<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, 1998

                                       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, 1998: $18,492,041

     AT MARCH 25, 1999 (BASED UPON THE LAST REPORTED SALES PRICE OF $1.875 PER
SHARE), THE AGGREGATE MARKET VALUE OF THE COMMON STOCK, $.001 PAR VALUE, OF THE
REGISTRANT HELD BY NON-AFFILIATES WAS APPROXIMATELY $11.8 MILLION. AT MARCH 25,
1999, THERE WERE OUTSTANDING 10,212,742 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 1999 Annual Meeting of Stockholders 
Transitional Small Business Disclosure Format.                                                  Part III, Items 9, 10, 11 and 12
                                                                              YES     NO  X .
                                                                                  ---    ---
</TABLE>

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<PAGE>   2

                                     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 facts, included in this Form
10-KSB regarding the Company's 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
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, competitive factors, general economic
conditions, customer relations, relationships with vendors, the interest rate
environment, governmental regulation and supervision, product introductions and
acceptance, technological change, changes in industry practices, one-time events
and other factors described herein, in the Company's Registration Statement on
Form S-3 (File No. 333-58849) filed on October 13, 1998, and in the Company's
annual, quarterly and other reports filed with the Securities and Exchange
Commission (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.


GENERAL

         Dexterity Surgical, Inc., formerly known as LifeQuest Medical, Inc.
(the "Company"), is engaged in the development, manufacture and distribution of
instruments, equipment and surgical supplies used in minimally invasive surgery
("MIS") and hand-assisted laparoscopic surgery ("HALS").

         MIS, a rapidly growing field, involves surgical procedures,
accomplished without a major incision, through strategically placed punctures in
a patient's body. These procedures generally result in reduced patient
discomfort, reduced risks of infection and greatly shortened hospitalization,
thereby decreasing overall costs. MIS products include a wide variety of
reusable and disposable items such as endoscopes(1), trocars(2), trocar
sleeves/cannulas(3), video systems, mechanical and laser-related cutting
devices, stapling(4) systems, electrocautery(5) systems, suction and irrigation
systems, graspers and dissectors, and hand-operated retractors(6). The products
are used by surgeons in hospitals and outpatient surgery facilities.

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

(1)  an instrument for the examination of the interior of a hollow viscus, such
     as the bladder.

(2)  a sharp-pointed instrument equipped with a cannula, used to puncture the
     wall of a body cavity and withdraw fluids.

(3)  a tube for insertion into a duct or cavity; during insertion its lumen is
     usually occupied by a trocar.

(4)  the act or process of closing a wound fastening with staples instead of
     sutures.

(5)  an apparatus for cauterizing tissue, consisting of a platinum wire in a
     holder which is heated to a red or white heat when the instrument is
     activated by an electric current.

(6)  an instrument for maintaining operative exposure by separating the edges of
     a wound and holding back underlying organs and tissues; many shapes, sizes,
     and styles are available; any retractile muscle.



                                      -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 Company acquired Dexterity Incorporated, a Delaware corporation
("Dexterity"), effective March 1999. Dexterity is located in the Philadelphia,
Pennsylvania metropolitan area and develops, manufactures and distributes
proprietary instruments, equipments and supplies used in HALS. Effective with
such acquisition, the Company changed its name to Dexterity Surgical, Inc.

         The Company acquired Mishbucha, Inc. d/b/a Medex Surgical, a Texas
corporation ("Medex Surgical"), effective September 1997. Medex Surgical is
located in Dallas, Texas, and distributes instruments, equipment and surgical
supplies used in MIS.

         The Company acquired W.H. Bookwalter and Associates, Inc., a Vermont
corporation ("Bookwalter"), in September 1997. Bookwalter is located in Milford,
Massachusetts, and distributes equipment, instruments and surgical supplies used
in MIS.

         In June 1997, the Company acquired Trimedica, Inc., a Colorado
corporation ("Trimedica") located in Colorado Springs, Colorado, which
distributes instruments, equipment and surgical supplies used in MIS.

         In December 1996, the Company acquired Val-U-Med, Inc. ("VMI"), and in
November 1996 the Company acquired Klein Medical, Inc. ("KMI"). KMI and VMI were
private companies located in San Antonio, Texas and Atlanta, Georgia,
respectively. Both companies distribute instruments, equipment and surgical
supplies used in MIS.

         In February 1996, the Company acquired GM Engineering, Inc. ("GME"), a
private company.

         The Company intends to continue to allocate its resources toward
becoming a significant competitor in the MIS and HALS markets by utilizing the
combined capabilities of its divisions to expand its geographical distribution
coverage in the U.S. and add relevant new products to its existing line through
internal development, licensing and acquisition.

         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 traded
on The NASDAQ SmallCap Market. 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., ("Val-U-Med") into
the Company. 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 ACQUISITIONS

         Dexterity

         In January 1998, the Company acquired approximately 20% of the common
stock of Dexterity, 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 at a special meeting held March 18,
1999, the Dexterity stockholders, other than the Company, received an aggregate
of:

         o        $1,500,000;
         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;
         o        promissory notes in the aggregate amount of $1,000,000; 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


                                      -3-
<PAGE>   4


                  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 products are currently the only HALS products approved
for sale in the United States. Simultaneous with the effectiveness of the
Dexterity Merger, the Company changed its name to Dexterity Surgical, Inc.

         The Pneumo Sleeve is a device that allows the surgeon to insert one
hand into the abdominal cavity while preserving pneumoperitoneum(7) 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. According to a Private Placement Memorandum (the "PPM") prepared by
Dexterity, the U.S. market potential for the Dexterity(R) Pneumo Sleeve is
estimated at more than 580,000 procedures annually, including digestive tract
surgery, urinary tract surgery, organ transplants, cancer surgery and vascular
surgery. This translates into an estimated $600 million U.S. market for
Dexterity(R) procedural kits, which include accessory devices such as hand-held
surgical instruments.

         In addition to being used with the Dexterity(R) Pneumo Sleeve, the
Dexterity(R) Protractor is used as a stand-alone product for open surgery,
providing atraumatic retraction and wound protection. According to the PPM, the
market potential for the Dexterity(R) Protractor is estimated at 2.4 million
surgical procedures per year in the United State, representing a dollar market
potential in excess of $200 million.

         The Company believes the potential exists for significant market
penetration by the Dexterity(R) products, and that sales of the Company's
existing product lines should benefit from these product introductions. The
Company expects that these products, along with the surgical clip applier
discussed below, will become integral components of LifeQuest's Lapro-PAK
surgical procedure kits.

         Ana-Tech

         In June 1998, the Company acquired approximately 4% of the membership
interests of Ana-Tech, L.L.C., a developmental stage company engaged in the
development, manufacturing and distribution of fecal incontinence devices, in
exchange for 370,000 shares of Common Stock. Ana-Tech, LLC is a Nevada limited
liability company and has one class of membership interests. As a member of
Ana-Tech, the Company has the right, along with the other members, to
participate in elections of managers of Ana-Tech, LLC and to receive
distributions of Net Cash Flow and Net Capital Proceeds (each as defined in the
Operating Agreement of Ana-Tech, LLC) on a pro-rata basis in accordance with the
Company's percentage of ownership of Ana-Tech, LLC. Allocations of profit and
loss of AnaTech, LLC will be allocated among the members of Ana-Tech, LLC
pro-rata in accordance with percentage of ownership.

         Medex Surgical

         Effective September 1997, the Company completed the merger (the "Medex
Merger") of Medex Surgical with and into Klein, a Nevada corporation and wholly
owned subsidiary of the Company, with Klein as the surviving corporation. Medex
Surgical distributes instruments, equipment and supplies used in MIS. The Medex
Merger was consummated under a Plan of Merger and Acquisition Agreement among
the Company, Medex Surgical, Klein, Robert Kraus and Edward Kraus, as
shareholders of Medex Surgical, pursuant to which Robert and Edward Kraus
received an aggregate of 98,246 shares of the Company's Common Stock.


------------
(7) 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.



                                      -4-
<PAGE>   5



         W.H. Bookwalter and Associates, Inc.

         In September 1997, the Company completed the merger (the "Bookwalter
Merger") of Bookwalter with and into Val-U-Med, a Nevada corporation and wholly
owned subsidiary of the Company, with Val-U-Med as the surviving corporation.
Bookwalter distributes instruments, equipment and surgical supplies used in MIS.
The Bookwalter Merger was consummated under a Plan of Merger and Acquisition
Agreement among the Company, Bookwalter, Val-U-Med, and the shareholders of
Bookwalter, pursuant to which such shareholders received an aggregate of 466,473
shares of the Company's Common Stock.

         Trimedica

         In June 1997, the Company completed the merger (the "Trimedica Merger")
of Trimedica with and into Klein, with Klein as the surviving corporation.
Trimedica distributes instruments, equipment and surgical supplies used in MIS.
The Trimedica Merger was consummated under a Plan of Merger and Acquisition
Agreement among the Company, Trimedica, Klein, and Mark Lovejoy, the sole
shareholder of Trimedica, pursuant to which Mark Lovejoy received 57,143 shares
of the Company's Common Stock.

         Val-U-Med

         In December 1996, the Company completed the merger (the "Val-U-Med
Merger") of VMI with and into Val- U-Med, with Val-U-Med as the surviving
corporation. The Val-U-Med Merger was consummated under a Plan of Merger and
Acquisition Agreement among the Company, Val-U-Med, VMI and the shareholders of
VMI, pursuant to which such shareholders received an aggregate of 1,200,000
shares of the Company's Common Stock and an aggregate of $400,000.

         Klein Medical

         In November 1996, the Company completed the merger (the "Klein Merger")
of KMI with and into Klein, with Klein as the surviving corporation. The Klein
Merger was consummated under a Plan of Merger and Acquisition Agreement among
the Company, Klein, KMI and the sole shareholder of KMI, pursuant to which such
shareholder received 600,000 shares of the Company's Common Stock.

         In connection with the acquisition of KMI, the Company obtained the
option to acquire the exclusive U.S. distribution rights to a patented
state-of-the-art clip applier which management believes is superior to currently
available clip appliers. The 5mm clip applier is less invasive than the 10mm
clip appliers which currently dominate the U.S. market. The clip applier is
currently not market-ready, and the Company plans to exercise such option and
introduce this product when it becomes commercially viable. Clip appliers are
crucial instruments for surgeons working in the abdomen and chest because they
provide the simplest, quickest and most effective means of occluding structures
such as small blood vessels and ducts, thus decreasing total surgical and
anesthesia time.

         The Company believes the potential exists for significant market
penetration by both the clip applier and the Dexterity(R) products discussed
above, and that sales of the Company's existing product lines should benefit
from these product introductions. The Company expects that these products shall
become integral components of LifeQuest's Lapro-PAK surgical procedure kits.

         GM Engineering

         In February 1996, the Company completed the merger (the "GM Merger") of
GME with and into LQET. Prior to the GM Merger, GME, a private company located
in La Verne, California, was primarily engaged in the development, manufacture
and marketing of surgical and related instruments used in MIS. Under the terms
of the Plan of Merger and Acquisition Agreement the principal shareholders of
GME received 350,000 shares of the Company's Common Stock.

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,



                                      -5-
<PAGE>   6


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 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.

         According to a 1995 market research report by Theta Corporation, the
United States MIS market exceeded $2 billion in 1994 and is forecast to grow at
a 17 to 22 percent rate through 1998. MIS instruments include a wide variety of
reusable and disposable items such as trocars, trocar sleeves/cannulas, video
systems, mechanical and laser- related cutting devices, stapling systems,
electrocautery systems, suction and irrigation systems, graspers and dissectors,
hand-operated retractors and insufflation devices.



                                      -6-
<PAGE>   7


PRODUCTS

         The Company distributes a variety of products manufactured and owned by
other companies and used primarily for MIS procedures. The list of companies
which utilize the Company to distribute selected products includes the
following: Origin MedSystems, Inc., ConMed Corporation, Sony Medical Products
Division, Welch Allyn Imaging, Instruments, Endo-LTD, Microline, Inc.,
Innerdyne, Inc. and Bionx Implants, Inc.

         The Company distributes disposable instruments, durable (reusable)
instruments and capital equipment. The first two categories include the
following: surgical hand instruments such as scissors, forceps, clip appliers,
tackers, and suction irrigators; surgical entry instrumentation such as trocars,
cannulas and dissection balloons; endoscopes; surgical accessories such as
insufflation tubing, Endofog and electrosurgical pens and pads; electrosurgical
instruments; and pneumatic small bone surgical instruments for driving wire,
drilling, and sawing. Capital equipment includes cameras, electrosurgical
generators, pumps, monitors, printers, telemedicine systems and breast biopsy
systems.

SALES AND MARKETING

         The Company began commercial sales of its first MIS product in the
first quarter of 1996 following the GM Merger, and, therefore, has limited
sales, marketing and distribution experience. In 1997, the Company completed the
Trimedica Merger, the Bookwalter Merger and the Medex Surgical Merger. In March
1999, the Company completed the Dexterity Merger. These acquisitions, along with
the Klein Merger, the Val-U-Med Merger and the GM Merger, allow the Company to
specialize in the sales, marketing and distribution of MIS and HALS devices,
including the Dexterity products. The Company is marketing the Dexterity
products, as well as the MIS products of other manufacturers, to hospitals,
purchasing groups and surgeons throughout the United States by demonstrating the
economic efficiencies of the Company's products and by assisting hospital
management in realizing the benefits associated with HALS and MIS. In the United
States, the Company markets MIS products and the Dexterity products primarily
through sales representatives who are employed by the Company within selected
geographical areas and independent sub-distributors who typically sell other
complementary MIS products to the same customer base. If the need arises, the
Company may expand its sales force, which will require recruiting and training
additional personnel. There can be no assurance that the Company will be able to
recruit and train such additional personnel in a timely fashion. Loss of a
significant number of the Company's current sales personnel or independent sales
representatives, or failure to attract additional personnel, could have a
material adverse effect on the Company's business, financial condition and
results of operations.

