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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, 1999
                                       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, 1999:
$21,013,000.

         AT MARCH 27, 2000 (BASED UPON THE LAST REPORTED SALES PRICE OF $1.719
PER SHARE), THE AGGREGATE MARKET VALUE OF THE COMMON STOCK, $.001 PAR VALUE, OF
THE REGISTRANT HELD BY NON-AFFILIATES WAS APPROXIMATELY $11,677,892 MILLION. AT
MARCH 27, 2000, 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 2000 Annual Meeting of Stockholders             Part III, Items 9, 10, 11 and 12
</TABLE>

Transitional Small Business Disclosure Format.  YES [ ] NO [X]

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                                     PART I

ITEM 1.                             BUSINESS


         Certain statements contained in this Form 10-KSB, including but not
limited to statements made in this Item 1, "Business" and those made in Item 6,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," are "forward-looking statements" within the meaning of Section 27A
of the Securities Act and Section 21E of the Exchange Act. Specifically, all
statements, other than statements of historical 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,


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

(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.


                                      -2-
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graspers and dissectors, and hand-operated retractors(6). The products are used
by surgeons in hospitals and outpatient surgery facilities.

         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 DEVELOPMENTS

         In February 2000, the Company's principal supplier, General Surgical
Innovations, Inc. ("GSI"), terminated its distribution agreement with the
Company. GSI supplied products which accounted for 38% of the Company's revenue
in 1999 and 50% of the Company's revenue since May 1, 1999, the effective date
of the distribution agreement. The Company has taken several steps in response
to this action. The Company has restructured its debt obligations, modified its
royalty agreement to provide for non-cash royalty payments, reduced its general
and administrative costs by converting its entire sales force from employees to
independent sales representatives and eliminated additional

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

(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.


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

         The Company believes that its revenues and other sources of liquidity
will provide adequate funding for its capital requirements through at least year
2000. However, there can be no assurance that the Company will not require
additional funding sooner or that such additional funding, if needed, will be
available on terms attractive to the Company or at all. In the event the Company
is required to raise additional funds, it does not believe it will be able to
obtain such financing from traditional commercial lenders. Rather, the Company
likely will have to conduct additional sales of its equity and/or debt
securities through public or private financings, collaborative relationships or
other arrangements. Substantial and immediate dilution to existing stockholders
likely would result from any sales of equity securities or other securities
convertible into equity securities.

ACQUISITIONS SINCE 1996

         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 March 18, 1999, the Dexterity
stockholders, other than the Company (the "Former Dexterity Stockholders"),
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 (the
                  "Warrants");

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

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

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

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

         The Pneumo Sleeve(R) 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(R) is
estimated at more than 580,000 procedures annually, including

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

(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.


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<PAGE>   5

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(R), the
Dexterity(R) Protractor(R) 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(R) 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
Dexterity products have become integral components of the Company'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 was a Nevada limited
liability company and has subsequently converted to a Delaware corporation.
Accordingly, the Company's membership interests have been converted into shares
of common stock of Ana-Tech.

         Ana-Tech has developed a product line that addresses the medical
condition of fecal incontinence. The ProCon A200 ("ProCon" or the "Product") is
a unique medical device that incorporates both a disposable catheter and an
electronic monitor. ProCon is patented, and has received FDA 510(k) clearance as
a Class II medical device. The Company has completed the formation of a Good
Manufacturing Practices (GMP) approved manual for the production of the product
and is currently positioned to manufacture and distribute the Product.

         ProCon is designed to prevent the involuntary discharge of fecal matter
while alerting the patient or caregiver of an impending discharge. The Product
utilizes a disposable single-use catheter with a balloon, flatus (gas) venting
ports, and micro chip detector with a protective cap. A pager-sized device
attached to the catheter alerts the patient or caregiver of an impending
discharge, allowing the episode to be addressed in a timely fashion.

         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.

         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


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<PAGE>   6

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, when approved for distribution, management
believes will be superior to currently available clip appliers.

         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, 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.


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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.

PRODUCTS

         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 through
independent sales representatives who are not employed by the Company within
selected geographical areas and independent sub-distributors who typically sell
other complementary MIS products to the same customer base. 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 1999, the combined distribution
coverage of the Company included 32 U.S. states. If the need arises, the Company
may expand its sales force, which will require additional recruiting and
training. There can be no assurance that the Company will be able to recruit and


                                      -7-
<PAGE>   8

train such additional personnel in a timely fashion. Loss of a significant
number of the Company's current 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.

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.

         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.


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DEPENDENCE ON PRODUCT 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. 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 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


                                      -9-
<PAGE>   10

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.

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

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

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

         Manufacturers of medical devices marketed in the United States are
required to adhere to applicable regulations setting forth detailed GMP
requirements, which include testing, control and documentation requirements.
Manufacturers also must comply with Medical Device Reporting ("MDR")
requirements which require that a firm report to the FDA certain adverse events
associated with the Company's devices. The Company is subject to routine
inspection by the FDA and certain state agencies for compliance with GMP
requirements, MDR requirements and other applicable regulations. The FDA is
using its statutory authority more vigorously during inspections of companies
and in other


                                      -10-
<PAGE>   11

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 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


                                      -11-
<PAGE>   12

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.

ADDITIONAL BUSINESS RISKS

         HISTORY OF LOSSES; PROFITABILITY UNCERTAIN. The Company has experienced
operating losses since its inception on January 1, 1989. At December 31, 1999,
the Company had an accumulated deficit of approximately $23 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, 1997
and 1998 the Company generated revenues of approximately $21 million during the
year ended December 31, 1999.

         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.


                                      -12-
<PAGE>   13

         1997 AND 1998 PRIVATE PLACEMENTS. Pursuant to a private placement which
occurred in November 1998, the Company issued to two affiliates of Renaissance
Capital Group, Inc. (collectively, "Renaissance") and one individual, who is an
officer and director of the Company, an aggregate of 1,025 shares of Series B
Cumulative Convertible Preferred Stock, $.001 par value ("Series B Preferred
Stock") for aggregate proceeds of $1,025,000. The Company used such proceeds for
working capital. The annual dividends on the Series B Preferred Stock are
cumulative at a rate of $80 per share. The Series B Preferred Stock is currently
convertible into shares of Common Stock at a conversion price of $1.00 per
share, for an aggregate of 1,025,000 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 $1.00. 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 662/3% of the votes entitled to be cast by the holders of the
Series B Preferred Stock is required in order to amend the Company's Certificate
of Incorporation or Bylaws to materially affect the rights of the holders of
Series B Preferred Stock, including authorizing and creating a class of stock
having rights prior to or senior to the Series B Preferred Stock. In the event
two quarterly dividends payable on the Series B Preferred Stock are in arrears,
the holders of Series B Preferred Stock, by a majority vote, shall be entitled
to designate two additional directors to serve on the Company's Board of
Directors.

         In August 1998, pursuant to a private placement, the Company issued to
Renaissance and two individuals, including one who is an officer and director of
the Company, an aggregate of 1,170 shares of 8% Series A Cumulative Convertible
Preferred Stock, $.001 par value ("Series A Preferred Stock"), for aggregate
proceeds of $1,170,000. The Company used such proceeds for working capital.
Annual dividends on the Series A Preferred Stock are cumulative at a rate of $80
per share. The Series A Preferred Stock is currently convertible into shares of
Common Stock at a conversion price of $1.00 per share, for an aggregate of
1,170,000 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 $1.00. 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 662/3%
of the votes entitled to be cast by the holders of the Series A Preferred Stock
is required in order to amend the Company's Certificate of Incorporation or
Bylaws to materially affect the rights of the holders of Series A Preferred
Stock, including authorizing and creating a class of stock having rights prior
to or senior to the Series A Preferred Stock. In the event two quarterly
dividends payable on the Series A Preferred Stock are in arrears, the holders of
Series A Preferred Stock, by a majority vote, shall be entitled to designate two
additional directors to serve on the Company's Board of Directors.

