generally the performance period of the related contract.


                                      F-12
<PAGE>   42


                    Dexterity Surgical, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

                           December 31, 2000 and 1999


2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

ADVERTISING

The Company expenses advertising costs as they are incurred. Advertising expense
was approximately $17,000 and $107,000 in 2000 and 1999, respectively.

SHIPPING AND HANDLING

Amounts billed to customers for shipping and handling costs are included in net
sales. Costs incurred for shipping and handling are included in selling,
general, and administrative expenses. Shipping and handling costs were
approximately $98,000 and $323,000 in 2000 and 1999, respectively.

NET LOSS PER SHARE

Basic earnings per share (EPS) is computed by dividing income (loss) available
to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the Company. As the Company had a net
loss for the years ended December 31, 2000 and 1999, diluted EPS equals basic
EPS, as potentially dilutive common stock equivalents, which consist of options,
warrants, and convertible debt and equity securities, are antidilutive in loss
periods. The average market price per share of the Company's common stock for
the years ended December 31, 2000 and 1999 was $.85 and $1.52, respectively.

USE OF ESTIMATES

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


                                      F-13
<PAGE>   43


                    Dexterity Surgical, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

                           December 31, 2000 and 1999


2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

NEW ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (FAS 133). FAS
133 establishes new rules for the recognition and measurement of derivatives and
hedging activities. FAS 133 is amended by FAS 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133," and FAS 138, "Accounting for Derivative Instruments and
Hedging Activities" (an amendment to FAS 133), is effective for years beginning
after June 15, 2000. The Company does not currently have any derivative
financial instruments or engage in hedging activities, and expects the adoption
of FAS 133 will have no impact on its financial position or results of
operations.

In December 1999, the SEC issued Staff Accounting Bulletin 101, "Revenue
Recognition in Financial Statements" (SAB 101). SAB 101 summarizes certain of
the SEC staff's views in applying generally accepted accounting principles to
revenue recognition. SAB 101, as amended through June 26, 2000, was required to
be implemented in the fourth quarter of 2000. Accordingly, the Company has
implemented SAB 101 in the financial statements filed herewith. Implementation
of this statement did not materially impact the financial position or results of
operations of the Company.

In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation" (FIN 44). FIN 44 provides guidance for issues arising in applying
APB 25, "Accounting for Stock Issued to Employees." FIN 44 applies specifically
to new awards, exchanges of awards in a business combination, modification to
outstanding awards, and changes in grantee status that occur on or after July 1,
2000, except for the provisions related to repricings and the definition of an
employee which apply to awards issued after December 15, 1998. The requirements
of FIN 44 are consistent with the Company's existing accounting policies.


                                      F-14
<PAGE>   44


                    Dexterity Surgical, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

                           December 31, 2000 and 1999


2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

In September 2000, the Emerging Issues Task Force issued EITF 00-10, "Accounting
for Shipping and Handling Fees and Costs" (EITF 00-10), which requires that
amounts billed to customers for shipping and handling be reported in revenues
and requires disclosure of costs incurred for shipping and handling if such
costs are not included in cost of goods sold. The Company's revenue recognition
policies were consistent with EITF 00-10, and disclosures have been made for
shipping and handling costs not included in cost of goods sold.

3.  CONCENTRATION OF RISK

CREDIT RISK

The Company's accounts receivable are from various hospitals, clinics, and
practicing surgeons. Ongoing credit evaluations of customers' financial
conditions are performed, and generally, no collateral is required. The Company
maintains reserves for potential credit losses, and such losses have not
exceeded management's expectations.

CUSTOMERS

On June 29, 2000, the Company announced it had signed an exclusive agreement
under which Weck Closure Systems (WCS) will distribute the Dexterity Pneumo
Sleeve and the Dexterity Protractor in the United States. The agreement also
covers international distribution except in those areas for which Dexterity has
signed previous exclusive sales and distribution agreements still in effect.
Under the terms of the agreement, WCS (a unit of Teleflex, Inc.) is required to
purchase certain minimum quantities. Also, per the agreement, WCS and the
Company will combine elements of both sales forces under the WCS umbrella. The
Company and WCS will continue as separate business entities. The Company
believes this agreement will allow it to benefit from a large, established
worldwide sales force and to continue to reduce overhead expenses.

Sales to WCS represented 27% of the Company's net sales for the year ended
December 31, 2000. Receivables from WCS represent 79% of net accounts receivable
at December 31, 2000.



                                      F-15
<PAGE>   45


                    Dexterity Surgical, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

                           December 31, 2000 and 1999


3.  CONCENTRATION OF RISK (CONTINUED)

SUPPLIERS

The manufacturer and supplier of the Pneumo Sleeve and Protractor accounts for
45% of purchases for the year ended December 31, 2000.

The Company had one supplier that accounted for 47% of purchases for the year
ended December 31, 1999. In February 2000, the supplier terminated its
distribution agreement with the Company as explained in Note 1.

4.  INVENTORIES

Inventories at December 31 are summarized as follows:

<TABLE>
<CAPTION>
                                                                        2000                 1999
                                                                    --------------       --------------
<S>                                                                 <C>                  <C>

     Raw materials                                                  $        5,458       $       34,284
     Work in process                                                       341,964              338,048
     Finished goods                                                      1,423,505            2,185,025
     Allowances                                                           (720,000)            (241,482)
                                                                    --------------       --------------
                                                                    $    1,050,927       $    2,315,875
                                                                    ==============       ==============
</TABLE>

5.  INVESTMENTS

In June 1998, the Company issued 370,000 shares of common stock at a per-share
price of $3.25 with an aggregate value of $1,202,500 in exchange for
approximately 4% of the ownership interests of Ana-Tech, L.L.C. (Ana-Tech),
pursuant to a subscription agreement dated June 9, 1998. At the same time,
Ana-Tech sold ownership interests for cash to third parties at the same unit
price. The Company accounts for the investment in Ana-Tech using the cost method
of accounting. The fair value of this investment approximates its carrying value
at December 31, 2000. The Company also entered into an Assignment Agreement
dated June 30, 1998 with Ana-Tech, pursuant to which the Company assigned all of
its rights, duties, and obligations under its Osteoport device patent license
agreement. As consideration for such assignment, the Company received $600,000
in cash and will receive a 5% royalty on future gross sales of the Osteoport
device when commercialization begins.



