GYNECARE INC, 10-Q, 1997-08-04

GYNECARE INC
10-Q, 1997-08-04
ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS

Previous: ITT CORP /NV/, 4, 1997-08-04

Next: ENDOCARE INC, 424B2, 1997-08-04

<PAGE>

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

Mark One:

[ X ] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934

For the quarterly period ended June 30, 1997 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 0-27214

GYNECARE, INC.
(Exact name of registrant as specified in its charter)

Delaware 94-3197941
-------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

235 Constitution Drive, Menlo Park, CA 94025
-----------------------------------------------------------
(Address of principal executive offices, including zip code)

Registrant's telephone number, including area code: (415) 614-2500

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
requirement for the past 90 days.

Yes [ X ] No [ ]

The number of shares of Common Stock outstanding as of July 31, 1997 was
8,295,693.

<PAGE>

TABLE OF CONTENTS

Page

Part I. Financial Information

Item 1. Financial Statements

Condensed Balance Sheets at June 30, 1997
and December 31, 1996 3

Statements of Operations for the three and six months
ended June 30, 1997 and 1996 4

Statements of Cash Flows for the six months ended
June 30, 1997 and 1996 5

Notes to Condensed Financial Statements 6

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8

Part II. Other Information

Item 4. Submission of Matters to a Vote of Security Holders 15

Item 6. Exhibits and Reports on Form 8-K 15

Signatures 16

2
<PAGE>

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

GYNECARE, INC.

CONDENSED BALANCE SHEETS
(UNAUDITED)

JUNE 30, DECEMBER 31,
1997 1996
------------- ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . $ 5,592,000 $ 3,823,000
Short-term investments. . . . . . . . . . . . . . . . . . 2,337,000 9,248,000
Accounts receivable, net. . . . . . . . . . . . . . . . . 371,000 457,000
Inventories . . . . . . . . . . . . . . . . . . . . . . . 406,000 424,000
Prepaids and other current assets . . . . . . . . . . . . 179,000 254,000
------------- ------------
Total current assets . . . . . . . . . . . . . . . . . 8,885,000 14,206,000
Property and equipment, net. . . . . . . . . . . . . . . . . 1,360,000 1,419,000
Prepaid royalties. . . . . . . . . . . . . . . . . . . . . . 1,910,000 1,900,000
Other assets, net. . . . . . . . . . . . . . . . . . . . . . 862,000 873,000
------------- ------------
Total assets . . . . . . . . . . . . . . . . . . . . . $ 13,017,000 $ 18,398,000
------------- ------------
------------- ------------

LIABILITIES
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . . $ 1,010,000 $ 481,000
Accrued expenses. . . . . . . . . . . . . . . . . . . . . 562,000 634,000
Current portion of long-term debt . . . . . . . . . . . . 355,000 291,000
------------- ------------
Total current liabilities. . . . . . . . . . . . . . . 1,927,000 1,406,000
Long-term debt, net of current portion . . . . . . . . . . . 384,000 458,000
------------- ------------
Total liabilities. . . . . . . . . . . . . . . . . . . 2,311,000 1,864,000
------------- ------------

STOCKHOLDERS' EQUITY

Common Stock . . . . . . . . . . . . . . . . . . . . . . . . 8,000 8,000
Additional paid-in-capital . . . . . . . . . . . . . . . . . 33,815,000 33,748,000
Deferred compensation. . . . . . . . . . . . . . . . . . . . (307,000) (387,000)
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . (22,810,000) (16,835,000)
------------- ------------
Total stockholders' equity . . . . . . . . . . . . . . 10,706,000 16,534,000
------------- ------------
Total liabilities and stockholders' equity . . . . . . $ 13,017,000 $ 18,398,000
------------- ------------
------------- ------------
</TABLE>

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

3
<PAGE>
GYNECARE, INC.

STATEMENTS OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 303,000 $ 218,000 $ 572,000 $ 475,000
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . 409,000 379,000 807,000 700,000
----------- ----------- ----------- -----------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . (106,000) (161,000) (235,000) (225,000)
----------- ----------- ----------- -----------
Operating expenses:
Research and development . . . . . . . . . . . . . . . . . . . . . 1,085,000 1,343,000 2,287,000 2,504,000
Selling, general and administrative. . . . . . . . . . . . . . . . 1,854,000 1,296,000 3,665,000 2,355,000
----------- ----------- ----------- -----------
Total operating expenses . . . . . . . . . . . . . . . . . . . . 2,939,000 2,639,000 5,952,000 4,859,000
----------- ----------- ----------- -----------
Loss from operations . . . . . . . . . . . . . . . . . . . . . . . . (3,045,000) (2,800,000) (6,187,000) (5,084,000)
Interest income, net . . . . . . . . . . . . . . . . . . . . . . . . 94,000 194,000 212,000 430,000
----------- ----------- ----------- -----------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(2,951,000) $(2,606,000) $(5,975,000) $(4,654,000)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net loss per share . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.36) $ (0.32) $ (0.72) $ (0.57)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Shares used in computing net loss per share. . . . . . . . . . . . . 8,295,000 8,160,000 8,297,000 8,157,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------

</TABLE>

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

4
<PAGE>

GYNECARE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)

<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
---------------------------------
1997 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (5,975,000) $ (4,654,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . 221,000 135,000
Amortization of deferred compensation. . . . . . . . . . . . . . 80,000 94,000
Provision for doubtful accounts. . . . . . . . . . . . . . . . . 74,000 32,000
Changes in operating assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . 12,000 (139,000)
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . 18,000 170,000
Prepaids and other current assets. . . . . . . . . . . . . . . 75,000 129,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . 529,000 (526,000)
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . (72,000) 40,000
------------- -------------
Net cash used in operating activities. . . . . . . . . . . . (5,038,000) (4,719,000)
------------- -------------

Cash flows from investing activities:
Acquisition of property and equipment. . . . . . . . . . . . . . (161,000) (330,000)
Acquisition of patent rights and
related technical information. . . . . . . . . . . . . . . . . -- (400,000)
Purchase of investments. . . . . . . . . . . . . . . . . . . . . (1,958,000) (20,444,000)
Maturity of investments. . . . . . . . . . . . . . . . . . . . . 8,869,000 7,535,000
------------- -------------
Net cash provided by/(used in) investing activities. . . . . 6,750,000 (13,639,000)
------------- -------------

Cash flows from financing activities:
Proceeds from issuance of Common Stock . . . . . . . . . . . . . 3,000 79,000
Proceeds from issuance of Common Stock pursuant to the
1995 Employee Stock Purchase Plan. . . . . . . . . . . . . . . 91,000 --
Repurchase of shares . . . . . . . . . . . . . . . . . . . . . . (27,000) --
Proceeds from issuance of debt . . . . . . . . . . . . . . . . . 137,000 --
Payments on debt . . . . . . . . . . . . . . . . . . . . . . . . (147,000) (146,000)
------------- -------------
Net cash provided by/(used in) financing activities. . . . . 57,000 (67,000)
------------- -------------
Net increase/(decrease) in cash and cash equivalents . . . . . . . 1,769,000 (18,425,000)
Cash and cash equivalents at beginning of period . . . . . . . . . 3,823,000 22,330,000
------------- -------------
Cash and cash equivalents at end of period . . . . . . . . . . . . $ 5,592,000 $ 3,905,000
------------- -------------
------------- -------------

Supplemental cash flow information:
Interest paid during the period. . . . . . . . . . . . . . . . . $ 36,000 $ 38,000
------------- -------------
------------- -------------
</TABLE>

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

5
<PAGE>

GYNECARE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)

1. BASIS OF PRESENTATION

In the opinion of management, the accompanying unaudited financial
statements have been prepared by the Company in accordance with
generally accepted accounting principles for interim financial
information and pursuant to the rules and regulations of the Securities
and Exchange Commission. All adjustments, consisting of only normal
recurring adjustments, necessary for a fair presentation have been
included. The results of operations for the six month period ended June
30, 1997 are not necessarily indicative of the results to be expected
for any other interim period or for the entire year.

The financial statements should be read in conjunction with the audited
financial statements and notes thereto included in Gynecare's (the
Company's) Annual Report on Form 10-K, for the year ended December 31,
1996, filed with the Securities and Exchange Commission pursuant to
Section 13 of the Securities Exchange Act of 1934.

2. CASH, CASH EQUIVALENTS, SHORT-TERM INVESTMENTS AND INVESTMENTS

All highly liquid investments purchased with an original maturity of
ninety days or less are considered to be cash equivalents. The Company
accounts for investments under Statement of Financial Accounting
Standards No. 115 "Accounting for Certain Investments in Debt and Equity
Securities" (SFAS No. 115), whereby investments that are deemed by
management to be held-to-maturity are reported at amortized cost. All
investments as of June 30, 1997 are classified as held-to-maturity and
are carried at amortized cost, which approximates fair market value.

3. INVENTORIES

Inventories are stated at the lower of cost (first-in, first-out) or
market. The components of inventory are:

June 30, December 31,
1997 1996
--------- -------------
Raw materials $ 230,000 $ 121,000
Work-in-process 113,000 105,000
Finished goods 63,000 198,000
--------- ----------
$ 406,000 $ 424,000
--------- ----------
--------- ----------

4. RECENT ACCOUNTING PRONOUNCEMENTS

In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" (SFAS 128), which specifies the computation, presentation and
disclosure requirements for earnings per share. SFAS 128 supersedes
Accounting Principles Board Opinion No. 15 and is effective for
financial statements issued for periods ending after December 15, 1997.
SFAS 128 requires restatement of all prior-period earnings per share
data presented after the effective date. SFAS 128 will not have a
material impact on the Company's financial position, results of
operations or cash flows.

In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS 130). SFAS 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. Comprehensive income is defined
as the change in equity of a business enterprise during a period from
transactions and other events and circumstances from nonowner sources.
It includes all changes in equity during a period except those resulting
from investments by owners and distributions to owners. SFAS 130 is
effective for fiscal years beginning after

6
<PAGE>

December 15, 1997, and reclassification of financial statements for
earlier periods provided for comparative purposes is required. SFAS 130
is not expected to have a material impact on the Company's financial
position, results of operations or cash flows.

In June 1997, the Financial Accounting Standards Board also issued
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS 131). SFAS 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 issued
to shareholders. SFAS 131 generally supersedes Statement of Financial
Accounting Standards No. 14 "Financial Reporting for Segments of a
Business Enterprise." SFAS 131 is effective for financial statements
for periods beginning after December 15, 1997, and restatement of
comparative information for earlier years is required. However, SFAS
131 is not required to be applied to interim financial statements in the
initial year of application. SFAS 131 will not have a material impact
on the Company's financial position, results of operations or cash
flows.

7
<PAGE>

PART I. Continued-

Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations

THIS SECTION OF THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE
COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED
IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A
DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE SUBSECTION
ENTITLED "FACTORS AFFECTING OPERATING RESULTS AND MARKET PRICE OF STOCK"
COMMENCING ON PAGE 8.

This Management's Discussion and Analysis of Financial Condition and Results
of Operations (MD&A) should be read in conjunction with the MD&A contained in
the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1996.

RESULTS OF OPERATIONS

Revenues increased 39% to $303,000 in the second quarter of fiscal 1997
and 20% to $572,000 in the first half of fiscal 1997 from $218,000 and
$475,000 in the corresponding periods of fiscal 1996. Substantially all of
the revenues to-date have been generated from international sales of the
ThermaChoice-TM- Uterine Balloon Therapy-TM- system. The growth in revenues
over the corresponding periods of fiscal 1996 was primarily the result of
increased sales of the ThermaChoice catheter, as an increasing number of
ThermaChoice procedures were performed internationally, and shipments of the
VersaPoint system during the first quarter of 1997.

Cost of goods sold increased 8% to $409,000 in the second quarter of
fiscal 1997 and 15% to $807,000 in the second half of fiscal 1997 from
$379,000 and $700,000 in the corresponding periods of fiscal 1996. These
increases were primarily the result of the increased level of revenues during
the related periods.

The Company's research and development expenses decreased 19% to
$1,085,000 and 9% to $2,287,000 for the quarter and six month period ended
June 30, 1997 from $1,343,000 and $2,504,000 for the corresponding periods of
fiscal 1996. This decrease was principally due to decreased expenditures
resulting from the completion of the U.S. clinical trials of the ThermaChoice
Uterine Balloon Therapy system, which commenced in January 1996 and ended in
early October 1996, and the absence of costs associated with the clinical
studies and submission for FDA clearance to market VersaPoint in the U.S.
Such FDA clearance was received in November 1996.

The Company's selling, general and administrative expenses increased 43%
to $1,854,000 and 56% to $3,665,000 for the second quarter and first half of
fiscal 1997 from $1,296,000 and $2,355,000 for the corresponding periods of
fiscal 1996. The increase was primarily the result of Gynecare's increased
investment in sales and marketing activities including retention of direct
marketing personnel in Canada and several other European countries, the
Company's ongoing efforts to obtain reimbursement in international markets,
and managing the international distributor network. Growth in the Company's
sales and marketing, accounting and administrative staff from sixteen
employees at June 30, 1996 to twenty-three at June 30, 1997 further
contributed to the increase in selling, general and administrative expenses.

Net interest income decreased to $94,000 and $212,000 for the quarter
and six month period ended June 30, 1997 from $194,000 and $430,000 for the
corresponding periods of fiscal 1996. The decrease is primarily the result
of the decreased level of cash and investments held by the Company during the
second quarter and first half of fiscal 1997 compared to those held during
the corresponding periods of fiscal 1996. This decreased level of cash and
investments is the result of expending such resources to fund continuing
operations.

As a result of all of the above factors, the Company's total net loss
increased to $2,951,000 and $5,975,000 for the quarter and six month period
ended June 30, 1997 from $2,606,000 and $4,654,000 for the corresponding
periods of fiscal 1996.

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

Since inception, the Company's cash expenditures have significantly
exceeded its revenues, resulting in an accumulated deficit of $22,810,000 at
June 30, 1997. The Company has funded its operations primarily through the
private placement of equity securities aggregating $15,361,000 during 1994
and 1995 and the completion of its initial public offering in November 1995
aggregating net proceeds of $15,223,000.

Cash used by the Company's operations was $5,038,000 for the six months
ended June 30, 1997 as compared to $4,719,000 for the corresponding period in
fiscal 1996. Cash was used during the first half of fiscal 1997 primarily to
fund the expansion of marketing programs for the ThermaChoice Uterine Balloon
Therapy system in the U.S. and in international markets, the costs of
obtaining reimbursement in existing markets, the ongoing development of the
ThermaChoice Uterine Balloon Therapy and VersaPoint systems, and increased
general and administrative expenses to support expanded operations.

The Company's capital expenditures for the first half of fiscal 1997 and
for the corresponding period in fiscal 1996 were $161,000 and $330,000,
respectively. The decreased level of capital expenditures during the first
half of fiscal 1997 compared to the corresponding period in fiscal 1996 was
due primarily to reduced capital requirements to support U.S. clinical
studies of the ThermaChoice Uterine Balloon Therapy system which commenced in
January 1996. The patient treatment phase of this study ended in October
1996.

During the first quarter of fiscal 1996, the Company exercised its
option to extend its license and OEM supply agreement with Gyrus Medical,
Ltd. ("Gyrus") to include use of the VersaPoint technology in the field of
laparoscopy. A $400,000 deposit on this OEM supply agreement was made in
March 1996. Additional deposits of up to $600,000 will be due over the next
12 to 24 months.

At June 30, 1997, the Company had outstanding borrowings totaling
$739,000 under two secured credit facilities. Borrowings bear interest at
the bank's prime rate plus 1.25%-1.50% per annum, are required to be repaid
in monthly installments over 30 months, and are secured by a pledge of all of
the Company's equipment and fixtures.