         In December 1997, the Company sold 250,000 shares of Common Stock to
Renaissance in a private placement for aggregate proceeds of $1,000,000 and
placed $3,000,000 in 9% Convertible Debentures (the "Debentures") with
Renaissance. The proceeds from the private placement were used to repay the
Company's line of credit with another financial institution, to make the January
1998 equity investment in Dexterity, and for working capital purposes. The
Debentures are secured by substantially all of the assets of the Company and
require monthly payments of interest and, unless sooner paid, redeemed or
converted, require monthly principal payments commencing in December 2000 of $10
per $1000 of the then remaining principal amount. In March 2000, the Debentures
were modified to provide that the interest payable between February 1, 2000
through January 31, 2001 shall be paid in shares of Common Stock, valued at
$1.00 per share. The remaining principal balance will mature in December 2004.
The Debentures currently require the Company to comply with the following
financial covenants: (i) a Debt to Net Worth Ratio of no greater than .95:1;
(ii) an Interest Coverage Ratio of at least .60:1; (iii) a Debt Coverage Ratio
of at least .10:1; and (iv) a Current Ratio of at least .70:1. If the Company is
unable to comply with these covenants, 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 $1.00 per share of Common Stock. The
conversion price is subject to downward revision if the Company sells shares of
its Common Stock, or securities convertible into Common Stock, at a price less
than $1.00 per share of Common Stock, subject to certain allowed exceptions,
during the term of the Debentures. The Debentures are currently convertible for
an aggregate of 3,000,000 shares of Common Stock; however, since the conversion
price is subject to downward adjustment as described above, and there is no
minimum conversion price, the maximum number of shares of Common Stock which may
be issued


                                      -13-
<PAGE>   14

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,
(i) the conversion of the Debentures or Preferred Stock or exercise of warrants
into Common Stock or (ii) the payment of interest and the Royalty in shares of
Common Stock and/or the sale of such Common Stock into the public market will
have on the market price of the Company's Common Stock. Offers or sales of
significant quantities of the Company's Common Stock, or the perception that
such sales may occur or have occurred, could adversely affect the market price.
The conversion features of the Debentures and Preferred Stock operates such that
the holders thereof receive more shares of the Common Stock upon conversion if
the conversion price is adjusted downward as described above. The issuance of
shares of Common Stock upon the conversion of the Preferred Stock or the
Debentures will substantially dilute the voting rights and other interests of
stockholders of the Company. As the number of shares of Common Stock issuable
upon the conversion of the Preferred Stock and the Debentures is indeterminate,
the Company is unable to predict to what extent the Company's stockholders'
rights will be diluted. Such uncertainty creates downward pressure on the public
market price of the Company's Common Stock. In the event such holders convert
their Debentures or shares of Preferred Stock, as applicable, and sell a large
number of shares of Common Stock into the public market over a short time, the
market price for the Common Stock could decline. Such a decline may make future
equity financings more difficult for the Company to obtain on an acceptable
basis, if at all.

         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, 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 the year 2000, 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 sooner 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 5,195,000 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


                                      -14-
<PAGE>   15

(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. 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. Pursuant to the exemptions from registration provided for in
Section 4(2) of the Securities Act, the Company has issued approximately 5.8
million shares of Common Stock, which represents approximately 57% of its
outstanding and issued shares of Common Stock at December 31, 1999, in
connection with its seven 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 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.

         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. In February 1998, The Nasdaq Stock Market announced
increases in the quantitative standards 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 these 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


                                      -15-
<PAGE>   16

the delivery, prior to any penny stock transaction, of a disclosure schedule
explaining the penny stock market and the risks associated therewith, and impose
various sales practice requirements on broker-dealers who sell penny stock to
persons other than established customers and accredited investors (which are
generally institutions). For these types of transactions, the broker-dealer must
make a special suitability determination for the purchase and have received the
purchaser's written consent to the transaction prior to the sale. The additional
burdens imposed upon broker-dealers by such requirements may discourage
broker-dealers from effecting transactions in the Common Stock which could
severely limit the market liquidity of Common Stock and the ability of
stockholders to sell their shares of Common Stock in the secondary market.

         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 6% and 14% of the Company's total assets
and total stockholders' equity, respectively, at December 31, 1999. Net goodwill
was approximately $1.46 million at December 31, 1999. 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 23, 2000, approximately 3.2 million 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, 1999 there were outstanding options to acquire up to approximately
1,496,100 shares of Common Stock, warrants to acquire 1,697,500 shares of Common
Stock, 3,000,000 shares of Common Stock issuable upon conversion of the
Debentures, 1,170,000


                                      -16-
<PAGE>   17

shares of Common Stock issuable upon conversion of Series A Preferred Stock and
1,025,000 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 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.


                                      -17-
<PAGE>   18

         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. Although the Company issued 1,170 shares of preferred stock in
August 1998, 1,000 shares of preferred stock in November 1998 and 25 shares of
preferred stock in January 1999, it has no present intention to issue any
additional shares of its preferred stock; however, there can be no assurance
that it will not do so in the future.

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

EMPLOYEES

         As of March 27, 2000, the Company employed approximately 25 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 27, 2000 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                      57      President and Chief Executive Officer                    1998
Randall K. Boatright                      51      Executive Vice President, Chief Financial                1992
                                                  Officer and Secretary
K.C. Fadem                                41      Executive Vice President and Chief                       1996
                                                  Operating Officer
Robert Fadem                              38      Executive Vice President                                 1996
William H. Bookwalter                     34      Vice President                                           1997
Frederic C.  Feiler, Jr.                  40      Vice President                                           1999
</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.


                                      -18-
<PAGE>   19

ITEM 2. PROPERTIES

         The Company currently leases corporate headquarters in San Antonio,
Texas, under a lease expiring in May 2002. The Company currently leases office
and distribution facilities in Atlanta, Georgia, under a lease expiring in March
2002. During 1999 the Company paid aggregate rentals of approximately $333,000.


ITEM 3. LEGAL PROCEEDINGS

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


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

         Not applicable.


                                      -19-
<PAGE>   20

                                     PART II

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

         The Common Stock, $.001 par value ("Common Stock"), of the Company
trades on the Nasdaq SmallCap Market under the symbol "DEXT." The Common Stock
traded under the symbol "LQMD" from August 1992 until March 1999. 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 1999:

Fourth Quarter               $1 3/4                  $ 7/8
Third Quarter                 1 7/8                    27/32
Second Quarter                1 7/8                   1 1/16
First Quarter                 2 1/8                   1 1/2

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
</TABLE>


         At March 23, 2000, there were approximately 175 record holders of
Common Stock and approximately 2558 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.


                                      -20-
<PAGE>   21
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
four fiscal years, the Company has continued to decrease its engagement in
Company sponsored research and development, and in fiscal 1999, incurred
approximately $70,000 in this area. The Company intends to continue to invest
moderate amounts in research and development in 2000. As of December 31, 1999,
the Company had an accumulated deficit of approximately $22,741,000. 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.

         During 1999, the Company sold the Med-Service division, closed the
Surgical Systems division, out sourced all manufacturing operations
(Technologies division) and committed all corporate resources to the
Endo-Surgery division. All operations are now consolidated in the two remaining
locations: San Antonio, Texas and Roswell, Georgia.


                                      -21-
<PAGE>   22

         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;

         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(R) and Dexterity(R)
Protractor(R), in March 1998. The transaction was accounted for using the
purchase method of accounting.

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

         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.

         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..

         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.


                                      -22-
<PAGE>   23

         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.

LIQUIDITY AND CAPITAL RESOURCES

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

         At December 31, 1999, the Company had current assets of $5,456,000 and
current liabilities of $6,199,000 resulting in a working capital deficit of
$743,000. This compares to a positive working capital position of $3,609,000 at
December 31, 1998. The decline in working capital is primarily due to the
Company's net loss for 1999 and to obligations incurred relative to the
Dexterity Merger.

         In April 1999, the Company acquired a new maximum $5,000,000 revolving
line of credit from a financial institution whereby all inventories, accounts
receivable and intangibles of the Company are pledged as collateral. At December
31, 1999, the outstanding balance due on such line of credit was $1,822,000 and
an additional $955,000 was available under the current borrowing base.

         Pursuant to a private placement which occurred in November 1998, the
Company issued to two affiliates of Renaissance Capital Group, Inc.
(collectively, "Renaissance") and one individual, who is an officer and director
of the Company, an aggregate of 1,025 shares of Series B Cumulative Convertible
Preferred Stock, $.001 par value ("Series B Preferred Stock") for aggregate
proceeds of $1,025,000. The Company used such proceeds for working capital. The
annual dividends on the Series B Preferred Stock are cumulative at a rate of $80
per share. The Series B Preferred Stock is currently convertible into shares of
Common Stock at a conversion price of $1.00 per share, for an aggregate of
1,025,000 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 $1.00. 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 662/3%
of the votes entitled to be cast by the holders of the Series B Preferred Stock
is required in order to amend the Company's Certificate of Incorporation or
Bylaws to materially affect the rights of the holders of Series B Preferred
Stock, including authorizing and creating a class of stock having rights prior
to or senior to the Series B Preferred Stock. In the event two quarterly
dividends payable on the Series B Preferred Stock are in arrears, the holders of
Series B Preferred Stock, by a majority vote, shall be entitled to designate two
additional directors to serve on the Company's Board of Directors.

         In August 1998, pursuant to a private placement, the Company issued to
Renaissance and two individuals, including one who is an officer and director of
the Company, an aggregate of 1,170 shares of Series A Cumulative


                                      -23-
<PAGE>   24

Convertible Preferred Stock, $.001 par value ("Series A Preferred Stock"), for
aggregate proceeds of $1,170,000. The Company used such proceeds for working
capital. Annual dividends on the Series A Preferred Stock are cumulative at a
rate of $80 per share. The Series A Preferred Stock is currently convertible
into shares of Common Stock at a conversion price of $1.00 per share, for an
aggregate of 1,170,000 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 $1.00. 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 662/3% of the votes entitled to be cast by the holders of the Series A
Preferred Stock is required in order to amend the Company's Certificate of
Incorporation or Bylaws to materially affect the rights of the holders of Series
A Preferred Stock, including authorizing and creating a class of stock having
rights prior to or senior to the Series A Preferred Stock. In the event two
quarterly dividends payable on the Series A Preferred Stock are in arrears, the
holders of Series A Preferred Stock, by a majority vote, shall be entitled to
designate two additional directors to serve on the Company's Board of Directors.