                                      F-16
<PAGE>   46


                    Dexterity Surgical, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

                           December 31, 2000 and 1999


6.  MERGER

In December 1997, the Company entered into an agreement to acquire approximately
19% of the stock of Dexterity Incorporated (DI), formerly TFX Holding Co., for
$1,000,000, which was paid in January 1998. DI, an affiliate of Teleflex, Inc.,
was a newly formed entity, and the Company began distribution of DI's minimally
invasive surgical devices, the Dexterity Pneumo Sleeve and Dexterity Protractor,
during 1998. The Company entered into an agreement in December 1998 to acquire
the remaining DI stock it did not currently own. On March 18, 1999, the
Company's stockholders approved the merger between the Company and DI.
Contemporaneously with the merger, the Company changed its name to Dexterity
Surgical, Inc. The Company accounted for this business combination as a
purchase. The consideration given to the selling stockholders by the Company for
the DI stock it did not previously own consisted of an aggregate of:

     (a) $1.5 million cash.

     (b) Three million shares of the Company's common stock valued at
         approximately $5.6 million.

     (c) Warrants to purchase 1.5 million shares of the Company's common stock
         valued at approximately $2.3 million.

     (d) $1 million in promissory notes bearing interest at 12 percent.

     (e) A royalty to be paid to the selling stockholders in an amount equal to
         15 percent of all sales of DI products for a period of seven years. The
         royalty is subject to minimum payments which aggregate approximately
         $9.7 million over the seven-year royalty period, with a net present
         value, discounted at 12 percent, of approximately $5.95 million.

Prior to the March 18, 1999 merger with DI, the Company's 19% investment in DI
had been accounted for as a cost investment. The 1998 financial statements were
restated to account for the Company's original investment in DI under the equity
method, as appropriate for a step-acquisition. The result of this restatement
was a decrease in investments and an increase in accumulated deficit at December
31, 1998 of $140,000. The beginning balance of accumulated deficit in the
Consolidated Statement of Stockholders' Equity reflects this adjustment.




                                      F-17
<PAGE>   47


                    Dexterity Surgical, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

                           December 31, 2000 and 1999


6.  MERGER (CONTINUED)

The Company's balance sheets as of December 31, 2000 and 1999 reflect the net
assets and liabilities of DI on a fully consolidated basis.

The consolidated results of operations include the operations of DI since March
18, 1999. Unaudited pro forma consolidated results of operations for the year
ended December 31, 1999, assuming the DI merger had occurred at January 1, 1999,
would have been as follows:

<TABLE>
<CAPTION>
                                                                     PRO FORMA
                                                                     (UNAUDITED)
                                                                     YEAR ENDED
                                                                    DECEMBER 31
                                                                        1999
                                                                 ----------------
<S>                                                              <C>
     Net sales                                                   $     21,032,633

     Net loss                                                          (3,794,372)

     Basic and diluted loss per share of common stock                        (.39)
</TABLE>


The foregoing pro forma information is presented in response to applicable
accounting rules relating to business acquisitions and is not necessarily
indicative of the actual results that would have been achieved had the DI merger
occurred at the beginning of 1999, nor is it indicative of future results of
operations.

7.  FEDERAL INCOME TAXES

As of December 31, 2000, the Company had net operating loss (NOL) carryforwards
of approximately $19,492,000 for federal income tax purposes that are available
to reduce future taxable income and will expire in 2006 through 2020 if not
utilized. For federal income tax purposes, the Company has deferred, for future
amortization, certain acquisition and research and development costs in the
amount of $1,292,000. Such costs, which have been expensed for financial
reporting purposes, will be amortized for tax purposes over future years when
associated commercial operations commence. The Company received Internal Revenue
Service (IRS) approval of its request for a change of




                                      F-18
<PAGE>   48


                    Dexterity Surgical, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

                           December 31, 2000 and 1999


7.  FEDERAL INCOME TAXES (CONTINUED)

tax accounting method to expense research and development costs for expenditures
incurred in 1992 and future years. The Company also has research and development
credit carryforwards that are available to offset future income taxes and expire
in 2005 through 2010.

The tax effects of significant temporary differences representing income tax
assets at December 31, 2000 and 1999 are as follows:

<TABLE>
<CAPTION>
                                                                       2000             1999
                                                                   -----------      -----------
<S>                                                                <C>              <C>
Capitalized research and development and acquisition costs         $   439,000      $   439,000
Royalty obligation                                                     117,359           12,548
Depreciation                                                            39,100           29,960
Accruals                                                               311,411          158,093
Reserves not deductible for tax                                        130,635          131,442
Research and development credit carryforwards                          560,920          560,920
Tax loss carryforwards                                               6,627,174        5,338,990
                                                                   -----------      -----------
Net deferred tax assets                                              8,225,599        6,670,953
Deferred tax valuation reserve                                      (8,225,599)      (6,670,953)
                                                                   -----------      -----------
Net deferred tax assets                                            $        --      $        --
                                                                   ===========      ===========
</TABLE>

As there is no assurance of future income, a 100% valuation reserve in 2000 and
1999 has been established against the Company's net deferred tax assets. The
Company will continue to evaluate the necessity for such valuation reserve in
the future.