The Company believes that its cash, cash equivalents and investments
together with interest thereon will be sufficient to fund its operations and
capital requirements through December 31, 1997. The estimate of this time
period is a forward-looking statement involving risks and uncertainties,
including the timing of FDA approval of the ThermaChoice Uterine Balloon
Therapy system and demand for and market acceptance of the Company's
products, the progress of the Company's clinical research and product
development programs, the receipt of and the time required to obtain other
regulatory clearances and approvals, the resources the Company devotes to
developing, manufacturing and marketing its products, the resources required
to hire and develop a direct sales force in the United States, the resources
required to expand manufacturing capacity and facilities requirements, the
costs of obtaining reimbursement for use of the Company's ThermaChoice
Uterine Balloon Therapy and VersaPoint systems in new and existing markets,
and other factors. As such, there can be no assurance that the Company will
not require additional financing prior to the end of 1997. Additional funding
may not be available when needed or on terms acceptable to the Company, which
would have a material adverse effect on the Company's business, financial
condition and results of operations.

RECENT ACCOUNTING PRONOUNCEMENTS

In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
(SFAS 128), which specifies the computation, presentation and disclosure
requirements for earnings per share. SFAS 128 supersedes Accounting
Principles Board Opinion No. 15 and is effective for financial statements
issued for periods ending after December 15, 1997. SFAS 128 requires
restatement of all prior-period earnings per share data presented after the
effective date. SFAS 128 will not have a material impact on the Company's
financial position, results of operations or cash flows.

9
<PAGE>

defined as the change in equity of a business enterprise during a period from
transactions and other events and circumstances from nonowner sources. It
includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners. SFAS 130 is effective for
fiscal years beginning after December 15, 1997, and reclassification of
financial statements for earlier periods provided for comparative purposes is
required. SFAS 130 is not expected to have a material impact on the
Company's financial position, results of operations or cash flows.

In June 1997, the Financial Accounting Standards Board also issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131). SFAS 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 issued to shareholders. SFAS 131 generally
supersedes Statement of Financial Accounting Standards No. 14 "Financial
Reporting for Segments of a Business Enterprise." SFAS 131 is effective for
financial statements for periods beginning after December 15, 1997, and
restatement of comparative information for earlier years is required.
However, SFAS 131 is not required to be applied to interim financial
statements in the initial year of application. SFAS 131 will not have a
material impact on the Company's financial position, results of operations or
cash flows.

FACTORS AFFECTING OPERATING RESULTS AND MARKET PRICE OF STOCK

Gynecare operates in a rapidly changing environment that involves a
number of uncertainties, some of which are beyond the Company's control. In
addition to the uncertainties described elsewhere in this report, these
uncertainties include:

DEPENDENCE ON A LIMITED NUMBER OF PRODUCTS. Currently, the ThermaChoice
Uterine Balloon Therapy and VersaPoint systems are the only products being
marketed by the Company. The Company will be required to obtain regulatory
approvals, including PMA approval from the FDA, before the ThermaChoice
Uterine Balloon Therapy system can be marketed in the United States and in
certain foreign countries, including Japan. There can be no assurance that
the Company's efforts will be successful or that the ThermaChoice Uterine
Balloon Therapy system will be safe or effective, capable of being
manufactured in commercial quantities at acceptable costs, approved by
appropriate regulatory or reimbursement authorities or successfully marketed.
The Company's VersaPoint system has only recently received FDA clearance for
marketing in the United States, and the Company has made limited shipments of
the system. Furthermore, because the ThermaChoice Uterine Balloon Therapy
and VersaPoint systems represent the Company's principal near-term focus, the
Company could be required to cease operations if these products are not
successfully commercialized. In addition, the continuing follow-up phase of
the U.S. clinical trials of the ThermaChoice Uterine Balloon Therapy system
may identify significant technical or other obstacles to be overcome prior to
obtaining necessary regulatory or reimbursement approvals. Although there has
been a significant success rate in the patients treated to date under the
current protocol for the ThermaChoice Uterine Balloon Therapy system, there
is only limited follow-up data for such patients. As a result, there can be
no assurance that the success rate of the procedure will be sustainable or
will not decrease over time. If the ThermaChoice Uterine Balloon Therapy
system does not prove to be safe and effective in the long-term follow up of
clinical trials, there would be a material adverse effect on the Company's
business, financial condition and results of operations.

LIMITED OPERATING HISTORY AND REVENUES; ANTICIPATED FUTURE LOSSES. The
Company has generated only limited revenues to date and has experienced net
losses since its inception. As of June 30, 1997, the Company had an
accumulated deficit of $22.8 million. The Company expects its operating
losses to continue for at least the next several years. In addition, the
Company expects that it will continue to expend substantial resources to fund
clinical trials in support of regulatory and reimbursement approvals,
expansion of marketing and sales activities and research and development.
There can be no assurance that the ThermaChoice Uterine Balloon Therapy and
VersaPoint systems will be successfully commercialized or that the Company
will achieve significant revenues from either international or domestic
sales. In addition, there can be no assurance that the Company will achieve
or sustain profitability in the future.

UNCERTAINTY OF MARKET ACCEPTANCE. The Company's success is dependent
upon acceptance of the ThermaChoice Uterine Balloon Therapy and VersaPoint
products by the medical community as reliable, safe and cost-effective
treatments for dysfunctional uterine bleeding and benign pathology. The
Company is unable to predict how quickly, if at all, its products will be
accepted by the medical community or, if accepted, the number of procedures
that will be performed. The medical indications that can be treated with the
ThermaChoice Uterine Balloon Therapy and VersaPoint systems can also

10
<PAGE>

be treated by surgery, drugs or other medical devices. Although the Company
believes that its products have certain advantages over competing products
and technologies, the Company does not have long-term clinical data
demonstrating such advantages. There can be no assurance that any such
advantages will be clinically significant. The ThermaChoice Uterine Balloon
Therapy and VersaPoint systems are designed to be used with a local
anesthetic in a clinic or physician's office. If physicians recommend or
require that the procedures using the ThermaChoice or VersaPoint products be
performed under general anesthesia in a hospital or outpatient surgery center
instead of under local anesthesia in a clinic or physician's office, market
acceptance of the products would be adversely affected, which would have a
material adverse effect on the Company's business, financial condition and
results of operations. Although the Company believes that the ThermaChoice
system may be adaptable to other uterine bleeding disorders, there can be no
assurance that the product will be clinically effective for any other
indications, that regulatory approval of the product for such other
indications could be obtained, that treatment of such conditions would be
commercially feasible or that additional markets for any such indications
will develop. Obtaining FDA approval to market the ThermaChoice Uterine
Balloon Therapy system for other indications is likely to require a long
period of time and considerable expense. Patient population estimates are
subject to inherent uncertainties, and the Company is unable to determine
with any degree of certainty the number of patients for any indication or the
number of patients who are suitable for treatment.

POTENTIAL FLUCTUATIONS IN FUTURE QUARTERLY RESULTS. The Company expects
that its operating results will fluctuate significantly from quarter to
quarter in the future and will depend on a number of factors, many of which
are outside the Company's control. These factors include actions relating to
regulatory and reimbursement matters, the extent to which the Company's
products gain market acceptance, the rate at which the Company establishes
its network of distributors and direct sales personnel in the U.S. and
internationally, the timing and size of customer purchases, which may be
influenced by volume purchase discounts and extended payment terms, and
competition.

LIMITED MANUFACTURING EXPERIENCE; DEPENDENCE ON SINGLE CONTRACT
MANUFACTURERS AND SOLE SOURCE SUPPLIERS; SCALE-UP RISK. The Company
currently manufactures certain components of its products and depends on
contract manufacturers for the production of certain components of the
ThermaChoice Uterine Balloon Therapy system and the entire VersaPoint system.
The Company expects to continue to depend on such manufacturers for the
foreseeable future. The integration of the Company's operations into new
facilities, which occurred in November 1995, has resulted and may continue to
result in inefficiencies. Specifically, manufacturers often encounter
difficulties in production of new products, including problems involving
production yields, quality control and assurance, component supply and
shortages of qualified personnel. The Company may experience a shortage of
manufacturing capacity if the new facility fails to operate as planned.
Although the Company intends to maintain sufficient levels of inventory to
avoid any material disruption resulting from the continuing scale-up of the
Company's facility, there can be no assurance that the Company will be able
to manufacture and supply sufficient quantities of products to meet product
requirements for commercial sales. Additionally, any delay or difficulty in
continuing manufacturing activities at its facility, or the inability of the
Company's contract manufacturers to supply required materials and the Company
subsequently not being able to successfully find an alternative source of
supply in a timely manner, may have a material adverse effect on the
Company's business, financial condition and results of operations. For the
foreseeable future, the Company expects that manufacturing and overhead costs
spread over low production volumes combined with the cost of using contract
manufacturers to produce the ThermaChoice controller and VersaPoint system
will continue to have an adverse effect on gross margins.

LIMITED INTERNATIONAL DISTRIBUTION; NO U.S. DISTRIBUTION. To date,
substantially all of the Company's sales have been outside the United States,
and the Company anticipates that a significant portion of its revenues for
the next year will continue to be derived from international sales. The
Company currently markets and sells its products internationally through a
network of distributors. The Company's international sales are dependent
upon the marketing efforts of, and sales by, these distributors. The Company
may also rely on these distributors to assist it in obtaining reimbursement
approvals from both government and private insurers in certain international
markets. In general, the Company has chosen to operate through small
distribution firms because of its belief that these firms will devote greater
attention to the Company's products. The use of small distributors increases
the risks associated with financial instability, which includes the risk that
distributors will cease operations or will be unable to satisfy financial
obligations to the Company. If a distributor were to fail to invest adequate
capital promoting the Company's products or were to cease operations, the
Company would likely be unable to achieve significant sales in the territory.
To market its products in the United States, Gynecare will need to establish
a distribution network which may consist of direct sales representatives,
independent sales representatives, independent distributors, or a combination
of these. The Company has only recently hired two direct sales

11
<PAGE>

representatives in the United States. There can be no assurance that the
Company will establish U.S. distribution networks for the ThermaChoice
Uterine Balloon Therapy and VersaPoint systems in a timely manner. The
failure to establish such distribution would have a material adverse effect
on the Company's business, financial condition and results of operations.

A number of other risks are inherent in international operations and
transactions. International sales and operations may be limited or disrupted
by the imposition of government controls, export license requirements,
political instability, trade restrictions, changes in tariffs, difficulties
in managing international operations and fluctuations in foreign currency
exchange rates. There can be no assurance that the Company will be able to
successfully commercialize the ThermaChoice Uterine Balloon Therapy system,
VersaPoint system, or any future product in any market.

UNCERTAINTY RELATING TO THIRD-PARTY REIMBURSEMENT. The Company's
success will be dependent upon, among other things, its ability to obtain
satisfactory reimbursement from health care payers for the ThermaChoice
Uterine Balloon Therapy and VersaPoint systems. The Company does not expect
that third-party reimbursement will be available, if at all, for use of the
ThermaChoice Uterine Balloon Therapy system in the United States unless and
until FDA approval is received. Third-party reimbursement for the VersaPoint
system and the ThermaChoice Uterine Balloon Therapy system, once FDA approval
is received, would be dependent upon decisions by the HCFA for Medicare, as
well as by individual health maintenance organizations, private insurers and
other payors. While the Company believes that the ThermaChoice Uterine
Balloon Therapy procedure may be reimbursed in the United States under
existing procedure codes for endometrial ablation and that the VersaPoint
procedure may be reimbursed under existing procedure codes for surgical
resection, there can be no assurance that this will occur or that the
reimbursement under these codes will be adequate. Given the efforts to
control and decrease healthcare costs in recent years, there can be no
assurance that any reimbursement will be sufficient to assure profitability.

Reimbursement systems in international markets vary significantly by
country, and by region within some countries, and reimbursement approvals
must be obtained on a country by country basis. Many international markets
have government managed health care systems that govern reimbursement for new
devices and procedures. In most markets, there are private insurance systems
as well as government managed systems. Large scale market acceptance of the
ThermaChoice Uterine Balloon Therapy and VersaPoint systems will depend on
the availability and level of reimbursement in international markets targeted
by the Company. Only recently has the Company's ThermaChoice products
obtained reimbursement for a small number of cases in several countries
internationally. The VersaPoint system has not yet been approved for
reimbursement in any international market. Obtaining reimbursement approvals
can require 12 to 18 months or longer. There can be no assurance that the
Company will continue to receive reimbursement in the several countries in
which it has recently received reimbursement or that it will obtain
reimbursement in any other countries within a particular time, for a
particular amount, or at all.

GOVERNMENT REGULATION. The manufacture and sale of medical devices,
including the ThermaChoice Uterine Balloon Therapy and VersaPoint systems,
are subject to extensive regulation by numerous government authorities in the
United States and other countries. The ThermaChoice Uterine Balloon Therapy
system is subject to the FDA's PMA requirements. As a result, the Company
will not be able to commence marketing and commercial sales of the
ThermaChoice Uterine Balloon Therapy system in the United States unless and
until it receives PMA approval for marketing of such product from the FDA.
In October 1996, the Company completed the patient treatment phase of its
U.S. clinical study for the ThermaChoice Uterine Balloon Therapy system and
the follow-up data collected to-date has indicated overall success in patient
treatment. However, there can be no assurance as to whether long-term safety
and efficacy data collected during clinical trials will be sufficient or
whether the Company will receive PMA approval for the ThermaChoice system.
The PMA for the ThermaChoice system was filed with the FDA in June 1997. In
addition, if approval is received, there can be no assurance that it would
not be for a more limited indication than the Company has requested, which
could limit the addressable market of the ThermaChoice Uterine Balloon
Therapy system and have a material adverse effect on the Company's business,
financial condition and results of operations. There can be no assurance
that the Company will not be required to conduct additional clinical trials
for the ThermaChoice Uterine Balloon Therapy system which may result in
substantial costs and delays. In addition, changes in existing regulations
or adoption of new government regulations or policies could prevent or delay
regulatory approval of the Company's products. Furthermore, if PMA approval
is granted, subsequent modifications to the approved device or manufacturing
process may require a PMA supplement or may require the submission of a new
PMA, which could require substantial additional clinical efficacy data

12
<PAGE>

and FDA review. Failure to obtain PMA approval or to obtain such approval on
a timely basis would have a material adverse effect on the Company's
business, financial condition and results of operations.

In the United States, the VersaPoint system received clearance from the
FDA under a 510(k) application in November 1996. However, if the Company
wished to propose modifications or enhancements to the VersaPoint system or
use the system for other indications such as laparoscopic indications, and
such major changes could affect the safety or effectiveness of the device, a
new 510(k) submission would be required. In such a case, the Company may be
prohibited from marketing the modified product until the 510(k) notice is
cleared by the FDA. Such a prohibition could have a material adverse effect
on the Company's business, financial condition and results of operations.

The Company will be required to adhere to applicable FDA regulations
regarding Good Manufacturing Practices (GMP) and similar regulations in other
countries, which include testing, control and documentation requirements.
The Company's success will depend in part on its ability to manufacture its
products in compliance with GMP and EN 46001 and other regulatory
requirements, in sufficient quantities and in a timely manner, while
maintaining product quality and acceptable manufacturing costs. Failure to
increase production volumes in a timely or cost-effective manner or to
maintain compliance with GMP and EN 46001 and other regulatory requirements
could have a material adverse effect on the Company's business, financial
condition and results of operations.

Regulatory approvals, if granted, may include significant limitations on
the indicated uses for which the products may be marketed. FDA enforcement
policy strictly prohibits the marketing of approved medical devices for
unapproved uses. Failure to comply with applicable regulatory requirements,
including marketing products for unapproved uses, could result in, among
other things, FDA warning letters, fines, injunctions, civil penalties,
recall or seizure of products, total or partial suspension of production,
refusal of the government to grant premarket clearance or premarket approval
for devices, withdrawal of approvals and criminal prosecution, which would
have a material adverse effect on the Company's business, financial condition
and results of operations.