BUSINESS STRATEGY

         The Company has continually expanded its geographical coverage in the
U.S. and plans to continue to add significant new products to its existing line
through internal development, licensing and acquisition. In 1998, the combined
distribution coverage of the Company included 35 U.S. states. Management intends
to add a significant number of direct sales representatives in 1999 to achieve
national distribution coverage. The table below set forth the Company's sales
force distribution, including independent contractors and distributors as of
March 12, 1999:

                            SALES FORCE DISTRIBUTION

<TABLE>
<CAPTION>
                 STATE                      SALES REPRESENTATIVES
                 <S>                                  <C>        
                 Alabama                              2          
                 Arizona                              1          
                 California                           9          
                 Colorado                             1          
                 Connecticut                          1          
                 Florida                              4          
                 Georgia                              6          
                 Idaho                                1          
                 Illinois                             3          
                 Indiana                              1          
                 Iowa                                 1          
                 Kentucky                             1          
                 Louisiana                            1          
</TABLE>         



                                      -7-
<PAGE>   8


<TABLE>
<CAPTION>
                 STATE                      SALES REPRESENTATIVES
                 <S>                                  <C>        
                 Maine                                1
                 Maryland                             2   
                 Massachusetts                        3   
                 Michigan                             4   
                 Minnesota                            2   
                 Mississippi                          1   
                 Missouri                             3   
                 Nebraska                             1   
                 New Jersey                           4   
                 New York                             4   
                 North Carolina                       2   
                 North Dakota                         1   
                 Ohio                                 3   
                 Oklahoma                             1   
                 Pennsylvania                         8   
                 South Carolina                       1   
                 Tennessee                            8   
                 Texas                               12   
                 Utah                                 1   
                 Virginia                             2   
                 West Virginia                        1   
                 Wisconsin                            3   
                                                  -----
                 Total                              100  
</TABLE>


COMPETITION

           The primary industry in which the Company competes, minimally
invasive surgery is highly competitive and in the current healthcare
environment, cost containment has become a significant factor in purchasing
decisions by hospitals. 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 and third party
reimbursement policies. For certain of the Company's potential products, an
important factor in competition may be the timing of market introduction of its
or its competitors' products. Accordingly, the relative speed with which the
Company can develop products and complete approval or clearance processes and
supply commercial quantities of the products to the market are important
competitive factors. The Company believes that its competitive success will be
based on its ability to create and maintain scientifically advanced technology,
develop proprietary products, attract and retain scientific personnel, obtain
patent or other protection for its products, obtain required regulatory
approvals and manufacture and successfully market its products.



                                      -8-
<PAGE>   9



         Many 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.

PRODUCTS SUPPLY: DEPENDENCE ON KEY SUPPLIERS

         The ability of the Company to obtain particular products or product
lines in the required quantities to fulfill customer orders on a timely basis is
critical to the Company's success. In most cases, the Company has no guaranteed
price or delivery agreements with its MIS device suppliers. As a result, the
Company may experience short-term inventory shortages. In addition,
manufacturers of MIS devices who currently distribute their products through the
Company may decide to distribute, or to substantially increase their existing
distribution through other distributors, their own dealer networks, or directly
to resellers. The Company's primary supplier, Origin MedSystems, Inc., provided
products which accounted for 38% and 43% of the Company's revenues in 1997 and
1998 respectively. The Company is a party to a distribution agreement with such
supplier which terminates in May 1999. There can be no assurance that the
Company will be able to renew the distribution agreement with its primary
supplier and the failure to do so will have an adverse impact on the Company's
business, financial condition and results of operations. There can be no
assurance that suppliers will be able to maintain an adequate supply of products
to fulfill the Company's customer orders on a timely basis or that the Company
will be able to obtain particular products or that a product line currently
offered by suppliers will continue to be available. Failure of the Company to
obtain particular products or product lines in the required quantities or to
fulfill customer orders on a timely basis could have a material adverse effect
on its business, financial condition or results of operation.

         The Company's ability to achieve increases in net sales or to sustain
current net sales levels depends in part on the ability and willingness of the
Company's suppliers to provide products in the quantities the Company requires.
Although the Company has written distribution agreements with many of its
suppliers, these agreements in certain instances provide for non-exclusive
distribution rights and often include territorial restrictions that limit the
geographical area in which the Company is permitted to distribute the products.
The agreements are also generally short-term, subject to periodic renewal and
often contain provisions permitting termination by either party without cause
upon relatively short notice. The termination of an agreement may have a
material adverse impact on the Company's business, financial condition or result
of operations.

DEPENDENCE UPON INDEPENDENT SHIPPING COMPANIES

         The Company relies heavily on arrangements with independent shipping
companies for the delivery of its products. In order to meet customer demand,
products are shipped from suppliers through independent shipping companies.
Currently, the Company's management estimates that United Parcel Service ("UPS")
delivers approximately 90% of the Company's products to its customers. The
termination of the Company's relationship with UPS, or the failure of one or
more other independent shipping companies to deliver products from suppliers to
the Company or products from the Company to its customers could have a material
adverse effect on the Company's business, financial condition or results of
operations. For instance, another employee work stoppage at UPS or an employee
work stoppage or slow-down at one or more of these independent shipping
companies could materially impair


                                      -9-
<PAGE>   10


the shipping company's ability to perform the services required by the Company.
There can be no assurance that the services of these independent shipping
companies will continue to be available to the Company on terms as favorable as
those currently available or that these companies will choose or be able to
perform the required shipping services for the Company.

DEPENDENCE ON KEY PERSONNEL

         The success of the Company will be largely dependent on the efforts of
a number of key management and technical personnel, including 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. The
Company believes that its future success will depend in large part upon its
ability to hire and retain suitable operating, marketing, financial and
technical personnel. The competition for qualified personnel in the medical
device industry is intense and, accordingly, there can be no assurance that the
Company will be able to hire or retain necessary personnel.

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 a 510(k) Notification clearance requires the
submission of substantially less data and generally involves a shorter review
period. Through December 31, 1998, the Company has received 510(k) Notifications
for the following products:

<TABLE>
<CAPTION>
510(k) Number    Description
-------------    ------------
<S>              <C>                                                      
K930756          Endo Aid Aspiration Irrigation Device
K942703          Disposable and Reusable Trocar Disposable and Reusable Light Cannula System
K974139          LQET Cannula/Trocar System
K934035          Monopolar Cautery/Suction Probe
K979335          Reusable Palpation Probe
</TABLE>

         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



                                      -10-
<PAGE>   11



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.

         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


                                      -11-
<PAGE>   12



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 MIS 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 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.


                                      -12-
<PAGE>   13



ADDITIONAL BUSINESS RISKS

         HISTORY OF LOSSES; PROFITABILITY UNCERTAIN. The Company has experienced
operating losses since its inception on January 1, 1989. At December 31, 1998,
the Company had an accumulated deficit of approximately $19.3 million. Prior to
1996, the Company was a development stage company focused primarily on obtaining
FDA approval of two medical devices. However, the Company has 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. Primarily as a result of its acquisitions in 1996 and
1997, the Company generated revenues of approximately $18.5 million during the
year ended December 31, 1998.

         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.

         RECENT PRIVATE PLACEMENTS. In November 1998, pursuant to the terms of a
private placement, the Company issued to two affiliates of Renaissance Capital
Group, Inc. (collectively, such affiliates referred to herein as "Renaissance")
an aggregate of 1,000 shares of Series B Cumulative Convertible Preferred Stock,
$.001 par value ("Series B Preferred Stock") for aggregate proceeds of
$1,000,000. On the date the Company closed such private placement, November 19,
1998, the closing per share price of Common Stock on the NASDAQ SmallCap Market
was $2.125. 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 initially convertible into shares of
Common Stock at a conversion price of $2 per share, for an aggregate of 500,000
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 $2. The conversion price for the Series B Preferred Stock is
subject to a one-time downward adjustment if, following the Company's public
release of its 1998 financial results, the then current market price of Common
Stock, as defined in the Company's Certificate of Incorporation, is less than $2
per share. 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 the terms of 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 Preferred Stock, $.001 par value ("Series A Preferred Stock"), for
aggregate proceeds of $1,170,000. On the date the Company closed such private
placement, August 11, 1998, the closing per share price of Common Stock on the
NASDAQ SmallCap Market was $1.75. The Company used such proceeds for working
capital. Annual dividends on the Series A Preferred Stock are cumulative at a
rate of $80 per share. The Series A Preferred Stock is initially convertible
into shares of Common Stock at a conversion price of $2 per share, for an
aggregate of 585,000 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 $2. The conversion price for the Series A
Preferred Stock is subject to a one-time downward adjustment if, following the
Company's public release of its 1998 financial results, the then current market
price of Common Stock, as defined in the Company's Certificate of Incorporation,
is less than $2 per share. 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.



                                      -13-
<PAGE>   14


         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 an equity
investment in TFX, and for working capital purposes. 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, require monthly principal payments commencing in December 2000 of $10
per $1000 of the then remaining principal amount. The remaining principal
balance will mature in December 2004. The Debentures require the Company to
comply with the following financial covenants (all as defined in the
Debentures): (i) a Debt to Net Worth Ratio of no greater than .85:1; (ii) an
Interest Coverage Ratio of at least 5:1; (iii) a Debt Coverage Ratio of at least
 .10:1; and (iv) a Current Ratio of at least 1.8:1. At December 31, 1998, the
Company was not in compliance with Interest Coverage Ratio and Debt Coverage
Ratio covenants, and has obtained a waiver from Renaissance to suspend the
Current Ratio, Interest Coverage Ratio and Debt Coverage Ratio covenants through
June 30, 1999, at which point the Company believes it will be in compliance with
such covenants. However, if the Company is unable to comply with such covenants
in the future, the Company could be found to be in technical default under the
Debentures and the holders thereof would have the right to demand the immediate
repayment of the entire amount outstanding. The Company believes that sufficient
resources would be available to fund such amounts in the event of such
acceleration. 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 $4 per share of Common Stock. On the date the Company closed
such private placement, December 19, 1997, the closing per share price of the
Company's Common Stock on the NASDAQ SmallCap Market was $4.063. 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 $4 per
share of Common Stock, subject to certain allowed exceptions, during the term of
the Debentures. Accordingly, the conversion price for the Debentures was reduced
to $2 per share of Common Stock in connection with the August 1998 private
placement. The Debentures are also subject to a one-time adjustment to the
conversion price whereby the price will be reduced if, following the Company's
public release of its 1998 financial results, the then current market price of
Common Stock, as defined in the Debentures, is less than $2 per share. The
Debentures are currently convertible for an aggregate of 1,500,000 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. 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,
the conversion of the Debentures or Preferred Stock or exercise of warrants into
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 is adjusted downward as described above. As the conversion
price of the Preferred Stock and the Debentures may be adjusted downward to an
amount equal to the volume-weighted average closing bid price of the Common
Stock for the twenty-one consecutive trading days following the Company's public
release of its 1998 financial results, sales of Common Stock by the holders of
the Preferred Stock or Debentures, or others, whether short or long selling,
could drive the market price of the Common Stock down during such twenty-one day
period, after which the holders of the Debentures and Preferred Stock could
profit by converting their securities into Common Stock at a lower price, then
selling such shares of Common Stock if the market price rises to a higher level.
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.

         FUTURE ADDITIONAL CAPITAL REQUIREMENTS; NO ASSURANCE FUTURE CAPITAL
WILL BE AVAILABLE. The Company's capital requirements will depend on numerous
factors, including market acceptance and demand for its products; the resources
the Company devotes to the development, manufacture and marketing of its
products; the resources required to protect the Company's intellectual property;
the resources expended, if any, to acquire complementary businesses,



                                      -14-
<PAGE>   15



products and technologies; and other factors. The timing and amount of such
capital requirements cannot be accurately predicted. Funds may also be used for
the acquisition of businesses, products and technologies that are complementary
to those marketed by the Company. Consequently, although the Company believes
that its revenues and other sources of liquidity will provide adequate funding
for its capital requirements through at least 1999, the Company may be required
to raise additional funds through public or private financings, collaborative
relationships or other arrangements. There can be no assurance that the Company
will not require additional funding or that such additional funding, if needed,
will be available on terms attractive to the Company or at all. In the event
that substantial amounts of additional financing are required, including amounts
that may be required for any potential redemption of the Debentures described
above, the Company 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. In three private
placements since December 1997, the Company has issued securities currently
convertible into 2,585,000 shares of Common Stock. If the holders of such
securities were to convert them into shares of Common Stock and sell a large
number of shares of Common Stock on the public market, the market price for the
Common Stock could decline, thus making additional equity financings more
difficult for the Company to obtain on an acceptable basis, if at all. There can
be no assurance that such additional financing will be available if and when,
and in the amounts required, by the Company. Moreover, even if such financing is
available if and when required, there can be no assurance that such financing
will be obtained on terms that are favorable to the Company, and substantial and
immediate dilution to existing stockholders likely would result from any sales
of equity securities or other securities convertible into equity securities. Any
additional debt financings, if available, may involve restrictive covenants.

         ACQUISITION INTEGRATION. The Company's growth in recent years has
resulted from acquisitions, which involve certain operational and financial
risks. This growth has resulted in a significant increase in responsibility for
existing management which has placed, and may continue to place, a significant
strain on the Company's limited personnel and management, manufacturing and
other resources. The integration of these acquisitions has required a
significant expansion, and in some instances the replacement, of the Company's
accounting and other internal management systems and the implementation of a
variety of procedures and controls, including systems and procedures designed to
harmonize (i) the various management systems of the acquired companies and (ii)
the management styles of management personnel of the acquired companies. There
can be no assurance that significant problems in these areas will not occur. Any
failure to continue to expand or replace, as applicable, these systems and
implement such procedures and controls in an efficient manner and at a pace
consistent with the Company's business could have a material adverse effect on
the Company's business, financial condition and results of operations.

         In connection with the Company's acquisitions and growth, the Company's
operating expenses have increased significantly, and the Company anticipates
that operating expenses will continue to increase in absolute dollars in the
future. In particular, in order to continue to provide quality products and
customer service and to meet anticipated demands of its customers, the Company
will be required to continue to increase staffing and other expenses, including
expenditures on sales and marketing and the infrastructure to support them.
Should the Company increase its expenditures in anticipation of a future level
of sales that does not materialize, the Company's business, financial condition
and results of operations would be materially and adversely affected. Certain
customers have required and may continue to require rapid increases in
production and accelerated delivery schedules which have placed and may continue
to place a significant burden on the Company's resources. In order to achieve
anticipated sales levels and profitability, the Company will continue to be
required to manage its assets and operations efficiently. In addition, should
the Company continue to expand geographically, it may experience certain
inefficiencies from the management of geographically dispersed personnel and
other resources.