The Company's ability to use its NOL carryforwards to offset future taxable
income is subject to restrictions enacted in the U.S. Internal Revenue Code of
1986 as amended (the Code). These restrictions provide for limitations on the
Company's utilization of its NOL carryforwards following certain ownership
changes described in the Code. As a result of ownership changes, the Company's
existing NOL carryforwards are subject to limitation and may become further
limited by future ownership changes. Additionally, because United States tax
laws limit the time during which NOL and tax credit carryforwards may be applied
against future taxable income and tax liabilities, the Company may not be able
to take full advantage of its NOL and tax credits for federal income tax
purposes.



                                      F-19
<PAGE>   49


                    Dexterity Surgical, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

                           December 31, 2000 and 1999


8.  LEASE OBLIGATIONS, COMMITMENTS, AND CONTINGENCIES

OPERATING LEASES

The Company leases office space under noncancelable operating leases expiring in
2002. Rentals are subject to escalation for increases in property taxes,
insurance, and various other expenses. Future minimum rental payments of the
Company under existing and pending operating lease agreements at December 31,
2000 are as follows:

<TABLE>

<S>                               <C>
     2001                         $      215,902
     2002                                 57,685
                                  --------------
                                  $      273,587
                                  ==============
</TABLE>

Rent expense totaled approximately $154,000 and $333,000 for the years ended
December 31, 2000 and 1999, respectively. Rent expense for the year ended
December 31, 2000 is net of sublease income of approximately $61,000.

EMPLOYMENT AGREEMENTS

As of December 31, 2000, the Company has entered into various employment
agreements that provide for compensation for future services. Future payments
under the employee agreements are as follows:

<TABLE>
<S>                                 <C>

     2001                               $453,000
     2002                                126,000
</TABLE>

Certain of the Company's employees have an opportunity to earn bonuses based
upon the achievement of specified performance criteria.

CONTINGENCIES

On February 19, 2001, in Andrieni v. Lifequest Medical, Inc., et al., Civil
Action File No. E-71617 in Fulton County (Georgia) Superior Court, the jury
rendered a verdict in favor of plaintiffs in the amount of $297,000, plus
statutory interest. The Company intends to file a motion for new trial in the
matter and, in the event such motion is denied, to appeal the judgment. In the
event of an unfavorable outcome, the Company believes that it is



                                      F-20
<PAGE>   50


                    Dexterity Surgical, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

                           December 31, 2000 and 1999


8.  LEASE OBLIGATIONS, COMMITMENTS, AND CONTINGENCIES (CONTINUED)

entitled to indemnification from the former stockholders of Val-U-Med for 42% to
100% of any ultimate judgment. The Company recorded an expense and accrued
liability of approximately $360,000 as of December 31, 2000.

Included in accounts payable at December 31, 2000 and 1999 is approximately $2.0
million owed to a former supplier, which is unpaid pending the outcome of
certain legal proceedings.

The Company is also a party to claims and legal proceedings arising in the
ordinary course of business. The Company believes it is unlikely that the final
outcome of any of the claims or proceedings to which the Company is a party
would have a material adverse effect on the Company's financial statements.
However, due to the inherent uncertainty of litigation, the range of possible
loss, if any, cannot be estimated with a reasonable degree of precision, and
there can be no assurance that the resolution of any particular claim or
proceeding would not have an adverse effect on the Company's results of
operations for the interim period in which such resolution occurred.

9.  DEBT AND OTHER LONG-TERM OBLIGATIONS

Debt and other long-term obligations are outstanding as follows:


<TABLE>
<CAPTION>
                                                                    DECEMBER 31
                                                                2000            1999
                                                            -----------     -----------

<S>                                                         <C>             <C>
Dexterity notes(1)                                          $ 1,000,000     $ 1,000,000
Line of credit(2)                                               754,233       1,822,452
Royalty obligation(3 )                                        6,387,670       6,149,308
Convertible debentures (in default at December 31,
  2000)(4)                                                    2,970,000       3,000,000
                                                            -----------     -----------
                                                             11,111,903      11,971,760
Less current portion                                          6,119,039       2,569,378
                                                            -----------     -----------
Total long-term obligations                                 $ 4,992,864     $ 9,402,382
                                                            ===========     ===========
</TABLE>


                                      F-21
<PAGE>   51


                    Dexterity Surgical, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

                           December 31, 2000 and 1999


9.  DEBT AND OTHER LONG-TERM OBLIGATIONS (CONTINUED)

     (1) Unsecured notes payable related to Dexterity acquisition, bearing
         interest at 12%, interest due quarterly, maturing in October 2001. In
         February 2000, the Company and the lender amended the notes to allow
         interest for the period January 1, 2000 through December 31, 2000 to be
         paid in shares of common stock at a per share price of $1.00. Interest
         subsequent to December 31, 2000 is payable in cash.

     (2) Revolving line of credit, due April 2003, secured by accounts
         receivable, inventories, and intangible assets, bearing interest at
         prime rate plus 1.5% or 11% at December 31, 2000. The line of credit
         has a maximum of $5 million, and $217,000 was available at December 31,
         2000. The balance at December 31, 2000 was $754,233 and is classified
         as a current liability. Lender draws on daily accounts receivable cash
         receipts to pay on the note.

     (3) Royalty obligation related to Dexterity acquisition, subject to annual
         minimum payments over a period of seven years, discounted at 12%. The
         minimum payments aggregate approximately $9.7 million over the
         seven-year royalty period.

         Subsequent to December 31, 1999, the Company and holders of the royalty
         obligation agreed to an amendment to the royalty agreement whereby a
         portion of the royalties due for the period January 1, 2000 through
         December 31, 2000 would be paid in shares of common stock at a per
         share price of $1.00. The amount paid in stock approximates $400,000.
         Royalties payable at and subsequent to December 31, 2000 are payable in
         cash.