Sales of medical devices outside of the United States are subject to
international regulatory requirements that vary from country to country. The
requirements for approval for sale internationally may differ from those
required for FDA approval. In Europe, the Company will be required to obtain
the certifications necessary to enable the CE mark to be affixed to the
Company's products by mid-calendar 1998 in order to continue commercial sales
in member countries of the European Union. Although the Company has obtained
all such certifications for its ThermaChoice Uterine Balloon Therapy and
VersaPoint systems, there can be no assurance that it will be able to obtain
certifications for other future products in a timely manner, if at all. A
failure to obtain any such certifications could have a material adverse
effect on the Company's business, financial condition and results of
operations.

DEPENDENCE ON LICENSES, PATENTS AND PROPRIETARY TECHNOLOGY. The
Company's success depends in part on its ability to retain licenses, obtain
patent protection for products and processes, and preserve its trade secrets
and proprietary technology. The Company's one issued United States patent
was assigned to the Company by Origin pursuant to a royalty-bearing agreement
covering potential future modifications to the ThermaChoice Uterine Balloon
Therapy system. Additionally, pursuant to such agreement, the Company
granted to Origin a non-exclusive, royalty-free license under such patent for
use in fields other than gynecology. The validity and breadth of claims
covered in medical device technology patents involve complex legal and
factual questions and, therefore, may be highly uncertain. No assurance can
be given that any patents will be issued from pending patent applications or
from any future patent applications, that the scope of any patent protection
will exclude competitors or provide competitive advantages to the Company,
that any of the Company's patents will be held valid if subsequently
challenged or that others will not claim rights in or ownership of the
patents and other proprietary rights held by the Company. For example, one
of the Company's competitors filed a third party observation investigating
prior art patents as they relate to a European patent application licensed to
the Company for the ThermaChoice product. As a result, the claims have been
amended and a European patent has been issued. This competitor has filed a
similar action in connection with the Company's prosecution of a
corresponding patent application in Australia. As a result, the claims have
been amended and a patent will be issued. Further, the Company believes such
competitor recently filed in the U.S. Patent Trademark Office a request for
re-examination of two issued patents related to the Company's ThermaChoice
product which request for re-examination has been granted by the Patent
Trademark Office based on certain prior art references presented to such
office, certain of which were the subject of the European observation. There
can be no assurance that these patents will be held valid after the
re-examination proceeding or, that if

13
<PAGE>

held invalid, would not have a material adverse effect on the Company's
business, financial condition or results of operations. Furthermore, certain
of the Company's licenses provide that the license rights revert back to the
licensors in the event of material breach of the license agreements,
including failure to pay minimum royalty amounts or milestone payments when
due, or failure to purchase certain quantities of product from the licensor.
To the extent license rights are involved, the Company is dependent upon
technology licensors to prosecute their patents in the United States and in
foreign countries. The reversion of rights under the Company's license
agreements or failure of the licensors to fully prosecute patents would have
a material adverse effect on the Company's business, financial condition and
results of operations.

There has been substantial litigation regarding patent and other
intellectual property rights in the medical device industry. Litigation,
which could result in substantial cost to and diversion of effort by the
Company, may be necessary to enforce patents issued or licensed to the
Company, protect trade secrets or know-how owned by the Company, defend the
Company against claimed infringement of the rights of others or determine the
ownership, scope or validity of the proprietary rights of the Company and
others. An adverse determination in any such litigation could subject the
Company to significant liabilities to third parties, require the Company to
seek licenses from third parties and prevent the Company from manufacturing,
selling or using its products, any of which could have a material adverse
effect on the Company's business, financial condition and results of
operations. In the event of such an adverse determination, there can be no
assurance whether a license would be offered on terms acceptable to the
Company, or at all.

POTENTIAL VOLATILITY OF STOCK PRICE. The securities markets have, from
time to time, experienced significant price and volume fluctuations that may
be unrelated to the operating performance of particular companies. The
market prices of the Common Stock of many publicly-held medical device
companies have in the past been, and can in the future be expected to be,
especially volatile. Announcements of technological innovations or new
products by the Company or its competitors, developments or disputes
concerning patents or proprietary rights, regulatory developments, the
issuance of new or changed stock market analyst reports and recommendations,
and economic and other external factors, as well as period-to-period
fluctuations in the Company's financial results, have had and may continue to
have in the future a significant impact on the market price of the Common
Stock.

FUTURE CAPITAL NEEDS. The Company's capital requirements depend on a
number of factors, including the timing of FDA approval of the ThermaChoice
Uterine Balloon Therapy system, and demand for and market acceptance of the
Company's products, the progress of the Company's clinical research and
product development programs, the receipt of and the time required to obtain
regulatory clearances and approvals, the resources the Company devotes to
developing, manufacturing and marketing its products, the resources required
to hire and develop a direct sales force in the United States, the resources
required to expand manufacturing capacity and facilities requirements, the
costs of obtaining reimbursement for use of the Company's ThermaChoice
Uterine Balloon Therapy and VersaPoint systems in new and existing markets,
and other factors. While the Company believes that its cash, cash equivalents
and short-term investments together with interest thereon will be sufficient
to fund its operations and capital requirements through December 31, 1997,
there can be no assurance that the Company will not require additional
financing prior to the end of 1997. The estimate of this time period is a
forward-looking statement involving risks and uncertainties and actual
results may differ materially as a result of a number of factors including
those noted above. Should additional be required, such funding may not be
available when needed or on terms acceptable to the Company, which would have
a material adverse effect on the Company's business, financial condition and
results of operations.

CONTROL BY DIRECTORS AND PRINCIPAL STOCKHOLDERS. The directors and
principal stockholders of the Company, and certain of their affiliates, own
approximately 65% of the Company's outstanding Common Stock. Accordingly,
these persons, individually and as a group, may be able to effectively
control the Company and direct its affairs and business, including any
determination with respect to the acquisition or disposition of assets by the
Company, future issuances of Common Stock or other securities by the Company,
declaration of dividends on the Common Stock and the election of directors.
Such concentration of ownership may also have the effect of delaying,
deferring or preventing a change in control of the Company.

14
<PAGE>

PART II. OTHER INFORMATION

Item 4. Submission of Matters to a vote of Security Holders

(a) The Annual Meeting of Stockholders of the Company was held on
May 28, 1997 (the "Meeting").

(b) The following directors were elected at the Meeting:

A. Lad Burgin
A. Grant Heidrich

(i) Election of Directors For Withheld
--------------------- --------- --------

A. Lad Burgin 7,496,666 31,813
A. Grant Heidrich 7,520,699 7,780

(ii) Approval of Amendment to 1994 Stock Plan to increase
the aggregate maximum number of shares issuable
thereunder by 700,000 to a total of 1,884,250.

For Against Abstained No Vote
--- ------- --------- -------
6,155,054 222,932 9,775 1,140,718

(iii) Ratification of Coopers & Lybrand, L.L.P. as
independent auditors for the Company for
fiscal year 1997:

For Against Abstained No Vote
--- ------- --------- -------
7,516,665 7,736 4,078 0

The foregoing matters are described in more detail in the Company's
definitive proxy statement dated April 25, 1997.

Item 6. (a) Exhibits

10.1 Business Loan between Silicon Valley Bank and Gynecare
dated July 12, 1995 as amended on December 17, 1996
11.1 Computation of Net Loss Per Share
27.1 Financial Data Schedule

(b) Reports on Form 8-K

No Reports on Form 8-K were filed during the quarter.

<PAGE>

SIGNATURES

Pursuant to the requirements 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.

GYNECARE, INC.

By: /s/ MALCOLM M. FARNSWORTH, JR.
--------------------------------
Malcolm M. Farnsworth, Jr.
Vice President, Finance and
Chief Financial Officer
(Principal Financial Officer),
Secretary

Date: August 1, 1997
------------------------------

<PAGE>

PROMISSORY NOTE
- --------------------------------------------------------------------------------

BORROWER: GYNECARE, INC. LENDER: Silicon Valley Bank
235 Constitution Drive Embarcadero/Technology
Menio Park, CA 94025 1731 Embarcadero, Suite 220
Palo Alto, CA 94303
- --------------------------------------------------------------------------------

PRINCIPAL AMOUNT: $750,000.00 INITIAL RATE: 10.250% DATE OF NOTE: July 12,
1995

Promise To Pay. GYNECARE, INC. ("Borrower") promises to pay to Silicon Valley
Bank ("Lender"), or order, in lawful money of the United States of America,
the principal amount of Seven Hundred Fifty Thousand & 00/100 Dollars
($750,000.00) or so much as may be outstanding, together with interest on the
unpaid outstanding principal balance of each advance. Interest shall be
calculated from the date of each advance until repayment of each advance.

PAYMENT. Borrower will pay this loan in accordance with the following payment
schedule:

Borrower will pay regular monthly payments of all accrued unpaid
interest beginning July 31, 1995, and all subsequent interest payments
are due on the last day of each month thereafter until December 31,
1995, at which time the outstanding principal balance will be payable in
even payments of principal plus interest for thirty (30) months due on
the last day of the each month beginning January 31, 1996. The final
payment due on June 30, 1998 will be for all outstanding principal and
accrued unpaid interest.

Interest on this Note is computed on a 365/360 simple interest basis; that
is, by applying the ratio of the annual interest rate over a year of 360
days, multiplied by the outstanding principal balance, multiplied by the
actual number of days the principal balance is outstanding. Borrower will pay
Lender at Lender's address shown above or at such other place as Lender may
designate in writing. Unless otherwise agreed or required by applicable law,
payments will be applied first to accrued unpaid interest, then to principal,
and any remaining amount to any unpaid collection costs and late charges.

VARIABLE INTEREST RATE. The interest rate on this Note is subject to change
from time to time based on changes in an index which is Lender's Prime Rate
(the "Index"). This is the rate Lender charges, or would charge, on 90-day
unsecured loans to the most creditworthy corporate customers. This rate may
or may not be the lowest rate available from Lender at any given time. Lender
will tell Borrower the current index rate upon Borrower's request. Borrower
understands that Lender may make loans based on other rates as well. The
interest rate change will not occur more often than each time the prime rate
is adjusted by Silicon Valley Bank. The Index currently is 8.750% per annum.
The interest rate to be applied to the unpaid principal balance of this Note
will be at a rate of 1.500 percentage points over the Index, resulting in an
initial rate of 10.250% per annum. NOTICE: Under no circumstances will the
interest rate on this Note be more than the maximum rate allowed by
applicable law.

PREPAYMENT. Borrower agrees that all loan fees and other prepaid finance
charges are earned fully as of the date of the loan and will not be subject
to refund upon early payment (whether voluntary or as a result of default),
except as otherwise required by law. Except for the foregoing, Borrower may
pay without penalty all or a portion of the amount owed earlier than it is
due. Early payments will not, unless agreed to by Lender in writing, relieve
Borrower of Borrower's obligation to continue to make payments of accrued
unpaid interest. Rather, they will reduce the principal balance due.

DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform
when due any other term, obligation, covenant, or condition contained in this
Note or any agreement related to this Note, or in any other agreement or loan
Borrower has with Lender. (c) Borrower defaults under any loan, extension of
credit, security agreement, purchase or sales agreement, or any other
agreement, in favor of any other creditor or person that may materially
affect any of Borrower's property or Borrower's ability to repay this Note or
perform Borrower's obligations under this Note or any of the Related
Documents. (d) Any representation or statement made or furnished to Lender by
Borrower or on Borrower's behalf is false or misleading in any material
respect either now or at the time made or furnished. (e) Borrower becomes
insolvent, a receiver is appointed for any part of Borrower's property,
Borrower makes an assignment for the benefit of creditors, or any proceeding
is commenced either by Borrower or against Borrower under any bankruptcy or
insolvency laws. (f) Any creditor tries to take any of Borrower's property on
or in which Lender has a lien or security interest. This includes a
garnishment of any of Borrower's accounts with Lender. (g) Any of the events
described in this default section occurs with respect to any guarantor of
this Note. (h) A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness is impaired.

LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Upon Borrower's failure to
pay all amounts declared due pursuant to this section, including failure to
pay upon final maturity, Lender, at its option, may also, if permitted under
applicable law, do one or both of the following: (a) increase the variable
interest rate on this Note to 6.500 percentage points over the Index, and (b)
add any unpaid accrued interest to principal and such sum will bear interest
therefrom until paid at the rate provided in this Note (including any
increased rate). Lender may hire or pay someone else to help collect this
Note if Borrower does not pay. Borrower also will pay Lender that amount.
This includes, subject to any limits under applicable law, Lender's
attorneys' fees and Lender's legal expenses whether or not there is a
lawsuit, including attorneys' fees and legal expenses for bankruptcy
proceedings (including efforts to modify or vacate any automatic stay or
injunction), appeals, and any anticipated post-judgement collection services.
Borrower also will pay any court costs, in addition to all other sums
provided by law.* This Note has been delivered to Lender and accepted by
Lender in the State of California. If there is a lawsuit, Borrower agrees
upon Lender's request to submit to the jurisdiction of the courts of Santa
Clara County, the State of California. Lender and Borrower hereby waive the
right to any jury trial in any action, proceeding, or counterclaim brought by
either Lender or Borrower against the other. (Initial Here MMF ) This Note
shall be governed by and construed in accordance with the laws of the State
of California.*

LINE OF CREDIT. This Note evidences a straight line of credit until December
31, 1995. Once the total amount of principal has been advanced, Borrower is
not entitled to further loan advances. Advances under this Note, as well as
directions for payment from Borrower's accounts, may be requested orally or
in writing by Borrower or by authorized person. Lender may, but need not,
require that all oral requests be confirmed in writing. Borrower agrees to be
liable for all sums either: (a) advanced in accordance with the instructions
of an authorized person or (b) credited to any of Borrower's accounts with
Lender. The unpaid principal balance owing on this Note at any time may be
evidenced by endorsements on this Note or by Lender's internal records,
including daily computer print-outs. Lender will have no obligation to
advance funds under this Note if: (a) Borrower or any guarantor is in default
under the terms of this Note or any agreement that Borrower or any guarantor
has with Lender, including any agreement made in connection with the signing
of this Note; (b) Borrower or any guarantor ceases doing business or is
insolvent; (c) any guarantor seeks, claims or otherwise attempts to limit,
modify or revoke such guarantor's guarantee of this Note or any other loan
with Lender; or (d) Borrower has applied funds provided pursuant to this Note
for purposes other than those authorized by Lender.

REQUEST TO DEBIT ACCOUNTS. Borrower will regularly deposit all funds received
from its business activities in accounts maintained by Borrower at Silicon
Valley Bank. Borrower hereby requests and authorizes Lender to debit any of
the Borrower's accounts with Lender, specifically, without limitation,
Account Number 0273517270, for payments of principal and interest due on
the loan and any other obligations owing by the Borrower to

<PAGE>

PROMISSORY NOTE PAGE 2
(CONTINUED)

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

Lender. Lender will notify Borrower of all debits which Lender makes against
Borrower's accounts. Any such debits against Borrower's accounts in no way
shall be deemed a set-off.

ADVANCES. At any time from the date hereof through December 31, 1995,
Borrower may from time to time request advances (each, an "Advance") from
Lender in an aggregate amount not to exceed $750,000.00. To evidence the
Advance, Borrower shall deliver to Lender, at the time of each Advance
Request, an invoice for the equipment or machinery to be purchased. The
Advances shall be used only to purchase equipment or machinery and shall not
exceed one hundred percent (100%) of the invoice amount of such equipment and
machinery approved from time to time by Lender, excluding taxes, shipping,
warranty charges, freight discount and installation expenses. Tenant
improvements and software Advances may, however, comprise up to $400,000.00
of the Advances.