         In December 1997, the Company sold 250,000 shares of Common Stock to
Renaissance in a private placement for aggregate proceeds of $1,000,000 and
placed $3,000,000 in 9% Convertible Debentures (the "Debentures") with
Renaissance. The proceeds from the private placement were used to repay the
Company's line of credit with another financial institution, to make the January
1998 equity investment in Dexterity, and for working capital purposes. The
Debentures are secured by substantially all of the assets of the Company and
require monthly payments of interest and, unless sooner paid, redeemed or
converted, require monthly principal payments commencing in December 2000 of $10
per $1000 of the then remaining principal amount. In March 2000, the Debentures
were modified to provide that the interest payable between February 1, 2000
through January 31, 2001 shall be paid in shares of Common Stock, valued at
$1.00 per share. The remaining principal balance will mature in December 2004.
The Debentures currently require the Company to comply with the following
financial covenants: (i) a Debt to Net Worth Ratio of no greater than .95:1;
(ii) an Interest Coverage Ratio of at least .60:1; (iii) a Debt Coverage Ratio
of at least .10:1; and (iv) a Current Ratio of at least .70:1. If the Company is
unable to comply with these covenants, 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 $1.00 per share of Common Stock. The
conversion price is subject to downward revision if the Company sells shares of
its Common Stock, or securities convertible into Common Stock, at a price less
than $1.00 per share of Common Stock, subject to certain allowed exceptions,
during the term of the Debentures. The Debentures are currently convertible for
an aggregate of 3,000,000 shares of Common Stock; however, since the conversion
price is subject to downward adjustment as described above, and there is no
minimum conversion price, the maximum number of shares of Common Stock which may
be issued pursuant to the Debentures is undeterminable. The provisions of the
Debentures provide that the holders of the Debentures have an option to redeem
the Debentures, in an amount equal to an 18 percent annual yield on the
principal balance, upon the occurrence of certain events, including the
delisting of Common Stock from the NASDAQ SmallCap Market and certain "change of
control" provisions, as defined in the Debentures, as they relate to the
Company. 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.

         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.

         For the year ended December 31, 1999, operating activities utilized
$1,484,000 of cash primarily due to the net loss for the year. Investment
activities during 1999 utilized cash of $1,072,000 primarily due to the
acquisition of


                                      -24-
<PAGE>   25

Dexterity. During 1999, the Company's financing activities provided $1,025,000
primarily from the net increase in the outstanding balance on the line of
credit.

         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.

         In February 2000, the Company's principal supplier, GSI, terminated its
distribution agreement with the Company. GSI supplied products which accounted
for 38% of the Company's revenue in 1999 and 50% of the Company's revenue since
the May 1, 1999 effective date of the distribution agreement.

         The Company believes that its revenues and other sources of liquidity
will provide adequate funding for its capital requirements through at least the
year 2000. However, there can be no assurance that the Company will not require
additional funding sooner or that such additional funding, if needed, will be
available on terms attractive to the Company or at all. In the event the Company
is required to raise additional funds, it does not believe it will be able to
obtain such financing from traditional commercial lenders. Rather, the Company
likely will have to conduct additional sales of its equity and/or debt
securities through public or private financings, collaborative relationships or
other arrangements. Substantial and immediate dilution to existing stockholders
likely would result from any sales of equity securities or other securities
convertible into equity securities.

RESULTS OF OPERATIONS FOR YEAR ENDING DECEMBER 31, 1999

         The Company reported a loss from operations of $2,079,000 for the year
ended December 31, 1999 as compared with a loss from operations of $2,046,000
for the year ended December 31, 1998. For the year ended December 31, 1999, the
Company reported a net loss applicable to common stock of $3,273,000 or $.34 per
basic and diluted share. This compares with a net loss applicable to common
stock of $2,114,000 or $.30 per basic and diluted share for the year ended
December 31, 1998. While loss from operations was virtually flat, reported
results for 1999 were adversely impacted by increased noncash amortization
expense (see below) and the transition of the Company from distributing products
of Origin MedSystems ("Origin") to distributing products of General Surgical
Innovations, Inc. ("GSI"). Origin products accounted for 52% of the Company's
revenues during the first quarter of 1999. However, as a result of the outcome
of a patent infringement lawsuit between Origin and GSI in April 1999, the
Company made the decision to discontinue distributing Origin products and begin
distributing GSI products. Subsequent to that decision, United States Surgical
Corporation purchased the Origin product line and also announced its acquisition
of GSI. Then, in February 2000, GSI terminated its distribution agreement with
the Company. GSI supplied products which accounted for 38% of the Company's
revenue in 1999 and 50% of the Company's revenue from May 1, 1999 (the effective
date of the distribution agreement) through December 31, 1999. In response to
this unilateral action by GSI, during the first quarter of 2000 the Company has
reduced its general and administrative costs by converting its entire sales
force from employees to independent sales representatives and by eliminating
additional administrative staff. In addition, certain officers of the Company
have agreed to restructure their compensation packages to increase short- term
cash flow.

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

         Product sales increased 17% in 1999 as compared with 1998. Product
sales were $20,347,000 for 1999 and $17,325,000 for 1998. These increases were
due to continued sales growth throughout the Company within existing product
lines.

         Gross profit from product sales was $8,533,000 in 1999 versus
$7,011,000 in 1998. The corresponding gross profit margins were 42% in 1999 and
40% in 1998. The improvement in margins is primarily due to the increased
proportion of the Company's proprietary products, the Dexterity(R) Pneumo
Sleeve(R) and the Dexterity(R) Protractor(R), within the sales mix.


                                      -25-
<PAGE>   26


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

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

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

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 $2,114,000 or $.30 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 $411,000 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 reflected 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 was 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.


ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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


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

         Previously Reported.


                                      -26-
<PAGE>   27

                                    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 2000 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 2000 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 2000 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 2000 Annual Meeting, which is incorporated herein by
reference.


                                      -27-
<PAGE>   28


                                     PART IV

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

(a) 1.   CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                                               Page
                                                                                                               ----
<S>                                                                                                            <C>
         Reports of Independent Auditors......................................................................  F-1

         Consolidated Balance Sheets at December 31, 1999 and 1998............................................  F-3

         Consolidated Statements of Operations for the years ended December 31, 1999 and 1998.................  F-5

         Consolidated Statements of Stockholders' Equity for the years ended December 31, 1999 and 1998.......  F-6

         Consolidated Statements of Cash Flows for the years ended December 31, 1999 and 1998.................  F-7

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

2.       EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER            IDENTIFICATION OF EXHIBIT
-------           -------------------------
<S>               <C>
2.1               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).

2.2               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).

2.3               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).

2.4               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.

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

2.6               Plan of Merger and Acquisition Agreement between the Company and Dexterity Incorporated dated
                  December 18, 1998 (incorporated by reference herein to Exhibit 2.1 to the Company's Quarterly
                  Report on Form 10-QSB filed May 14, 1999).

3.1               Restated Certificate of Incorporation, as amended (incorporated by reference herein to Exhibit 3.1
                  to the Company's Quarterly Report on Form 10-QSB filed May 14, 1999).
</TABLE>


                                      -28-
<PAGE>   29


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

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

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

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

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

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

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

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

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

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

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

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

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

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


                                      -29-
<PAGE>   30


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

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

10.15             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).

10.16             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).

10.17             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).

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

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

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

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

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

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

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


                                      -30-
<PAGE>   31
<TABLE>
<S>               <C>
22                Subsidiaries

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

23.1*          Consent of Arthur Andersen LLP

23.2*          Consent of Ernst & Young LLP

27.1*          Financial Data Schedule for year ended December 31, 1999

27.2*          Financial Data Schedule Restated for year ended December 31, 1998
</TABLE>

*   Filed herewith

(b)      REPORTS ON FORM 8-K

         None


                                      -31-
<PAGE>   32

                                   SIGNATURES

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

                                      DEXTERITY SURGICAL, INC.


April 10, 2000                        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                  April 10, 2000
---------------------------------------      and Director (Principal Executive
Richard A. Woodfield                         Officer)

/s/ Randall K. Boatright                     Executive Vice President, Chief                     April 10, 2000
---------------------------------------      Financial Officer and Director
Randall K. Boatright                         (Principal Financial and
                                             Accounting Officer)

/s/ Robert B. Johnson                        Director                                            April 10, 2000
---------------------------------------
Robert B. Johnson

/s/ K.C. Fadem                               Director                                            April 10, 2000
---------------------------------------
K.C. Fadem

/s/ Jeffrey H. Berg, Ph.D.                   Director                                            April 10, 2000
---------------------------------------
Jeffrey H. Berg, Ph.D.

/s/ Robert L. Evans                          Director                                            April 10, 2000
---------------------------------------
Robert L. Evans

/s/ William H. Bookwalter                    Director                                            April 10, 2000
---------------------------------------
William H. Bookwalter

/s/Robert Pearson                            Director                                            April 10, 2000
---------------------------------------
Robert Pearson

/s/ Christopher K. Black                     Director                                            April 10, 2000
---------------------------------------
Christopher K. Black

/s/ John J. Sickler                          Director                                            April 10, 2000
---------------------------------------
John J. Sickler
</TABLE>



                                      -32-
<PAGE>   33
                                          DEXTERITY SURGICAL, INC.,
                                          AND SUBSIDIARIES
                                          (FORMERLY LIFEQUEST MEDICAL, INC.)