                                      F-22

<PAGE>   52


                    Dexterity Surgical, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

                           December 31, 2000 and 1999


9.  DEBT AND OTHER LONG-TERM OBLIGATIONS (CONTINUED)

         Future minimum royalty obligations are due as follows at December 31,
2000:

<TABLE>
<S>                                                              <C>

              2001                                               $    1,394,806
              2002                                                    1,661,379
              2003                                                    1,779,401
              2004                                                    1,779,401
              2005                                                    1,779,401
              Thereafter                                                444,850
                                                                 --------------
              Gross minimum royalty obligation                        8,839,238
              Less amount representing interest                       2,451,568
                                                                 --------------
              Discounted royalty obligation                           6,387,670
              Less current portion                                    1,394,806
                                                                 --------------
              Long-term royalty obligation                       $    4,992,864
                                                                 ==============
</TABLE>

     (4) In December 1997, the Company sold 250,000 shares of common stock to
         affiliates of Renaissance Capital Group, Inc. (Renaissance), in a
         private placement for aggregate proceeds of $1,000,000, and placed
         $3,000,000 in 9% Convertible Debentures (Debentures) with Renaissance.
         The Debentures are secured by substantially all of the assets of the
         Company and require monthly payments of interest beginning in February
         1998 and, unless sooner paid, redeemed, or converted, monthly principal
         payments commencing in December 2000 of $10 per $1,000 of the
         then-remaining principal amount. The remaining principal balance will
         mature in December 2004.

         The Debentures are convertible into shares of the Company's common
         stock, in whole or in part, at any time at the option of the holder.
         The Debentures are currently convertible at a price of $1.00 per share
         of common stock, or 2,970,000 shares. The conversion price is subject
         to downward revision if the Company sells shares of its common stock,
         or securities convertible into shares of its common stock, at a price
         less than $1.00 per share of common stock, subject to certain allowed
         exceptions, during the term of the Debentures.


                                      F-23
<PAGE>   53


                    Dexterity Surgical, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

                           December 31, 2000 and 1999


9.  DEBT AND OTHER LONG-TERM OBLIGATIONS (CONTINUED)

         Additionally, an amendment allowed for interest on the Debentures to be
         paid in shares of common stock at a per share price of $1.00 for the
         period February 1, 2000 through January 31, 2001. Interest subsequent
         to January 31, 2001 is payable in cash.

         The Debentures currently require the Company to comply with the
         following financial covenants: (i) a Debt-to-Net Worth Ratio of no
         greater than .99:1; (ii) an Interest Coverage Ratio of at least .60:1;
         (iii) a Debt Coverage Ratio of at least .10:1; and (iv) a Current Ratio
         of at least .68:1. The Company is currently not in compliance and,
         therefore, is in technical default under the Debentures. As discussed
         in Note 1, the delisting of the Company's common stock in October 2000
         also creates an event of default. Under these events of default, the
         holders have the right to demand the immediate repayment of the entire
         amount outstanding. Accordingly, the entire balance due of $2,970,000
         has been classified as a current liability as of December 31, 2000. The
         Company currently does not have sufficient resources to fund such
         amounts in the event of such acceleration.

         If not accelerated by demand of the holders, the obligation is due as
         follows under its original maturity schedule:

<TABLE>
<S>                                                 <C>
              2001                                  $      335,000
              2002                                         300,000
              2003                                         265,000
              2004                                       2,070,000
                                                    --------------
              Total                                 $    2,970,000
                                                    ==============
</TABLE>


                                      F-24
<PAGE>   54


                    Dexterity Surgical, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

                           December 31, 2000 and 1999


9.  DEBT AND OTHER LONG-TERM OBLIGATIONS (CONTINUED)

Interest expense was incurred and paid as follows in 2000 and 1999:

<TABLE>
<CAPTION>

                                      TOTAL                        PAID IN       NONCASH
                                    INTEREST        PAID IN       SHARES OF    ACCRETION AND     ACCRUED
                                     EXPENSE         CASH       COMMON STOCK   AMORTIZATION     INTEREST
                                   ----------     ----------    ------------  -------------    ----------
<S>                                <C>            <C>           <C>           <C>              <C>
2000:
  Dexterity notes                  $  120,000     $       --     $  120,000     $       --     $       --
  Line of credit                      153,597        153,597             --             --             --
  Royalty obligation                  747,786             --             --        747,786             --
  Convertible debentures              325,161         22,500        247,500             --         55,161
  Deferred finance and
   other charges                       92,004         17,172             --         74,832             --
                                   ----------     ----------     ----------     ----------     ----------
Total                              $1,438,548     $  193,269     $  367,500     $  822,618     $   55,161
                                   ----------     ----------     ----------     ----------     ----------

1999:
  Dexterity notes                  $   90,000     $   90,000     $       --     $       --     $       --
  Line of credit                       88,048         88,048             --             --             --
  Royalty obligation                  550,134             --             --        550,134             --
  Convertible debentures              270,000        270,000             --             --             --
  Deferred finance and
   other charges                      106,289         45,844             --         60,445             --
                                   ----------     ----------     ----------     ----------     ----------
Total                              $1,104,471     $  493,892     $       --     $  610,579     $       --
                                   ==========     ==========     ==========     ==========     ==========
</TABLE>


10.  PREFERRED STOCK PLACEMENTS

Pursuant to a private placement which occurred in July and August 2000, the
Company issued to TFX Equities, Inc., a business development subsidiary of
Teleflex, Inc., and Cuda Products Company, whose chief executive officer is a
director of the Company, an aggregate of 400 shares of Series C Cumulative
Convertible Preferred Stock, $.001 par value (Series C Preferred Stock), for
aggregate proceeds of $400,000. The Company used such proceeds for working
capital. The annual dividends on the Series C Preferred Stock are cumulative at
a rate of $80 per share. The Series C Preferred Stock is currently convertible
into shares of common stock at a conversion price of $1.00 per share, for an
aggregate of 400,000 shares of common stock. The conversion price for the
Series C