BUSINESS LOAN AGREEMENT. This Note is subject to and shall be governed by all
the terms and conditions of the Business Loan Agreement of even date between
Lender and Borrower, as the same may be amended from time to time, which
Business Loan Agreement is incorporated herein by reference.

LOAN FEE. This Note is subject to a loan fee in the amount of Seven Thousand
Five Hundred and 00/100 Dollars ($75,000.00) plus all out-of-pocket expenses.

GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or
remedies under this Note without losing them. Borrower and any other person
who signs, guarantees or endorses this Note, to the extent allowed by law,
waive any applicable statute of limitations, presentment, demand for payment,
protest and notice of dishonor. Upon any change in the terms of this Note,
and unless otherwise expressly stated in writing, no party who signs this
Note, whether as maker, guarantor, accommodation maker or endorser, shall be
released from liability. All such parties agree that Lender may renew or
extend (repeatedly and for any length of time) this loan, or release any
party or guarantor or collateral; or impair, fail to realize upon or perfect
Lender's security interest in the collateral; and take any other action
deemed necessary by Lender without the consent of or notice to anyone. All
such parties also agree that Lender may modify this loan without the consent
of or notice to anyone other than the party with whom the modification is
made.

PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS
OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER
AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY
OF THE NOTE.

BORROWER:

GYNECARE, INC.

BY: /s/ M M Farnsworth
---------------------------------------------------
NAME: Malcolm Farnsworth TITLE: CFO
------------------------- -----

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

BUSINESS LOAN AGREEMENT

BORROWER: GYNECARE, INC. LENDER: SILICON VALLEY BANK
235 Constitution Drive 1731 Embarcadero, suite 220
Menlo Park, CA 94025 Palo Alto, CA 94303

================================================================================

THIS BUSINESS LOAN AGREEMENT between GYNECARE, INC. ("Borrower") and Silicon
Valley Bank ("Lender") is made and executed on the following terms and
conditions. Borrower has received prior commercial loans from Lender or has
applied to Lender for a commercial loan or loans and other financial
accommodations, including those which may be described on any exhibit or
schedule attached to this Agreement. All such loans and financial
accommodations, together with all future loans and financial accommodations
from Lender to Borrower, are referred to in this Agreement individually as
the "Loan" and collectively as the "Loans." Borrower understands and agrees
that: (a) in granting, renewing, or extending any Loan, Lender is relying
upon Borrower's representations, warranties, and agreements, as set forth in
this Agreement; (b) the granting, renewing, or extending of any Loan by
Lender at all times shall be subject to Lender's sole judgment and
discretion; and (c) all such Loans shall be and shall remain subject to the
following terms and conditions of this Agreement.

TERM. This Agreement shall be effective as of July 12, 1995, and shall
continue thereafter until all Indebtedness of Borrower to Lender has been
performed in full and the parties terminate this Agreement in writing.

DEFINITIONS. The following words shall have the following meanings when used
in this Agreement. Terms not otherwise defined in this Agreement shall have
the meanings attributed to such terms in the Uniform Commercial Code. All
references to dollar amounts shall mean amounts in lawful money of the United
States of America.

Agreement. The word "Agreement" means this Business Loan Agreement, as
this Business Loan Agreement may be amended or modified from time to time,
together with all exhibits and schedules attached to this Business Loan
Agreement from time to time.

Borrower. The word "Borrower" means GYNECARE, INC.. The word "Borrower"
also includes, as applicable, all subsidiaries and affiliates of Borrower
as provided below in the paragraph titled "Subsidiaries and Affiliates."

CERCLA. The word "CERCLA" means the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended.

Cash Flow. The words "Cash Flow" mean net income after taxes, and
exclusive of extraordinary gains and income, plus depreciation and
amortization.

Collateral. The word "Collateral" means and includes without limitation
all property and assets granted as collateral security for a Loan, whether
real or personal property, whether granted directly or indirectly, whether
granted now or in the future, and whether granted in the form of a
security interest, mortgage, deed of trust, assignment, pledge, chattel
mortgage, chattel trust, factor's lien, equipment trust, conditional sale,
trust receipt, lien, charge, lien or title retention contract, lease or
consignment intended as a security device, or any other security or lien
interest whatsoever, whether created by law, contract, or otherwise.

Debt. The word "Debt" means all of Borrower's liabilities excluding
Subordinated Debt.

ERISA. The word "ERISA" means the Employee Retirement Income Security
Act of 1974, as amended.

Event of Default. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "EVENTS OF DEFAULT."

Grantor. The word "Grantor" means and includes without limitation each
and all of the persons or entities granting a Security Interest in any
Collateral for the Indebtedness, including without limitation all
Borrowers granting such a Security Interest.

Guarantor. The word "Guarantor" means and includes without limitation
each and all of the guarantors, sureties, and accommodation parties in
connection with any Indebtedness.

Indebtedness. The word "Indebtedness" means and includes without
limitation all Loans, together with all other obligations, debts and
liabilities of Borrower to Lender, or any one or more of them, as well
as all claims by Lender against Borrower, or any one or more of them;
whether now or hereafter existing, voluntary or involuntary, due or not
due, absolute or contingent, liquidated or unliquidated; whether
Borrower may be liable individually or jointly with others; whether
Borrower may be obligated as a guarantor, surety, or otherwise; whether
recovery upon such Indebtedness may be or hereafter may become barred
by any statute of limitations; and whether such Indebtedness may be or
hereafter may become otherwise unenforceable.

Lender. The word "Lender" means Silicon Valley Bank, its successors and
assigns.

Liquid Assets. The words "Liquid Assets" mean Borrower's cash on hand
plus Borrower's receivables.

Loan. The word "Loan" or "Loans" means and includes without limitation
any and all commercial loans and financial accommodations from Lender to
Borrower, whether now or hereafter existing, and however evidenced,
including without limitation those loans and financial accommodations
described herein or described on any exhibit or schedule attached to
this Agreement from time to time.

Note. The word "Note" means and includes without limitation Borrower's
promissory note or notes, if any, evidencing Borrower's Loan
obligations in favor of Lender, as well as any substitute, replacement
or refinancing note or notes therefor.

<PAGE>

BUSINESS LOAN AGREEMENT
(Continued)

Permitted Liens. The words "Permitted Liens" mean: (a) liens and
security interests securing Indebtedness owed by Borrower to Lender, (b)
liens for taxes, assessments, or similar charges either not yet due or
being contested in good faith; (c) liens of materialmen, mechanics,
warehousemen, or carriers, or other like liens arising in the ordinary
course of business and securing obligations which are not yet
delinquent; (d) purchase money liens or purchase money security
interests upon or in any property acquired or held by Borrower in the
ordinary course of business to secure indebtedness outstanding on the
date of this Agreement or permitted to be incurred under the paragraph of
this Agreement titled "Indebtedness and Liens"; (e) liens and security
interests which, as of the date of this Agreement, have been disclosed to
and approved by the Lender in writing; and (f) those liens and security
interests which in the aggregate constitute an immaterial and
insignificant monetary amount with respect to the net value of Borrower's
assets.

Related Documents. The words "Related Documents" mean and include
without limitation all promissory notes, credit agreements, loan
agreements, environmental agreements, guaranties, security agreements,
mortgages, deeds of trust, and all other instruments, agreements and
documents, whether now or hereafter existing, executed in connection
with the Indebtedness.

Security Agreement. The words "Security Agreement" mean and include
without limitation any agreements, promises, covenants, arrangements,
understandings or other agreements, whether created by law, contract, or
otherwise, evidencing, governing, representing, or creating a Security
Interest.

Security Interest. The words "Security Interest" mean and include
without limitation any type of collateral security, whether in the
form of a lien, charge, mortgage, deed of trust, assignment, pledge,
chattel mortgage, chattel trust, factor's lien, equipment trust,
conditional sale, trust receipt, lien or title retention contract, lease
or consignment intended as a security device, or any other security or
lien interest whatsoever, whether created by law, contract, or otherwise.

SARA. The word "SARA" means the Superfund Amendments and Reauthorization
Act of 1986 as now or hereafter amended.

Subordinated Debt. The words "Subordinated Debt" mean indebtedness and
liabilities of Borrower which have been subordinated by written
agreement to indebtedness owned by Borrower to Lender in form and
substance acceptable to Lender.

Tangible Net Worth. The words "Tangible Net Worth" mean Borrower's total
assets excluding all intangible assets (i.e., goodwill, trademarks,
patents, copyrights, organizational expenses, and similar intangible
items, but including leaseholds and leasehold improvements) less total
Debt.

Working Capital. The words "Working Capital" mean Borrower's current
assets, excluding prepaid expenses, less Borrower's current liabilities.

CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the initial
Loan Advance and each subsequent Loan Advance under this Agreement shall be
subject to the fulfillment to Lender's satisfaction of all of the conditions
set forth in this Agreement and in the Related Documents.

Loan Documents. Borrower shall provide to Lender in form satisfactory to
Lender the following documents for the Loan: (a) the Note, (b) Security
Agreements granting to Lender security interests in the Collateral, (c)
Financing Statements perfecting Lender's Security Interests; (d) evidence
of insurance as required below; and (e) any other documents required
under this Agreement or by Lender or its counsel.

Borrower's Authorization. Borrower shall have provided in form and
substance satisfactory to Lender properly certified resolutions, duly
authorizing the execution and delivery of this Agreement, the Note and the
Related Documents, and such other authorizations and other documents and
instruments as Lender or its counsel, in their sole discretion, may
require.

Payment of Fees and Expenses. Borrower shall have paid to Lender all
fees, charges, and other expenses which are then due and payable as
specified in this Agreement or any Related Document.

Representations and Warranties. The representations and warranties set
forth in this Agreement, in the Related Documents, and in any document or
certificate delivered to Lender under this Agreement are true and correct.

No Event of Default. There shall not exist at the time of any advance a
condition which would constitute an Event of Default under this Agreement.

REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender,
as of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any
Loan, and at all times any Indebtedness exists:

Organization. Borrower is a corporation which is duly organized, validly
existing, and in good standing under the laws of the State of California
and is validly existing and in good standing in all states in which
Borrower is doing business. Borrower has the full power and authority to
own its properties and to transact the businesses in which it is
presently engaged or presently proposes to engage. Borrower also is duly
qualified as a foreign corporation and is in good standing in all states
in which the failure to so qualify would have a material adverse effect
on its businesses or financial condition.

Authorization. The execution, delivery, and performance of this
Agreement and all Related Documents by Borrower, to the extent to be
executed, delivered or performed by Borrower, have been duly authorized by
all necessary action by Borrower; do not require the consent or approval of
any other person, regulatory authority or governmental body; and do not
conflict with, result in a violation of, or constitute a default under (a)
any provision of its articles of incorporation or organization, or
bylaws, or any agreement or other instrument binding upon Borrower or
(b) any law, governmental regulation, court decree, or order applicable
to Borrower.

Financial Information. Each financial statement of Borrower supplied to
Lender truly and completely disclosed Borrower's financial condition as of
the date of the statement, and there has been no material adverse change in
Borrower's financial condition subsequent to the date of the most recent
financial statement supplied to Lender. Borrower has no material
contingent obligations except as disclosed in such financial statements.

Legal Effect. This Agreement constitutes, and any instrument or
agreement required hereunder to be given by Borrower when delivered will
constitute, legal, valid and binding obligations of Borrower enforceable
against Borrower in accordance with their respective terms.

Properties. Except as contemplated by this Agreement or as previously
disclosed in Borrower's financial statements or in writing to Lender and as
accepted by Lender, and except for property tax liens for taxes not
presently due and payable, Borrower owns and has good title to all of
Borrower's

<PAGE>

BUSINESS LOAN AGREEMENT
(Continued)

properties free and clear of all Security Interests, and has not executed
any security documents or financing statements relating to such properties.
All of Borrower's properties are titled in Borrower's legal name, and
Borrower has not used, or filed a financing statement under, any other name
for at least the last five (5) years.

HAZARDOUS SUBSTANCES. The terms "hazardous waste," "hazardous substance,"
"disposal," "release," and "threatened release," as used in this Agreement,
shall have the same meanings as set forth in the "CERCLA," "SARA," the
Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq.,
the Resource Conservation and Recovery Act, 49 U.S.C. Section 6901, et
seq., Chapters 6.5 through 7.7 of Division 20 of the California Health and
Safety Code, Section 25100, et seq., or other applicable state or Federal
laws, rules, or regulations adopted pursuant to any of the foregoing.
Except as disclosed to and acknowledged by Lender in writing, Borrower
represents and warrants that: (a) During the period of Borrower's ownership
of the properties, there has been no use, generation, manufacture, storage,
treatment, disposal, release or threatened release of any hazardous waste
or substance by any person on, under, about or from any of the properties.
(b) Borrower has no knowledge of, or reason to believe that there has been
(i) any use, generation, manufacture, storage, treatment, disposal,
release, or threatened release of any hazardous waste or substance on,
under, about or from the properties by any prior owners or occupants of any
of the properties, or (ii) any actual or threatened litigation or claims of
any kind by any person relating to such matters. (c) Neither Borrower nor
any tenant, contractor, agent or other authorized user of any of the
properties shall use, generate, manufacture, store, treat, dispose of, or
release any hazardous waste or substance on, under, about or from any of
the properties; and any such activity shall be conducted in compliance with
all applicable federal, state, and local laws, regulations, and ordinances,
including without limitation those laws, regulations and ordinances
described above. Borrower authorizes Lender and its agents to enter upon
the properties to make such inspections and tests as Lender may deem
appropriate to determine compliance of the properties with this section of
the Agreement. Any inspections or tests made by Lender shall be at
Borrower's expense and for Lender's purposes only and shall not be
construed to create any responsibility or liability on the part of Lender
to Borrower or to any other person. The representations and warranties
contained herein are based on Borrower's due diligence in investigating the
properties for hazardous waste and hazardous substances. Borrower hereby
(a) releases and waives any future claims against Lender for indemnity or
contribution in the event Borrower becomes liable for cleanup or other
costs under any such laws, and (b) agrees to indemnify and hold harmless
Lender against any and all claims, losses, liabilities, damages, penalties,
and expenses which Lender may directly or indirectly sustain or suffer
resulting from a breach of this section of the Agreement or as a
consequence of any use, generation, manufacture, storage, disposal, release
or threatened release occurring prior to Borrower's ownership or interest
in the properties, whether or not the same was or should have been known to
Borrower. The provisions of this section of the Agreement, including the
obligation to indemnify, shall survive the payment of the Indebtedness and
the termination or expiration of this Agreement and shall not be affected
by Lender's acquisition of any interest in any of the properties, whether
by foreclosure or otherwise.

LITIGATION AND CLAIMS. No litigation, claim, investigation, administrative
proceeding or similar action (including those for unpaid taxes) against
Borrower is pending or threatened, and no other event has occurred which
may materially adversely affect Borrower's financial condition or
properties, other than litigation, claims, or other events, if any, that
have been disclosed to and acknowledged by Lender in writing.

TAXES. To the best of Borrower's knowledge, all tax returns and reports of
Borrower that are or were required to be filed, have been filed, and all
taxes, assessments and other governmental charges have been paid in full,
except those presently being or to be contested by Borrower in good faith
in the ordinary course of business and for which adequate reserves have
been provided.

LIEN PRIORITY. Unless otherwise previously disclosed to Lender in writing,
Borrower has not entered into or granted any Security Agreements, or
permitted the filing or attachment of any Security Interests on or
affecting any of the Collateral directly or indirectly securing repayment
of Borrower's Loan and Note, that would be prior or that may in any way be
superior to Lender's Security Interests and rights in and to such
Collateral.