         Although many of the companies acquired by the Company had significant
operating histories, the Company has limited experience owning and operating
them on a consolidated basis. Operational risks associated with an acquisition
include the possibility that an acquisition does not ultimately provide the
benefits originally anticipated by the Company's management, while the Company
continues to incur operating expenses to provide the services formerly provided
by the acquired company. Financial risks involve the incurrence of indebtedness
as a result of the acquisition and the consequent need to service that
indebtedness. In connection with an acquisition made in December 1996, the
Company paid an aggregate of $400,000 in cash. In addition, as of December 31,
1998 pursuant to the exemptions from registration provided for in Section 4(2)
of the Securities Act, the Company has issued approximately 2.8 million shares
of Common Stock, which represents approximately 38% of its outstanding and
issued shares of Common Stock at December 31, 1998, in connection with its six
acquisitions since February 1996. The issuance of Common Stock dilutes the
voting power and may dilute the economic interests of existing stockholders. As
part of the Company's growth strategy, the Company will continue to review
acquisition opportunities in the future, and in making acquisitions, if any, the
Company may issued additional shares of Common Stock, other equity securities,
debt


                                      -15-
<PAGE>   16


securities or equity or debt securities convertible into shares of Common Stock.
In carrying out its acquisition strategy, the Company attempts to minimize the
risk of unexpected liabilities and contingencies associated with acquired
businesses through planning, investigation and negotiation, but there is no
assurance that it will be successful in doing so. There can be no assurance that
recent or future acquisitions can be readily assimilated into the Company's
operating structure. Inability to efficiently integrate acquired companies could
have a material adverse effect on the Company's financial condition and results
of operations. The Company does not currently have any commitments or agreements
with respect to any material acquisitions.

         MANAGEMENT OF GROWTH. The rapid growth of the Company's business has
required the Company to make significant additions in personnel and has
significantly increased the Company's working capital requirements. Although the
Company has experienced significant sales growth in 1996, 1997 and 1998, such
growth should not be considered indicative of future sales growth. Such growth
has resulted in new and increased responsibilities for management personnel and
has placed and continues to place a significant strain upon the Company's
management, operating and financial systems, and other resources. There can be
no assurance that the strain placed upon the Company's management, operating and
financial systems, and other resources will not have a material adverse effect
on the Company's business, financial condition, and results of operations, nor
can there be any assurance that the Company will be able to attract or retain
sufficient personnel to continue the expansion of its operations. Also crucial
to the Company's success in managing its growth will be its ability to achieve
additional economies of scale. There can be no assurance that the Company will
be able to achieve such economies of scale, and the failure to do so could have
a material adverse effect on the Company's business, financial condition, and
results of operations.

         To manage the expansion of its operations, the Company must
continuously evaluate the adequacy of its management structure and its existing
systems and procedures, including, among others, its data processing, financial,
and internal control systems. When entering new geographic markets, the Company
will be required, on a timely and cost-effective basis, to hire personnel,
establish suitable distribution centers, and adapt the Company's distribution
systems and procedures to these new markets. There can be no assurance that
management will adequately anticipate all of the changing demands that growth
could impose on the Company's systems, procedures, and structure. In addition,
the Company will be required to react to changes in the MIS distribution
industry, and there can be no assurance that it will be able to do so
successfully. Any failure to adequately anticipate and respond to such changing
demands may have a material adverse effect on the Company's business, financial
condition, or results of operations.

         EFFECTS OF DELISTING FROM NASDAQ SMALLCAP MARKET; LACK OF LIQUIDITY OF
LOW PRICED STOCKS. If the Company fails to maintain the qualification for its
Common Stock to trade on the Nasdaq SmallCap Market, its securities could be
subject to delisting. The Nasdaq Stock Market announced increases in the
quantitative standards, which became effective in February 1998, for maintenance
of listings on The Nasdaq SmallCap Market. The revised standards for continued
listing include maintenance of any of (x) $2,000,000 of net tangible assets, (y)
$35,000,000 of market capitalization or (z) $500,000 of net income for two of
the last three years and a minimum bid price per share of $1.00. Although the
Company is currently in compliance with the new Nasdaq SmallCap Market continued
listing requirements, no assurances can be given that the Company will be able
to maintain such compliance in the future. In the event the Company is unable to
satisfy the continued listing requirements, trading, if any, in the Common Stock
would thereafter be conducted in the over-the-counter markets in the so-called
"pink sheets" or the National Association of Securities Dealer's "Electronic
Bulletin Board." Consequently, the liquidity of the Company's Common Stock would
likely be 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, if any, of the Company and
lower prices for the Company's securities than might otherwise prevail.

         In addition, if the Common Stock were to become delisted from trading
on the Nasdaq SmallCap Market and the trading price of the Common Stock were
below $5.00 per share, trading in the Common Stock would also be 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


                                      -16-
<PAGE>   17


severely limit the market liquidity of Common Stock and the ability of
stockholders to sell their shares of Common Stock in the secondary market.

         RELIANCE ON FUTURE PRODUCTS AND NEW APPLICATIONS; UNCERTAINTY OF
TECHNOLOGY CHANGES. The markets for the Company's products are characterized by
rapid, unpredictable and significant technological change. Competition in the
Company's industry is intense. Many of the Company's competitors have greater
financial resources, research and development capabilities and more experience
in obtaining regulatory approvals, manufacturing and marketing than the Company.
Accordingly, these competitors may succeed in developing, obtaining regulatory
approval for and some have commercialized their products more rapidly than the
Company. There can be no assurance that developments by the Company's
competitors or potential competitors will not render the Company's MIS products
non-competitive, uneconomical or obsolete. There can be no assurance that the
Company will be able to successfully obtain new MIS products or technologies,
manufacture products in commercial volumes or gain market acceptance of its
products or the products of others. Delays in development, manufacturing or
market acceptance of new or enhanced products could have a material adverse
effect on the Company's business, financial condition and results of operations.
The future success of the Company will also depend upon, among other factors,
its ability to obtain and distribute new and enhanced versions of products in a
timely fashion.

         RISK RELATED TO INTANGIBLE ASSETS. Largely as a result of acquisitions,
net goodwill accounts for approximately 14% and 29% of the Company's total
assets and total stockholders' equity, respectively, at December 31, 1998. Net
goodwill was approximately $1.67 million at December 31, 1998. Goodwill arises
when an acquirer pays more for a business than the fair value of the tangible
and separately measurable intangible net assets acquired. The Company
periodically evaluates whether events and circumstances have occurred indicating
that any portion of the remaining balance of amounts allocable to the Company's
intangible assets may not be recoverable. If factors indicate that the carrying
value of the Company's intangible assets has been impaired, the Company would be
required to reduce the carrying value of such assets. Any future determination
requiring the write-off of a significant portion of the unamortized intangible
assets could have a material adverse effect on the Company's business, results
of operations or financial condition. A reduction in net income resulting from
the amortization of goodwill may have an adverse impact upon the market price of
the Company's Common Stock.

         STOCK PRICE VOLATILITY. The stock market in general, and stocks of
medical device companies 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 25, 1999, approximately 669,425 shares of Common Stock are
eligible for sale in the public market upon compliance with the volume and other
limitations contained in Rule 144 of the Securities Act. In addition, at
December 31, 1998 there were outstanding options to acquire up to approximately
1,128,000 shares of Common Stock, 1,500,000 shares of Common Stock issuable upon
conversion of the Debentures, 585,000 shares of Common Stock issuable upon
conversion of Series A Preferred Stock and 500,000 shares of Common Stock
issuable upon conversion of the Series B 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 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


                                      -17-
<PAGE>   18


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 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.



                                      -18-
<PAGE>   19


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.

         NONPAYMENT 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 16, 1999, the Company employed approximately 83 persons.
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 16, 1999 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       56      President and Chief Executive Officer          1998
Randall K. Boatright       50      Executive Vice President, Chief Financial      1992
                                   Officer and Secretary
K.C. Fadem                 40      Vice President                                 1996
Robert Fadem               37      Vice President                                 1996
William H. Bookwalter      33      Vice President                                 1997
</TABLE>

         K.C. Fadem and Robert Fadem are brothers. There are no other family
relationships among the officers listed. In connection with the Val-U-Med
Merger, K.C. Fadem and Robert Fadem were made Vice Presidents of the Company. In
connection with the Bookwalter Merger, William H. Bookwalter was made a Vice
President of the Company. There are no other arrangements or understandings
pursuant to which any of the other 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.


ITEM 2.                            PROPERTIES

         The Company currently leases corporate headquarters and distribution
facilities 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 expiring in March 2002, and office and distribution facilities in
Milford, Massachusetts under a lease expiring in March 2002. During 1998 the
Company paid aggregate rentals of approximately $290,000.


ITEM 3.                         LEGAL PROCEEDINGS

         In June 1998, a case was filed in the State Court of Fulton County,
Georgia, alleging that the Company breached a distribution agreement with the
plaintiff. The plaintiff, Endo-Tech Ltd., Inc., asserted damages of
approximately $400,000, plus unspecified "consequential" damages. The Company
filed a counterclaim against the plaintiff and removed the case to the United
States District Court for the Northern District of Georgia, Atlanta Division. In
November 1998, the Company and the plaintiff agreed to dismiss their respective
claims against each other and entered into a settlement agreement pursuant to
which the Company agreed to purchase $18,000 of products per month from January
1999 through December 2000.


                                      -19-
<PAGE>   20


         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, 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.



                                      -20-
<PAGE>   21


                                     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
traded on the Nasdaq SmallCap Market under the symbol "LQMD" until March 19,
1999, at which time it began trading under the symbol "DEXT." The Common Stock
commenced trading in August 1992. 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 1998:

Fourth Quarter       $2 9/16       $1 1/4
Third Quarter         2 13/16       1 1/4
Second Quarter        4 13/16       2 1/8
First Quarter         4 15/16       3 3/16

Fiscal 1997:

Fourth Quarter       $5 3/8        $3 5/8
Third Quarter         5 1/4         4 1/8
Second Quarter        5 1/8         4 1/8
First Quarter         5 1/2         2 7/8
</TABLE>


         At March 16, 1999, there were approximately 194 record holders of
Common Stock and approximately 1,760 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.

         On November 19, 1998, pursuant to the terms of a private placement, the
Company issued to two affiliates of Renaissance Capital Group, Inc. an aggregate
of 1,000 shares of 8% Series B Cumulative Convertible Preferred Stock (the
"Series B Preferred") at a per share purchase price of $1,000. The Series B
Preferred is convertible into an aggregate of 500,000 shares of Common Stock
(subject to adjustment) at a conversion price not to exceed $2.00. Dividends
cumulatively accrue on the Series B Preferred at a rate of $80 per annum per
share. So long as any accrued dividends on Series B Preferred are unpaid, no
dividends may be declared on Common Stock. The holders of Series B Preferred
shall be entitled, upon a liquidation of the Company, to receive $1,000 per
share of Series B Preferred, plus all accrued and unpaid dividends. The holders
of the Series B Preferred have the right to one vote per share of Series B
Preferred on all matters submitted to a vote of the stockholders of the Company.
The affirmative vote of 66-2/3% of the shares of Series B Preferred then
outstanding is required to materially amend the Certificate of Incorporation or
Bylaws of the Company. In the event two quarterly dividends on the Series B
Preferred shall be in arrears, the holders of the Series B Preferred have the
right to elect or designate two directors of the Company.



                                      -21-
<PAGE>   22



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

         Certain statements contained in this 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 of 1933, as amended, and Section 21E of the Exchange Act of 1934, as
amended. Specifically, all statements other than statements of historical fact
included in this Item 6 regarding Dexterity Surgical, Inc. and its subsidiaries'
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
manufacture, market and 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, product introductions and
acceptance, technological change, changes in industry practices, one-time events
and other factors described herein, in the Company's Registration Statement on
Form S-3 (File No. 333-58849) filed with the Security and Exchange Commission
("SEC") on October 13, 1998, 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

         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 decided to reduce continuing investment
in research and development related to such technologies and to focus its
efforts on acquiring and distributing MIS devices. Accordingly, during the last
three fiscal years, the Company has continued to decrease its engagement in
Company sponsored research and development, and in fiscal 1998, eliminated
virtually all expenditures in this area. However, due to the Dexterity Merger
(defined below), the Company intends to invest moderate amounts in research and
development in 1999. As of December 31, 1998, the Company had an accumulated
deficit of approximately $19,327,000. 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 manufacture, market and 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 create, obtain and 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.

         In January 1998, the Company acquired approximately 20% of the common
stock of 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"). 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; 

         o        3,000,000 shares of Common Stock;


                                      -22-
<PAGE>   23



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

         o        promissory notes in the aggregate amount of $1,000,000; 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 transaction was accounted for using the purchase method of
accounting.

         Effective January 1, 1998, the Company merged all of its wholly owned
subsidiaries with and into the Company. In conjunction with this upward merger,
the Company created four new operating divisions: Endo-Surgery, Surgical
Systems, Med-Service, and Technologies.

         Effective September 1997, W. H. Bookwalter and Associates, Inc., a
Vermont corporation ("Bookwalter"), was acquired by the Company and merged into
Val-U-Med, Inc., a Nevada corporation and a wholly-owned subsidiary of the
Company ("Val-U-Med"), in consideration for an aggregate of 466,473 shares of
Common Stock. The transaction was accounted for using the pooling-of-interests
accounting method; and therefore, the assets, liabilities and operations of
Bookwalter are included in the consolidated financial statements contained
herein for all periods reported therein. Bookwalter business activity will
provide the Company with distribution coverage in the northeastern region of the
United States.

         Effective September 1997, Mishbucha, Inc., a Texas corporation d/b/a
Medex Surgical ("Medex Surgical"), was acquired by the Company and merged into
Klein Medical, Inc., a Nevada corporation and a wholly-owned subsidiary of the
Company ("Klein"), in consideration for an aggregate of 98,246 shares of Common
Stock. Medex Surgical was formed during 1997 and the transaction was accounted
for using the pooling-of-interests accounting method; therefore, the assets,
liabilities, and operations of Medex Surgical are included in the consolidated
financial statements contained herein for 1997. Medex Surgical business activity
provides the Company with distribution coverage in the Dallas/Fort Worth and
North Texas area.

         Effective June 1997, Trimedica, Inc., a Colorado corporation
("Trimedica"), was acquired by the Company and merged into Klein in
consideration for an aggregate of 57,143 shares of Common Stock. The transaction
was accounted for using the pooling-of-interests accounting method; therefore,
the assets, liabilities, and operations of Trimedica are included in the
consolidated financial statements contained herein for all periods reported
therein. Trimedica business activity provides the Company with distribution
coverage in the Rocky Mountain region, and is managed by the Company's
Orthopedic Sales Division.

         In December 1996, Val-U-Med, Inc., a Georgia corporation ("VMI"), was
acquired by the Company and merged into Val-U-Med in consideration for an
aggregate of 1,200,000 shares of Common Stock and an aggregate of $400,000. The
transaction was accounted for using the purchase method of accounting;
therefore, the assets, liabilities and operations of VMI prior to its
acquisition by the Company are not included in the consolidated financial
statements contained herein.

         In November 1996, Klein Medical, Inc., a Texas corporation ("KMI"), was
acquired by the Company and merged into Klein in consideration for an aggregate
of 600,000 shares of Common Stock. The transaction was accounted for using the
pooling-of-interests accounting method; therefore, the assets, liabilities, and
operations of KMI are included in the consolidated financial statements
contained herein for all period reported therein.