                                      F-25
<PAGE>   55


                    Dexterity Surgical, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

                           December 31, 2000 and 1999


10.  PREFERRED STOCK PLACEMENTS (CONTINUED)

Preferred Stock is subject to downward adjustment in the event the Company sells
shares of common stock, or securities convertible into shares of common stock,
at a per price less than $1.00. The holders of Series C Preferred Stock are
entitled to one vote per share on all matters submitted to a vote of the
stockholders of the Company, and the affirmative vote of the holders of 66 2/3%
of the votes entitled to be cast by the holders of the Series C Preferred Stock
is required in order to amend the Company's Certificate of Incorporation or
Bylaws to materially affect the rights of the holders of Series C Preferred
Stock, including authorizing and creating a class of stock having rights prior
to or senior to the Series C Preferred Stock. In the event two quarterly
dividends payable on the Series C Preferred Stock are in arrears, the holders of
the Series C Preferred Stock, by a majority vote, shall be entitled to designate
two additional directors to serve on the Company's Board of Directors.

Pursuant to a private placement which occurred in November 1998, the Company
issued to two affiliates of Renaissance and one individual, who is an officer
and director of the Company, an aggregate of 1,025 shares of Series B Cumulative
Convertible Preferred Stock, $.001 par value (Series B Preferred Stock), for
aggregate proceeds of $1,025,000. The Company used such proceeds for working
capital. The annual dividends on the Series B Preferred Stock are cumulative at
a rate of $80 per share. The Series B Preferred Stock is currently convertible
into shares of common stock at a conversion price of $1.54 per share, for an
aggregate of 665,584 shares of common stock. The conversion price for the Series
B Preferred Stock is subject to downward adjustment in the event the Company
sells shares of common stock, or securities convertible into shares of common
stock, at a per share price less than $1.54. The holders of Series B Preferred
Stock are entitled to one vote per share on all matters submitted to a vote of
the stockholders of the Company, and the affirmative vote of the holders of 66
2/3% of the votes entitled to be cast by the holders of the Series B Preferred
Stock is required in order to amend the Company's Certificate of Incorporation
or Bylaws to materially affect the rights of the holders of Series B Preferred
Stock, including authorizing and creating a class of stock having rights prior
to or senior to the Series B Preferred Stock. In the event two quarterly
dividends payable on the Series B Preferred Stock are in arrears, the holders of
the Series B Preferred Stock, by a majority vote, shall be entitled to designate
two additional directors to serve on the Company's Board of Directors.


                                      F-26
<PAGE>   56


                    Dexterity Surgical, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

                           December 31, 2000 and 1999


10.  PREFERRED STOCK PLACEMENTS (CONTINUED)

In August 1998, pursuant to a private placement, the Company issued to
Renaissance and two individuals, including one who is an officer and director of
the Company, an aggregate of 1,170 shares of Series A Cumulative Convertible
Preferred Stock, $.001 par value (Series A Preferred Stock), for aggregate
proceeds of $1,170,000. The Company used such proceeds for working capital.
During March 2000, 150 shares of Series A Preferred Stock were converted to
93,750 shares of common stock. The annual dividends on the Series A Preferred
Stock are cumulative at a rate of $80 per share. The Series A Preferred Stock is
currently convertible into shares of common stock at a conversion price of $1.54
per share, for an aggregate of 662,338 shares of common stock. The conversion
price for the Series A Preferred Stock is subject to downward adjustment in the
event the Company sells shares of common stock, or securities convertible into
shares of common stock, at a per share price less than $1.54. The holders of
Series A Preferred Stock are entitled to one vote per share on all matters
submitted to a vote of the stockholders of the Company, and the affirmative vote
of the holders of 66 2/3% of the votes entitled to be cast by the holders of the
Series A Preferred Stock is required in order to amend the Company's Certificate
of Incorporation or Bylaws to materially affect the rights of the holders of
Series A Preferred Stock, including authorizing and creating a class of stock
having rights prior to or senior to the Series A Preferred Stock. In the event
two quarterly dividends payable on the Series A Preferred Stock are in arrears,
the holders of Series A Preferred Stock, by a majority vote, shall be entitled
to designate two additional directors to serve on the Company's Board of
Directors.

11.  EARNINGS PER SHARE

The following table sets forth the reconciliation from basic to diluted weighted
average shares of common stock outstanding and the calculation of net loss per
share of common stock:

<TABLE>
<CAPTION>
                                                                         YEAR ENDED DECEMBER 31
                                                                        2000                 1999
                                                                    -----------          -----------
<S>                                                                 <C>                  <C>
     Computation of basic loss per share:
       Net loss                                                     $(5,746,538)         $(3,097,941)
       Preferred stock dividends                                       (176,933)            (175,480)
                                                                    -----------          -----------
     Net loss applicable to common stockholders                     $(5,923,471)         $(3,273,421)
                                                                    ===========          ===========
</TABLE>


