Cautionary Notes Regarding "Forward-Looking" Statements

This report contains statements that we believe to be "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange act of 1934, as amended. Forward-looking statements give our current expectations or forecasts of future events. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "may," "will," "expect," "intend," "estimate," "anticipate," "believe," "project," or "continue," or similar words or the negative thereof. From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public. Any or all of our forward-looking statements in this report and in any public statements we make could be materially different from actual results. They can be affected by assumptions we might make or by known or unknown risks or uncertainties. Consequently, we cannot guarantee any forward-looking statements. Investors are cautioned not to place undue reliance on any forward-looking statements. Investors should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a complete statement of all potential risks and uncertainties. The following factors and those discussed in ITEM 1A, Risk Factors, included in our Annual Report on Form 10-K for the year ended December 31, 2011, may affect the achievement of forward-looking statements:

? general economic and political conditions, such as political instability, credit market uncertainty, the rate of economic growth or decline in our principal geographic or product markets or fluctuations in exchange rates; continued deterioration in or stabilization of the global economy;

? changes in general economic and industry conditions in markets in which we participate, such as:

? deterioration in or destabilization of the global economy;

? the strength of product demand and the markets we serve;

? the intensity of competition, including that from foreign competitors;

? pricing pressures;

? the financial condition of our customers;

? market acceptance of new product introductions and enhancements;

? the introduction of new products and enhancements by competitors;

? our ability to maintain and expand relationships with large customers;

? our ability to source raw material commodities from our suppliers without interruption and at reasonable prices; and

? our ability to source components from third parties, in particular from foreign manufacturers, without interruption and at reasonable prices;

? our ability to access capital markets and obtain anticipated financing under favorable terms;

? our ability to identify, complete and integrate acquisitions successfully and to realize expected synergies on our anticipated timetable;

? changes in our business strategies, including acquisition, divestiture and restructuring activities;

? changes in operating factors, such as continued improvement in manufacturing activities, the achievement of related efficiencies and inventory risks due to shifts in market demand;

? our ability to generate savings from our cost reduction actions;

? unanticipated developments that could occur with respect to contingencies such as litigation, intellectual property matters, product liability exposures and environmental matters; and

? our ability to accurately evaluate the effects of contingent liabilities.

The foregoing factors are not exhaustive, and new factors may emerge or changes to the foregoing factors may occur that would impact our business. We assume no obligation, and disclaim any duty, to update the forward-looking statements in this report. Past performance is no guaranty of future results.

Executive Level Overview

We are a medical device company engaged in the manufacturing and marketing of electrosurgical devices. Our medical products include a wide range of devices including electrosurgical generators and accessories, cauteries, medical lighting, nerve locators and other products.

We internally divide our operations into three product lines. Electrosurgical products, battery-operated cauteries and other products. The electrosurgical line sells electrosurgical products which include desiccators, generators, electrodes, electrosurgical pencils and various ancillary disposable products. These products are used in surgery for the cutting and coagulation of tissue. Battery-operated cauteries are used for precise hemostasis (to stop bleeding) in ophthalmology and in other fields. Our other revenues are derived from nerve locators, disposable and reusable penlights, medical lighting, Medical Illumination (MII) Lighting, laparoscopic instruments, license fees, development fees and other miscellaneous income.

Most of our products currently are marketed through medical distributors, which distribute to more than 6,000 hospitals, and to doctors and other health-care facilities. New distributors are contacted through responses to our advertising in international and domestic medical journals and domestic or international trade shows. International sales represented approximately 18.8% of total revenues for the first nine months of 2012, as compared with approximately 22.7% for the first nine months of 2011. Our products are sold in more than 150 countries mainly through local dealers which are coordinated by sales and marketing personnel at the Clearwater, Florida facility. In addition, for the launch of our new surgical suite / J-Plasma product lines, we have established the use of a network of approximately 50 commission-based independent direct sales contractors to market these products. Our business is generally not seasonal in nature.

Results of Operations - Three and Nine Months Ended September 30, 2012 Compared to Three and Nine Months Ended September 30, 2011

Sales

Sales by Product Line     Three months ended                       Nine months ended
(in thousands)               September 30,          Percent          September 30,           Percent
                           2012          2011        change        2012          2011        change

Electrosurgical         $    4,149      $ 3,989          4.0 %   $  13,417     $ 12,905           4.0 %
Cauteries                    1,878        1,577         19.1 %       5,181        4,720           9.8 %
Other                          644          690        (6.7) %       2,245        1,627          38.0 %

Total                   $    6,671      $ 6,256          6.6 %   $  20,843     $ 19,252           8.3 %