         In February 1996, the Company completed the merger of GM Engineering,
Inc., a California corporation ("GME"), with and into LifeQuest Endoscopic
Technologies, Inc., ("LQET") a Nevada corporation and wholly owned subsidiary of
the Company, in consideration for 350,000 shares of Common Stock. The
transaction was recorded using the pooling-of-interests method of accounting;
therefore, the assets, liabilities, and operations of GME are included in the
consolidated financial statements contained herein for all periods reported
therein.



                                      -23-
<PAGE>   24
LIQUIDITY AND CAPITAL RESOURCES

         At December 31, 1998, the Company had current assets of $7,004,000 and
current liabilities of $3,395,000 resulting in working capital of $3,609,000.
This compares to a working capital position of $4,175,000 at December 31, 1997.
The decline in working capital is primarily due to the Company's net loss for
1998 offset by proceeds from two preferred stock placements.

         In January 1999, pursuant to the terms of a private placement, the
Company issued to an officer and director of the Company 25 shares of 8% Series
B Cumulative Preferred Stock, $.001 par value ("Series B Preferred"), for
proceeds of $25,000.

         In November 1998, pursuant to the terms of a private placement, the
Company issued to two affiliates of Renaissance Capital Group, Inc.
(collectively, such affiliates referred to herein as "Renaissance") 1,000 shares
of 8% Series B Preferred for aggregate proceeds of $1,000,000. The Company used
such proceeds for working capital. Annual dividends on the Series B Preferred
are cumulative at a rate of $80 per share. The Series B Preferred is initially
convertible into shares of Common Stock at a conversion price of $2 per share,
for an aggregate of 500,000 shares of Common Stock. On the date the Company
closed such private placement, November 19, 1998, the closing per share price of
Common Stock on the NASDAQ SmallCap Market was $2.13.

         In August 1998, pursuant to the terms of 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 Preferred Stock, $.001 par value ("Series A Preferred"), for
aggregate proceeds of $1,170,000. The Company used such proceeds for working
capital. Annual dividends on the Series A Preferred are cumulative at a rate of
$80 per share. The Series A Preferred is initially convertible into shares of
Common Stock at a conversion price of $2 per share, for an aggregate of 585,000
shares of Common Stock. On the date the Company closed such private placement,
August 11, 1998, the closing per share price of Common Stock on the NASDAQ
SmallCap Market was $1.75.

         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 an 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 beginning in February 1998 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. The remaining
principal balance will mature in December 2004. The Debentures require the
Company to comply with the following financial covenants (all as defined in the
Debentures): (i) a Debt to Net Worth Ratio of no greater than .85:1; (ii) an
Interest Coverage Ratio of at least 5:1; (iii) a Debt Coverage Ratio of at least
 .10:1; and (iv) a Current Ratio of at least 1.8:1. At December 31, 1998, the
Company was not in compliance with Interest Coverage Ratio and Debt Coverage
Ratio covenants, and has obtained a waiver from Renaissance to suspend the
Interest Coverage Ratio, Debt Coverage Ratio and Current Ratio covenants through
June 30, 1999 at which time the Company believes it will be in compliance with
such covenants. However, if the Company is unable to comply with such covenants
in the future, the Company could be found to be in technical default under the
Debentures and the holders thereof would have the right to demand the immediate
repayment of the entire amount outstanding. The Company believes that sufficient
resources would be available to fund such amounts in the event of such
acceleration. 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 $4 per share of Common Stock. On the date the Company closed
such private placement, December 19, 1997, the closing per share price of the
Company's Common Stock on the NASDAQ SmallCap Market was $4.063.

         Pursuant to a Subscription Agreement dated June 9, 1998, the Company
issued 370,000 shares of the Company's Common Stock, at a per share price of
$3.25, with an aggregate value of $1,202,500 in exchange for approximately four
percent (4%) of the ownership interests of Ana-Tech, L.L.C. At the same time,
Ana-Tech, L.L.C. sold ownership interests for cash to third parties at the same
unit price. The Company also has entered into an Assignment Agreement dated June
30, 1998 with Ana-Tech, L.L.C., pursuant to which the Company assigned all of
its rights, duties and obligations under its Osteoport(R) device patent license
agreement. As consideration for such assignment, the Company received $600,000
cash and will receive a five percent (5%) royalty on future gross sales of the
Osteoport(R) device. The assignment resulted in a gain of $411,000.

         On February 2, 1996, the Company borrowed $750,000 from a commercial
bank pledging a like amount of short-term investments as collateral. On
September 3, 1997, the loan was converted to a line of credit maturing September
1998 whereby all inventories, accounts receivable and intangibles of the Company
are pledged as collateral. The line of credit was paid in full in December 1997
with proceeds from the December 1997 private placement


                                      -24-
<PAGE>   25


described above. The line of credit expired September 3, 1998. The Company has
received preliminary approval of a new $5,000,000 line of credit from a
financial institution and estimates completion of the transaction in April 1999.
All inventories, accounts receivable and intangibles of the Company are
anticipated to be pledged as collateral. However, there can be no assurance the
transaction will be consummated.

         For the year ended December 31, 1998, operating activities utilized
$1,842,000 of cash primarily due to the net loss for the year. Investment
activities during 1998 utilized cash of $2,121,000, primarily from the purchase
of investments. During 1998, the Company realized $2,170,000 from the sale of
preferred stock and $254,000 from the exercise of stock options.

         For the year ended December 31, 1997, operating activities utilized
$2,304,000 of cash primarily from the net loss for the year. Investment
activities during 1997 provided cash of $1,926,000 primarily from the sale of
investments. Total cash provided from financing activities for 1997 was
$3,320,000. The Company sold common stock and convertible debentures during 1997
realizing net proceeds of $4,200,000. Also, during 1997, the Company repaid
$796,000 of long-term debt.

         Based upon the current level of operations, the Company believes that
projected cash flow from operations plus the Company's cash from the realization
of its current assets will be adequate to meet its anticipated requirements for
working capital and capital expenditures through 1999. However, additional
capital may be required in order for the Company to take advantage of any
potential acquisition opportunities or to participate in future alliances or
joint ventures. There can be no assurance that the Company will not require
additional funding or that such additional funding, if needed, will be available
on terms beneficial to the Company or at all.

         RESULTS OF OPERATIONS FOR YEAR ENDING DECEMBER 31, 1998

         For the year ended December 31, 1998, the Company reported a net loss
applicable to common stock of $1,974,000 or $.28 per basic and diluted share.
This compares with a net loss applicable to common stock of $2,997,000 or $.48
per basic and diluted share for the year ended December 31, 1997. The
improvement in reported results for 1998 was primarily due to an increase in net
sales and gross profit margins. Also, the Company is continually monitoring
non-profitable divisions and non-performing assets. Accordingly, during 1998,
the Company closed the Med-Service division, closed its Colorado office and sold
the Osteoport(R) device. Furthermore, the Technologies division was closed March
15, 1999 at an approximate cost of $30,000, which was accrued in the fourth
quarter of 1998. The net loss for the year ended December 31, 1998 included an
approximate $400,000 gain on the sale of the Osteoport(R) device as previously
discussed.

         Product sales increased 29% in 1998 as compared with 1997. Product
sales were $17,325,000 for 1998 and $13,428,000 for 1997. These increases were
due to continued sales growth throughout the Company within existing product
lines and sales generated by the Dexterity(R) product line, which was added in
March 1998.

         Commissions earned increased 28% in 1998 as compared with 1997.
Commissions earned were $1,167,000 in 1998 and $909,000 in 1997. The increase in
commissions earned reflects the continuing acquisition of new product
representations and new sales territories within existing product lines.

         Gross profit from product sales was $7,011,000 in 1998 versus
$4,727,000 in 1997. The corresponding gross profit margins were 40% in 1998 and
35% in 1997. The increase in margins is a result of the realization of the
efficiencies incurred through expanding volumes and economies of scale. Also,
marketing emphasis on higher margin products contributed to higher gross profit
margins.

         In 1998, selling, general and administrative expenses, which consist
primarily of sales commissions, salaries and other costs necessary to support
the Company's infrastructure, increased 20% to $9,820,000 from $8,181,000 in
1997. These increased costs primarily reflect higher sales commissions due to
the increased level of sales. However, as a percentage of net sales, selling,
general and administrative expenses have decreased: 53% for 1998 versus 57% for
1997.

         RESULTS OF OPERATIONS FOR YEAR ENDING DECEMBER 31, 1997

         For the year ended December 31, 1997, the Company reported a net loss
of $2,997,000 or $.48 per basic and diluted share. This compares with a net loss
of $1,958,000, or $.40 per basic and diluted share for the year ended


                                      -25-
<PAGE>   26


December 31, 1996. The increase in the net loss for the year was primarily
caused by costs associated with the Company's acceleration of the geographic
expansion of its business activity and sales force and distribution and sales
support infrastructure and due to expenses incurred during the development of
the Company's own SST brand of trocars and cannulas. During the year ended
December 31, 1997, the Company's sales force grew in excess of 200% and its
distribution coverage expanded to include 32 states and one Canadian province.
The sales force expansion was necessary to prepare for the launch of the
Dexterity products in 1998, which significantly increased selling, general and
administrative expenses as discussed below.

         Product sales increased 140% in 1997 as compared with 1996. Product
sales were $13,428,000 for 1997 and $5,595,000 for 1996. The increase in sales
is due to the acquisition of Val-U-Med, which transaction was recorded using the
purchase method of accounting. Therefore, the results of operations of Val-U-Med
are included in the Company's consolidated statement of operations for 1997 but
not 1996.

         Gross profit from product sales was $4,727,000 in 1997 versus
$2,099,000 in 1996. The corresponding gross profit margins were 35% in 1997 and
38% in 1996. The decrease in margins for 1997 was a result of certain inventory
adjustments relative to discontinued product lines as well as inventory consumed
as demonstration units in the sales function. On July 18, 1997, the Company
completed its previously announced relocation which combined its corporate
offices, San Antonio warehouse and distribution center, repair and service
center, and manufacturing facility in one new San Antonio location. The Company
believes this move and the related February 1997 move of Val-U-Med and the
Atlanta distribution center into a new larger facility prepares the Company for
continued growth and positions the Company to capture further operating
efficiencies.

         In 1997, selling, general and administrative expenses, which consist
primarily of sales commissions, salaries and other costs necessary to support
the Company's infrastructure, increased to $8,181,000 in 1997 from $3,933,000 in
1996. The increased costs reflect higher sales commissions due to the inclusion
of the Val-U-Med results, increased costs related to developing and supporting
an infrastructure necessary to integrate the Company's acquisitions during 1996
and 1997 and costs associated with development of a new customized line of
trocars and cannulas.

         YEAR 2000 ISSUE

         The efficient operation of the Company's business is dependent on its
computer software programs and operating systems (collectively, "Programs and
Systems"). These Programs and Systems are used in several key areas of the
Company's business, including information management services and financial
reporting, as well as in various administrative functions. The Company has
evaluated its Programs and Systems to identify potential year 2000 compliance
problems, as well as manual processes, external interfaces with customers, and
services supplied by vendors to coordinate year 2000 compliance and conversion.
The year 2000 problem refers to the limitations of the programming code in
certain existing software programs to recognize date sensitive information for
the year 2000 and beyond. Unless modified prior to December 31, 1999, such
systems may not properly recognize date-sensitive information and could generate
erroneous data or cause a system to fail to operate properly. Based on current
information, the Company believes its Programs and Systems are year 2000
compliant. However, because most computer systems are, by their very nature,
interdependent, it is possible that non-compliant third party computers may not
interface properly with the Company's computer systems. The Company could be
adversely affected by the year 2000 problem if it or unrelated parties fail to
successfully address this issue. Problems encountered by the Company's vendors,
customers and other third parties also may have a material adverse effect on the
Company's financial condition and results of operations.

         In the event the Company determines, following the year 2000 date
change, that its Programs and Systems are not year 2000 compliant, the Company
will likely experience considerable delays in processing customer orders and
invoices, compiling information required for financial reporting and performing
various administrative functions. In the event of such occurrence, the Company's
contingency plans call for it to switch vendors to obtain hardware and/or
software that is year 2000 compliant, and until such hardware and/or software
can be obtained, the Company will plan to use non-computer systems for its
business, including information management services and financial reporting, as
well as its various administrative functions.

         The above Year 2000 disclosure constitutes a "Year 2000 Readiness
Disclosure" as defined in The Year 2000 Information and Readiness Disclosure Act
(the "Act"), which was signed into law on October 19, 1998. The Act provides
added protection from liability for certain public and private statements
concerning a company's Year 2000 readiness.


                                      -26-
<PAGE>   27



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

                  None.



                                      -27-
<PAGE>   28


                                    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 1999 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 1999 Annual Meeting, which is incorporated herein by
reference.


ITEM 11.       SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         Information required under this Item will be contained in the Company's
Proxy Statement for 1999 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 1999 Annual Meeting, which is incorporated herein by
reference.




                                      -28-
<PAGE>   29

                                     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 Public Accountants....................................................  F-1

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

         Statements of Operations for the years ended December 31, 1997 and 1998.....................  F-4

         Statements of Stockholders' Equity for the years ended December 31, 1997 and 1998...........  F-5

         Statements of Cash Flows for the years ended December 31, 1997 and 1998.....................  F-6

         Notes to Financial Statements...............................................................  F-7
</TABLE>

2.       EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER         IDENTIFICATION OF EXHIBIT
-------        -------------------------
<S>            <C>

2.1            Plan of Merger and Acquisition Agreement dated February 13, 1996,
               but effective as of January 1, 1996, among LifeQuest Medical,
               Inc., LifeQuest Endoscopic Technologies, Inc., GM Engineering,
               Inc., Gregory M. Miles and Susan G. Miles (incorporated by
               reference herein to Exhibit 2.1 to the Company's Current Report
               on Form 8-K filed February 27, 1996).


2.2            Plan of Merger and Acquisition Agreement dated November 27, 1996,
               among LifeQuest Medical, Inc., Klein Medical Acquisition Co.,
               Klein Medical, Inc. and Richard H. Klein (incorporated by
               reference herein to Exhibit 2.1 to the Company's Current Report
               on Form 8-K filed December 12, 1996).

2.3            Plan of Merger and Acquisition Agreement dated December 27, 1996,
               among LifeQuest Medical, Inc., Val-U-Med Acquisition Co.,
               Val-U-Med, Inc. and the Stockholders of Val-U-Med, Inc.
               (incorporated by reference herein to Exhibit 2.1 to the Company's
               Current Report on Form 8-K filed January 10, 1997).

2.4            Plan of Merger and Acquisition Agreement dated June 30, 1997,
               among LifeQuest Medical, Inc., Klein Medical, Inc., Trimedica,
               Inc., and Mark Lovejoy. (incorporated by reference herein to
               Exhibit 2.1 to the Company's Quarterly Report on Form 10-QSB for
               the quarter ending June 30, 1997).