                                      F-27
<PAGE>   57


                    Dexterity Surgical, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

                           December 31, 2000 and 1999


11.  EARNINGS PER SHARE (CONTINUED)

<TABLE>
<CAPTION>
                                                                      YEAR ENDED DECEMBER 31
                                                                     2000              1999
                                                                 ------------      ------------
<S>                                                              <C>               <C>
Weighted average shares of common stock outstanding
  used for computation                                             11,130,368         9,571,075
                                                                 ------------      ------------
Basic loss per share of common stock                             $       (.53)     $       (.34)
                                                                 ============      ============
Computation of diluted loss per share:
  Net loss                                                       $ (5,746,538)     $ (3,097,941)
  Interest on convertible debentures                                  270,000           270,000
                                                                 ------------      ------------
Net loss used for computation                                    $ (5,476,538)     $ (2,827,941)
                                                                 ============      ============
Weighted average shares of common stock outstanding                11,130,368         9,571,075
Weighted average incremental shares outstanding upon
  assumed conversion of options and dilutive securities                61,635             5,281
Weighted average incremental shares outstanding upon
  assumed conversion of convertible debentures and
  preferred stock                                                   4,501,883         3,245,964
                                                                 ------------      ------------
Weighted average shares of common stock and common
  stock equivalents outstanding used for computation               15,693,886        12,822,320
                                                                 ============      ============

Diluted loss per common share and common share
  equivalents(a)                                                 $       (.35)     $       (.22)
                                                                 ============      ============
</TABLE>


(a)      This calculation is submitted in accordance with Item 601(b)(11) of
         Regulation SB. As the calculation is antidilutive in loss periods,
         diluted loss per common share equals basic loss per common share.


                                      F-28
<PAGE>   58


                    Dexterity Surgical, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

                           December 31, 2000 and 1999


12.  STOCK OPTIONS AND WARRANTS

STOCK OPTIONS

In December 1989, the Company adopted a stock option plan (the 1989 Plan). Under
the 1989 Plan, the Company may grant incentive and nonstatutory stock options to
employees, directors, and consultants of the Company. Unexercised options expire
10 years from the date of grant. The 1989 Plan expired in December 1999, and
389,950 shares of common stock are reserved for future issuance for options
still outstanding at December 31, 2000.

In August 1994, ValQuest adopted the 1994 Stock Option Plan (the 1994 Plan).
Under the 1994 Plan, ValQuest may grant incentive and nonstatutory stock options
to employees, directors, and consultants of ValQuest. The maximum number of
shares of ValQuest common stock available for grant under the 1994 Plan is
250,000. Stock options under the 1989 Plan and the 1994 Plan become exercisable
pursuant to the individual written agreements between the Company and ValQuest,
respectively, and the participants. Unexercised options expire 10 years from the
date of grant for the 1994 Plan. At December 31, 2000, 48,000 of the options
outstanding and exercisable are exercisable into the common stock of ValQuest.

In May 1995, the Company adopted the 1995 Non-Employee Director Stock Option
Plan (NEDSOP). Under NEDSOP, the Company may grant stock options to nonemployee
directors of the Company. The maximum number of shares available for grant under
NEDSOP is 400,000. The NEDSOP options vest in 25% increments on each succeeding
anniversary of the grant date, with unexercised options expiring on the tenth
anniversary of the date they vest. At December 31, 2000, 139,200 options are
outstanding under the NEDSOP.

In December 1999, the Company adopted a stock option plan to replace the 1989
Plan (the 2000 Plan). Under the 2000 Plan, the Company may grant incentive and
nonstatutory stock options and restricted shares of common stock to employees,
directors, and consultants of the Company. Unexercised options vest in 25%
increments on each succeeding anniversary of the grant date, with unexercised
options expiring on the tenth anniversary of the date of grant. The maximum
number of shares available for grant under the 2000 Plan is 3,500,000, including
2,000,000 shares under option grants and 1,500,000 shares of restricted stock.
At December 31, 2000, 331,000 options are outstanding under the 2000 Plan.


                                      F-29
<PAGE>   59


                    Dexterity Surgical, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

                           December 31, 2000 and 1999


12.  STOCK OPTIONS AND WARRANTS (CONTINUED)

Under all plans, the exercise price must be at least equal to the stock's market
price on the date of grant.

The Company periodically grants options to employees and directors outside of
any plan. During the year ended December 31, 2000, the Company granted 100,000
options outside of any option plan. At December 31, 2000, shares of common stock
are reserved for future issuance for the 711,950 options outstanding outside of
any plan.

Had compensation cost for these plans been determined consistent with FAS 123,
the Company's net loss applicable to common stock and net loss per share would
have been changed to the following pro forma amounts at December 31:

<TABLE>
<CAPTION>

                                                                       2000                  1999
                                                                  ---------------        --------------
<S>                                                               <C>                   <C>
     Net loss applicable to
       common stock                  As reported                  $    (5,923,471)       $   (3,273,421)
                                     Pro forma                         (6,118,921)           (4,030,188)

     Earnings per share, basic and
       diluted                       As reported                  $          (.53)       $         (.34)
                                     Pro forma                               (.55)                 (.42)
</TABLE>

Because the FAS 123 method of accounting has not been applied to options granted
prior to January 1, 1995, the resulting pro forma compensation cost may not be
representative of that to be expected in future years.


                                      F-30
<PAGE>   60


                    Dexterity Surgical, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

                           December 31, 2000 and 1999


12.  STOCK OPTIONS AND WARRANTS (CONTINUED)

A summary of the status of the Company's stock options at December 31, 2000 and
1999, and changes during the years then ended, is presented in the table below:

<TABLE>
<CAPTION>
                                                         2000                             1999
                                               ---------------------------   ----------------------------
                                                              WEIGHTED                       WEIGHTED
                                               SHARES     AVERAGE EXERCISE   SHARES      AVERAGE EXERCISE
                                               (000s)     PRICE PER SHARE    (000s)      PRICE PER SHARE
                                               ------     ----------------   ------      ----------------
<S>                                            <C>        <C>                <C>         <C>
     Outstanding, beginning of year              1,544        $  2.33            1,176        $  2.93
       Granted                                     521            .97              517           1.28
       Canceled                                    (50)          1.00             (149)          3.43
       Forfeited                                  (395)          2.07               --             --
                                                 -----        -------            -----        -------
     Outstanding, end of year                    1,620        $  1.99            1,544        $  2.33
                                                 -----        -------            -----        -------
     Options exercisable, end of year              895        $  2.38              582        $  2.90
                                                 =====        =======            =====        =======
     Weighted average fair value of
       options granted                                        $   .65                         $   .73
                                                              =======                         =======
</TABLE>

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model for a stock that does not pay dividends with
the following weighted average assumptions in 2000 and 1999: risk-free interest
rates based on market rates at grant date, ranging from 4.4% to 6.8%; expected
lives of 5 years; and expected volatility of 77 percent and 61 percent,
respectively.