BINDING EFFECT. This Agreement, the Note, all Security Agreements directly
or indirectly securing repayment of Borrower's Loan and Note and all of the
Related Documents are binding upon Borrower as well as upon Borrower's
successors, representatives and assigns, and are legally enforceable in
accordance with their respective terms.

COMMERCIAL PURPOSES. Borrower intends to use the Loan proceeds solely for
business or commercial related purposes.

EMPLOYEE BENEFIT PLANS. Each employee benefit plan as to which Borrower may
have any liability complies in all material respects with all applicable
requirements of law and regulations, and (i) no Reportable Event nor
Prohibited Transaction (as defined in ERISA) has occurred with respect to
any such plan, (ii) Borrower has not withdrawn from any such plan or
initiated steps to do so, and (iii) no steps have been taken to terminate
any such plan.

LOCATION OF BORROWER'S OFFICES AND RECORDS. Borrower's place of business,
or Borrower's Chief executive office, if Borrower has more than one place
of business, is located at 235 Constitution Drive, Menlo Park, CA 94025.
Unless Borrower has designated otherwise in writing this location is also
the office or offices where Borrower keeps its records concerning the
Collateral.

INFORMATION. All information heretofore or contemporaneously herewith
furnished by Borrower to Lender for the purposes of or in connection with
this Agreement or any transaction contemplated hereby is, and all
information hereafter furnished by or on behalf of Borrower to Lender will
be, true and accurate in every material respect on the date as of which
such information is dated or certified; and none of such information is or
will be incomplete by omitting to state any material fact necessary to make
such information not misleading.

SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Borrower understands and agrees
that Lender, without independent investigation, is relying upon the above
representations and warranties in extending Loan Advances to Borrower.
Borrower further agrees that the foregoing representations and warranties
shall be continuing in nature and shall remain in full force and effect
until such time as Borrower's Indebtedness shall be paid in full, or until
this Agreement shall be terminated in the manner provided above, whichever
is the last to occur.

AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:

LITIGATION. Promptly inform Lender in writing of (a) all material
adverse changes in Borrower's financial condition, and (b) all existing
and all threatened litigation, claims, investigations, administrative
proceedings or similar actions affecting Borrower or any Guarantor which
could materially affect the financial condition of Borrower or the
financial condition of any Guarantor.

FINANCIAL RECORDS. Maintain its books and records in accordance with
generally accepted accounting principles, applied on a consistent basis,
and permit Lender to examine and audit Borrower's books and records at
all reasonable times.

<PAGE>

BUSINESS LOAN AGREEMENT
(Continued)

FINANCIAL STATEMENTS. Furnish Lender with, as soon as available, but in no
event later than ninety (90) days after the end of each fiscal year,
Borrower's balance sheet and income statement for the year ended, reviewed by
a certified public accountant satisfactory to Lender, and, as soon as
available, but in no event later than thirty (30) days after the end of each
month, Borrower's balance sheet and profit and loss statement for the period
ended, prepared and certified as correct to the best knowledge and belief by
Borrower's chief financial officer or other officer or person acceptable to
Lender. All financial reports required to be provided under this Agreement
shall be prepared in accordance with generally accepted accounting
principles, applied on a consistent basis, and certified by Borrower as being
true and correct.

ADDITIONAL INFORMATION. Furnish such additional information and statements,
lists of assets and liabilities, agings of receivables and payables,
inventory schedules, budgets, forecasts, tax returns, and other reports with
respect to Borrower's financial condition and business operations as Lender
may request from time to time.

FINANCIAL COVENANTS AND RATIOS. Comply with the following covenants and
ratios: Except as provided above, all computations made to determine
compliances with the requirements contained in this paragraph shall be made
in accordance with generally accepted accounting principles, applied on a
consistent basis, and certified by Borrower as being true and correct.

INSURANCE. Maintain fire and other risk insurance, public liability
insurance, and such other insurance as Lender may require with respect to
Borrower's properties and operations, in form, amounts, coverages and with
insurance companies reasonably acceptable to Lender. Borrower, upon request
of Lender, will deliver to Lender from time to time the policies or
certificates of insurance in form satisfactory to Lender, including
stipulations that coverages will not be canceled or diminished without at
least ten (10) days' prior written notice to Lender. Each insurance policy
also shall include an endorsement providing that coverage in favor of Lender
will not be impaired in any way by any act, omission or default of Borrower
or any other person. In connection with all policies covering assets in which
Lender holds or is offered a security interest for the Loans, Borrower will
provide Lender with such loss payable or other endorsements as Lender may
require.

INSURANCE REPORTS. Furnish to Lender, upon request of Lender, reports on each
existing insurance policy showing such information as Lender may reasonably
request, including without limitation the following: (a) the name of the
insurer; (b) the risks insured; (c) the amount of the policy; (d) the
properties insured; (e) the then current property values on the basis of
which insurance has been obtained, and the manner of determining those
values; and (f) the expiration date of the policy. In addition, upon request
of Lender (however not more often than annually), Borrower will have an
independent appraiser satisfactory to Lender determine, as applicable, the
actual cash value or replacement cost of any Collateral. The cost of such
appraisal shall be paid by Borrower.

OTHER AGREEMENTS. Comply with all terms and conditions of all other
agreements, whether now or hereafter existing, between Borrower and any other
party and notify Lender immediately in writing of any default in connection
with any other such agreements.

LOAN PROCEEDS. Use all Loan proceeds solely for Borrower's business
operations, unless specifically consented to the contrary by Lender in
writing.

TAXES, CHARGES AND LIENS. Pay and discharge when due all of its indebtedness
and obligations, including without limitation all assessments, taxes,
governmental charges, levies and liens, of every kind and nature, imposed upon
Borrower or its properties, income, or profits, prior to the date on which
penalties would attach, and all lawful claims that, if unpaid, might become a
lien or charge upon any of Borrower's properties, income, or profits.
Provided however, Borrower will not be required to pay and discharge any such
assessment, tax, charge, levy, lien or claim so long as (a) the legality of
the same shall be contested in good faith by appropriate proceedings, and
(b) Borrower shall have established on its books adequate reserves with
respect to such contested assessment, tax, charge, levy, lien, or claim in
accordance with generally accepted accounting practices. Borrower, upon
demand of Lender, will furnish to Lender evidence of payment of the
assessments, taxes, charges, levies, liens and claims and will authorize the
appropriate governmental official to deliver to Lender at any time a written
statement of any assessments, taxes, charges, levies, liens and claims
against Borrower's properties, income, or profits.

PERFORMANCE. Perform and comply with all terms, conditions, and provisions
set forth in this Agreement and in the Related Documents in a timely manner,
and promptly notify Lender if Borrower learns of the occurrence of any event
which constitutes an Event of Default under this Agreement or under any of
the Related Documents.

OPERATIONS. Maintain executive and management personnel with substantially
the same qualifications and experience as the present executive and
management personnel; provide written notice to Lender of any change in
executive and management personnel; conduct its business affairs in a
reasonable and prudent manner and in compliance with all applicable federal,
state and municipal laws, ordinances, rules and regulations respecting its
properties, charters, businesses, and operations, including without
limitation, compliance with the Americans With Disabilities Act and with all
minimum funding standards and other requirements of ERISA and other laws
applicable to Borrower's employee benefit plans.

INSPECTION. Permit employees or agents of Lender at any reasonable time to
inspect any and all Collateral for the Loan or Loans and Borrower's other
properties and to examine or audit Borrower's books, accounts, and records
and to make copies and memoranda of Borrower's books, accounts, and records.
If Borrower now or at any time hereafter maintains any records (including
without limitation computer generated records and computer software programs
for the generation of such records) in the possession of a third party,
Borrower, upon request of Lender, shall notify such party to permit Lender
free access to such records at all reasonable times and to provide Lender
with copies of any records it may request, all at Borrower's expense.

COMPLIANCE CERTIFICATE. Unless waived in writing by Lender, provide Lender
monthly, within 30 days, and at the time of each disbursement of Loan
proceeds with a certificate executed by Borrower's chief financial officer,
or other officer or person acceptable to Lender, certifying that the
representations and warranties set forth in this Agreement are true and
correct as of the date of the certificate and further certifying that, as of
the date of the certificate, no Event of Default exists under this Agreement.

ENVIRONMENTAL COMPLIANCE AND REPORTS. Borrower shall comply in all respects
with all environmental protection federal, state and local laws, statutes,
regulations and ordinances; not cause or permit to exist, as a result of an
intentional or unintentional action or omission on its part or on the part of
any third party, on property owned and/or occupied by Borrower, any
environmental activity where damage may result to the environment, unless
such environmental activity is pursuant to and in compliance with the
conditions of a permit issued by the appropriate federal, state or local
governmental authorities; shall furnish to Lender promptly and in any event
within thirty (30) days after receipt thereof a copy of any notice, summons,
lien, citation, directive, letter or other communication from any
governmental agency or instrumentality concerning any intentional or
unintentional action

<PAGE>

BUSINESS LOAN AGREEMENT
(Continued)

or omission on Borrower's part in connection with any environmental
activity whether or not there is damage to the environment and/or
other natural resources.

ADDITIONAL ASSURANCES. Make, execute and deliver to Lender such
promissory notes, mortgages, deeds of trust, security agreements,
financing statements, instruments, documents and other agreements as
Lender or its attorneys may reasonably request to evidence and secure
the Loans and to perfect all Security Interests.

NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent
of Lender:

INDEBTEDNESS AND LIENS. (a) Except for trade debt incurred in the normal
course of business, equipment lease, and indebtedness to Lender
contemplated by this Agreement, create, incur or assume indebtedness for
borrowed money, including capital leases, (b) except as allowed as a
Permitted Lien, sell, transfer, mortgage, assign, pledge, lease, grant a
security interest in, or encumber any of Borrower's assets, or (c) sell
with recourse any of Borrower's accounts, except to Lender.

CONTINUITY OF OPERATIONS. (a) Engage in any business activities
substantially different than those in which Borrower is presently
engaged, (b) cease operations, liquidate, merge, transfer, acquire or
consolidate with any other entity, change ownership, change its name,
dissolve or transfer or sell Collateral out of the ordinary course of
business, (c) pay any dividends on Borrower's stock (other than
dividends payable in its stock), provided, however that notwithstanding
the foregoing, but only so long as no Event of Default has occurred and
is continuing or would result from the payment of dividends, if Borrower
is a "Subchapter S Corporation" (as defined in the Internal Revenue Code
of 1986, as amended), Borrower may pay cash dividends on its stock to
its shareholders from time to time in amounts necessary to enable the
shareholders to pay income taxes and make estimated income tax payments
to satisfy their liabilities under federal and state law which arise
solely from their status as Shareholders of a Subchapter S Corporation
because of their ownership of shares of stock of Borrower, or (d)
purchase or retire any of Borrower's outstanding shares (other than the
repurchase of unvested Employee Common Stock) or alter or amend
Borrower's capital structure.

LOANS, ACQUISITIONS AND GUARANTIES. (a) Loan, invest in or advance money
or assets, (b) purchase, create or acquire any interest in any other
enterprise or entity, or (c) incur any obligation as surety or guarantor
other than in the ordinary course of business.

CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan proceeds
if: (a) Borrower or any Guarantor is in default under the terms of this
Agreement or any of the Related Documents or any other agreement that
Borrower or any Guarantor has with Lender; (b) Borrower or any Guarantor
becomes insolvent, files a petition in bankruptcy or similar proceedings, or
is adjudged a bankrupt; (c) there occurs a material adverse change in
Borrower's financial condition, in the financial condition of any Guarantor,
or in the value of any Collateral securing any Loan; or (d) any Guarantor
seeks, claims or otherwise attempts to limit, modify or revoke such
Guarantor's guaranty of the Loan or any other loan with Lender.

LOAN ADVANCES. Lender, in its discretion, will make loans to Borrower, in
amounts determined by Lender, up to the amounts as defined and permitted in
the Agreement and Related Documents, including but not limited to any
Promissory Notes, executed by Borrower (the "Credit Limit"). The Borrower is
responsible for monitoring the total amount of Loans and Indebtedness
outstanding from time to time, and Borrower shall not permit the same, at any
time to exceed the Credit Limit. If at any time the total of all outstanding
Loans and Indebtedness exceeds the Credit Limit, the Borrower shall
immediately pay the amount of the excess to Lender, without notice or demand.

DEFAULT RATE. Upon default, including failure to pay upon final maturity,
Lender, at its option, may do one or both of the following: (a) increase the
variable interest rate on the Note to five percentage points (5.000%) over
the Interest Rate otherwise payable thereunder, and (b) add any unpaid
accrued interest to principal and such sum will bear interest therefrom until
paid at the rate provided in the Note.

FINANCIAL COVENANTS. Borrower shall maintain, on a monthly basis, a minimum
quick ratio of 1.50 to 1.00; a minimum tangible net worth of $1,000,000.00; a
maximum total debt to tangible net worth ratio of 1.00 to 1.00; and a minimum
liquidity of $2,000,000.00, reducing to $1,250,000.00 as of June 30, 1997.
Upon Borrower's ability to achieve two (2) consecutive quarters of a minimum
debt service coverage of 1.50 to 1.00, the liquidity covenant shall be
replaced with a minimum debt service coverage of 1.50 to 1.00, to be tested
by Lender, on a quarterly basis.

ADDITIONAL PROVISION. Borrower shall afford Lender the first right of
refusal to provide a commercially reasonable line of credit to the Borrower.

EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:

DEFAULT ON INDEBTEDNESS. Failure of Borrower to make any payment when
due on the Loans.

OTHER DEFAULTS. Failure of Borrower or any Grantor to comply with or to
perform when due any other term, obligation, covenant or condition
contained in this Agreement or in any of the Related Documents, or
failure of Borrower to comply with or to perform any other term,
obligation, covenant or condition contained in any other agreement
between Lender and Borrower.

DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor
default under any loan, extension of credit, security agreement,
purchase or sales agreement, or any other agreement, in favor of any
other creditor or person that may materially affect any of Borrower's
property or Borrower's or any Grantor's ability to repay the Loans or
perform their respective obligations under this Agreement or any of the
Related Documents.

FALSE STATEMENTS. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Borrower or any Grantor under
this Agreement or the Related Documents is false or misleading in any
material respect at the time made or furnished, or becomes false or
misleading at any time thereafter.

DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related
Documents ceases to be in full force and effect (including failure of
any Security Agreement to create a valid and perfected Security
Interest) at any time and for any reason.

INSOLVENCY. The dissolution or termination of Borrower's existence as a
going business, the insolvency of Borrower, the appointment of a
receiver for any part of Borrower's property, any assignment for the
benefit of creditors, any type of creditor workout, or the commencement
of any proceeding under any bankruptcy or insolvency laws by or against
Borrower.

<PAGE>

BUSINESS LOAN AGREEMENT
(Continued)

CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Borrower, any
creditor of any Grantor against any collateral securing the
Indebtedness, or by any governmental agency. This includes a
garnishment, attachment, or levy on or of any of Borrower's deposit
accounts with Lender.

EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with
respect to any Guarantor of any of the Indebtedness or any Guarantor
dies or becomes incompetent, or revokes or disputes the validity of, or
liability under, any Guaranty of the Indebtedness.

CHANGE IN OWNERSHIP. Any change in ownership of twenty-five percent
(25%) or more of the common stock of Borrower.

ADVERSE CHANGE. A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of
the Indebtedness is impaired.

EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except
where otherwise provided in this Agreement or the Related Documents, all
commitments and obligations of Lender under this Agreement or the Related
Documents or any other agreement immediately will terminate (including any
obligation to make Loan Advances or disbursements), and, at Lender's option,
all Indebtedness immediately will become due and payable, all without notice
of any kind to Borrower, except that in the case of an Event of Default of
the type described in the "Insolvency" subsection above, such acceleration
shall be automatic and not optional. In addition, Lender shall have all the
rights and remedies provided in the Related Documents or available at law, in
equity, or otherwise. Except as may be prohibited by applicable law, all of
Lender's rights and remedies shall be cumulative and may be exercised
singularly or concurrently. Election by Lender to pursue any remedy shall not
exclude pursuit of any other remedy, and an election to make expenditures or
to take action to perform an obligation of Borrower or of any Grantor shall
not affect Lender's right to declare a default and to exercise its rights and
remedies.

MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part
of this Agreement:

AMENDMENTS. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to the
matters set forth in this Agreement. No alteration of or amendment to this
Agreement shall be effective unless given in writing and signed by the
party or parties sought to be charged or bound by the alteration or
amendment.

APPLICABLE LAW. This Agreement has been delivered to Lender and accepted
by Lender in the State of California. If there is a lawsuit, Borrower
agrees upon Lender's request to submit to the jurisdiction of the courts
of Santa Clara County, the State of California. Lender and Borrower
hereby waive the right to any jury trial in any action, proceeding, or
counterclaim brought by either Lender or Borrower against the other.
(Initial Here /s/MMF ) This Agreement shall be governed by and construed
in accordance with the laws of the State of California.

CAPTION HEADINGS. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the
provisions of this Agreement.

MULTIPLE PARTIES; CORPORATE AUTHORITY. All obligations of Borrower under
this Agreement shall be joint and several, and all references to
Borrower shall mean each and every Borrower. This means that each of the
Borrowers signing below is responsible for all obligations in this
Agreement.

CONSENT TO LOAN PARTICIPATION. Borrower agrees and consents to Lender's
sale or transfer, whether now or later, of one or more participation
interests in the Loans to one or more purchasers, whether related or
unrelated to Lender. Lender may provide, without any limitation
whatsoever, to any one or more purchasers, or potential purchasers, any
information or knowledge Lender may have about Borrower or about any
other matter relating to the Loan, and Borrower hereby waives any rights
to privacy it may have with respect to such matters. Borrower additionally
waives any and all notices of sale of participation interests, as well
as all notices of any repurchase of such participation interests.
Borrower also agrees that the purchasers of any such participation
interests will be considered as the absolute owners of such interests in
the Loans and will have all the rights granted under the participation
agreement or agreements governing the sale of such participation
interests. Borrower further waives all rights of offset or counterclaim
that it may have now or later against Lender or against any purchaser of
such a participation interest and unconditionally agrees that either
Lender or such purchaser may enforce Borrower's obligation under the
Loans irrespective of the failure or insolvency of any holder of any
interest in the Loans. Borrower further agrees that the purchaser of any
such participation interests may enforce its interests irrespective of
any personal claims or defenses that Borrower may have against Lender.

COSTS AND EXPENSES. Borrower agrees to pay upon demand all of Lender's
expenses, including without limitation attorneys' fees, incurred in
connection with the preparation, execution, enforcement, modification
and collection of this Agreement or in connection with the Loans made
pursuant to this Agreement. Lender may pay someone else to help collect
the Loans and to enforce this Agreement, and Borrower will pay that
amount. This includes, subject to any limits under applicable law,
Lender's attorneys' fees and Lender's legal expenses, whether or not
there is a lawsuit, including attorneys' fees for bankruptcy proceedings
(including efforts to modify or vacate any automatic stay or
injunction), appeals, and any anticipated post-judgment collection
services. Borrower also will pay any court costs, in addition to all
other sums provided by law.

NOTICES. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimile, and shall be effective
when actually delivered or when deposited with a nationally recognized
overnight courier or deposited in the United States mail, first class,
postage prepaid, addressed to the party to whom the notice is to be
given at the address shown above. Any party may change its address for
notices under this Agreement by giving formal written notice to the
other parties, specifying that the purpose of the notice is to change
the party's address. To the extent permitted by applicable law, if there
is more than one Borrower, notice to any Borrower will constitute notice
to all Borrowers. For notice purposes, Borrower agrees to keep Lender
informed at all times of Borrower's current address(es).

SEVERABILITY. If a court of competent jurisdiction finds any provision
of this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; however, if the offending
provision cannot be so modified, it shall be stricken and all other
provisions of this Agreement in all other respects shall remain valid
and enforceable.

SUBSIDIARIES AND AFFILIATES OF BORROWER. To the extent the context of
any provisions of this Agreement makes it appropriate, including without
limitation any representation, warranty or covenant, the word "Borrower"
as used herein shall include all subsidiaries and affiliates of Borrower

<PAGE>

BUSINESS LOAN AGREEMENT
(Continued)

Notwithstanding the foregoing however, under no circumstances shall this
Agreement be construed to require Lender to make any Loan or other
financial accommodation to any subsidiary or affiliate of Borrower.

SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or on
behalf of Borrower shall bind its successors and assigns and shall inure
to the benefit of Lender, its successors and assigns. Borrower shall not,
however, have the right to assign its rights under this Agreement or any
interest therein, without the prior written consent of Lender.

SURVIVAL. All warranties, representations, and covenants made by
Borrower in this Agreement or in any certificate or other instrument
delivered by Borrower to Lender under this Agreement shall be considered
to have been relied upon by Lender and will survive the making of the
Loan and delivery to Lender of the Related Documents, regardless of any
investigation made by Lender or on Lender's behalf.

TIME IS OF THE ESSENCE. Time is of the essence in the performance of
this Agreement.

WAIVER. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender.
No delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender
of a provision of this Agreement shall not prejudice or constitute a
waiver of Lender's right otherwise to demand strict compliance with that
provision or any other provision of this Agreement. No prior waiver by
Lender, nor any course of dealing between Lender and Borrower, or
between Lender and any Grantor, shall constitute a waiver of any of
Lender's rights or of any obligations of Borrower or of any Grantor as
to any future transactions. Whenever the consent of Lender is required
under this Agreement, the granting of such consent by Lender in any
instance shall not constitute continuing consent in subsequent instances
where such consent is required, and in all cases such consent may be
granted or withheld in the sole discretion of Lender.

BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN
AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF
JULY 12, 1995.

BORROWER:

GYNECARE, INC.

By: /s/ MM Farnsworth
----------------------------
Name: Malcolm Farnsworth
--------------------------
Title: CFO
-------------------------

LENDER:
Silicon Valley Bank

By: /s/ Raja F. Singh
----------------------------
Authorized Officer

<PAGE>

COMMERCIAL SECURITY AGREEMENT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

Borrower: GYNECARE, INC. Lender: Silicon Valley Bank
235 Constitution Drive Embarcadero/Technology
Menlo Park, CA 94025 1731 Embarcadero, Suite 220
Palo Alto, CA 94303
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

THIS COMMERCIAL SECURITY AGREEMENT is entered into between GYNECARE, INC.
(referred to below as "Grantor"); and Silicon Valley Bank (referred to below
as "Lender"). For valuable consideration, Grantor grants to Lender a
security interest in the Collateral to secure the Indebtedness and agrees that
Lender shall have the rights stated in this Agreement with respect to the
Collateral, in addition to all other rights which Lender may have by law.

AGREEMENT. The word "Agreement" means this Commercial Security
Agreement, as this Commercial Security Agreement may be amended or
modified from time to time, together with all exhibits and schedules
attached to this Commercial Security Agreement from time to time.

COLLATERAL. The word "Collateral" means the following described property
of Grantor, whether now owned or hereafter acquired, whether now existing
or hereafter arising, and wherever located:

EQUIPMENT AND FIXTURES

In addition, the word "Collateral" includes all the following, whether
now owned or hereafter acquired, whether now existing or hereafter
arising, and wherever located:

(a) All attachments, accessions, accessories, tools, parts,
supplies, increases, and additions to and all replacements of and
substitutions for any property described above.

(b) All products and produce of any of the property described in
this Collateral section.

(c) All accounts, contract rights, general intangibles,
instruments, rents, monies, payments, and all other rights, arising
out of a sale, lease, or other disposition of any of the property
described in this Collateral section.

(d) All proceeds (including insurance proceeds) from the sale,
destruction, loss, or other disposition of any of the property
described in this Collateral section.

(e) All records and data relating to any of the property described
in this Collateral section, whether in the form of a writing,
photograph, microfilm, microfiche, or electronic media, together
with all of Grantor's right, title, and interest in and to all
computer software required to utilize, create, maintain, and process
any such records or data on electronic media.

EVENT OF DEFAULT. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "Events of Default."

GRANTOR. The word "Grantor" means GYNECARE, INC., its successors and
assigns

GUARANTOR. The word "Guarantor" means and includes without limitation
each and all of the guarantors, sureties, and accommodation parties in
connection with the indebtedness.

INDEBTEDNESS. The word "Indebtedness" means the indebtedness evidenced
by the Note, including all principal and interest, together with all
other indebtedness and costs and expenses for which Grantor is responsible
under this Agreement or under any of the Related Documents.
(Initial Here )

LENDER. The word "Lender" means Silicon Valley Bank, its successors
and assigns.

NOTE. The word "Note" means the Notes, letters of credit or credit
agreements in any principal amount from Borrower to Lender, together
with all renewals of, extensions of, modifications of, refinancings of,
consolidations of and substitutions for the notes, letters of credit or
credit agreements.

RELATED DOCUMENTS. The words "Related Documents" mean and include
without limitation all promissory notes, credit agreements, loan
agreements, environmental agreements, guaranties, security agreements,
mortgages, deeds of trust, and all other instruments, agreements and
documents, whether now or hereafter existing, executed in connection
with the Indebtedness.

OBLIGATIONS OF GRANTOR. Grantor warrants and covenants to Lender as follows:

PERFECTION OF SECURITY INTEREST. Grantor agrees to execute such
financing statements and to take whatever other actions are requested by
Lender to perfect and continue Lender's security interest in the
Collateral. Upon request of Lender, Grantor will deliver to Lender any and
all of the documents evidencing or constituting the Collateral, and
Grantor will note Lender's interest upon any and all chattel paper if not
delivered to Lender for possession by Lender. Grantor hereby appoints
Lender as its irrevocable attorney-in-fact for the purpose of executing
any documents necessary to perfect or to continue the security interest
granted in this Agreement. Lender may at any time, and without further
authorization from Grantor, file a carbon, photographic or other
reproduction of any financing statement or of this Agreement for use as
a financing statement. Grantor will reimburse Lender for all expenses for
the perfection and the continuation of the perfection of Lender's security
interest in the Collateral. Grantor promptly will notify Lender before
any change in Grantor's name including any change to the assumed business
names of Grantor.

NO VIOLATION. The execution and delivery of this Agreement will not
violate any law or agreement governing Grantor or to which Grantor is a
party, and its certificate or articles of incorporation and bylaws do not
prohibit any term or condition of this Agreement.

ENFORCEABILITY OF COLLATERAL. To the extent the Collateral consists of
accounts, chattel paper, or general intangibles, the Collateral is
enforceable in accordance with its terms, is genuine, and complies with
applicable laws concerning form, content and manner of preparation and
execution, and all persons appearing to be obligated on the Collateral
have authority and capacity to contract and are in fact obligation as they
appear to be on the Collateral.

LOCATION OF THE COLLATERAL. Grantor, upon request of Lender, will deliver
to Lender in form satisfactory to Lender a schedule of real properties and
Collateral locations relating to Grantor's operations, including without
limitation the following: (a) all real property owned or being purchased
by Grantor; (b) all real property being rented or leased by Grantor;
(c) all storage facilities owned, rented, leased, or being used by
Grantor; and

<PAGE>

COMMERCIAL SECURITY AGREEMENT Page 2
(Continued)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

(d) all other properties where Collateral is or may be located. Except
in the ordinary course of its business, Grantor shall not remove the
Collateral from its existing locations without the prior written consent
of Lender.

REMOVAL OF COLLATERAL. Grantor shall keep the Collateral (or to the
extent the Collateral consists of intangible property such as accounts,
the records concerning the Collateral) at Grantor's address shown above,
or at such other locations as are acceptable to Lender. Except in the
ordinary course of its business, including the sales of inventory, Grantor
shall not remove the Collateral from its existing locations without the
prior written consent of Lender. To the extent that the Collateral
consists of vehicles, or other titled property, Grantor shall not take
or permit any action which would require application for certificates of
title for the vehicles outside the State of California, without the
prior written consent of Lender.

TRANSACTIONS INVOLVING COLLATERAL. Except for inventory sold or accounts
collected in the ordinary course of Grantor's business, Grantor shall not
sell, offer to sell, or otherwise transfer or dispose of the Collateral.
While Grantor is not in default under this Agreement, Grantor may sell
inventory, but only in the ordinary course of its business and only to
buyers who qualify as a buyer in the ordinary course of business. A sale
in the ordinary course of Grantor's business does not include a transfer
in partial or total satisfaction of a debt or any bulk sale. Grantor
shall not pledge, mortgage, encumber or otherwise permit the Collateral
to be subject to any lien, security interest, encumbrance, or charge,
other than the security interest provided for in this Agreement, without
the prior written consent of Lender. This includes security interests even
if junior in right to the security interest granted under this Agreement.
Unless waived by Lender, all proceeds from any disposition of the
Collateral (for whatever reason) shall be held in trust for Lender and
shall not be commingled with any other funds; provided however, this
requirement shall not constitute consent by Lender to any sale or other
disposition. Upon receipt, Grantor shall immediately deliver any such
proceeds to Lender.

TITLE. Grantor represents and warrants to Lender that it holds good and
marketable title to the Collateral, free and clear of all liens and
encumbrances except for the lien of this Agreement. No financing statement
covering any of the Collateral is on file in any public office other than
those which reflect the security interest created by this Agreement or to
which Lender has specifically consented. Grantor shall defend Lender's
rights in the Collateral against the claims and demands of all other
persons.

COLLATERAL SCHEDULES AND LOCATIONS. Insofar as the Collateral consists
of inventory, Grantor shall deliver to Lender, as often as Lender shall
require, such lists, descriptions, and designations of such Collateral as
Lender may require to identify the nature, extent, and location of such
Collateral. Such information shall be submitted for Grantor and each of
its subsidiaries or related companies.

MAINTENANCE AND INSPECTION OF COLLATERAL. Grantor shall maintain all
tangible Collateral in good condition and repair. Grantor will not commit
or permit damage to or destruction of the Collateral or any part of the
Collateral. Lender and its designated representatives and agents shall
have the right at all reasonable times to examine, inspect, and audit the
Collateral wherever located. Grantor shall immediately notify Lender of
all cases involving the return, rejection, repossession, loss or damage
of or to any Collateral; of any request for credit or adjustment or of any
other dispute arising with respect to the Collateral; and generally of all
happenings and events affecting the Collateral or the value or the amount
of the Collateral.

TAXES, ASSESSMENTS AND LIENS. Grantor will pay when due all taxes,
assessments and liens upon the Collateral, its use or operation, upon
this Agreement, upon any promissory note or notes evidencing the
indebtedness, or upon any of the other Related Documents. Grantor may
withhold any such payment or may elect to contest any lien if Grantor is
in good faith conducting an appropriate proceeding to contest the
obligation to pay and so long as Lender's interest in the Collateral is
not jeopardized in Lender's sole opinion. If the Collateral is subjected
to a lien which is not discharged within fifteen (15) days, Grantor shall
deposit with Lender cash, a sufficient corporate surety bond or other
security satisfactory to Lender in an amount adequate to provide for the
discharge of the lien plus any interest, costs, attorneys' fees or other
charges that could accrue as a result of foreclosure or sale of the
Collateral. In any contest Grantor shall defend itself and Lender and
shall satisfy any final adverse judgement before enforcement against
the Collateral. Grantor shall name Lender as an additional obligee under
any surety bond furnished in the contest proceedings.

COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. Grantor shall comply promptly
with all laws, ordinances, rules and regulations of all governmental
authorities, now or hereafter in effect, applicable to the ownership,
production, disposition, or use of the Collateral. Grantor may contest in
good faith any such law, ordinance or regulation and withhold compliance
during any proceeding, including appropriate appeals, so long as Lender's
interest in the Collateral, in Lender's opinion, is not jeopardized.

HAZARDOUS SUBSTANCES. Grantor represents and warrants that the Collateral
never has been, and never will be so long as this Agreement remains a lien
on the Collateral, used for the generation, manufacture, storage,
transportation, treatment, disposal, release or threatened release of any
hazardous waste or substance, as those terms are defined in the
Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"), the
Superfund Amendments and Reauthorization Act of 1986, Pub. L No. 99-499
("SARA"), the Hazardous Materials Transportation Act, 49 U.S.C.
Section 1801, et seq., the Resource Conservation and Recovery Act,
49 U.S.C. Section 6901, et seq., Chapters 6.5 through 7.7 of Division 20
of the California Health and Safety Code, Section 25100, et seq., or
other applicable state or Federal laws, rules, or regulations adopted
pursuant to any of the foregoing. The terms "hazardous waste" and
"hazardous substance" shall also include, without limitation, petroleum
and petroleum by-products or any fraction thereof and asbestos. The
representations and warranties contained herein are based on Grantor's
due diligence in investigating the Collateral for hazardous wastes
and substances. Grantor hereby (a) releases and waives any future claims
against Lender for indemnity or contribution in the event Grantor becomes
liable for cleanup or other costs under any such laws, and (b) agrees to
indemnify and hold harmless Lender against any and all claims and losses
resulting from a breach of this provision of this Agreement. This
obligation to indemnify shall survive the payment of the indebtedness and
the satisfaction of this Agreement.

MAINTENANCE OF CASUALTY INSURANCE. Grantor shall procure and maintain all
risks insurance, including without limitation fire, theft and liability
coverage together with such other insurance as Lender may require with
respect to the Collateral, in form, amounts, coverages and basis
reasonably acceptable to Lender and issued by a company or companies
reasonably acceptable to Lender. Grantor, upon request of Lender, will
deliver to Lender from time to time the policies or certificates of
insurance in form satisfactory to Lender, including stipulations that
coverages will not be cancelled or diminished without at least ten (10)
days' prior written notice to Lender and not including any disclaimer of
the insurer's liability for failure to give such a notice. Each insurance
policy also shall include an endorsement providing that coverage in favor
of Lender will not be impaired in any way by any act, omission or default
of Grantor or any other person. In connection with all policies covering
assets in which Lender holds or is offered a security interest, Grantor
will provide Lender with such loss payable or other endorsements as
Lender may require. If Grantor at any time fails to obtain or maintain
any insurance as required under this Agreement, Lender may (but shall
not be obligated to) obtain such insurance as Lender deems appropriate,
including if it so chooses "single interest insurance," which will cover
only Lender's interest in the Collateral.

APPLICATION OF INSURANCE PROCEEDS. Grantor shall promptly notify Lender of
any loss or damage to the Collateral. Lender may make proof of loss if
Grantor fails to do so within fifteen (15) days of the casualty. All
proceeds of any insurance on the Collateral, including accrued proceeds
thereon, shall be held by Lender as part of the Collateral. If Lender
consents to repair or replacement of the damaged or destroyed Collateral.
Lender shall, upon satisfactory proof of expenditure, pay or reimburse
Grantor from the proceeds for the reasonable cost of repair or
restoration. If Lender does not consent to repair or replacement of the
Collateral, Lender shall retain a sufficient amount of the proceeds to
pay all of the indebtedness, and shall pay the balance to Grantor. Any
proceeds which have not been disbursed within six (6) months after
their receipt and which Grantor has not committed to the repair
or restoration of the Collateral shall be used to prepay the indebtedness.

<PAGE>

COMMERCIAL SECURITY AGREEMENT PAGE 3
(CONTINUED)

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

INSURANCE RESERVES. Lender may require Grantor to maintain with Lender
reserves for payment of insurance premiums, which reserves shall be
created by monthly payments from Grantor of a sum estimated by Lender to
be sufficient to produce, at least fifteen (15) days before the premium
due date, amounts at least equal to the insurance premiums to be paid.
If fifteen (15) days before payment is due, the reserve funds are
insufficient, Grantor shall upon demand pay any deficiency to Lender.
The reserve funds shall be held by Lender as a general deposit and shall
constitute a non-interest-bearing account which Lender may satisfy by
payment of the insurance premiums required to be paid by Grantor as they
become due. Lender does not hold the reserve funds in trust for Grantor,
and Lender is not the agent of Grantor for payment of the insurance
premiums required to be paid by Grantor. The responsibility for the
payment of premiums shall remain Grantor's sole responsibility.

INSURANCE REPORTS. Grantor, upon request of Lender, shall furnish to
Lender reports on each existing policy of insurance showing such
information as Lender may reasonably request including the following:
(a) the name of the insurer; (b) the risks insured; (c) the amount of
the policy; (d) the property insured; (e) the then current value on the
basis of which insurance has been obtained and the manner of determining
that value; and (f) the expiration date of the policy. In addition,
Grantor shall upon request by Lender (however not more often than
annually) have an independent appraiser satisfactory to Lender
determine, as applicable, the cash value or replacement cost of the
Collateral.

GRANTOR'S RIGHT TO POSSESSION. Until default, Grantor may have possession of
the tangible personal property and beneficial use of all the Collateral and
may use it in any lawful manner not inconsistent with this Agreement or the
Related Documents, provided that Grantor's right to possession and
beneficial use shall not apply to any Collateral where possession of the
Collateral by Lender is required by law to perfect Lender's security
interest in such Collateral. If Lender at any time has possession of any
Collateral, whether before or after an Event of Default, Lender shall be
deemed to have exercised reasonable care in the custody and preservation of
the Collateral if Lender takes such action for that purpose as Grantor shall
request or as Lender, in Lender's sole discretion, shall deem appropriate
under the circumstances, but failure to honor any request by Grantor shall
not of itself be deemed to be a failure to exercise reasonable care. Lender
shall not be required to take any steps necessary to preserve any rights in
the Collateral against prior parties, nor to protect, preserve or maintain
any security interest given to secure the indebtedness.

EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may (but
shall not be obligated to) discharge or pay any amounts required to be
discharged or paid by Grantor under this Agreement, including without
limitation all taxes, liens, security interests, encumbrances, and other
claims, at any time levied or placed on the Collateral. Lender also may (but
shall not be obligated to) pay all costs for insuring, maintaining and
preserving the Collateral. All such expenditures incurred or paid by Lender
for such purposes will then bear interest at the rate charged under the Note
from the date incurred or paid by Lender to the date of repayment by Grantor.
All such expenses shall become a part of the indebtedness and, at Lender's
option, will (a) be payable on demand, (b) be added to the balance of the Note
and be apportioned among and be payable with any installment payments to
become due during either (i) the term of any applicable insurance policy or
(ii) the remaining term of the Note, or (c) be treated as a balloon payment
which will be due and payable at the Note's maturity. This Agreement also
will secure payment of these amounts. Such right shall be in addition to all
other rights and remedies to which Lender may be entitled upon the occurrence
of an Event of Default.

EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:

DEFAULT ON INDEBTEDNESS. Failure of Grantor to make any payment when due
on the indebtedness.

OTHER DEFAULTS. Failure of Grantor to comply with or to perform any
other term, obligation, covenant or condition contained in this
Agreement or in any of the Related Documents or in any other agreement
between Lender and Grantor.

INSOLVENCY. The dissolution or termination of Grantor's existence as a
going business, the insolvency of Grantor, the appointment of a receiver
for any part of Grantor's property, any assignment for the benefit of
creditors, any type of creditor workout, or the commencement of any
proceeding under any bankruptcy or insolvency laws by or against Grantor.

CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Grantor or by any
governmental agency against the Collateral or any other collateral
securing the indebtedness. This includes a garnishment of any of
Grantor's deposit accounts with Lender.

EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with
respect to any Guarantor of any of the indebtedness or such Guarantor
dies or becomes incompetent.

ADVERSE CHANGE. A material adverse change occurs in Grantor's financial
condition, or Lender believes the prospect of payment or performance of
the indebtedness is impaired.

RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this
Agreement, at any time thereafter, Lender shall have all the rights of a
secured party under the California Uniform Commercial Code. In addition and
without limitation, Lender may exercise any one or more of the following
rights and remedies:

ACCELERATE INDEBTEDNESS. Lender may declare the entire indebtedness,
including any prepayment penalty which Grantor would be required to pay,
immediately due and payable, without notice.

ASSEMBLE COLLATERAL. Lender may require Grantor to deliver to Lender all
or any portion of the Collateral and any and all certificates of title
and other documents relating to the Collateral. Lender may require
Grantor to assemble the Collateral and make it available to Lender at a
place to be designated by Lender. Lender also shall have full power to
enter upon the property of Grantor to take possession of and remove the
Collateral. If the Collateral contains other goods not covered by this
Agreement at the time of repossession, Grantor agrees Lender may take
such other goods, provided that Lender makes reasonable efforts to
return them to Grantor after repossession.

SELL THE COLLATERAL. Lender shall have full power to sell, lease,
transfer, or otherwise deal with the Collateral or proceeds thereof in
its own name or that of the Grantor. Lender may sell the Collateral at
public auction or private sale. Unless the Collateral threatens to
decline speedily in value or is of a type customarily sold on a
recognized market, Lender will give Grantor reasonable notice of the
time after which any private sale or any other intended disposition of
the Collateral is to be made. The requirements of reasonable notice
shall be met if such notice is given at least ten (10) days, or such
lesser time as required by state law, before the time of the sale or
disposition. All expenses relating to the disposition of the
Collateral, including without limitation the expenses of retaking,
holding, insuring, preparing for sale and selling the Collateral, shall
become a part of the indebtedness secured by this Agreement and shall be
payable on demand, with interest at the Note rate from date of
expenditure until repaid.

APPOINT RECEIVER. To the extent permitted by applicable law, Lender
shall have the following rights and remedies regarding the appointment
of a receiver: (a) Lender may have a receiver appointed as a matter of
right, (b) the receiver may be an employee of Lender and may serve
without bond, and (c) all fees of the receiver and his or her attorney
shall become part of the indebtedness secured by this Agreement and
shall be payable on demand, with interest at the Note rate from date of
expenditure until repaid.

COLLECT REVENUES, APPLY ACCOUNTS. Lender, either itself or through a
receiver, may collect the payments, rents, income, and revenues from the
Collateral. Lender may at any time in its discretion transfer any
Collateral into its own name or that of its nominee and receive the
payments, rents, income, and revenues therefrom and hold the same as
security for the indebtedness or apply it to payment of the indebtedness
in such order of preference as Lender may determine. Insofar as the
Collateral consists of accounts, general intangibles, insurance
policies, instruments, chattel paper, choses in action, or similar
property, Lender may demand, collect, receipt for, settle, compromise,
adjust, sue for, foreclose, or realize on the Collateral as Lender may
determine, whether or not indebtedness or Collateral is the due. For
these purposes, Lender may, on

<PAGE>

COMMERCIAL SECURITY AGREEMENT PAGE 4
(CONTINUED)

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

behalf of and in the name of Grantor, receive, open and dispose of mail
addressed to Grantor; change any address to which mail and payments are
to be sent; and endorse notes, checks, drafts, money orders, documents
of title, instruments and items pertaining to payment, shipment, or
storage of any Collateral. To facilitate collection, Lender may notify
account debtors and obligors on any Collateral to make payments directly
to Lender.

OBTAIN DEFICIENCY. If Lender chooses to sell any or all of the
Collateral, Lender may obtain a judgment against Grantor for any
deficiency remaining on the indebtedness due to Lender after application
of all amounts received from the exercise of the rights provided in this
Agreement. Grantor shall be liable for a deficiency even if the
transaction described in this subsection is a sale of accounts or
chattel paper.

OTHER RIGHTS AND REMEDIES. Lender shall have all the rights and remedies
of a secured creditor under the provisions of the Uniform Commercial
Code, as may be amended from time to time. In addition, Lender shall
have and may exercise any or all other rights and remedies it may have
available at law, in equity, or otherwise.

CUMULATIVE REMEDIES. All of Lender's rights and remedies, whether
evidenced by this Agreement or the Related Documents or by any other
writing, shall be cumulative and may be exercised singularly or
concurrently. Election by Lender to pursue any remedy shall not exclude
pursuit of any other remedy, and an election to make expenditures or to
take action to perform an obligation of Grantor under this Agreement,
after Grantor's failure to perform, shall not affect Lender's right to
declare a default and to exercise its remedies.

MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement.

AMENDMENTS. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to
the matters set forth in this Agreement. No alteration of or amendment
to this Agreement shall be effective unless given in writing and signed
by the party or parties sought to be charged or bound by the alteration
or amendment.

APPLICABLE LAW. This Agreement has been delivered to Lender and accepted
by Lender in the State of California. If there is a lawsuit, Grantor
agrees upon Lender's request to submit to the jurisdiction of the courts
of Santa Clara County, State of California. Lender and Grantor hereby
waive the right to any jury trial in any action, proceeding, or
counterclaim brought by either Lender or Grantor against the other.
Initial Here (/s/MMF) This Agreement shall be governed by and construed
in accordance with the laws of the State of California.

ATTORNEYS' FEES; EXPENSES. Grantor agrees to pay upon demand all of
Lender's costs and expenses, including attorneys' fees and Lender's
legal expenses, incurred in connection with the enforcement of this
Agreement. Lender may pay someone else to help enforce this Agreement,
and Grantor shall pay the costs and expenses of such enforcement. Costs
and expenses include Lender's attorneys' fees and legal expenses whether
or not there is a lawsuit, including attorneys' fees and legal expenses
for bankruptcy proceedings (and including efforts to modify or vacate
any automatic stay or injunction), appeals, and any anticipated
post-judgment collection services. Grantor also shall pay all court
costs and such additional fees as may be directed by the court.

CAPTION HEADINGS. Caption headings in the Agreement are for convenience
purposes only and are not to be used to interpret or define the
provisions of this Agreement.

MULTIPLE PARTIES; CORPORATE AUTHORITY. All obligations of Grantor under
this Agreement shall be joint and several, and all references to Grantor
shall mean each and every Grantor. This means that each of the Borrowers
signing below is responsible for all obligations in the Agreement.

NOTICES. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacimile, and shall be effective
when actually delivered or when deposited with a nationally recognized
overnight courier or deposited in the United States mail, first class,
postage prepaid, addressed to the party to whom the notice is to be
given at the address shown above. Any party may change its address for
notices under this Agreement by giving formal written notice to the
other parties, specifying that the purpose of the notice is to change
the party's address. To the extent permitted by applicable law, if there
is more than one Grantor, notice to any Grantor will constitute notice
to all Grantors. For notice purposes, Grantor agrees to keep Lender
informed at all times of Grantor's current address(es).

POWER OF ATTORNEY. Grantor hereby appoints Lender as its true and lawful
attorney-in-fact, irrevocably, with full power of substitution to do the
following: (a) to demand, collect, receive, receipt for, sue and
recover all sums of money or other property which may now or hereafter
become due, owing or payable from the Collateral; (b) to execute, sign
and endorse any and all claims, instruments, receipts, checks, drafts or
warrants issued in payment for the Collateral; (c) to settle or
compromise any and all claims arising under the Collateral, and, in the
place and stead of Grantor, to execute and deliver its release and
settlement for the claim; and (d) to file any claim or claims or to take
any action or institute or take part in any proceedings, either in its
own name or in the name of Grantor, or otherwise, which in the
discretion of Lender may seem to be necessary or advisable. This power
is given as security for the Indebtedness, and the authority hereby
conferred is and shall be irrevocable and shall remain in full force
and effect until renounced by Lender.