2.5            Plan of Merger and Acquisition Agreement dated September 30,
               1997, among LifeQuest Medical, Inc., Val-U-Med, Inc., W. H.
               Bookwalter & Associates, Inc., and the shareholders of W. H.
               Bookwalter & Associates, Inc. (incorporated by reference herein
               to Exhibit 21.1 to the Company's Quarterly Report on Form 10-Q
               for the quarter ending September 30, 1997).

2.6            Plan of Merger and Acquisition Agreement dated October 7, 1997,
               among LifeQuest Medical, Inc., Klein Medical, Inc., Mishbucha,
               Inc. d/b/a Medex Surgical, Inc., Edward Kraus, and Robert Kraus
               (incorporated by reference herein to Exhibit 2.2 to the Company's
               Quarterly Report on Form 10-Q for the quarter ending September
               30, 1997).

2.7            Plan of Merger and Acquisition Agreement dated December 30, 1997,
               among LifeQuest Medical, Inc., LifeQuest Endoscopic Technologies,
               Inc., Klein Medical, Inc. and Val-U-Med, Inc.
</TABLE>



                                      -29-
<PAGE>   30


<TABLE>
<S>            <C>
2.8*           Plan of Merger and Acquisition Agreement dated December 18, 1998
               between Dexterity Incorporated and the Company.

3.1*           Restated Certificate of Incorporation of the Registrant.

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           Employment Agreement dated February 15, 1992, between LifeQuest
               Medical, Inc. and Herbert H. Spoon (incorporated by reference
               herein to Exhibit 10.8 to the Company's Registration Statement on
               Form S-1 filed on August 19, 1992, Registration No. 33-49196).

10.3           Incentive Stock Option Agreement dated January 15, 1990, between
               LifeQuest Medical, Inc. and Herbert H. Spoon (incorporated herein
               to Exhibit 10.12 to the Company's Registration Statement on Form
               S-1 filed on August 19, 1992, Registration No. 33-49196).

10.4           Patent License Agreement dated January 1, 1989, between LifeQuest
               Medical, Inc. and The Board of Regents of the University of Texas
               System, as amended by instrument dated November 1, 1989
               (incorporated herein to Exhibit 10.15 to the Company's
               Registration Statement on Form S-1 filed on August 19, 1992,
               Registration No. 33-49196).

10.5           License Agreement dated June 26, 1992, between LifeQuest Medical,
               Inc. and George C. Kramer, Ph.D. (incorporated herein to Exhibit
               10.22 to the Company's Registration Statement on Form S-1 filed
               on August 19, 1992, Registration No. 33-49196).

10.6           Incentive Stock Option Agreement dated October 17, 1994, between
               LifeQuest Medical, Inc. and Herbert H. Spoon (incorporated herein
               by reference to Exhibit 10.15 to the Company's Annual Report on
               Form 10-K for the fiscal year ended December 31, 1994).

10.7           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).

10.8           Incentive Stock Option Agreement dated October 17, 1994, between
               LifeQuest Medical, Inc. and David J. Collette, M.D. (incorporated
               herein by reference to Exhibit 10.18 to the Company's Annual
               Report on Form 10-K for the fiscal year ended December 31, 1994).

10.9           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).

10.10          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).

10.11          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).

10.12          ValQuest Medical, Inc. 1994 Stock Option Plan (incorporated
               herein by reference to Exhibit 10.23 to the Company's Annual
               Report on Form 10-K for the fiscal year ended December 31, 1994).
</TABLE>



                                      -30-
<PAGE>   31


<TABLE>
<S>            <C>
10.13          Incentive Stock Option Agreement dated August 19, 1994, between
               ValQuest Medical, Inc. and Herbert H. Spoon (incorporated herein
               by reference to Exhibit 10.24 to the Company's Annual Report on
               Form 10-K for the fiscal year ended December 31, 1994).

10.14          Incentive Stock Option Agreement dated August 19, 1994, between
               ValQuest Medical, Inc. and Randall K. Boatright (incorporated
               herein by reference to Exhibit 10.25 to the Company's Annual
               Report on Form 10-K for the fiscal year ended December 31, 1994).

10.15          Incentive Stock Option Agreement dated August 19, 1994, between
               ValQuest Medical, Inc. and David J. Collette, M.D. (incorporated
               herein by reference to Exhibit 10.26 to the Company's Annual
               Report on Form 10-K for the fiscal year ended December 31, 1994).

10.16          Non-Incentive Stock Option Agreement dated August 19, 1994,
               between ValQuest Medical, Inc. and Robert B. Johnson
               (incorporated herein by reference to Exhibit 10.29 to the
               Company's Annual Report on Form 10-K for the fiscal year ended
               December 31, 1994).

10.17          Assignment and License Agreement dated May 11, 1994, between
               ValQuest Medical, Inc. and Fibotech, Inc. d/b/a Valdor Fiber
               Optics (incorporated herein by reference to Exhibit 10.30 to the
               Company's Annual Report on Form 10-K for the fiscal year ended
               December 31, 1994).

10.18          Employment Agreement dated November 27, 1996, between Klein
               Medical Acquisition Co. and Richard H. Klein (incorporated by
               reference herein to Exhibit 10.1 to the Company's Current Report
               on Form 8-K filed December 12, 1996).

10.19          Non-Qualified Stock Option Agreement dated November 27, 1996,
               between LifeQuest Medical, Inc. and Richard H. Klein
               (incorporated by reference herein to Exhibit 10.2 to the
               Company's Current Report on Form 8-K filed December 12, 1996).

10.20          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).

10.21          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).

10.22          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).

10.23          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).

10.24          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).

10.25          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).

10.26          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).
</TABLE>



                                      -31-
<PAGE>   32


<TABLE>
<S>            <C>
10.27          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).

10.28          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).

10.29          Subscription Agreement dated June 9, 1998 between the Company and
               Ana-Tech, L.L.C. (incorporated herein by reference to Exhibit
               10.4 to the Company's Form 10-Q for the quarter ended June 30,
               1998).

10.30          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).

10.31          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).

10.32*         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

10.33*         Amended Employment Agreement between the Company and Richard A.
               Woodfield dated December 15, 1998.

10.34*         Amended Option Agreement between the Company and Richard A.
               Woodfield dated December 15, 1998.

22             Subsidiaries
                                                             Name Under Which
               Name               State of Incorporation     Doing Business
               ----               ----------------------     ----------------

               ValQuest Medical, Inc.      Nevada         ValQuest Medical, Inc.

11*            Computation of earnings (loss) per share

23*            Consent of Arthur Andersen LLP

27*            Financial Data Schedule
</TABLE>


*   Filed herewith

(b)      REPORTS ON FORM 8-K

         None



                                      -32-
<PAGE>   33



                                   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.

                                        LIFEQUEST MEDICAL, INC.


March ___, 1999                         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 ___, 1999
--------------------------       and Director (Principal Executive
Richard A. Woodfield             Officer)

/s/ Randall K. Boatright         Executive Vice President, Chief         March ___, 1999
--------------------------       Financial Officer and Director
Randall K. Boatright             (Principal Financial and
                                 Accounting Officer)

/s/ Robert B. Johnson            Director                                March ___, 1999
-------------------------
Robert B. Johnson

/s/ K.C. Fadem                   Director                                March ___, 1999
-------------------------
K.C. Fadem
/s/ Jeffrey H. Berg, Ph.D.       Director                                March ___, 1999
-------------------------
Jeffrey H. Berg, Ph.D.

/s/ Robert L. Evans              Director                                March ___, 1999
-------------------------
Robert L. Evans

/s/ William H. Bookwalter        Director                                March ___, 1999
-------------------------
William H. Bookwalter

/s/Robert Pearson                Director                                March ___, 1999
-------------------------
Robert Pearson

/s/ Christopher K. Black         Director                                March ___, 1999
-------------------------
Christopher K. Black

/s/ John J. Sickler              Director                                March ___, 1999
-------------------------
John J. Sickler
</TABLE>



                                      -33-
<PAGE>   34

                      REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To Dexterity Surgical, Inc.:

We have audited the accompanying consolidated balance sheets of Dexterity
Surgical, Inc., formerly LifeQuest Medical, Inc. (a Delaware corporation), and
subsidiaries as of December 31, 1997 and 1998, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Dexterity Surgical, Inc., and
subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.




                                                     /s/ ARTHUR ANDERSEN LLP


San Antonio, Texas
March 12, 1999


                                      F-1
<PAGE>   35



                   DEXTERITY SURGICAL, INC., AND SUBSIDIARIES

                       (Formerly LifeQuest Medical, Inc.)


                           CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                               December 31
                                                                      ------------------------------
                                          ASSETS                         1997                1998
                                                                      ------------      ------------
<S>                                                                   <C>               <C>         
CURRENT ASSETS:
   Cash and cash equivalents                                          $  3,236,307      $  1,644,535
   Short-term investments                                                  150,000           983,714
   Accounts receivable (net of allowance for doubtful accounts of
     $256,362 and $219,829 in 1997 and 1998, respectively)               2,292,235         2,786,909
   Accounts receivable from related parties                                 17,710            56,619
   Inventories, net                                                      1,745,523         1,482,899
   Prepaid and other assets                                                172,209            49,715
                                                                      ------------      ------------
                          Total current assets                           7,613,984         7,004,391
                                                                      ------------      ------------

PROPERTY, PLANT AND EQUIPMENT                                            1,541,376         1,604,043
   Less- Accumulated depreciation                                         (922,437)       (1,051,117)
                                                                      ------------      ------------
                          Net property, plant and equipment                618,939           552,926
                                                                      ------------      ------------
DEFERRED FINANCE CHARGES                                                   180,996           155,139
                                                                      ------------      ------------
INVESTMENTS, at cost                                                            --         2,202,500
                                                                      ------------      ------------
INTANGIBLE ASSETS:
   Licensed technology rights and other                                    441,358           680,912
   Goodwill, net                                                         1,882,839         1,673,818
                                                                      ------------      ------------
                          Net intangible assets                          2,324,197         2,354,730
                                                                      ------------      ------------
                          Total assets                                $ 10,738,116      $ 12,269,686
                                                                      ============      ============
</TABLE>



                   The accompanying notes are an integral part
                   of these consolidated financial statements.


                                      F-2
<PAGE>   36



                   DEXTERITY SURGICAL, INC., AND SUBSIDIARIES

                       (Formerly LifeQuest Medical, Inc.)


                           CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                                         December 31
                                                                               ------------------------------
                         LIABILITIES AND STOCKHOLDERS' EQUITY                     1997              1998
                                                                               ------------      ------------
<S>                                                                            <C>               <C>         
CURRENT LIABILITIES:
   Accounts payable                                                            $  2,605,366      $  2,633,032
   Accrued liabilities                                                              826,695           645,605
   Current portion of long-term debt                                                  6,838           116,310
                                                                               ------------      ------------

                     Total current liabilities                                    3,438,899         3,394,947
                                                                               ------------      ------------

MINORITY INTEREST                                                                   108,802           106,544
                                                                               ------------      ------------

CONVERTIBLE DEBENTURES                                                            3,000,000         3,000,000
                                                                               ------------      ------------

COMMITMENTS AND CONTINGENCIES (Note 9)

STOCKHOLDERS' EQUITY:
   Preferred stock, $.001 par value; 2,000,000 shares authorized; 0 (1997)
     and 2,170 (1998) shares issued and outstanding                                      --                 2
   Common stock, $.001 par value; 50,000,000 shares authorized; 6,653,883
     (1997) and 7,212,742 (1998) shares issued and outstanding                        6,654             7,213
   Additional paid-in capital                                                    21,576,854        25,095,313
   Deferred compensation                                                            (40,055)           (6,857)
   Accumulated deficit                                                          (17,353,038)      (19,327,476)
                                                                               ------------      ------------

                     Total stockholders' equity                                   4,190,415         5,768,195
                                                                               ------------      ------------

                     Total liabilities and stockholders' equity                $ 10,738,116      $ 12,269,686
                                                                               ============      ============
</TABLE>


                   The accompanying notes are an integral part
                   of these consolidated financial statements.


                                      F-3
<PAGE>   37



                   DEXTERITY SURGICAL, INC., AND SUBSIDIARIES

                       (Formerly LifeQuest Medical, Inc.)


                      CONSOLIDATED STATEMENTS OF OPERATIONS



<TABLE>
<CAPTION>
                                                                     Year Ended December 31
                                                                    1997              1998
                                                                ------------      ------------
<S>                                                             <C>               <C>         
NET SALES:
   Product sales                                                $ 13,427,839      $ 17,325,096
   Commissions earned                                                908,989         1,166,945
                                                                ------------      ------------

                                                                  14,336,828        18,492,041

COST AND EXPENSES:
   Cost of sales                                                   8,701,263        10,313,931
   Research and development                                           32,424                -- 
   Selling, general and administrative                             8,181,314         9,819,634
   Depreciation and amortization                                     432,160           404,881
                                                                ------------      ------------

                                                                  17,347,161        20,538,446
                                                                ------------      ------------
LOSS FROM OPERATIONS                                              (3,010,333)       (2,046,405)

OTHER INCOME (EXPENSE):
   (Loss) gain on sale of assets, net                                 (7,070)          389,503
   Interest expense                                                  (83,788)         (330,620)
   Investment and other income                                        92,486            56,374
                                                                ------------      ------------

NET LOSS BEFORE MINORITY INTEREST                                 (3,008,705)       (1,931,148)

MINORITY INTEREST IN NET LOSS OF CONSOLIDATED SUBSIDIARY              11,578             2,258
                                                                ------------      ------------

NET LOSS                                                          (2,997,127)       (1,928,890)
   Less- Dividend requirement on cumulative preferred stock               --           (45,548)
                                                                ------------      ------------

NET LOSS APPLICABLE TO COMMON STOCK                             $ (2,997,127)     $ (1,974,438)
                                                                ============      ============

BASIC AND DILUTED LOSS PER SHARE OF COMMON STOCK                $       (.48)     $       (.28)
                                                                ============      ============

WEIGHTED AVERAGE SHARES OUTSTANDING USED IN COMPUTING
 BASIC AND DILUTED LOSS PER SHARE OF COMMON STOCK                  6,299,592         6,989,951
                                                                ============      ============
</TABLE>



                   The accompanying notes are an integral part
                   of these consolidated financial statements.


                                      F-4
<PAGE>   38



                                    DEXTERITY SURGICAL, INC., AND SUBSIDIARIES

                                        (Formerly LifeQuest Medical, Inc.)