                                          Consolidated Financial Statements

                                          Years Ended December 31, 1999 and 1998
                                          with Reports of Independent Auditors






<PAGE>   34




                         Report of Independent Auditors



Board of Directors and Stockholders
Dexterity Surgical, Inc.

We have audited the accompanying consolidated balance sheet of Dexterity
Surgical, Inc. (the Company), formerly LifeQuest Medical, Inc. (a Delaware
corporation), and subsidiaries as of December 31, 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year 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 audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Dexterity
Surgical, Inc., and subsidiaries at December 31, 1999, and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States.

                                                   /s/ ERNST & YOUNG, LLP



San Antonio, Texas
March 28, 2000



                                      F-1
<PAGE>   35
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS




To Dexterity Surgical, Inc.:

We have audited the accompanying consolidated balance sheet of Dexterity
Surgical, Inc., formerly LifeQuest Medical, Inc. (a Delaware corporation), and
subsidiaries as of December 31, 1998, and the related consolidated statements of
operations, stockholders' equity and cash flows for the year 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 audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides 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, 1998, and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States.

As discussed in Note 6 to the consolidated financial statements, in 1999, the
Company changed its method of reporting an investment.


                                          /s/ ARTHUR ANDERSEN LLP

San Antonio, Texas
March 18, 1999


                                      F-2
<PAGE>   36

                   Dexterity Surgical, Inc., and Subsidiaries
                       (Formerly LifeQuest Medical, Inc.)

                           Consolidated Balance Sheets


<TABLE>
<CAPTION>
                                                                DECEMBER 31
                                                            1999          1998
                                                        -----------   -----------
<S>                                                     <C>           <C>
ASSETS
Current assets:
   Cash and cash equivalents                            $   113,384   $ 1,644,535
   Short-term investments                                      --         983,714
   Accounts receivable (net of allowance for doubtful
     accounts of $105,000 and $219,829
     in 1999 and 1998, respectively)                      2,865,824     2,786,909
   Accounts receivable from related parties                  41,066        56,619
   Inventories, net                                       2,315,875     1,482,899
   Prepaid and other assets                                 120,006        49,715
                                                        -----------   -----------
Total current assets                                      5,456,155     7,004,391

Property, plant, and equipment                            1,324,699     1,604,043
Less accumulated depreciation                               677,525     1,051,117
                                                        -----------   -----------
Net property, plant, and equipment                          647,174       552,926


Deferred finance charges                                    290,326       155,139

Investments                                               1,202,500     2,062,500


Intangible assets:
   Licensed technology rights and other, less
     accumulated amortization of $1,138,798 in
     1999                                                17,030,212       680,912
   Goodwill, net, less accumulated amortization of
     $629,738 and $420,326 in 1999 and 1998,
     respectively                                         1,464,406     1,673,818
                                                        -----------   -----------
Net intangible assets                                    18,494,618     2,354,730
                                                        -----------   -----------

Total assets                                            $26,090,773   $12,129,686
                                                        ===========   ===========
</TABLE>



                                      F-3
<PAGE>   37

<TABLE>
<CAPTION>
                                                                 DECEMBER 31
                                                            1999             1998
                                                        ------------    ------------
<S>                                                     <C>             <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                     $  2,847,579    $  2,633,032
   Accrued liabilities                                       782,359         645,605
   Current portion of long-term obligations                2,569,378         116,310
                                                        ------------    ------------
Total current liabilities                                  6,199,316       3,394,947

Minority interest                                            106,544         106,544

Long-term notes payable                                    1,000,000            --
Convertible debentures                                     2,970,000       3,000,000
Royalty obligation                                         5,432,382            --

Commitments and contingencies (Note 8)

Stockholders' equity:
   Preferred stock, $.001 par value; 2,000,000 shares
     authorized; 2,195 (1999) and 2,170 (1998) shares
     issued and outstanding                                        2               2
   Common stock, $.001 par value; 50,000,000
     shares authorized; 10,212,742 (1999) and
     7,212,742 (1998) shares issued and
     outstanding                                              10,213           7,213
   Additional paid-in capital                             30,742,313      25,095,313
   Warrants                                                2,370,900            --
   Deferred compensation                                        --            (6,857)
   Accumulated deficit                                   (22,740,897)    (19,467,476)
                                                        ------------    ------------
Total stockholders' equity                                10,382,531       5,628,195
                                                        ------------    ------------

Total liabilities and stockholders' equity              $ 26,090,773    $ 12,129,686
                                                        ============    ============
</TABLE>




See accompanying notes.


                                      F-4
<PAGE>   38

                   Dexterity Surgical, Inc., and Subsidiaries
                       (Formerly LifeQuest Medical, Inc.)

                      Consolidated Statements of Operations


<TABLE>
<CAPTION>
                                                      YEAR ENDED DECEMBER 31
                                                        1999            1998
                                                   ------------    ------------
<S>                                                <C>             <C>
Net sales:
   Product sales                                   $ 20,347,188    $ 17,325,096
   Commissions earned                                   665,362       1,166,945
                                                   ------------    ------------
                                                     21,012,550      18,492,041

Cost and expenses:
   Cost of sales                                     11,814,270      10,313,931
   Research and development                              69,755            --
   Selling, general, and administrative               9,630,401       9,819,634
   Depreciation and amortization                      1,577,091         404,881
                                                   ------------    ------------
                                                     23,091,517      20,538,446
                                                   ------------    ------------
Loss from operations                                 (2,078,967)     (2,046,405)

Other income (expense):
   Interest expense                                  (1,104,471)       (330,620)
   Gain on sale of assets, net                           61,878         389,503
   Investment and other income                           53,619          56,374
   Loss on investment in affiliate                      (30,000)       (140,000)
                                                   ------------    ------------
Net loss before minority interest                    (3,097,941)     (2,071,148)

Minority interest in net loss of consolidated
   subsidiary                                              --             2,258
                                                   ------------    ------------
Net loss                                             (3,097,941)     (2,068,890)

Less: dividend requirement on cumulative
   convertible preferred stock                          175,480          45,548
                                                   ------------    ------------

Net loss applicable to common stock                $ (3,273,421)   $ (2,114,438)
                                                   ============    ============

Basic and diluted loss per share of common
   stock                                           $       (.34)   $       (.30)
                                                   ============    ============

Weighted average shares outstanding used in
   computing basic and diluted loss per share
   of common stock                                    9,571,075       6,989,951
                                                   ============    ============
</TABLE>



See accompanying notes.


                                      F-5
<PAGE>   39

                   Dexterity Surgical, Inc., and Subsidiaries
                       (Formerly LifeQuest Medical, Inc.)

                 Consolidated Statements of Stockholders' Equity


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

<S>                                   <C>          <C>          <C>          <C>          <C>
Balance, December 31, 1997                 -       $   -         6,653,883    $  6,654    $   21,576,854
   Exercise of stock options               -           -           188,859         189           253,611
   Issuance of stock,
     Ana-Tech                              -           -           370,000         370         1,202,130
   Compensation expense                    -           -                 -           -                 -
   Sale of preferred stock             2,170           2                 -           -         2,169,998
   Preferred stock dividends               -           -                 -           -                 -
   Cancellation of stock
     options to consultant                 -           -                 -           -          (107,280)
   Net loss                                -           -                 -           -                 -
                                       -----       -----        ----------    --------    --------------
Balance, December 31, 1998             2,170           2         7,212,742       7,213        25,095,313
   Issuance of stock,
     Dexterity purchase                    -           -         3,000,000       3,000         5,622,000
   Issuance of warrants,
     Dexterity purchase                    -           -                 -           -                 -
   Compensation expense                    -           -                 -           -                 -
   Sale of preferred stock                25           -                 -           -            25,000
   Preferred stock dividends               -           -                 -           -                 -
   Warrants issued for services            -           -                 -           -                 -
   Net loss                                -           -                 -           -                 -
                                       -----       -----        ----------    --------    --------------

Balance, December 31, 1999             2,195       $   2        10,212,742    $ 10,213    $   30,742,313
                                       =====       =====        ==========    ========    ==============

<CAPTION>


                                      DEFERRED                        ACCUMULATED
                                    COMPENSATION      WARRANTS          DEFICIT           TOTAL
                                   --------------------------------------------------------------------

Balance, December 31, 1997             $  (40,055)  $           -    $  (17,353,038)   $   4,190,415
   Exercise of stock options                    -               -                 -          253,800
   Issuance of stock,
     Ana-Tech                                   -               -                 -        1,202,500
   Compensation expense                    33,198               -                 -           33,198
   Sale of preferred stock                      -               -                 -        2,170,000
   Preferred stock dividends                    -               -           (45,548)         (45,548)
   Cancellation of stock
     options to consultant                      -               -                 -         (107,280)
   Net loss                                     -               -        (2,068,890)      (2,068,890)
                                       ----------   ------------     --------------    -------------
Balance, December 31, 1998                 (6,857)              -       (19,467,476)       5,628,195
   Issuance of stock,
     Dexterity purchase                         -               -                 -        5,625,000
   Issuance of warrants,
     Dexterity purchase                         -       2,310,000                 -        2,310,000
   Compensation expense                     6,857               -                 -            6,857
   Sale of preferred stock                      -               -                 -           25,000
   Preferred stock dividends                    -               -          (175,480)        (175,480)
   Warrants issued for services                 -          60,900                 -           60,900
   Net loss                                     -               -        (3,097,941)      (3,097,941)
                                       ----------   ------------     --------------    -------------

Balance, December 31, 1999             $        -   $   2,370,900    $  (22,740,897)   $  10,382,531
                                       ==========   =============    ==============    =============
</TABLE>



See accompanying notes.