Sales by Domestic and
International (in          Three months ended                           Nine months ended
thousands)                    September 30,            Percent            September 30,            Percent
                           2012           2011          change          2012          2011          change
Domestic                $    5,308      $   5,024            5.7 %   $   16,865     $  14,835           13.7 %
International                1,363          1,232           10.6 %        3,978         4,417          (9.9) %

Total                   $    6,671      $   6,256            6.6 %   $   20,843     $  19,252            8.3 %

During the three months ended September 30, 2012, we experienced increases in demand in both of our primary product line categories. The largest dollar sales increases occurred in our cauteries category amounting to approximately $301,000, or a 19.1% increase for the three months ended September 30, 2012 compared to the same period in 2011. The 4.0% sales increase experienced in our electrosurgical category during the three months ended September 30, 2012 compared to the same period in 2011, was mainly attributable to increased demand for our electrosurgical generators both internationally and with our domestic OEM customer amounting to approximately $160,000. We experienced a 6.7% decrease, or approximately $46,000, in our "other products" category sales for the three months ended September 30, 2012 when compared to the same period in 2011.

Sales during the nine months ended September 30, 2012 increased approximately $1.6 million or 8.3% compared to the same period in 2011. Our largest dollar sales increase which approximated $618,000 or 38% was in our "other products" category. This increase was also related to the sales trend of our new medical lighting systems and laproscopic instruments, amounting to increases of approximately $523,000 and $48,000 respectively. Some additional contributing factors to these increases were in various other products as well as engineering consulting services for which the combined net increase approximated $47,000 for the nine months ended September 30, 2012 as compared to the same period in 2011. The stronger demand for our OEM domestic electrosurgical generators we saw at the beginning of the year continued through the nine months ended September 30, 2012 and resulted in a 4.0% sales increase in our electrosurgical category, or approximately $513,000 when compared to the same period in 2011. Our trend of increased demand from our domestic customers for cauteries continued through the nine months ended September 30, 2012 amounting to approximately $461,000 or 9.8% when compared to the same period in 2011.

Our ten largest customers accounted for approximately 66% of net revenues for the nine months ended September 30, 2012 and 67% for the same period in 2011. At September 30, 2012 and 2011, our ten largest trade receivables accounted for approximately 62% and 67% of our net receivables, respectively. During the first nine months of 2012, two of our customers each accounted for 11% of total sales. No customer accounted for greater than 10% of our sales for the same period ending September 30, 2011.

Gross Profit

                        Three months
                            ended                                                      Nine months ended
(in thousands)          September 30,          Percent of sales         Percent          September 30,            Percent of sales         Percent
                      2012        2011         2012          2011       change         2012          2011         2012          2011       change
Cost of sales        $ 3,777     $ 3,650          56.6 %      58.3 %         3.5 %   $  12,297     $ 11,167          59.0 %      58.0 %        10.1 %

Gross profit         $ 2,894     $ 2,606          43.4 %      41.7 %        11.1 %   $   8,546     $  8,085          41.0 %      42.0 %         5.7 %

In addition to our increased overall sales, our gross profit also increased as a percentage of sales by approximately 1.7% or $288,000 for the three months ended September 30, 2012 as compared to the same period in 2011. This increase is mainly attributable to higher sales of higher profit margin products which are offset by increased costs of goods sold expenses in areas of direct labor, health insurance, and direct and indirect J-Plasma product line costs, all totaling approximately $127,000 during the three months ended September 30, 2012 as compared to the same period in 2011.

Our gross profit for the nine months ended September 30, 2012 increased by approximately $461,000, or 5.7%, as compared to the same period in 2011. Although our gross profit was an increase in actual dollars it amounted to a 1% decrease as a percentage of sales, which was primarily attributable to higher sales of lower profit margin OEM generators during the period, lower sales of our higher profit margin generators sold through distribution during the period, a 70% cost of sales attributable to the additional medical lighting systems sales which we only began selling in the third quarter of 2011, and increases related to direct and indirect costs in the initial manufacture and roll out of our J-Plasma product line.

Other Gain

Salient/Medtronic Settlement

During the nine months ended September 30, 2011, we entered into a settlement agreement related to the legal action with Salient Surgical Technologies, Inc. and Medtronic, Inc. The settlement called for us and related parties to immediately exit and not enter into the monopolar and bipolar saline-enhanced RF device business (including SEER TM) worldwide through February 2015. In exchange, Salient made a one-time payment to us of $750,000.