                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                            Preferred Stock                   Common Stock
                                                     -----------------------------     ----------------------------- 
                                                       Shares             $.001          Shares           $.001       
                                                     Issued and            Par         Issued and           Par       
                                                     Outstanding          Value        Outstanding         Value      
                                                     ------------     ------------     ------------     ------------  

<S>                                                  <C>             <C>                 <C>           <C>            
BALANCES, December 31, 1996                                    --     $         --        6,134,071     $      6,134  
   Exercise of stock options                                   --               --          121,566              122  
   Trimedica dividend                                          --               --               --               --  
   Revaluation of stock options                                --               --               --               --  
   Compensation expense                                        --               --               --               --  
   Sale of stock to officer                                    --               --           50,000               50  
   Sale of stock                                               --               --          250,000              250  
   Issuance of stock options to consultant                     --               --               --               --  
   Issuance of stock, Medex Surgical acquisition               --               --           98,246               98  
   Issuance of stock for services by acquired
     entity                                                    --               --               --               --  
   Net loss                                                    --               --               --               --  
                                                     ------------     ------------     ------------     ------------  

BALANCES, December 31, 1997                                    --               --        6,653,883            6,654  
   Exercise of stock options                                   --               --          188,859              189  
   Issuance of stock, Ana-Tech                                 --               --          370,000              370  
   Compensation expense                                        --               --               --               --  
   Sale of preferred stock                                  2,170                2               --               --  
   Preferred stock dividends                                   --               --               --               --  
   Cancellation of stock options to consultant                 --               --               --               --  
   Net loss                                                    --               --               --               --  
                                                     ------------     ------------     ------------     ------------  

BALANCES, December 31, 1998                                 2,170     $          2        7,212,742     $      7,213  
                                                     ============     ============     ============     ============  

<CAPTION>
                                                     
                                                     Additional
                                                       Paid-In           Deferred        Accumulated
                                                        Capital        Compensation         Deficit           Total
                                                     ------------      ------------      ------------      ------------

<S>                                                  <C>               <C>               <C>               <C>         
BALANCES, December 31, 1996                          $ 19,989,524      $         --      $(14,321,067)     $  5,674,591
   Exercise of stock options                              131,304                --                --           131,426
   Trimedica dividend                                          --                --           (34,844)          (34,844)
   Revaluation of stock options                            78,346           (78,346)               --                -- 
   Compensation expense                                        --            38,291                --            38,291
   Sale of stock to officer                               199,950                --                --           200,000
   Sale of stock                                          999,750                --                --         1,000,000
   Issuance of stock options to consultant                158,611                --                --           158,611
   Issuance of stock, Medex Surgical acquisition              902                --                --             1,000
   Issuance of stock for services by acquired
     entity                                                18,467                --                --            18,467
   Net loss                                                    --                --        (2,997,127)       (2,997,127)
                                                     ------------      ------------      ------------      ------------

BALANCES, December 31, 1997                            21,576,854           (40,055)      (17,353,038)        4,190,415
   Exercise of stock options                              253,611                --                --           253,800
   Issuance of stock, Ana-Tech                          1,202,130                --                --         1,202,500
   Compensation expense                                        --            33,198                --            33,198
   Sale of preferred stock                              2,169,998                --                --         2,170,000
   Preferred stock dividends                                   --                --           (45,548)          (45,548)
   Cancellation of stock options to consultant           (107,280)               --                --          (107,280)
   Net loss                                                    --                --        (1,928,890)       (1,928,890)
                                                     ------------      ------------      ------------      ------------

BALANCES, December 31, 1998                          $ 25,095,313      $     (6,857)     $(19,327,476)     $  5,768,195
                                                     ============      ============      ============      ============
</TABLE>


                   The accompanying notes are an integral part
                   of these consolidated financial statements.


                                      F-5
<PAGE>   39


                   DEXTERITY SURGICAL, INC., AND SUBSIDIARIES

                       (Formerly LifeQuest Medical, Inc.)


                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                           Year Ended December 31
                                                                            1997            1998
                                                                        -----------      -----------
<S>                                                                     <C>              <C>         
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss                                                             $(2,997,127)     $(1,928,890)
   Adjustments to reconcile net loss to net cash used in operating
     activities-
       Depreciation and amortization                                        432,160          404,881
       Amortization of deferred finance charges                                  --           25,857
       Option expense                                                        56,758           33,198
       Issuance of stock and options to consultant                           36,005               -- 
       Loss on disposal of fixed assets                                       7,070           23,187
       Disposal of intangible asset                                              --           11,066
       Minority interest in net loss of consolidated subsidiary             (11,578)          (2,258)
       Changes in operating assets and liabilities-
         Increase in accounts receivable, net                              (959,739)        (494,674)
         (Increase) decrease in inventories, net                           (121,408)         262,624
         Decrease in prepaid and other assets                                24,776           15,212
         Increase in accounts receivable from related parties                (2,839)         (38,909)
         Increase in accounts payable                                       915,680           27,666
         Increase (decrease) in accrued liabilities                         316,567         (181,090)
                                                                        -----------      -----------

                Net cash used in operating activities                    (2,303,675)      (1,842,130)
                                                                        -----------      -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Additions to property, plant and equipment                              (378,679)        (133,703)
   Additions to licensed technology rights and other                             --         (153,639)
   Acquisitions and investments, net of cash received                       (70,462)      (1,000,000)
   Purchases of investments                                              (2,248,153)      (1,111,160)
   Sales of investments                                                   4,568,214          291,085
   (Increase) decrease in interest receivable                                55,063          (13,639)
                                                                        -----------      -----------

                Net cash provided by (used in) investing activities       1,925,983       (2,121,056)
                                                                        -----------      -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from convertible debentures                                   3,000,000               -- 
   Proceeds from issuance of common stock                                 1,200,000               -- 
   Proceeds from issuance of preferred stock                                     --        2,170,000
   Payments for deferred finance charges                                   (180,996)              -- 
   Proceeds from exercise of stock options                                  131,426          253,800
   Payments to stockholders                                                 (34,844)              -- 
   Payments of preferred stock dividends                                         --          (45,548)
   Payments on long-term debt                                              (795,730)          (6,838)
                                                                        -----------      -----------

                Net cash provided by financing activities                 3,319,856        2,371,414
                                                                        -----------      -----------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                      2,942,164       (1,591,772)

CASH AND CASH EQUIVALENTS, beginning of year                                294,143        3,236,307
                                                                        -----------      -----------

CASH AND CASH EQUIVALENTS, end of year                                  $ 3,236,307      $ 1,644,535
                                                                        ===========      ===========
</TABLE>


                   The accompanying notes are an integral part
                   of these consolidated financial statements.



                                      F-6
<PAGE>   40


                   DEXTERITY SURGICAL, INC., AND SUBSIDIARIES

                       (Formerly LifeQuest Medical, Inc.)


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



  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 15, 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. In 1994, the Company and Valdor Fiber Optics
formed ValQuest Medical, Inc., a Nevada corporation (ValQuest), a corporate
joint venture (see Note 5). ValQuest currently operates as an 82 percent owned
subsidiary of the Company. In December 1996, the Company completed the merger of
Val-U-Med, Inc., a Georgia corporation (VMI), with and into Val-U-Med, Inc., a
Nevada corporation (Val-U-Med), and wholly owned subsidiary of the Company. The
Val-U-Med merger was accounted for as a purchase transaction. The accounts of
Val-U-Med have been included in the accompanying consolidated financial
statements since the acquisition date. In February 1996, the Company completed
the merger of GM Engineering, Inc., a California corporation (GME), with and
into LifeQuest Endoscopic Technologies, Inc., a Nevada corporation (LQET), and
wholly owned subsidiary of the Company. In November 1996, the Company completed
the merger of Klein Medical, Inc., a Texas corporation (KMI), with and into
Klein Medical, Inc., a Nevada corporation (Klein), and wholly owned subsidiary
of the Company. In June 1997, the Company completed the merger of Trimedica,
Inc., a Colorado corporation (Trimedica), with and into Klein. In September
1997, the Company completed the merger of Mishbucha, Inc., a Texas corporation
d/b/a Medex Surgical (Medex Surgical), with and into Klein. In September 1997,
the Company completed the merger of W. H. Bookwalter and Associates, Inc., a
Vermont corporation (Bookwalter), with and into Val-U-Med. The GME, KMI,
Trimedica, Medex Surgical and Bookwalter mergers were accounted for as
pooling-of-interests business combinations. Effective January 1, 1998, the
Company merged each of its wholly owned subsidiaries, LQET, Klein and Val-U-Med,
into the Company. The accompanying consolidated financial statements include the
accounts of Dexterity and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.

At December 31, 1998, the Company had an accumulated deficit of approximately
$19.3 million. During the years ended December 31, 1997 and 1998, the Company
incurred net losses of approximately $3 million and $1.9 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, cash proceeds from the exercise of stock options, debt
financing and the sale of convertible debentures. As discussed in Note 11, the
Company has obtained a waiver for certain affirmative financial covenant
requirements associated with its convertible debentures through June 30, 1999,
at which point the Company believes it will be in compliance with the covenants.
However, if the Company is unable to comply with such requirements in the
future, the Company could be found to be in technical default under the
Debentures and the holder would have the right to demand immediate repayment of
the entire amount outstanding. The Company believes that sufficient resources
would be available to fund such amounts in the event of such acceleration. The
Company has also taken steps to improve its 1999 operating results which include
anticipated improvements relating to the Company's acquisitions described in
Notes 6 and 15 and the anticipated launch of new products. The Company's
management believes that it is likely the Company's



                                      F-7
<PAGE>   41



operating results for 1999 will significantly improve over 1998 and will
generate sufficient working capital, along with available cash and available
borrowings under an anticipated revolving line of credit, to sustain its
operations throughout the year. However, there are no assurances that the
Company can achieve such operating improvements.

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 many 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 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 compete in the medical devices market
and the failure to do so would have a material adverse effect on the Company's
business, financial condition and results of operations.

  2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Revenue Recognition

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 an historical analysis of returns. Substantially all returns
relate to inaccurate order fulfillment.

Inventory

Inventory consists 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.

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 (3 - 7 years). Additions and improvements that extend the
useful life of the asset are capitalized. Repairs and maintenance are charged to
expense as incurred. Upon sales or retirement of property and equipment, the
related cost and accumulated depreciation are eliminated from the accounts and
the resulting gain or loss is recorded.

Licensed Technology Rights

Licensed technology rights are amortized upon the commencement of commercial
sales of the underlying products. The carrying value of the licensed technology
is periodically reviewed by the Company with impairments being recognized when
the expected future operating cash flows derived from such licensed technology
rights is less than their carrying value.


                                      F-8
<PAGE>   42
Goodwill

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

Use of Estimates

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

Statements of Cash Flows

The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents. During 1997 and 1998, the Company
had cash payments for interest of $83,788 and $269,086 respectively. During
1997, the Company had a cash payment for income taxes of $70,462 relating to a
preacquisition liability of an acquired entity. The Company had no cash payments
for income taxes during 1998. The following provides supplemental disclosure of
noncash investing and financing activities during 1997 and 1998:

<TABLE>
<CAPTION>
                                                                   1997        1998
                                                                ----------   ----------
<S>                                                             <C>          <C>        
Assets acquired in connection with acquisitions                 $  121,973   $       -- 
Liabilities assumed in connection with acquisitions                121,973           -- 
Common stock issued in connection with an investment                    --    1,202,500
Cancellation of options issued under a consulting arrangement           --      107,280
Note issued for distributorship agreement                               --      100,000
Note issued for purchase of property                                    --       16,310
</TABLE>

During 1997, the Company determined that approximately $700,000 of accrued
liabilities that had been recorded in connection with the Val-U-Med acquisition
were not required. Accordingly, the liabilities and goodwill were reduced by a
corresponding amount during 1997. See Note 6 for a description of shares of the
Company's common stock issued in connection with recent mergers and
acquisitions.

Net Loss Per Share

In February 1997, Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings Per Share" (SFAS 128), was issued. SFAS 128 specifies the computation,
presentation and disclosure requirements for earnings per share (EPS) for
entities with publicly held common stock or potential common stock. SFAS 128
supersedes Accounting Principles Board Opinion No. 15 and replaces the
presentation of Primary EPS with Basic EPS and requires dual presentation of
Basic and Diluted EPS on the face of the statements of operations. Basic EPS
excludes dilution and 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. SFAS 128 is effective for financial statements
issued after December 15, 1997, and, accordingly, the accompanying consolidated
financial statements reflect the adoption of SFAS 128. As the Company had a net
loss for the years ended December 31, 1997 and 1998, Diluted EPS equals Basic
EPS as potentially dilutive common stock equivalents, which consist of options
and warrants, are antidilutive in loss periods. The average market price per
share of the Company's common stock for the years ended December 31, 1997 and
1998, was $4.41 and $2.76, respectively. Note 13 provides a detail of options
and warrants outstanding and their corresponding exercise prices. If the Company
would have had net income for the years ended December 31, 1997 and 1998, the
denominator (weighted average common shares and common share equivalents
outstanding) in the Diluted EPS calculation would have been increased, through
application of the treasury stock method, for each class of option or warrant
for which the average market price per share of the Company's common stock
exceeded the common stock equivalent's exercise price.



                                      F-9
<PAGE>   43



Reclassifications

Certain prior period amounts have been reclassified to conform with the 1998
presentation.

  3.   CONCENTRATION OF RISK:

Credit Risk

The Company's accounts receivable are from various hospitals, clinics and
practicing surgeons. Concentration of credit risk with respect to trade
receivables is limited due to the large number of customers comprising the
Company's customer base. Ongoing credit evaluations of customers' financial
condition 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

No single customer accounted for more than 10 percent of consolidated sales
during the years ended December 31, 1997 and 1998.

Suppliers

The Company had one supplier that accounted for 52 percent and 57 percent of
purchases for the years ended December 31, 1997 and 1998, respectively.

  4.   INVENTORIES:

Inventories at December 31 are summarized as follows:

<TABLE>
<CAPTION>
                                         1997           1998     
                                     ------------   -----------  
<S>                                  <C>            <C>          
                   Raw materials     $   328,375    $    29,250  
                   Work in process        18,557        431,986  
                   Finished goods      1,579,551      1,186,279  
                   Allowances           (180,960)      (164,616) 
                                     -----------    -----------  
                                     $ 1,745,523    $ 1,482,899  
                                     ===========    ===========  
</TABLE>           

  5.   CORPORATE JOINT VENTURES AND INVESTMENTS:

In May 1994, the Company and Valdor Fiber Optics (Valdor) of San Jose,
California, formed ValQuest, a corporate joint venture. In accordance with the
terms of the joint venture agreement, Valdor transferred to ValQuest the
exclusive worldwide rights to develop, manufacture and market all present and
future medical applications of Valdor's patented fiber optic connector
technology. The Company paid $100,000 to Valdor in consideration for the
transfer of these rights to ValQuest. Valdor contributed such rights, which had
an initial value of $327,273 in the consolidated financial statements, to
ValQuest in exchange for a 45 percent interest in ValQuest. The Company
contributed $400,000 to be used as working capital in exchange for a 55 percent
interest in ValQuest. At December 31, 1997 and 1998, purchases of additional
ValQuest stock had increased the Company's ownership interest to 82 percent.