                                      F-6
<PAGE>   40

                   Dexterity Surgical, Inc., and Subsidiaries
                       (Formerly LifeQuest Medical, Inc.)

                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31
                                                             1999           1998
                                                         -----------    -----------
<S>                                                      <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss                                                 $(3,097,941)   $(2,068,890)
Adjustments to reconcile net loss to net cash used
   in operating activities:
     Depreciation                                            228,882        194,341
     Amortization                                          1,348,209        210,540
     Accretion of royalty obligation                         550,134           --
     Amortization of deferred finance charges                 60,445         25,857
     Deferred compensation expense                             6,857         33,198
     Noncash consulting expense                                9,625           --
     (Gain) loss on disposal of fixed assets                 (61,878)        23,187
     Disposal of intangible asset                               --           11,066
     Loss on investment in affiliate                          30,000        140,000
     Minority interest in net loss of consolidated
       subsidiary                                               --           (2,258)
     Changes in operating assets and liabilities:
       (Increase) decrease in accounts receivable, net       122,886       (494,674)
       (Increase) decrease in accounts receivable
         from related parties                                 15,553        (38,909)
       (Increase) decrease in inventories, net              (615,376)       262,624
       (Increase) decrease in prepaid and other
         assets                                              (30,266)        15,212
       Increase in accounts payable                          213,153         27,666
       Decrease in accrued liabilities                      (264,547)      (181,090)
                                                         -----------    -----------
Net cash used in operating activities                     (1,484,264)    (1,842,130)

CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant, and equipment                 (154,125)      (133,703)
Proceeds on disposal of property, plant, and
  equipment
                                                             154,835           --
Additions to licensed technology rights and other            (40,126)      (153,639)
Acquisitions and investments, net of cash received        (2,016,030)    (1,000,000)
Purchases of short-term investments                             --       (1,111,160)
Sales of short-term investments                              983,714        291,085
Increase in interest receivable                                 --          (13,639)
                                                         -----------    -----------
Net cash used in investing activities                     (1,071,732)    (2,121,056)
</TABLE>


                                      F-7
<PAGE>   41

                   Dexterity Surgical, Inc., and Subsidiaries
                       (Formerly LifeQuest Medical, Inc.)

                Consolidated Statements of Cash Flows (continued)


<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31
                                                               1999           1998
                                                           -----------    -----------

<S>                                                        <C>            <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term debt                                 $  (116,310)   $    (6,838)
Net proceeds on line of credit                               1,822,452           --
Proceeds from issuance of preferred stock                       25,000      2,170,000
Payments for deferred finance charges                         (184,382)          --
Proceeds from exercise of stock options                           --          253,800
Payments on royalty obligation                                (346,435)          --
Payments of preferred stock dividends                         (175,480)       (45,548)
                                                           -----------    -----------
Net cash provided by financing activities                    1,024,845      2,371,414
                                                           -----------    -----------
Net decrease in cash and cash equivalents                   (1,531,151)    (1,591,772)

Cash and cash equivalents, beginning of year                 1,644,535      3,236,307
                                                           -----------    -----------

Cash and cash equivalents, end of year                     $   113,384    $ 1,644,535
                                                           ===========    ===========


Cash paid for interest during the year                     $   410,042    $   269,086

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
   ACTIVITIES
Common stock issued in connection with
   acquisitions/investments
                                                           $ 5,625,000    $ 1,202,500
Fair value of warrants issued in connection with
   acquisitions                                              2,310,000           --
Present value of minimum royalty obligation
   assumed in acquisitions                                   5,945,609           --
Notes payable issued in connection with acquisitions         1,000,000           --
Liabilities assumed in connection with acquisitions            402,695           --
Fair value of warrants issued for professional services         60,900           --
Cancellation of options issued under consulting
   arrangements                                                   --          107,280
Note issued for distributorship                                   --          100,000
Note issued for purchase of property                              --           16,310
</TABLE>


See accompanying notes.


                                      F-8
<PAGE>   42

                   Dexterity Surgical, Inc., and Subsidiaries
                       (Formerly LifeQuest Medical, Inc.)

                   Notes to Consolidated Financial Statements

                           December 31, 1999 and 1998


1.  ORGANIZATION AND DESCRIPTION OF THE COMPANY AND RISK FACTORS

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

At December 31, 1999, the Company had an accumulated deficit of approximately
$22.7 million. During the years ended December 31, 1999 and 1998, the Company
incurred net losses of approximately $3.1 million and $2.1 million,
respectively. The Company's cumulative losses have been funded primarily through
the Company's initial public offering of common stock, private sales of common
stock and preferred stock, cash proceeds from the exercise of stock options,
debt financing, and the sale of convertible debentures. As discussed in Note 9,
the Company has obtained a waiver for and amendments to certain affirmative
financial covenant requirements associated with its convertible debentures. The
Company believes it will be in compliance with the amended covenants. The
Company has also taken steps to improve its 2000 operating results and
anticipated cash flows. Steps to improve operating results include reductions in
selling, general, and administrative costs and increased sales of Dexterity
products. Actions to improve anticipated cash flows include executing agreements
with the debt and obligation holders allowing the Company to fund interest on
the convertible debentures and Dexterity note and a portion of the royalty
obligation with stock, in lieu of cash, during 2000. Based on current
projections for 2000, management believes the Company's operating results for
2000 will generate sufficient working capital, along with available cash and
available borrowings under a revolving line of credit, to sustain its operations
throughout the year. However, there can be no assurances that the Company can
achieve all of the planned operating improvements or that ultimately the
projections of operating results will be achieved.


                                      F-9
<PAGE>   43

                   Dexterity Surgical, Inc., and Subsidiaries
                       (Formerly LifeQuest Medical, Inc.)

             Notes to Consolidated Financial Statements (continued)

                           December 31, 1999 and 1998


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

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

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

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


                                      F-10
<PAGE>   44

                   Dexterity Surgical, Inc., and Subsidiaries
                       (Formerly LifeQuest Medical, Inc.)

             Notes to Consolidated Financial Statements (continued)

                           December 31, 1999 and 1998



2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

CASH AND CASH EQUIVALENTS

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

SHORT-TERM INVESTMENTS

Short-term investments consisted solely of debt securities issued by the U.S.
Treasury, with maturities from three to twelve months, which are held to
maturity. These securities are reported at amortized cost. A portion of the
investments were pledged as collateral.

INVENTORIES

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

RESEARCH AND DEVELOPMENT

Research and development costs are expensed as incurred.

FIXED ASSETS AND DEPRECIATION

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


                                      F-11
<PAGE>   45

                   Dexterity Surgical, Inc., and Subsidiaries
                       (Formerly LifeQuest Medical, Inc.)

             Notes to Consolidated Financial Statements (continued)

                           December 31, 1999 and 1998



2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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. The amortization periods range from 7
to 17 years. Impairments are recognized when the expected future operating cash
flows derived from such licensed technology rights are less than their carrying
value. The Company believes that no impairment of long-lived assets exist at
December 31, 1999.

GOODWILL

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

SEGMENT DISCLOSURE

In 1998, the Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information ("Statement 131"). Statement 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports. Statement 131 also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The adoption of Statement 131 did not affect results of operations or financial
position. Furthermore, the statement did not affect disclosure of segment
information as the Company operates in one business segment.

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.


                                      F-12
<PAGE>   46

                   Dexterity Surgical, Inc., and Subsidiaries
                       (Formerly LifeQuest Medical, Inc.)

             Notes to Consolidated Financial Statements (continued)

                           December 31, 1999 and 1998



2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

ADVERTISING

The Company expenses advertising costs as they are incurred. Advertising expense
was approximately $107,000 and $41,000 in 1999 and 1998, respectively.

NET LOSS PER SHARE

Basic earnings per share (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. As the Company had
a net loss for the years ended December 31, 1999 and 1998, diluted EPS equals
basic EPS, as potentially dilutive common stock equivalents, which consist of
options, warrants, and convertible debt and equity securities, are antidilutive
in loss periods. The average market price per share of the Company's common
stock for the years ended December 31, 1999 and 1998, was $1.52 and $2.76,
respectively.

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 composing the
Company's customer base. Ongoing credit evaluations of customers' financial
conditions are performed, and generally, no collateral is required. The Company
maintains reserves for potential credit losses, and such losses have not
exceeded management's expectations.