                                      F-31
<PAGE>   61


                    Dexterity Surgical, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

                           December 31, 2000 and 1999


12.  STOCK OPTIONS AND WARRANTS (CONTINUED)

The following table summarizes the information about options outstanding at
December 31, 2000:

<TABLE>
<CAPTION>

                                                  WEIGHTED AVERAGE           NUMBER
                                                      REMAINING          EXERCISABLE AT
      EXERCISE PRICES                NUMBER       CONTRACTUAL LIFE        DECEMBER 31
         PER SHARE                OUTSTANDING          (YEARS)                2000
      ---------------             -----------     ----------------        -------------
<S>                               <C>             <C>                    <C>

        $    .001                       5,285            3.04                  5,285
              .75                     118,000            4.64                118,000
             1.00                     606,000            9.88                143,750
             1.88                      39,000            9.38                 11,250
             2.00                     350,000            8.96                175,000
             2.25                      50,000            5.40                 50,000
             2.50                      20,050            5.68                 20,050
             3.00                     170,000            6.99                167,500
             3.13                      11,700            7.09                  8,775
             3.25                      38,500            8.14                 21,750
             4.00                      30,700            4.80                 30,700
             4.25                      25,000            8.14                 12,500
             4.38                     123,333            7.91                 98,333
             4.88                      19,200            7.47                 19,200
             5.03                      13,332            7.75                 13,332
                                    ---------                                -------
                                    1,620,100                                895,425
                                    =========                                =======
</TABLE>

WARRANTS

At December 31, 2000, the Company has 1,697,500 warrants outstanding. Each
warrant, when exercised, is exchangeable for one share of the Company's common
stock.



                                      F-32
<PAGE>   62


                    Dexterity Surgical, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

                           December 31, 2000 and 1999


12.  STOCK OPTIONS AND WARRANTS (CONTINUED)

The following table summarizes the information about warrants outstanding at
December 31, 2000:

<TABLE>
<CAPTION>

         EXERCISE                    NUMBER              NUMBER EXERCISABLE
          PRICE                   OUTSTANDING             DECEMBER 31, 2000          EXPIRATION
         --------                 -----------            ------------------          ----------
<S>                               <C>                    <C>                         <C>

            $1.00                    1,500,000                   300,000             March 2009
            $1.50                       50,000                        --             *
            $2.00                       22,500                    22,500             December 2004
            $2.25                       25,000                    25,000             April 2004
            $3.00                       50,000                        --             *
            $4.00                       50,000                        --             *

</TABLE>

*  These warrants are exercisable when the Company's stock trades at various
   minimum prices for 10 consecutive days. These warrants expire December 2002.

13.  RELATED PARTY TRANSACTIONS

During 1999, the Company sold 25 shares of preferred stock to an officer and
director of the Company as further described in Note 10.


                                      F-33
<PAGE>   63
                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER            DESCRIPTION
-------           -----------
<S>               <C>
2.1               Plan of Merger and Acquisition Agreement dated December 18,
                  1998 between Dexterity Incorporated and the Company
                  (incorporated by reference herein to Exhibit 2.8 to the
                  Company's Annual Report on Form 10-KSB for the year ended
                  December 31, 1998).

3.1*              Restated Certificate of Incorporation, as amended

3.2               Bylaws of the Registrant (incorporated by reference herein to
                  Exhibit 3.2 to the Company's Registration Statement on Form
                  S-1 filed on August 19, 1992, Registration No. 33-49196).

4.1               Convertible Loan Agreement among the Company, Renaissance
                  Capital Growth and Income Fund III, Inc., Renaissance US
                  Growth and Income Trust PLC and Renaissance Capital Group,
                  Inc. dated December 19, 1997.

10.1              1989 Stock Option Plan of LifeQuest Medical, Inc.
                  (incorporated by reference herein to Exhibit 4.4 to the
                  Company's Registration Statement on Form S-8 filed on October
                  12, 1993, Registration No. 33-70174).

10.2              Incentive Stock Option Agreement dated October 17, 1994,
                  between LifeQuest Medical, Inc. and Randall K. Boatright
                  (incorporated herein by reference to Exhibit 10.16 to the
                  Company's Annual Report on Form 10-K for the fiscal year ended
                  December 31, 1994).

10.3              1994 Non-Employee Director Stock Option Plan (incorporated
                  herein by reference to Exhibit 10.19 to the Company's Annual
                  Report on Form 10-K for the fiscal year ended December 31,
                  1994).

10.4              Non-Qualified Stock Option Agreement dated October 17, 1994,
                  between LifeQuest Medical, Inc. and Robert B. Johnson
                  (incorporated herein by reference to Exhibit 10.21 to the
                  Company's Annual Report on Form 10-K for the fiscal year ended
                  December 31, 1994).
</TABLE>

<PAGE>   64


<TABLE>
<S>               <C>
10.5              Non-Qualified Stock Option Agreement dated March 2, 1995,
                  between LifeQuest Medical, Inc. and Jeffrey H. Berg, Ph.D.
                  (incorporated herein by reference to Exhibit 10.22 to the
                  Company's Annual Report on Form 10-K for the fiscal year ended
                  December 31, 1994).