                                      F-10
<PAGE>   44



In December 1997, the Company entered into an agreement to acquire approximately
19 percent 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(R) Pneumo Sleeve and
Dexterity(R) Protractor, during 1998. The Company recognized no revenues or
expenses associated with DI operations prior to 1998. The Company has accounted
for its approximate 19 percent interest in DI under the cost method. As
discussed in Note 6, in December 1998, the Company entered into an agreement to
acquire the remaining DI stock it did not currently own.

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 percent 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 Company also has 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(R) device patent
license agreement. As consideration for such assignment, the Company received
$600,000 cash and will receive a 5 percent royalty on future gross sales of the
Osteoport(R) device. The assignment resulted in a net gain of $411,000 for
financial reporting purposes.

In December 1998, the Company entered into an agreement to acquire the rights to
a distributorship agreement for certain minimally invasive surgical devices from
a company whose president was a former officer and director of the Company. In
connection with obtaining such rights, the Company paid $100,000 and entered
into a promissory note payable in the amount of $100,000 (see Note 10). These
amounts are reflected as a component of licensed technology rights on the
accompanying consolidated balance sheets.

  6.   ACQUISITIONS AND ANTICIPATED TRANSACTIONS:

The following describes acquisitions by the Company during the year ended
December 31, 1997, and an anticipated transaction:

Trimedica, Inc.

Effective June 1997, Trimedica was acquired by the Company and merged into
Klein. Trimedica was purchased for an aggregate of 57,143 shares of common
stock. The transaction was accounted for using the pooling-of-interests
accounting method, therefore, the assets, liabilities and operations of
Trimedica prior to the merger are included in the consolidated financial
statements for all periods reported herein. Trimedica business activity will
constitute the new orthopedic sales force of Klein. The following table shows
the net sales and net income related to Trimedica through the date of
acquisition that have been included in the consolidated statement of operations
for the year ended December 31, 1997:

<TABLE>
<S>                                <C>
               Net sales           $  148,464
               Net income              49,230
</TABLE>


Medex Surgical

Effective September 1997, Medex Surgical was acquired by the Company and merged
into Klein. Medex Surgical was purchased for an aggregate of 98,246 shares of
common stock. Medex Surgical was formed during 1997 and the transaction was
accounted for using the pooling-of-interests accounting method,


                                      F-11
<PAGE>   45



therefore, the assets, liabilities and operations of Medex Surgical prior to the
merger are included in the consolidated financial statements for 1997. Medex
Surgical business activity will allow the Company to further expand its
geographical area. The following table shows the net sales and net loss related
to Medex Surgical through the date of acquisition that have been included in the
consolidated statement of operations for the year ended December 31, 1997:

<TABLE>
<S>                                <C>
               Net sales           $  58,579
               Net loss               (5,757)
</TABLE>


W. H. Bookwalter and Associates, Inc.

Effective September 1997, Bookwalter was acquired by the Company and merged into
Val-U-Med. Bookwalter was purchased for an aggregate of 466,473 shares of common
stock. The transaction was accounted for using the pooling-of-interests
accounting method, therefore, the assets, liabilities and operations of
Bookwalter prior to the merger are included in the consolidated financial
statements for all periods reported herein. Bookwalter business activity will
provide the Company with distribution coverage in the northeastern region of the
United States. The following table shows the net sales and net loss related to
Bookwalter through the date of acquisition that have been included in the
consolidated statement of operations for the year ended December 31, 1997:

<TABLE>
<S>                                <C>
               Net sales           $  1,790,572
               Net loss                 (89,839)
</TABLE>

Anticipated Transaction

On December 18, 1998, LifeQuest and DI entered into a Plan of Merger and
Acquisition Agreement (Agreement) whereby DI, subject to LifeQuest shareholder
approval, would be merged with and into LifeQuest (Merger), and LifeQuest would
be the surviving corporation. Contemporaneously with the Merger, the surviving
corporation would change its name to Dexterity Surgical, Inc. The Company will
account for this business combination as a purchase. If the Merger had been
consummated at December 31, 1998, the Company's net loss for 1998 would have
been increased by approximately $140,000, or $.02 per basic and diluted common
share, reflecting the Company's approximate 19 percent interest in DI's net loss
for 1998 and the amortization of the premium the Company paid for its 19 percent
interest over the Company's share of DI's underlying net assets. See Note 15 for
a description of the Merger consummated in March 1999.

  7.   FEDERAL INCOME TAXES:

As of December 31, 1998, the Company had net operating loss (NOL) carryforwards
of approximately $15 million for federal income tax purposes that are available
to reduce future taxable income and will expire in 2006 through 2018 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 IRS approval of
its request for a change of 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 available to
offset future income taxes and expire in 2005 through 2010.


                                      F-12
<PAGE>   46


The tax effect of significant temporary differences representing income tax
assets (liabilities) at December 31, 1997 and 1998, are as follows:

<TABLE>
<CAPTION>

                                                                 1997           1998
                                                             -----------    -----------
<S>                                                          <C>            <C>        
Capitalized research and development and acquisition costs   $   735,000    $   439,000
Depreciation                                                       5,000         15,000
Accruals                                                          59,000        171,000
Reserves not deductible for tax                                  149,000        141,000
Research and development credit carryforwards                    552,000        552,000
Tax loss carryforwards                                         4,871,000      5,073,000
                                                             -----------    -----------

Net deferred tax assets                                        6,371,000      6,391,000
Deferred tax valuation reserve                                (6,371,000)    (6,391,000)
                                                             -----------    -----------

Net deferred tax assets                                      $        --    $        --
                                                             ===========    ===========
</TABLE>

As there is no assurance of future income, a 100 percent valuation reserve in
1997 and 1998 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.

  8.   SHORT-TERM INVESTMENTS:

Short-term investments consist solely of debt securities issued by the U. S.
Treasury. The Company intends to hold these securities to maturity and believes
it has the ability to do so. Therefore, these securities are reported at
amortized cost. A portion of the investments is pledged as collateral. The
following table summarizes short-term investments held by the Company at
December 31, 1997 and 1998:

<TABLE>
<CAPTION>
                                                                              Gross
                                                                            Unrealized
                                                                              Holding
                                                 Amortized   Fair Market       Gain
                                                   Cost         Value         (Loss)
                                                 ---------   -----------    ----------
<S>                                              <C>         <C>            <C>
December 31, 1997-
   Debt securities issued by the U.S. Treasury   $150,000      $149,816      $   (184)
                                                 ========      ========      ========

December 31, 1998-
   Debt securities issued by the U.S. Treasury   $983,714      $985,000      $  1,286
                                                 ========      ========      ========
</TABLE>



                                      F-13
<PAGE>   47



  9.   LEASE OBLIGATIONS, COMMITMENTS
       AND CONTINGENCIES:                            

Operating Leases

The Company leases office space under noncancelable operating leases. 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, 1998, are as follows:

<TABLE>
<S>                                    <C> 
                    1999               $  274,602
                    2000                  277,712
                    2001                  270,502
                    2002                   71,335
                    2003                       --
                    Thereafter                 --
                                       ----------
                                       $  894,151
                                       ==========
</TABLE>

Rent expense totaled approximately $250,000 and $290,000 for the years ended
December 31, 1997 and 1998, respectively.

Employment Agreements

As of December 31, 1998, the Company had entered into various employment
agreements that provide for future compensation as described below:

<TABLE>
<CAPTION>
                       Annual
   Employee         Compensation           Expires
   --------         ------------       --------------
<S>                   <C>                        <C> 
       A              $125,000          December 1999
       B              $100,000          December 1999
       C              $100,000          December 1999
       D              $100,000            June 2000
       E              $100,000         September 2000
       F              $175,000            May 2002
       G              $150,000           March 2001
</TABLE>

In December 1998, Employee A and Employee D resigned and the Company has no
continuing obligation under the related employment agreement. Certain of the
Company's employees have an opportunity to earn bonuses based upon the
achievement of specified performance criteria of various Company divisions.

Contingencies

In June 1998, a case was filed in the State Court of Fulton County, Georgia,
alleging that the Company breached a distribution agreement with the plaintiff.
The plaintiff, Endo-Tech Ltd., Inc., asserted damages of approximately $400,000,
plus unspecified "consequential" damages. The Company contested the plaintiff's
claims. The Company filed a counterclaim against the plaintiff and removed the
case to the United States District Court for the Northern District of Georgia,
Atlanta Division. In November 1998, the plaintiff and the Company dropped their
claims against each other and entered into a compromise and settlement agreement
whereby each party released the other from any and all claims that were or could
have been asserted under the distribution agreement and covenanted not to sue
each other with respect to all claims released. Additionally, the Company and
the plaintiff amended the terms of the distribution agreement whereby the
Company agreed to purchase certain medical devices in an amount totaling $18,000
per month from January 1999 through December 2000. In connection therewith, the
Company escrowed $54,000.


                                      F-14
<PAGE>   48



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.

10.    DEBT:

The Company had the following current and long-term debt at December 31:

<TABLE>
<CAPTION>
                                                                   1997          1998
                                                                  --------    ---------
<S>                                                               <C>         <C>    
Unsecured note payable for a distributorship agreement,
  bearing interest at 6 percent, principal and interest due
  monthly, maturing in 1999                                       $     --    $ 100,000

Secured note payable for a vehicle loan, bearing interest at 
  9 percent, principal and interest due monthly, maturing in
  1999                                                                   --      16,310
Secured note payable for a vehicle loan, bearing interest at
  8.75 percent, principal and interest due monthly, maturing
  in 1998                                                             6,838          --
                                                                   --------   ---------
                        Total long-term debt                          6,838     116,310

Less- Current portion                                                 6,838     116,310
                                                                   --------   ---------

                        Long-term debt                             $     --   $      --
                                                                   ========    ========
</TABLE>

The carrying amount of the Company's debt approximates the fair value of the
debt. This determination is based on management's estimate of the fair value at
which such instruments could be sold or obtained in a third-party transaction.

11.    CONVERTIBLE DEBENTURES:

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 percent Convertible
Debentures (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 an 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 beginning in February 1998 and,
unless sooner paid, redeemed or converted, require 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 require the Company to comply with the following financial covenants
(all as defined in the Debentures): (i) a Debt to Net Worth Ratio of no greater
than .85:1; (ii) an Interest Coverage Ratio of at least 5:1; (iii) a Debt
Coverage Ratio of at least .10:1; and (iv) a Current Ratio of at least 1.8:1. At
December 31, 1998, the Company was not in compliance with certain of the
covenants and has obtained a waiver from Renaissance to suspend the Interest
Coverage Ratio, Current Ratio and Debt Coverage Ratio covenants through June 30,
1999, at which point the Company believes it will be in compliance with the
covenants. However, if the Company is unable to comply with such requirements in
the



                                      F-15
<PAGE>   49



future, the Company could be found to be in technical default under the
Debentures and the holder would have the right to demand immediate repayment of
the entire amount outstanding. The Company believes that sufficient resources
would be available to fund such amounts in the event of such acceleration. 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 $4
per share of common stock. On the date the Company closed such private
placement, the closing per share price of the Company's common stock
approximated the conversion price. 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 $4 per share of common
stock, subject to certain allowed exceptions, during the term of the Debentures.
Accordingly, the conversion price for the Debentures was reduced to $2 per share
of common stock in connection with the 1998 private placements discussed in Note
12. In the event of the issuance of common stock, or securities convertible into
common stock, for consideration other than cash, the amount of the consideration
received therefore shall be deemed to be the fair market value of the property
received as consideration for the issuance of such shares of common stock. The
Debentures are also subject to a one-time adjustment to the conversion price
whereby the price will be reduced if (i) the Company does not have pretax
income, excluding extraordinary gains, of at least $4,400,000 in 1998 and (ii)
the volume-weighted average closing bid price of the common stock, as determined
by Bloomberg Financial Markets and Commodities News, for the 21 consecutive
trading days following the Company's public release of its 1998 financial
results (the 1998 Conversion Price Adjustment), is less than $2 per share. Upon
the occurrence of (i) and (ii) above, the conversion price of the Debentures
will be adjusted downward to an amount equal to the 1998 Conversion Price
Adjustment. The Debentures at December 31, 1998, were convertible for an
aggregate of 1,500,000 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 conversion of 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. 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. The following table shows the principal maturities of the Debentures
as of December 31, 1998:

<TABLE>
<S>                                    <C> 
                    1999               $        --
                    2000                    30,000
                    2001                   335,000
                    2002                   300,000
                    2003                   265,000
               Thereafter                2,070,000
                                      ------------
                         Total        $  3,000,000
                                      ============
</TABLE>

12.    PREFERRED STOCK PLACEMENTS:

In August 1998, pursuant to the terms of 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 percent Series A Cumulative
Preferred Stock, $.001 par value (Series A Preferred Stock), for aggregate
proceeds of $1,170,000. In November 1998, pursuant to the terms of a private
placement, the Company issued to Renaissance an aggregate of 1,000 shares of 8
percent Series B Cumulative Preferred Stock, $.001 par value (Series B Preferred
Stock), for aggregate proceeds of $1,000,000. The Company used such proceeds for
working capital. Annual dividends on the Preferred Stock are cumulative at a
rate of $80 per share. The Preferred Stock is initially convertible into shares
of common stock at a conversion price of $2 per share, for an aggregate of
585,000 shares (Series A) and 500,000 shares (Series B) of common stock. On the
dates the Company closed such private placements, the closing per share price of
the Company's common stock



                                      F-16
<PAGE>   50


approximated the conversion price. Since the conversion price is subject to
downward adjustment as described below, and there is no minimum conversion
price, the maximum number of shares of common stock which may be issued pursuant
to the conversion of the preferred stock is undeterminable. The conversion price
for the 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 $2. In the event of the issuance of
common stock, or securities convertible into common stock, for consideration
other than cash, the amount of the consideration received therefore shall be
deemed to be the fair market value of the property received as consideration for
the issuance of such shares of common stock. The conversion price for the
Preferred Stock is also subject to the one-time 1998 Conversion Price Adjustment
described in Note 11. The holders of 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 percent of the votes entitled
to be cast by the holders of the 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 Preferred Stock, including authorizing and creating a
class of stock having rights prior to or senior to the Preferred Stock. In the
event two quarterly dividends payable on the Preferred Stock are in arrears, the
holders of each class of Preferred Stock, by a majority vote, shall be entitled
to designate two additional directors to serve on the Company's Board of
Directors.