CUSTOMERS

No single customer accounted for more than 10% of consolidated sales during the
years ended December 31, 1999 and 1998.



                                      F-13
<PAGE>   47

                   Dexterity Surgical, Inc., and Subsidiaries
                       (Formerly LifeQuest Medical, Inc.)

             Notes to Consolidated Financial Statements (continued)

                           December 31, 1999 and 1998



3.  CONCENTRATION OF RISK (CONTINUED)

SUPPLIERS

The Company had one supplier that accounted for 47% and 57% of purchases for the
years ended December 31, 1999 and 1998, respectively. Subsequent to December 31,
1999, the supplier terminated its distribution agreement with the Company (see
Note 15).

4.  INVENTORIES

Inventories at December 31 are summarized as follows:

<TABLE>
<CAPTION>
                      1999           1998
                  -----------    -----------

<S>               <C>            <C>
Raw materials     $    34,284    $    29,250
Work in process       338,048        431,986
Finished goods      2,185,025      1,186,279
Allowances           (241,482)      (164,616)
                  -----------    -----------

                  $ 2,315,875    $ 1,482,899
                  ===========    ===========
</TABLE>

5.  INVESTMENTS

In December 1997, the Company entered into an agreement to acquire approximately
19% of the stock of Dexterity Incorporated (DI), formerly TFX Holding Co., for
$1,000,000, which was paid in January 1998. DI, an affiliate of Teleflex, Inc.,
was a newly formed entity, and the Company began distribution of DI's minimally
invasive surgical devices, the Dexterity(R) Pneumo Sleeve(R) and Dexterity(R)
Protractor(R), during 1998. As discussed in Note 6, the Company entered into an
agreement in December 1998 to acquire the remaining DI stock it did not
currently own, and completed the merger on March 18, 1999. Prior to the March
18, 1999 merger with DI, the Company's 19.2% investment in DI had been accounted
for using the cost method. See Note 6 for a discussion of the effect on the
consolidated financial statements.


                                      F-14
<PAGE>   48

                   Dexterity Surgical, Inc., and Subsidiaries
                       (Formerly LifeQuest Medical, Inc.)

             Notes to Consolidated Financial Statements (continued)

                           December 31, 1999 and 1998



5.  INVESTMENTS (CONTINUED)

In June 1998, the Company issued 370,000 shares of common stock at a per-share
price of $3.25 with an aggregate value of $1,202,500 in exchange for
approximately 4% of the ownership interests of Ana-Tech, L.L.C. (Ana-Tech),
pursuant to a subscription agreement dated June 9, 1998. At the same time,
Ana-Tech sold ownership interests for cash to third parties at the same unit
price. The Company accounts for the investment in Ana-Tech using the cost method
of accounting. The 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
in cash and will receive a 5% royalty on future gross sales of the Osteoport(R)
device. The assignment resulted in a net gain of $411,000 for financial
reporting purposes.

6.  MERGER

On March 18, 1999, the Company's stockholders approved the merger between the
Company and DI. Contemporaneously with the merger, the Company changed its name
to Dexterity Surgical, Inc. The Company accounted for this business combination
as a purchase. The consideration given to the selling stockholders by the
Company for the DI stock it did not previously own consisted of an aggregate of:

     (a)  $1.5 million cash.

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

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

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


                                      F-15
<PAGE>   49

                   Dexterity Surgical, Inc., and Subsidiaries
                       (Formerly LifeQuest Medical, Inc.)

             Notes to Consolidated Financial Statements (continued)

                           December 31, 1999 and 1998



6.  MERGER (CONTINUED)

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

The 1998 financial statements have been restated to account for the Company's
original investment in DI under the equity method, as appropriate for a
step-acquisition. This investment was previously accounted for using the cost
method. The result of this restatement was a decrease in "Investments" and an
increase in "Accumulated deficit" at December 31, 1998, of $140,000, as well as
an increase in net loss for the year ended December 31, 1998 of $140,000. The
effect of the restatement on earnings per share for the year ended December 31,
1998, was a decrease in basic and diluted earnings per share of approximately
$.02.

The Company's balance sheet as of December 31, 1999 reflects the net assets and
liabilities of DI on a fully consolidated basis. The results of operations for
the year ended December 31, 1999, include the operations of DI from March 18,
1999.

Unaudited pro forma consolidated results of operations, assuming the DI merger
had occurred at January 1, 1998, would have been as follows:

<TABLE>
<CAPTION>
                                           PRO FORMA (UNAUDITED)
                                           YEAR ENDED DECEMBER 31
                                           1999            1998
                                      ------------    ------------
<S>                                   <C>             <C>
Net sales                             $ 21,032,633    $ 18,578,616

Net loss                                (3,794,372)     (4,832,159)

Basic and diluted loss per share of
  common stock
                                              (.39)           (.49)
</TABLE>



                                      F-16
<PAGE>   50

                   Dexterity Surgical, Inc., and Subsidiaries
                       (Formerly LifeQuest Medical, Inc.)

             Notes to Consolidated Financial Statements (continued)

                           December 31, 1999 and 1998



6.  MERGER (CONTINUED)

The foregoing pro forma information is presented in response to applicable
accounting rules relating to business acquisitions and is not necessarily
indicative of the actual results that would have been achieved had the DI merger
occurred at the beginning of 1998, nor is it indicative of future results of
operations.

7.  FEDERAL INCOME TAXES

As of December 31, 1999, the Company had net operating loss (NOL) carryforwards
of approximately $15,703,000 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 Internal Revenue
Service (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
that are available to offset future income taxes and expire in 2005 through
2010.

The tax effects of significant temporary differences representing income tax
assets at December 31, 1999 and 1998, are as follows:

<TABLE>
<CAPTION>
                                                    1999           1998
                                                -----------    -----------
<S>                                             <C>            <C>
Capitalized research and development and
 acquisition costs                              $   439,000    $   439,000
Royalty obligation                                   12,548           --
Depreciation                                         29,960         15,000
Accruals                                            158,093        171,000
Reserves not deductible for tax                     131,442        141,000
Research and development credit carryforwards       560,920        552,000
Tax loss carryforwards                            5,338,990      5,073,000
                                                -----------    -----------
Net deferred tax assets                           6,670,953      6,391,000
Deferred tax valuation reserve                   (6,670,953)    (6,391,000)
                                                -----------    -----------

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


                                      F-17
<PAGE>   51

                   Dexterity Surgical, Inc., and Subsidiaries
                       (Formerly LifeQuest Medical, Inc.)

             Notes to Consolidated Financial Statements (continued)

                           December 31, 1999 and 1998



7.  FEDERAL INCOME TAXES (CONTINUED)

As there is no assurance of future income, a 100% valuation reserve in 1999 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.  LEASE OBLIGATIONS, COMMITMENTS, AND CONTINGENCIES

OPERATING LEASES

The Company leases office space under noncancelable operating leases expiring in
2002. Rentals are subject to escalation for increases in property taxes,
insurance, and various other expenses. Future minimum rental payments of the
Company under existing and pending operating lease agreements at December 31,
1999, are as follows:

<TABLE>
          <S>            <C>
          2000           $219,792
          2001            215,902
          2002             57,685
                         --------
                         $493,379
                         ========
</TABLE>

Rent expense totaled approximately $333,000 and $290,000 for the years ended
December 31, 1999 and 1998, respectively.


                                      F-18
<PAGE>   52

                   Dexterity Surgical, Inc., and Subsidiaries
                       (Formerly LifeQuest Medical, Inc.)

             Notes to Consolidated Financial Statements (continued)

                           December 31, 1999 and 1998



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

EMPLOYMENT AGREEMENTS

As of December 31, 1999, the Company had entered into various employment
agreements that provide for compensation for future services. Future payments
under the employee agreements are as follows:

<TABLE>
                   <S>            <C>
                   2000           $410,000
                   2001            215,000
                   2002             73,000
</TABLE>

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

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.

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.



                                      F-19
<PAGE>   53

                   Dexterity Surgical, Inc., and Subsidiaries
                       (Formerly LifeQuest Medical, Inc.)

             Notes to Consolidated Financial Statements (continued)

                           December 31, 1999 and 1998



9.  DEBT AND OTHER OBLIGATIONS

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.

<TABLE>
<CAPTION>
                                                           DECEMBER 31
                                                       1999          1998
                                                   -----------   -----------

<S>                                      <C>       <C>           <C>
Note payable - distributorship agreement (1)       $      --     $   100,000
Vehicle note (2)                                          --          16,310
Dexterity notes (3)                                  1,000,000          --
Line of credit (4)                                   1,822,452          --
Royalty obligation (5)                               6,149,308          --
Convertible debentures (6)                           3,000,000     3,000,000
                                                   -----------   -----------
                                                    11,971,760     3,116,310
Less current portion                                 2,569,378       116,310
                                                   -----------   -----------

Total long-term obligations                        $ 9,402,382   $ 3,000,000
                                                   ===========   ===========
</TABLE>

Debt outstanding as of December 31, 1998:

     (1)  Unsecured note payable for a distributorship agreement, bearing
          interest at 6%, principal and interest due monthly, matured and paid
          in 1999.