Research and Development Expense

                        Three months
                            ended                                                        Nine months ended
(in thousands)          September 30,           Percent of sales                           September 30,             Percent of sales
                                                                         Percent                                                              Percent
                      2012         2011        2012           2011       change        2012             2011        2012           2011       change
R & D Expense       $   322      $  288          4.8 %         4.6 %        11.8 %   $  969         $    924          4.6 %         4.8 %         4.9 %

We experienced an increase in research and development costs approximating $34,000 or 11.8% in the three months ended September 30, 2012 as compared to the same period in 2011, which were directly related to increased engineering labor, consulting, and testing costs related to advancing the J-Plasma product line as well as other new products.

During the nine months ended September 30, 2012, we experienced a 4.9% increase in research and development costs, or approximately $45,000, when compared to the same period in 2011. This increase, similar to our experience in the recent quarter, was mainly related to increased engineering labor, consulting, and testing costs with our other new products as well as advancing the J-Plasma product line.

Professional Services

                           Three months ended                                                   Nine months ended September
(in thousands)                September 30,              Percent of sales         Percent                   30,                      Percent of sales         Percent
                          2012            2011          2012          2011        change         2012                2011           2012          2011        change
Professional services   $     408       $     289          6.1 %         4.6 %        41.2 %   $   1,061         $        906          5.1 %         4.7 %       17.1  %

We experienced an increase of approximately $119,000, or 41.2% in our professional services costs during the three months ended September 30, 2012 when compared to the same period in 2011. The main area of increase was in legal fees where we experienced an approximate increase of $133,000 primarily attributable to litigation expenses. This increase was offset by a reduction in accounting and auditing costs of approximately $14,000.

Our professional services costs for the nine months ended September 30, 2012 increased by approximately $155,000, or 17.1%, mainly due to increased legal fees related to existing lawsuits when compared to the same nine month period in 2011.

Salaries

                             Three months ended                                                Nine months ended September
( in thousands)                 September 30,             Percent of sales        Percent                  30,                   Percent of sales        Percent

During the three months ended September 30, 2012, we had two additional sales positions which were offset by a reduction in in-house legal salaries, as compared to the same period in 2011, which resulted in our salaries expense in dollars remaining relatively the same.

We experienced a net 1.6% decrease in salaries and related costs, or approximately $39,000, during the nine months ending September 30, 2012 as compared to the same period in 2011 for similar reasons previously mentioned and experienced during the quarter.

Selling, General & Administrative Expenses

Our selling, general and administrative costs increased by approximately $105,000, or 10.5% for the three months ended September 30, 2012 as compared to the same period in 2011. This overall increase was the net result of the following approximate offsetting amounts:

· a $61,000 decrease in bank fees and other various overhead related costs along with a gain on disposition of assets;

· increases in rental fees, shareholder and stock exchange related costs, obsolete inventory provisions, general insurance, and various other overhead related costs amounting to approximately $144,000;

· a $14,000 decrease in regulatory costs related to the support of our distribution and new product sales;

· a $21,000 decrease in amortization costs related to the Meg product line which was written-off last year;

· a $15,000 net increase in selling and marketing costs which includes trade shows, sales travel both international and domestic, and advertising; and

· a $42,000 increase in commission expense due to increased distribution sales;

For the nine months ending September 30, 2012, we experienced an increase of approximately $15,000, or 0.5% in selling, general and administrative costs as compared to the same period in 2011. This slight overall increase was the net result of the following approximate offsetting amounts:

· a $152,000 decrease in bank fees, general insurance from a premium reduction, royalty expense, obsolete inventory provisions, building maintenance utilities, and other various overhead related costs along with a gain on disposition of assets;

· a $65,000 decrease in regulatory costs related to the support of our distribution and new product sales;

· a $37,000 decrease in amortization costs related to the Meg product line which was written-off last year;

· a $56,000 decrease in miscellaneous cost related to the 2011 one time legal settlement which was absent for the same period 2012;

· increases in computers and software, rental fees, general insurance, shareholder and stock exchange related costs, and various other overhead related costs amounting to approximately $101,000;

· a $159,000 increase in selling and marketing costs related to our existing products along with our new J-Plasma line of products, which includes trade shows, sales travel both international and domestic, and advertising; and

· a $66,000 increase in commission expense due to increased distribution sales;

Other Income

                            Three months ended                                                       Nine months ended
(in thousands)                 September 30,               Percent of sales          Percent           September 30,             Percent of sales         Percent
                           2012             2011          2012          2011         change         2012           2011         2012          2011        change

Net interest expense    $    (58 )      $     (42 )        (0.9) %      (0.7) %         38.1 %   $   (175 )      $ (141)         (0.8) %      (0.7) %        24.1 %
Change in fair value
of liabilities          $   (135  )     $     (67  )       (2.0) %      (1.1)  %       101.5 %   $   (108  )     $   181         (0.5) %       0.9%         159.7 %

Net interest expense increased by approximately $16,000 or 38.1% in the three months ended September 30, 2012 as compared to the same period in 2011. The increase was mainly due to slightly higher interest rates and amortization of charges due to refinancing of the industrial revenue bonds in late 2011.