In January 1999, pursuant to the terms of a private placement, the Company
issued to an officer and director of the Company 25 shares of Series B Preferred
Stock for proceeds of $25,000.

13.    STOCK OPTIONS:

In October 1995, SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS
123), was issued. SFAS 123 defines a fair value based method of accounting for
employee stock options or similar equity instruments and encourages all entities
to adopt that method of accounting for all of their employee stock compensation
plans. Under the fair value based method, compensation cost is measured at the
grant date based on the value of the award and is recognized over the service
period of the award, which is usually the vesting period. However, SFAS 123 also
allows entities to continue to measure compensation costs for employee stock
compensation plans using the intrinsic value method of accounting prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25). The Company has adopted SFAS 123 effective January 1, 1996,
and has elected to remain with the accounting prescribed by APB 25. The Company
has made the required disclosures prescribed by SFAS 123.

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. The maximum number of
shares available for grant under the 1989 Plan, as amended in 1993, is 685,000.
Unexercised options expire 10 years from the date of grant.

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.



                                      F-17
<PAGE>   51


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 percent increments on each
succeeding anniversary of the grant date, with unexercised options expiring on
the 10th anniversary of the date they vest. Under the three plans, the option
exercise price must be at least equal to the stock's market price on the date of
grant.

Pursuant to certain agreements entered into in May 1990, the Company granted to
three consultants in January 1993, nonqualified stock options to purchase in the
aggregate up to 21,141 shares of common stock at an exercise price of $.001 per
share. The options, which expire in January 2003, were granted outside any
option plan and vested in 1994. Options to purchase 14,094 shares have been
exercised to date and 5,285 options are currently exercisable. Prior to December
31, 1996, the Company recognized approximately $236,000 (none in 1997 or 1998)
as research and development expense representing the difference between the
exercise price and the fair market value of options that became exercisable.

In 1996, the Company granted four employee directors nonqualified options to
purchase in the aggregate up to 380,000 shares of common stock at an exercise
price equal to the stock's market price on the date of grant. The options were
granted outside any option plan, vest over three years based on continued
employment and expire 10 years from grant date. During 1997, one employee
terminated employment with the Company and 185,000 unvested options were
forfeited. During 1998, one employee terminated employment with the Company and
20,000 unvested options were forfeited. There are 120,000 options currently
exercisable.

During 1997, the Company granted certain employees 304,700 options to purchase
shares of common stock at exercise prices ranging from $3.00 to $5.03 per share.
The options were granted outside any option plan and vest over time periods
ranging from three to four years.

During 1998, the Company granted a certain employee 250,000 options to purchase
shares of common stock at an exercise price of $4 per share. In December 1998,
this option grant was canceled and the employee was granted 350,000 options to
purchase shares of common stock at an exercise price of $2 per share. These
options were granted outside any option plan and vest in equal increments over
four years commencing in May 1999. As of December 31, 1998, there were 350,000
options outstanding under this option grant with none exercisable.

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

<TABLE>
<CAPTION>
                                               1997               1998
                                            -----------      ------------
<S>                                         <C>              <C>          
Net Loss Applicable to
  Common Stock              As Reported     $(2,997,127)     $ (1,974,438)
                            Pro Forma        (3,495,377)       (2,733,996)

EPS                         As Reported     $      (.48)     $       (.28)
                            Pro Forma              (.55)             (.39)
</TABLE>


Because the SFAS 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-18
<PAGE>   52



A summary of the status of the Company's stock options at December 31, 1997 and
1998, and changes during the years then ended is presented in the table and
narrative below:

<TABLE>
<CAPTION>
                                                         1997                  1998
                                                  --------------------   -------------------
                                                              Weighted              Weighted
                                                              Average                Average
                                                              Exercise              Exercise
                                                  Shares        Price     Shares     Price
                                                   (000s)    Per Share    (000s)    Per Share
                                                  -------    ---------    -------   ---------
<S>                                               <C>        <C>         <C>        <C>    
Outstanding, beginning of year                        954     $  1.95      1,086     $  2.81
   Granted                                            522        3.85        865        3.06
   Exercised                                         (122)       1.11       (189)       1.34
   Canceled                                            --          --       (250)       2.00
   Forfeited                                         (268)       2.56       (336)       2.97
                                                  -------     -------    -------     -------

Outstanding, end of year                            1,086     $  2.81      1,176     $  2.93

Options exercisable, end of year                      438     $  1.99        370     $  2.96

Weighted average fair value of options granted                $  2.94                $  1.88
</TABLE>


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


<TABLE>
<CAPTION>
                                         Weighted
                                          Average          Number
                                         Remaining     Exercisable at
 Exercise Prices         Number         Contractual     December 31,
   Per Share           Outstanding      Life (Years)       1998
 ---------------       -----------      ------------   --------------
<S>                    <C>              <C>            <C>  
     $.001                   5,285           4.04               5,285
       .75                  48,000           5.64              48,000
      2.00                 350,000           9.96                  --
      2.25                  50,000           6.40              50,000
      2.50                  20,050           6.68              12,825
      3.00                 248,000           7.99             142,000
      3.13                  27,950           8.09               7,925
      3.25                 154,700           9.14                  --
      3.50                   2,500           9.12                  --
      4.00                  30,700           5.80              30,700
      4.25                  30,000           9.14               1,250
      4.38                 149,333           8.91              39,833
      4.88                  19,200           8.47              19,200
      5.03                  40,000           8.75              13,332
                       -----------                     --------------
                         1,175,718                            370,350
                       ===========                     ==============
</TABLE>

The fair value of each option grant is estimated on the date of grant using an
option pricing model, which approximates the Black-Scholes option pricing model,
for a stock that does not pay dividends with the following weighted average
assumptions used for grants in 1997 and 1998, respectively: risk-free interest
rates of 6.4 percent and 5.0 percent; expected lives of 10 years and 10 years;
and expected volatility of 61 percent and 77 percent.



                                      F-19
<PAGE>   53



14. RELATED-PARTY TRANSACTIONS:

During 1997, the Company sold 50,000 shares of common stock to its former
president and chief executive officer for $200,000. During 1998, the Company
sold 20 shares of Preferred Stock to an officer and director of the Company as
further described in Note 12. During 1998, the Company acquired the rights to a
distributorship agreement from a company affiliated with a former officer and
director of the Company as further described in Note 5.

15. SUBSEQUENT EVENTS (UNAUDITED):

On March 18, 1999, the Company's stockholders approved the Merger.
Contemporaneously with the Merger, the Company changed its name to Dexterity
Surgical, Inc. The Company will account 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:

     (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)   A one year, $1 million promissory note 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 Dexterity 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.



                                      F-20
<PAGE>   54
                                 EXHIBIT INDEX
                                 -------------
<TABLE>
<CAPTION>
EXHIBIT
NUMBER         IDENTIFICATION OF EXHIBIT
-------        -------------------------
<S>            <C>

2.1            Plan of Merger and Acquisition Agreement dated February 13, 1996,
               but effective as of January 1, 1996, among LifeQuest Medical,
               Inc., LifeQuest Endoscopic Technologies, Inc., GM Engineering,
               Inc., Gregory M. Miles and Susan G. Miles (incorporated by
               reference herein to Exhibit 2.1 to the Company's Current Report
               on Form 8-K filed February 27, 1996).


2.2            Plan of Merger and Acquisition Agreement dated November 27, 1996,
               among LifeQuest Medical, Inc., Klein Medical Acquisition Co.,
               Klein Medical, Inc. and Richard H. Klein (incorporated by
               reference herein to Exhibit 2.1 to the Company's Current Report
               on Form 8-K filed December 12, 1996).

2.3            Plan of Merger and Acquisition Agreement dated December 27, 1996,
               among LifeQuest Medical, Inc., Val-U-Med Acquisition Co.,
               Val-U-Med, Inc. and the Stockholders of Val-U-Med, Inc.
               (incorporated by reference herein to Exhibit 2.1 to the Company's
               Current Report on Form 8-K filed January 10, 1997).

2.4            Plan of Merger and Acquisition Agreement dated June 30, 1997,
               among LifeQuest Medical, Inc., Klein Medical, Inc., Trimedica,
               Inc., and Mark Lovejoy. (incorporated by reference herein to
               Exhibit 2.1 to the Company's Quarterly Report on Form 10-QSB for
               the quarter ending June 30, 1997).

2.5            Plan of Merger and Acquisition Agreement dated September 30,
               1997, among LifeQuest Medical, Inc., Val-U-Med, Inc., W. H.
               Bookwalter & Associates, Inc., and the shareholders of W. H.
               Bookwalter & Associates, Inc. (incorporated by reference herein
               to Exhibit 21.1 to the Company's Quarterly Report on Form 10-Q
               for the quarter ending September 30, 1997).

2.6            Plan of Merger and Acquisition Agreement dated October 7, 1997,
               among LifeQuest Medical, Inc., Klein Medical, Inc., Mishbucha,
               Inc. d/b/a Medex Surgical, Inc., Edward Kraus, and Robert Kraus
               (incorporated by reference herein to Exhibit 2.2 to the Company's
               Quarterly Report on Form 10-Q for the quarter ending September
               30, 1997).

2.7            Plan of Merger and Acquisition Agreement dated December 30, 1997,
               among LifeQuest Medical, Inc., LifeQuest Endoscopic Technologies,
               Inc., Klein Medical, Inc. and Val-U-Med, Inc.
</TABLE>
<PAGE>   55


<TABLE>
<S>            <C>
2.8*           Plan of Merger and Acquisition Agreement dated December 18, 1998
               between Dexterity Incorporated and the Company.

3.1*           Restated Certificate of Incorporation of the Registrant.

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           Employment Agreement dated February 15, 1992, between LifeQuest
               Medical, Inc. and Herbert H. Spoon (incorporated by reference
               herein to Exhibit 10.8 to the Company's Registration Statement on
               Form S-1 filed on August 19, 1992, Registration No. 33-49196).

10.3           Incentive Stock Option Agreement dated January 15, 1990, between
               LifeQuest Medical, Inc. and Herbert H. Spoon (incorporated herein
               to Exhibit 10.12 to the Company's Registration Statement on Form
               S-1 filed on August 19, 1992, Registration No. 33-49196).

10.4           Patent License Agreement dated January 1, 1989, between LifeQuest
               Medical, Inc. and The Board of Regents of the University of Texas
               System, as amended by instrument dated November 1, 1989
               (incorporated herein to Exhibit 10.15 to the Company's
               Registration Statement on Form S-1 filed on August 19, 1992,
               Registration No. 33-49196).

10.5           License Agreement dated June 26, 1992, between LifeQuest Medical,
               Inc. and George C. Kramer, Ph.D. (incorporated herein to Exhibit
               10.22 to the Company's Registration Statement on Form S-1 filed
               on August 19, 1992, Registration No. 33-49196).

10.6           Incentive Stock Option Agreement dated October 17, 1994, between
               LifeQuest Medical, Inc. and Herbert H. Spoon (incorporated herein
               by reference to Exhibit 10.15 to the Company's Annual Report on
               Form 10-K for the fiscal year ended December 31, 1994).

10.7           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).

10.8           Incentive Stock Option Agreement dated October 17, 1994, between
               LifeQuest Medical, Inc. and David J. Collette, M.D. (incorporated
               herein by reference to Exhibit 10.18 to the Company's Annual
               Report on Form 10-K for the fiscal year ended December 31, 1994).

10.9           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).

10.10          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).

10.11          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).

10.12          ValQuest Medical, Inc. 1994 Stock Option Plan (incorporated
               herein by reference to Exhibit 10.23 to the Company's Annual
               Report on Form 10-K for the fiscal year ended December 31, 1994).
</TABLE>

<PAGE>   56


<TABLE>
<S>            <C>
10.13          Incentive Stock Option Agreement dated August 19, 1994, between
               ValQuest Medical, Inc. and Herbert H. Spoon (incorporated herein
               by reference to Exhibit 10.24 to the Company's Annual Report on
               Form 10-K for the fiscal year ended December 31, 1994).

10.14          Incentive Stock Option Agreement dated August 19, 1994, between
               ValQuest Medical, Inc. and Randall K. Boatright (incorporated
               herein by reference to Exhibit 10.25 to the Company's Annual
               Report on Form 10-K for the fiscal year ended December 31, 1994).

10.15          Incentive Stock Option Agreement dated August 19, 1994, between
               ValQuest Medical, Inc. and David J. Collette, M.D. (incorporated
               herein by reference to Exhibit 10.26 to the Company's Annual
               Report on Form 10-K for the fiscal year ended December 31, 1994).

10.16          Non-Incentive Stock Option Agreement dated August 19, 1994,
               between ValQuest Medical, Inc. and Robert B. Johnson
               (incorporated herein by reference to Exhibit 10.29 to the
               Company's Annual Report on Form 10-K for the fiscal year ended
               December 31, 1994).

10.17          Assignment and License Agreement dated May 11, 1994, between
               ValQuest Medical, Inc. and Fibotech, Inc. d/b/a Valdor Fiber
               Optics (incorporated herein by reference to Exhibit 10.30 to the
               Company's Annual Report on Form 10-K for the fiscal year ended
               December 31, 1994).

10.18          Employment Agreement dated November 27, 1996, between Klein
               Medical Acquisition Co. and Richard H. Klein (incorporated by
               reference herein to Exhibit 10.1 to the Company's Current Report
               on Form 8-K filed December 12, 1996).

10.19          Non-Qualified Stock Option Agreement dated November 27, 1996,
               between LifeQuest Medical, Inc. and Richard H. Klein
               (incorporated by reference herein to Exhibit 10.2 to the
               Company's Current Report on Form 8-K filed December 12, 1996).

10.20          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).

10.21          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).

10.22          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).

10.23          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).

10.24          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).

10.25          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).

10.26          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).
</TABLE>
<PAGE>   57


<TABLE>
<S>            <C>
10.27          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).

10.28          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).

10.29          Subscription Agreement dated June 9, 1998 between the Company and
               Ana-Tech, L.L.C. (incorporated herein by reference to Exhibit
               10.4 to the Company's Form 10-Q for the quarter ended June 30,
               1998).

10.30          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).

10.31          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).

10.32*         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

10.33*         Amended Employment Agreement between the Company and Richard A.
               Woodfield dated December 15, 1998.

10.34*         Amended Option Agreement between the Company and Richard A.
               Woodfield dated December 15, 1998.

22             Subsidiaries
                                                             Name Under Which
               Name               State of Incorporation     Doing Business
               ----               ----------------------     ----------------

               ValQuest Medical, Inc.      Nevada         ValQuest Medical, Inc.

11*            Computation of earnings (loss) per share

23*            Consent of Arthur Andersen LLP

27*            Financial Data Schedule
</TABLE>


*   Filed herewith