     (2)  Secured note payable for a vehicle loan, bearing interest at 9%,
          principal and interest due monthly, matured and paid in 1999.

Debt outstanding as of December 31, 1999:

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



                                      F-20
<PAGE>   54

                   Dexterity Surgical, Inc., and Subsidiaries
                       (Formerly LifeQuest Medical, Inc.)

             Notes to Consolidated Financial Statements (continued)

                           December 31, 1999 and 1998



9.  DEBT AND OTHER OBLIGATIONS (CONTINUED)

     (4)  Revolving line of credit, due April 2003, secured by accounts
          receivable, inventories, and intangible assets, bearing interest at
          prime rate plus 1.5% or 10% at December 31, 1999. The line of credit
          has a maximum of $5 million, and $955,000 million was available at
          December 31, 1999. The balance at December 31, 1999, was $1,822,452
          and is classified as current. Lender draws on daily accounts
          receivable cash receipts to pay on the note.

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

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

<TABLE>
               <S>                                 <C>
               2000                                $  731,180
               2001                                 1,187,302
               2002                                 1,661,379
               2003                                 1,779,401
               2004                                 1,779,401
               Thereafter                           2,224,251
                                                   ----------
               Gross minimum royalty obligation     9,362,914
               Less amount representing interest    3,213,606
                                                   ----------
               Discounted royalty obligation        6,149,308
               Current portion                        716,926
                                                   ----------

               Long-term royalty obligation        $5,432,382
                                                   ==========
</TABLE>


     (6)  In December 1997, the Company sold 250,000 shares of common stock to
          affiliates of Renaissance Capital Group, Inc. (Renaissance), in a
          private placement for aggregate proceeds of $1,000,000, and placed
          $3,000,000 in 9% Convertible



                                      F-21
<PAGE>   55

                   Dexterity Surgical, Inc., and Subsidiaries
                       (Formerly LifeQuest Medical, Inc.)

             Notes to Consolidated Financial Statements (continued)

                           December 31, 1999 and 1998



9.  DEBT AND OTHER OBLIGATIONS (CONTINUED)

     Debentures (Debentures) with Renaissance. The Debentures are secured by
     substantially all of the assets of the Company and require monthly payments
     of interest beginning in February 1998 and, unless sooner paid, redeemed,
     or converted, monthly principal payments commencing in December 2000 of $10
     per $1,000 of the then-remaining principal amount. The remaining principal
     balance will mature in December 2004.

     The Debentures are convertible into shares of the Company's common stock,
     in whole or in part, at any time at the option of the holder. At December
     31, 1999, the Debentures were convertible at a price of $1.60 per share of
     common stock. The Debentures are currently convertible at a price of $1.00
     per share of common stock, or 3,000,000 shares, based on an amendment to
     the Debentures subsequent to December 31, 1999. The conversion price is
     subject to downward revision if the Company sells shares of its common
     stock, or securities convertible into shares of its common stock, at a
     price less than $1.00 per share of common stock, subject to certain allowed
     exceptions, during the term of the Debentures.

     The Debentures require the Company to comply with certain financial
     covenants. In anticipation of potential covenant violations, the Company
     and Renaissance agreed in December 1999 to amend the covenants. As a result
     at December 31, 1999, the Company was in compliance with the amended
     covenants.

     Effective March 24, 2000, Renaissance agreed to waive the Interest Earned
     Ratio and Debt Coverage Ratio covenants through March 31, 2000 and amend
     the Debt to Net Worth Ratio, Interest Earned Ratio and Current Ratio.

     The Debentures require the Company to comply with the following financial
     covenants, as amended: (i) a Debt-to-Net Worth Ratio of no greater than
     .95:1; (ii) an Interest Coverage Ratio of at least .60:1; (iii) a Debt
     Coverage Ratio of at least .10:1; and (iv) a Current Ratio of at least
     .70:1.

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


                                      F-22
<PAGE>   56

                   Dexterity Surgical, Inc., and Subsidiaries
                       (Formerly LifeQuest Medical, Inc.)

             Notes to Consolidated Financial Statements (continued)

                           December 31, 1999 and 1998



9.  DEBT AND OTHER OBLIGATIONS (CONTINUED)

         The obligation is due as follows:

<TABLE>
              <S>                               <C>
              2000                              $       30,000
              2001                                     335,000
              2002                                     300,000
              2003                                     265,000
              2004                                   2,070,000
                                                --------------

              Total                             $    3,000,000
                                                ==============
</TABLE>


10.  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 Series B
Cumulative Convertible Preferred Stock, $.001 par value (Series B Preferred
Stock), for proceeds of $25,000.

In November 1998, pursuant to a private placement, the Company issued to two
affiliates of Renaissance an aggregate of 1,000 shares of Series B Preferred
Stock for aggregate proceeds of $1,000,000. The Company used such proceeds for
working capital. The annual dividends on the Series B Preferred Stock are
cumulative at a rate of $80 per share. At December 31, 1999, the Series B
Preferred Stock was convertible into shares of common stock at a conversion
price of $1.60 per share. The Series B Preferred Stock is currently convertible
into shares of common stock at a conversion price of $1.00 per share, for an
aggregate of 1,025,000 shares of common stock. The conversion price for the
Series B Preferred Stock is subject to further downward adjustment in the event
the Company sells shares of common stock, or securities convertible into shares
of common stock, at a per share price less than $1.00. The holders of Series 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


                                      F-23
<PAGE>   57

                   Dexterity Surgical, Inc., and Subsidiaries
                       (Formerly LifeQuest Medical, Inc.)

             Notes to Consolidated Financial Statements (continued)

                           December 31, 1999 and 1998



10.  PREFERRED STOCK PLACEMENTS (CONTINUED)

dividends payable on the Series B Preferred Stock are in arrears, the holders of
Series B Preferred Stock, by a majority vote, shall be entitled to designate two
additional directors to serve on the Company's Board of Directors.

In August 1998, pursuant to a private placement, the Company issued to
Renaissance and two individuals, including one who is an officer and director of
the Company, an aggregate of 1,170 shares of Series A Cumulative Convertible
Preferred Stock, $.001 par value (Series A Preferred Stock), for aggregate
proceeds of $1,170,000. The Company used such proceeds for working capital.
Annual dividends on the Series A Preferred Stock are cumulative at a rate of $80
per share. At December 31, 1999, the Series A Preferred Stock was convertible
into shares of common stock at a conversion price of $1.60 per share. The Series
A Preferred Stock is currently convertible into shares of common stock at a
conversion price of $1.00 per share, for an aggregate of 1,170,000 shares of
common stock. The conversion price for the Series A Preferred Stock is subject
to further downward adjustment in the event the Company sells shares of common
stock, or securities convertible into shares of common stock, at a per share
price less than $1.00. The holders of Series 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.



                                      F-24
<PAGE>   58

                   Dexterity Surgical, Inc., and Subsidiaries
                       (Formerly LifeQuest Medical, Inc.)

             Notes to Consolidated Financial Statements (continued)

                           December 31, 1999 and 1998



11.  EARNINGS PER SHARE

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

<TABLE>
<CAPTION>
                                                     YEAR ENDED DECEMBER 31
                                                     1999           1998
                                                 -----------    -----------

<S>                                              <C>            <C>
Computation of basic loss per share:
  Net loss                                       $(3,097,941)   $(2,068,890)
  Preferred stock dividends                         (175,480)       (45,548)
                                                 -----------    -----------

Net loss applicable to common stockholders       $(3,273,421)   $(2,114,438)
                                                 ===========    ===========

Weighted average shares of common stock
  outstanding used for computation                 9,571,075      6,989,951
                                                 ===========    ===========

Basic loss per share of common stock             $      (.34)   $      (.30)
                                                 ===========    ===========

Computation of diluted loss per share:
  Net loss                                       $(3,097,941)   $(2,068,890)
  Interest on convertible debentures                 270,000        270,000
                                                 -----------    -----------

Net loss used for computation                    $(2,827,941)   $(1,798,890)
                                                 ===========    ===========
</TABLE>


                                      F-25
<PAGE>   59

                   Dexterity Surgical, Inc., and Subsidiaries
                       (Formerly LifeQuest Medical, Inc.)

             Notes to Consolidated Financial Statements (continued)

                           December 31, 1999 and 1998



11.  EARNINGS PER SHARE (CONTINUED)

<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31
                                                              1999           1998
                                                          -----------    -----------

<S>                                                         <C>            <C>
Weighted average shares of common stock
 outstanding                                                9,571,075      6,989,951

Weighted average incremental shares
  outstanding upon assumed conversion of
  options and dilutive securities                               5,281        112,592

Weighted average incremental shares
  outstanding upon assumed conversion of
  convertible debentures and preferred stock                3,245,964      1,943,795
                                                          -----------    -----------

Weighted average shares of common stock and common
  stock equivalents outstanding used
  for computation                                          12,822,320      9,046,338
                                                          ===========    ===========

Diluted loss per common share and common share
  equivalents (a)                                         $      (.22)   $      (.20)
                                                          ===========    ===========
</TABLE>

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

12.  STOCK OPTIONS AND WARRANTS

Stock Options

Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (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


                                      F-26
<PAGE>   60

                   Dexterity Surgical, Inc., and Subsidiaries
                       (Formerly LifeQuest Medical, Inc.)