For the nine-month period ended September 30, 2012 as compared to the same period in 2011, net interest expense increased by $34,000. The increase was mainly due to slightly higher interest rates and amortization of charges due to refinancing of the industrial revenue bonds in late 2011.

The change in fair value of liabilities was related to the warrants associated with our equity issuance in April 2010. The derivative warrant liability was valued at approximately $105,000 at December 31, 2011 and was valued at approximately $213,000 on September 30, 2012 resulting in a year-to-date loss of approximately $108,000.

Income Taxes

                            Three months ended                                                        Nine months ended
(in thousands)                 September 30,              Percent of sales           Percent            September 30,             Percent of sales           Percent
                            2012            2011         2012           2011         change          2012           2011         2012           2011         change
Income before income
taxes                   $       89       $    139          1.3 %          2.2 %        (36.0 )%   $    635       $  1,423          3.0 %          7.4 %        (55.4 )%
Provision for income
taxes, net              $      (96 )     $    (76 )       (1.4 )%        (1.2 )%        26.3 %    $   (304 )     $   (439 )       (1.5 )%        (2.3 )%        30.8 %
Effective tax rate           107.9 %         54.7 %                                                   47.9 %         30.9 %

While we are subject to U.S. federal income tax as well as income tax of certain state jurisdictions, during the nine months ended September 30, 2012, our current provision was zero because the net effect of our permanent and temporary differences resulted in us recognizing a loss for tax purposes. However, for the three month period ended September 30, 2012, permanent differences related to fair value adjustments resulted in us recognizing a gain for tax purposes and our current provision was approximately $96,000. At September 30, 2012, we have remaining net operating loss carryforwards and other net deferred income tax assets of approximately $2.9 million to reduce future taxable income. Our effective tax rate of 47.9% for the nine months ended September 30, 2012 was greater than the statuatory tax rates primarily because we recognized certain losses from the fair value adjustments for financial statement purposes that are not expected to reverse (i.e. permanent differences).

Net Income

                      Three months ended                                                  Nine months ended September
(in thousands)           September 30,             Percent of sales         Percent                   30,                     Percent of sales        Percent

Product Development

We have developed most of our products and product improvements internally. Funds for this development have come primarily from our internal cash flow and equity issuances. We maintain close working relationships with physicians and medical personnel in hospitals and universities who assist in product research and development. New and improved products play a critical role in our sales growth. We continue to emphasize the development of proprietary products and product improvements to complement and expand our existing product lines. We have a centralized research and development focus in Florida for new product development and product improvements. Our research, development and engineering units at the manufacturing locations maintain relationships with distribution locations and customers to provide an understanding of changes in the market and product needs. During 2012, we continued to invest in expanding our J-Plasma product line and technology, ICON VS™ and the accompanying vessel sealing technology, and Aaron™ 1450. We intend to pay the ongoing costs for this development from operating cash flows.

At this time, we do not contemplate any material purchase or acquisition of assets during the next twelve months that our ordinary cash flow and/or credit line would be unable to sustain.

Reliance on Collaborative, Manufacturing and Selling Arrangements

We depend on certain contractual OEM customers for product development. In these situations, we plan to manufacture the products developed. The customer has no legal obligation, however, to purchase the developed products. If the collaborative customer fails to give us purchase orders for the product after development, our future business and value of related assets could be negatively affected. Furthermore, we can give no assurance that a collaborative customer may give sufficient high priority to our products. In addition, disagreements or disputes may arise between us and our contractual customers, which could adversely affect production of our products. We also have two collaborative arrangements with foreign suppliers, one informal and one contractual, in which we request the development of certain items and components, and we purchase them pursuant to purchase orders. Our purchase orders are never longer than one year and are supported by orders from our customers. We recently amended the manufacturing agreement with our Bulgarian supplier, which as of March 1, 2012, may result in certain contingent liabilities on our part if we terminate our arrangement prior to July 1, 2014 (see Note 10).

Liquidity and Capital Resources

Our working capital at September 30, 2012 increased by approximately $0.3 million to $14.4 million compared to approximately $14.1 million at December 31, 2011. This increase was mainly the result of a decrease in inventory purchases and increased sales. Accounts receivable days of sales outstanding were 39.1 days and 34.8 days at September 30, 2012 and 2011, respectively. The number of days worth of sales in inventory, which is the total inventory available for . . .