10.6              Employment Agreement dated December 27, 1996, between
                  Val-U-Med Acquisition Co. and K.C. Fadem (incorporated by
                  reference herein to Exhibit 10.1 to the Company's Current
                  Report on Form 8-K filed January 10, 1997).

10.7              Non-Qualified Stock Option Agreement dated December 27, 1996,
                  between LifeQuest Medical, Inc. and K.C. Fadem (incorporated
                  by reference herein to Exhibit 10.2 to the Company's Current
                  Report on Form 8-K filed January 10, 1997).

10.8              Employment Agreement dated December 27, 1996, between
                  Val-U-Med Acquisition Co. and Robert Fadem (incorporated by
                  reference herein to Exhibit 10.3 to the Company's Current
                  Report on Form 8-K filed January 10, 1997).

10.9              Non-Qualified Stock Option Agreement dated December 27, 1996,
                  between LifeQuest Medical, Inc. and Robert Fadem (incorporated
                  by reference herein to Exhibit 10.4 to the Company's Current
                  Report on Form 8-K filed January 10, 1997).

10.10             Lease Agreement dated April 28, 1997, between Interpark Jack
                  Limited Partnership and LifeQuest Medical, Inc. (incorporated
                  by reference herein to Exhibit 10.1 to the Company's Quarterly
                  Report on Form 10-Q for the quarterly period ended June 30,
                  1997).

10.11             Lease Agreement dated March 1, 1997, between Williams North
                  Fulton Group and the Company (incorporated by reference herein
                  to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
                  for the quarterly period ended June 30, 1997).

10.12             Employment Agreement dated September 30, 1997, between William
                  H. Bookwalter and the Company (incorporated by reference
                  herein to Exhibit No. 10.1 to the Company's Quarterly Report
                  on Form 10-Q for the quarterly period ended September 30,
                  1997).

10.13             Distribution Agreement dated May 1, 1997 between LifeQuest
                  Medical, Inc. and Origin MedSystems, Inc. (incorporated by
                  reference herein to Exhibit No. 10.27 to the Company's Annual
                  Report on Form 10-KSB/A for the year ended December 31, 1997).

10.14             Employment Agreement dated April 1, 1998 between the Company
                  and Randall K. Boatright (incorporated herein by reference to
                  Exhibit 10.1 to the Company's Form 10-Q for the quarter ended
                  June 30, 1998).

10.15             Series A Cumulative Convertible Stock Purchase Agreement dated
                  August 11, 1998, among the Company, Renaissance Capital Growth
                  & Income Fund III, Inc. and Renaissance U.S. Growth & Income
                  Trust, PLC (incorporated herein by reference to Exhibit 10.5
                  to the Company's Form 10-Q for the quarter ended June 30,
                  1998).

10.16             Series A Cumulative Convertible Preferred Stock Purchase
                  Agreement dated August 11, 1998, among the Company, Richard A.
                  Woodfield and R. Michael Yates (incorporated herein by
                  reference to Exhibit 10.6 to the Company's Form 10-Q for the
                  quarter ended June 30, 1998).

10.17             Series B Convertible Stock Purchase Agreement dated November
                  19, 1998, among the Company, Renaissance Capital Growth &
                  Income Trust Fund III, Inc. and Renaissance U.S. Growth &
                  Income Trust, PLC. (incorporated by reference herein to
                  Exhibit 10.18 to the Company's Annual Report on Form 10-KSB
                  for the year ended December 31, 1998).
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<PAGE>   65



<TABLE>
<S>               <C>
10.18             Amended Employment Agreement between the Company and Richard
                  A. Woodfield dated December 15, 1998. (incorporated by
                  reference herein to Exhibit 10.19 to the Company's Annual
                  Report on Form 10-KSB for the year ended December 31, 1998).

10.19             Amended Stock Option Agreement between the Company and Richard
                  A. Woodfield dated December 15, 1998. (incorporated by
                  reference herein to Exhibit 10.20 to the Company's Annual
                  Report on Form 10-KSB for the year ended December 31, 1998).

10.20             Series B Convertible Preferred Stock Purchase agreement dated
                  January 21, 1999 between the Company and Richard A. Woodfield
                  (incorporated by reference herein to Exhibit 10.1 to the
                  Company's Quarterly Report on Form 10-QSB filed May 14, 1999).

10.21             Consulting Agreement between the Company and Christopher Black
                  dated March 18, 1999 (incorporated by reference herein to
                  Exhibit 10.2 to the Company's Quarterly Report on Form 10-QSB
                  filed May 14, 1999).

10.22             Royalty Agreement among the Company and TFX Equities
                  Incorporated dated March 18, 1999 (incorporated by reference
                  herein to Exhibit 10.3 to the Company's Quarterly Report on
                  Form 10-QSB filed May 14, 1999).

10.23             Registration Rights Agreement among the Company and Dexterity
                  Stockholders dated March 18, 1999 (incorporated by reference
                  herein to Exhibit 10.4 to the Company's Quarterly Report on
                  Form 10-QSB filed May 14, 1999.

10.24             Exclusive Distribution Agreement between the Company and Weck
                  Closure Systems, LLC dated July 1, 2000 (incorporated herein
                  by reference to Exhibit 99.2 to the Company's Current Report
                  on Form 8-L filed September 13, 2000).

10.25*            Amended Employment Agreement between the Company and Randall
                  K. Boatright dated December 1, 2000.

10.26*            Series C Convertible Preferred Stock Purchase Agreement dated
                  July 31, 2000.

22                Subsidiaries

                                                                     Name Under Which
               Name                   State of Incorporation         Doing Business
               ----                   ----------------------         ----------------
               ValQuest Medical, Inc.        Nevada                  ValQuest Medical, Inc.

23.1*             Consent of Ernst & Young LLP
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* Filed herewith