             Notes to Consolidated Financial Statements (continued)

                           December 31, 1999 and 1998



12.  STOCK OPTIONS AND WARRANTS (CONTINUED)

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. At December 31, 1999, 48,000 of the options
outstanding and exercisable are exercisable into the common stock of ValQuest.

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


                                      F-27
<PAGE>   61

                   Dexterity Surgical, Inc., and Subsidiaries
                       (Formerly LifeQuest Medical, Inc.)

             Notes to Consolidated Financial Statements (continued)

                           December 31, 1999 and 1998



12.  STOCK OPTIONS AND WARRANTS (CONTINUED)

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.

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 the 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 160,000 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 $4.00 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 $2.00 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, 1999,
there were 350,000 options outstanding under this option grant with 87,500
exercisable.

During 1999, the Company granted various employees 517,000 options to purchase
shares of common stock at exercise prices ranging from $1.00 to $1.88 per share.
These options were granted under the 1989 Plan.


                                      F-28
<PAGE>   62

                   Dexterity Surgical, Inc., and Subsidiaries
                       (Formerly LifeQuest Medical, Inc.)

             Notes to Consolidated Financial Statements (continued)

                           December 31, 1999 and 1998



12.  STOCK OPTIONS AND WARRANTS (CONTINUED)

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 would
have been changed to the following pro forma amounts at December 31:

<TABLE>
<CAPTION>
                                                       1999           1998
                                                   ------------  -------------
<S>                                  <C>           <C>           <C>
     Net loss applicable to:
       Common stock                  As reported   $ (3,273,421) $  (2,114,438)
                                     Pro forma       (4,030,188)    (2,873,996)

       Earnings per share            As reported   $       (.34) $        (.30)
                                     Pro forma             (.42)          (.41)

</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.

A summary of the status of the Company's stock options at December 31, 1999 and
1998, and changes during the years then ended is presented in the table and
narrative below:

<TABLE>
<CAPTION>
                                                1999                            1998
                                   ----------------------------   ----------------------------
                                                     WEIGHTED                      WEIGHTED
                                                     AVERAGE                        AVERAGE
                                                    EXERCISE                       EXERCISE
                                     SHARES         PRICE PER        SHARES        PRICE PER
                                     (000S)           SHARE          (000S)          SHARE
                                   ------------    ------------   ------------    ------------

<S>                                <C>             <C>            <C>             <C>
Outstanding, beginning of year            1,176    $       2.93          1,086    $       2.81
  Granted                                   517            1.28            865            3.06
  Exercised                                --              --             (189)           1.34
  Canceled                                 (149)           3.43           (250)           2.00
  Forfeited                                --              --             (336)           2.97
                                   ------------    ------------   ------------    ------------
Outstanding, end of year                  1,544    $       2.33          1,176    $       2.93
                                   ============    ============   ============    ============

Options exercisable, end of year            582    $       2.90            370    $       2.96
                                   ============    ============   ============    ============
Weighted average fair value of
  options granted                                  $        .73                   $       1.88
                                   ============    ============   ============    ============
</TABLE>


                                      F-29
<PAGE>   63

                   Dexterity Surgical, Inc., and Subsidiaries
                       (Formerly LifeQuest Medical, Inc.)

             Notes to Consolidated Financial Statements (continued)

                           December 31, 1999 and 1998



12.  STOCK OPTIONS AND WARRANTS (CONTINUED)

The following table summarizes the information about options outstanding at
December 31, 1999:

<TABLE>
<CAPTION>
                                              WEIGHTED AVERAGE              NUMBER
                                                REMAINING              EXERCISABLE AT
      EXERCISE PRICES          NUMBER        CONTRACTUAL LIFE           DECEMBER 31,
         PER SHARE          OUTSTANDING         (YEARS)                      1999
---------------------------------------------------------------------------------------------

<S>      <C>                   <C>                 <C>                      <C>
         $    .001             5,285               3.04                     5,285
              .75             48,000               4.64                    48,000
             1.00            350,000               9.88                         -
             1.88            128,500               9.38                         -
             2.00            350,000               8.96                    87,500
             2.25             50,000               5.40                    50,000
             2.50             20,050               5.68                    17,650
             3.00            237,000               6.99                   198,500
             3.13             26,700               7.09                    13,350
             3.25            114,500               8.14                    25,750
             3.50              2,500               8.12                       625
             4.00             30,700               4.80                    30,700
             4.25             25,000               8.14                     6,250
             4.38            123,333               7.91                    65,833
             4.88             19,200               7.47                    19,200
             5.03             13,332               7.75                    13,332
                           ---------                                   ----------

                           1,544,100                                      581,975
                           =========                                   ==========
</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 1999 and 1998: risk-free interest rates based on
market rates at grant date, ranging from 4.4% to 6.0%; expected lives of 5 years
and 10 years, respectively; and expected volatility of 61 percent and 77
percent, respectively.



                                      F-30
<PAGE>   64

                   Dexterity Surgical, Inc., and Subsidiaries
                       (Formerly LifeQuest Medical, Inc.)

             Notes to Consolidated Financial Statements (continued)

                           December 31, 1999 and 1998



12.  STOCK OPTIONS AND WARRANTS (CONTINUED)

Warrants

At December 31, 1999, the Company has 1,697,500 warrants outstanding. No
warrants were outstanding as of December 31, 1998. Each warrant, when exercised,
is exchangeable for one share of the Company's common stock.

The following table summarizes the information about warrants outstanding at
December 31, 1999:

<TABLE>
<CAPTION>
         EXERCISE            NUMBER         NUMBER EXERCISABLE
           PRICE          OUTSTANDING        DECEMBER 31, 1999        EXPIRATION
----------------------------------------------------------------------------------

          <S>             <C>                  <C>                   <C>
            $1.00          1,500,000                 -                March 2009
            $1.50             50,000                 -                *
            $2.00             22,500            22,500                December 2004
            $2.25             25,000            25,000                April 2004
            $3.00             50,000                 -                *
            $4.00             50,000                 -                *
</TABLE>

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

13.  RELATED PARTY TRANSACTIONS

During 1999 and 1998, the Company sold 25 shares and 20 shares, respectively, of
preferred stock to an officer and director of the Company as further described
in Note 10. During 1998, the Company acquired the rights to a distributorship
agreement from a company affiliated with a former officer and director of the
Company.



                                      F-31
<PAGE>   65

                   Dexterity Surgical, Inc., and Subsidiaries
                       (Formerly LifeQuest Medical, Inc.)

             Notes to Consolidated Financial Statements (continued)

                           December 31, 1999 and 1998



14.  IMPACT OF YEAR 2000

In prior years, the Company discussed the nature and progress of its plans to
become Year 2000 ready. In late 1999, the Company completed its remediation and
testing of systems. As a result of those planning and implementation efforts,
the Company experienced no significant disruptions in mission-critical
information technology and noninformation technology systems and believes those
systems successfully responded to the Year 2000 date change. The Company is not
aware of any material problems resulting from Year 2000 issues with either its
products, its internal systems, or the products and services of third parties.
The Company will continue to monitor its mission-critical computer applications
and those of its suppliers and vendors throughout the year 2000 to ensure that
any latent Year 2000 matters that may arise are addressed promptly.

15.  SUBSEQUENT EVENTS

Subsequent to December 31, 1999, the United States Surgical Corporation (U.S.
Surgical), a division of Tyco Healthcare Group LP, terminated its General
Surgical Innovations, Inc. (GSI) distribution agreement with the Company related
to balloon dissector, blunt tip trocar, and tacker products associated with
minimally invasive hernia surgery. These products have accounted for
approximately 50% of sales and 44% of gross profit of Dexterity since the
effective date of the distribution agreement, which was May 1, 1999. The Company
does not believe that U.S. Surgical has any right to cancel the agreement and is
currently vigorously pursuing legal negotiations and remedies.



                                      F-32
<PAGE>   66
                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER            IDENTIFICATION OF EXHIBIT
-------           -------------------------
<S>               <C>
2.1               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).

2.2               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).

2.3               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).

2.4               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.

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

2.6               Plan of Merger and Acquisition Agreement between the Company and Dexterity Incorporated dated
                  December 18, 1998 (incorporated by reference herein to Exhibit 2.1 to the Company's Quarterly
                  Report on Form 10-QSB filed May 14, 1999).

3.1               Restated Certificate of Incorporation, as amended (incorporated by reference herein to Exhibit 3.1
                  to the Company's Quarterly Report on Form 10-QSB filed May 14, 1999).
</TABLE>


<PAGE>   67


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

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

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

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

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

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

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

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

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

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

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

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

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

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


<PAGE>   68


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

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

10.15             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).

10.16             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).

10.17             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).

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

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

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

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

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

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

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


<PAGE>   69

<TABLE>
<S>               <C>
22                Subsidiaries

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

23.1*          Consent of Arthur Andersen LLP

23.2*          Consent of Ernst & Young LLP

27.1*          Financial Data Schedule for year ended December 31, 1999

27.2*          Financial Data Schedule Restated for year ended December 31, 1998
</TABLE>

*   Filed herewith