PREFERENCE PAYMENTS. Any monies Lender pays because of an asserted
preference claim in Borrower's bankruptcy will become a part of the
Indebtedness and, at Lender's option, shall be payable by Borrower as
provided above in the "EXPENDITURES BY LENDER" paragraph.

SUCCESSOR INTERESTS. Subject to the limitations set forth above on
transfer of the Collateral, this Agreement shall be binding upon and
inure to the benefit of the parties, their successors and assigns.

WAIVER. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender.
No delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender
of a provision of this Agreement shall not prejudice or constitute a
waiver of Lender's right otherwise to demand strict compliance with that
provision or any other provision of this Agreement. No prior waiver by
Lender, nor any course of dealing between Lender and Grantor, shall
constitute a waiver of any of Lender's rights or of any of Grantor's
obligations as to any future transactions. Whenever the consent of
Lender is required under this Agreement, the granting of such consent by
Lender in any instance shall not constitute continuing consent to
subsequent instances where such consent is required and in all cases
such consent may be granted or withheld in the sole discretion of Lender.

WAIVER OF CO-OBLIGOR'S RIGHTS. If more than one person is obligated for
the Indebtedness, Borrower irrevocably waives, disclaims and relinquishes
all claims against such other person which Borrower has or would
otherwise have by virtue of payment of the Indebtedness or any part
thereof, specifically including but not limited to all rights of
indemnity, contribution or exoneration.

ADDITIONAL PROVISIONS. If any law is passed that requires additional action
on the part of Lender, Borrower and/or Grantor shall fully cooperate with
Lender in complying with the law and accordingly, shall reimburse Lender for
all costs and expenses which Lender incurs in compliance with the law.

<PAGE>

COMMERCIAL SECURITY AGREEMENT PAGE 5
(CONTINUED)

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

GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS COMMERCIAL
SECURITY AGREEMENT, AND GRANTOR AGREES TO ITS TERMS. THIS AGREEMENT IS DATED
JULY 12, 1995.

GRANTOR:

GYNECARE, INC.

By: /s/ M M Farnsworth
------------------------------------
Name: Malcolm Farnsworth Title: CFO
------------------- ------

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

<PAGE>

LOAN MODIFICATION AGREEMENT

This Loan Modification Agreement is entered into as of December 17, 1996,
by and between Gynecare, Inc. ("Borrower") whose address is 235 Constitution
Drive, Menlo Park, CA 94025, and Silicon Valley Bank ("Lender") whose address
is 3003 Tasman Drive, Santa Clara, CA 95054.

1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which may
be owing by Borrower to Lender, Borrower is indebted to Lender pursuant to,
among other documents, a Promissory Note, of even date herewith, in the
original principal amount of Six Hundred Thousand and 00/100 Dollars
($600,000.00)(the "Term Note"). The Note, together with other promissory
notes from Borrower to Lender, is governed by the terms of a Business Loan
Agreement, dated July 12, 1995, as such agreement may be amended from time to
time, between Borrower and Lender (the "Loan Agreement"). Defined terms used
but not otherwise defined herein, shall have the same meanings as in the Loan
Agreement.

Hereinafter, all indebtedness owing by Borrower to Lender shall be referred
to as the "Indebtedness".

2. DESCRIPTION OF COLLATERAL AND GUARANTIES. Repayment of the Indebtedness,
together with other promissory notes from Borrower to Lender, is secured by
a Commercial Security Agreement, dated July 12, 1995.

Hereinafter, the above-described security documents and guaranties, together
with all other documents securing repayment of the Indebtedness shall be
referred to as the "Security Documents". Hereinafter, the Security Documents,
together with all other documents evidencing or securing the Indebtedness
shall be referred to as the "Existing Loan Documents".

3. DESCRIPTION OF CHANGE IN TERMS.

A. MODIFICATION(S) TO LOAN AGREEMENT.

1. The paragraph entitled "Financial Covenants" is hereby amended in
its entirety, to read as follows:

Borrower shall maintain, on a quarterly basis, beginning with the
quarter ending December 31, 1996, a minimum Tangible Net Worth of
$2,500,000.00; a maximum total Debt to Tangible Net Worth ratio of
1.00 to 1.00; and a minimum liquidity of $3,000,000.00, reducing to
$2,000,000.00 as of the quarter ending June 30, 1998, and
thereafter. Upon Borrower's achievement of a minimum debt service
coverage ratio of 1.50 to 1.00 for two (2) consecutive quarters,
the liquidity covenant shall be replaced with a debt service
coverage covenant of 1.50 to 1.00. For purposes of calculation,
deferred revenue shall be excluded from current liabilities.
Notwithstanding the foregoing, in the event Borrower's liquidity
falls below $5,000,000.00, Borrower shall maintain the above
covenants on a monthly basis. Such change shall only become
effective the month following Lender's receipt of Borrower's
financial statements showing Borrower has achieved the above-
described criteria.

<PAGE>

2. The paragraph entitled "Financial Statements" is hereby amended
in its entirety, to read as follows:

Furnish Lender with, as soon as available, but in no event later
than five (5) days after filing with the Securities Exchange
Commission (SEC), Borrower's forms 10K and 10Q together with a
Compliance Certificate. All financial reports required to be
provided under this Agreement shall be prepared in accordance
with generally accepted accounting principles, applied on a
consistent basis, and certified by Borrower as being true and
correct. Notwithstanding the foregoing, in the event Borrower's
cash falls below $5,000,000.00, Borrower shall furnish Lender
with a Compliance Certificate as soon as available, but in no
event later than thirty (30) days after the end of each month.

4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended
wherever necessary to reflect the changes described above.

5. PAYMENT OF LOAN FEE. Borrower shall pay to Lender a fee in the amount of
Four Thousand Five Hundred and 00/100 Dollars ($4,500.00)(the "Loan Fee")
plus all out-of-pocket expenses.

6. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor signing
below) agrees that it has no defenses against the obligations to pay any
amounts under the Indebtedness.

7. CONTINUING VALIDITY. Borrower (and each guarantor and pledgor signing
below) understands and agrees that in modifying the existing Indebtedness,
Lender is relying upon Borrower's representations, warranties, and
agreements, as set forth in the Existing Loan Documents. Except as expressly
modified pursuant to this Loan Modification Agreement, the terms of the
Existing Loan Documents remain unchanged and in full force and effect.
Lender's agreement to modifications to the existing Indebtedness pursuant to
this Loan Modification Agreement in no way shall obligate Lender to make any
future modifications to the Indebtedness. Nothing in this Loan Modification
Agreement shall constitute a satisfaction of the Indebtedness. It is the
intention of Lender and Borrower to retain as liable parties all makers and
endorsers of Existing Loan Documents, unless the party is expressly released
by Lender in writing. No maker, endorser, or guarantor will be released by
virtue of this Loan Modification Agreement. The terms of this paragraph apply
not only to this Loan Modification Agreement, but also to all subsequent loan
modification agreements.

8. CONDITIONS. The effectiveness of this Loan Modification Agreement is
conditioned upon Borrower's payment of the Loan Fee.

This Loan Modification Agreement is executed as of the date first written
above.

BORROWER: LENDER:

GYNECARE, INC. SILICON VALLEY BANK

By: /s/ M M Farnsworth By: /s/ John Dewey
--------------------- ---------------------

Name: M M Farnsworth Name: John Dewey
-------------------- --------------------

Title: CFO Title: A.V.P
------------------- -------------------

<PAGE>

PROMISSORY NOTE

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

BORROWER: Gynecare, Inc. LENDER: Silicon Valley Bank
235 Constitution Drive 3003 Tasman Drive
Menlo Park, CA 94025 Santa Clara, CA 95054

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

PRINCIPAL AMOUNT: $600,000.00 INITIAL RATE: 9.500%
DATE OF NOTE: DECEMBER 17, 1996

PROMISE TO PAY. Gynecare, Inc. ("Borrower") promises to pay to Silicon
Valley Bank ("Lender"), or order, In lawful money of the United States of
America, the principal amount of Six Hundred Thousand & 00/100 Dollars
($600,000.00) or so much as may be outstanding, together with interest on the
unpaid outstanding principal balance of each advance. Interest shall be
calculated from the date of each advance until repayment of each advance.

PAYMENT. Borrower will pay this loan in accordance with the following payment
schedule:

The Draw Period shall begin as of this date and shall end on December
31, 1997 (the "Draw Period"). During the Draw Period, Borrower will pay
regular monthly payments of all accrued unpaid Interest due as of each
payment date, beginning January 31, 1996 and all subsequent Interest
payments will be due on the last day of each month thereafter through
December 31, 1997. The outstanding principal balance of the Note on
December 31, 1997 will be payable in forty-two (42) even payments of
principal plus Interest due as of each payment date, beginning
January 31, 1998 and all subsequent payments of principal plus Interest
will be due on the last day of each month thereafter. The final payment,
due on June 30, 2001, will be for all outstanding principal plus all
accrued Interest not yet paid.

VARIABLE INTEREST RATE. The interest rate on this Note is subject to change
from time to time based on changes in an index which is Lender's Prime Rate
(the "Index"). This is the rate Lender charges, or would charge, on 90-day
unsecured loans to the most creditworthy corporate customers. This rate
may or may not be the lowest rate available from Lender at any given time.
Lender will tell Borrower the current Index rate upon Borrower's request.
Borrower understands that Lender may make loans based on other rates as well.
The interest rate change will not occur more often than each time the prime
rate is adjusted by Silicon Valley Bank. THE INDEX CURRENTLY IS 8.250% PER
ANNUM. THE INTEREST RATE TO BE APPLIED TO THE UNPAID PRINCIPAL BALANCE OF
THIS NOTE WILL BE AT A RATE OF 1.250 PERCENTAGE POINTS OVER THE INDEX,
RESULTING IN AN INITIAL RATE OF 9.500% PER ANNUM. NOTICE: Under no
circumstances will the interest rate on this Note be more than the maximum
rate allowed by applicable law.

DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform
when due any other term, obligation, covenant, or condition contained in this
Note or any agreement related to this Note, or in any other agreement or loan
Borrower has with Lender. (c) Borrower defaults under any loan, extension of
credit, security agreement, purchase or sales agreement, or any other
agreement, in favor of any other creditor or person that may materially
affect any of Borrower's property or Borrower's ability to repay this Note or
perform Borrower's obligations under this Note or any of the Related
Documents. (d) Any representation or statement made or furnished to Lender by
Borrower or on Borrower's behalf is false or misleading in any material
respect either now or at the time made or furnished. (e) Borrower becomes
insolvent, a receiver is appointed for any part of Borrower's property,
Borrower makes an assignment for the benefit of creditors, or any proceeding
is commenced either by Borrower or against Borrower under any bankruptcy or
insolvency laws. (f) Any creditor tries to take any of the Borrower's
property on or in which Lender has a lien or security interest. This includes
a garnishment of any of Borrower's accounts with Lender. (g) Any guarantor
dies or any of the other events described in this default section occurs with
respect to any guarantor of this Note. (h) A material adverse change occurs
in Borrower's financial condition, or Lender believes the prospect of payment
or performance of the Indebtedness is impaired.

LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Upon Borrower's failure to
pay all amounts declared due pursuant to this section, including failure to
pay upon final maturity, Lender, at its option, may also, if permitted under
applicable law, increase the variable interest rate on this Note to 6.250
percentage points over the Index. Lender may hire or pay someone else to help
collect this Note if Borrower does not pay. Borrower also will pay Lender
that amount. This includes, subject to any limits under applicable law,
Lender's attorneys' fees and Lender's legal expenses whether or not there is
a lawsuit, including attorneys' fees and legal expenses for bankruptcy
proceedings (including efforts to modify or vacate any automatic stay or
injunction), appeals, and any anticipated post-judgment collection services.
Borrower also will pay any court costs, in addition to all other sums
provided by law. THIS NOTE HAS BEEN DELIVERED TO LENDER AND ACCEPTED BY
LENDER IN THE STATE OF CALIFORNIA. IF THERE IS A LAWSUIT, BORROWER AGREES
UPON LENDER'S REQUEST TO SUBMIT TO THE JURISDICTION OF THE COURTS OF SANTA
CLARA COUNTY, THE STATE OF CALIFORNIA. LENDER AND BORROWER HEREBY WAIVE THE
RIGHT TO ANY JURY TRIAL IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY
EITHER LENDER OR BORROWER AGAINST THE OTHER. THIS NOTE SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA.

LINE OF CREDIT. This Note evidences a straight line of credit through the end
of the Draw Period. Once the total amount of principal has been advanced,
Borrower is not entitled to further loan advances. Advances under this Note,
as well as directions for payment from Borrower's accounts, may be requested
orally or in writing by Borrower or by an authorized person. Lender may, but
need not, require that all oral requests be confirmed in writing. Borrower
agrees to be liable for all sums either: (a) advanced in accordance with the
instructions of an authorized person or (b) credited to any of Borrower's
accounts with Lender. The unpaid principal balance owing on this Note at any
time may be evidenced by endorsements on this Note or by Lender's internal
records, including daily computer print-outs. Lender will have no obligation
to advance funds under this Note if: (a) Borrower or any guarantor is in
default under the terms of this Note or any agreement that Borrower or any
guarantor has with Lender, including any agreement made in connection with
the signing of this Note; (b) Borrower or any guarantor ceases doing business
or is insolvent; (c) any guarantor seeks, claims or otherwise attempts to
limit, modify or revoke such guarantor's guarantee of this Note or any other
loan with Lender; or (d) Borrower has applied funds provided pursuant to this
Note for purposes other than those authorized by Lender.

BUSINESS LOAN AGREEMENT. This Note is governed by all the terms and
conditions of the Business Loan Agreement dated July 12, 1995, between
Borrower and Lender, as such agreement may be amended from time to time,
which Business Loan Agreement is incorporated herein by this reference.

PAYMENT OF LOAN FEE. Borrower shall pay to Lender a fee in the amount of Four
Thousand Five Hundred and 00/100 Dollars ($4,500.00) plus all

<PAGE>

12-17-1996 PROMISSORY NOTE PAGE 2
(Continued)

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

out-of-pocket expenses.

REQUEST TO DEBIT ACCOUNTS. Borrower will regularly deposit all funds received
from its business activities in accounts maintained by Borrower at Silicon
Valley Bank. Borrower hereby requests and authorizes Lender to debit any of
Borrower's accounts with Lender, specifically, without limitation, Account
Number , for payments of principal and interest due on the loan and any
other obligations owing by Borrower to Lender. Lender will notify Borrower of
all debits which Lender makes against Borrower's accounts. Any such debits
against Borrower's accounts in no way shall be deemed a set-off.

ADVANCE RATE. At any time from the date hereof through the end of the Draw
Period, Borrower may request advances (each an "Advance" and collectively,
the "Advances") from Lender in an aggregate amount not to exceed the
principal amount of the Note. To evidence the Advances, Borrower shall
deliver to Lender, at the time of each Advance request, an invoice for the
equipment or machinery to be purchased. The Advances shall only be used to
purchase equipment or machinery and shall not exceed one hundred percent
(100%) of the invoice amount approved from time to time by Lender, excluding
taxes, shipping and installation expense (except as provided for herein).
Taxes, shipping and installation expense may, however, comprise up to
$100,000.00 of total advances. An amount not to exceed $350,000.00 may be
used for the purchase of used equipment, including prior tenant improvements,
provided, however, such used equipment is purchased with the initial advance
under this Note and the value of such equipment shall not exceed the net book
value of the equipment.

GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or
remedies under this Note without losing them. Borrower and any other person
who signs, guarantees or endorses this Note, to the extent allowed by law,
waive any applicable statute of limitations, presentment, demand for payment,
protest and notice of dishonor. Upon any change in the terms of this Note,
and unless otherwise expressly stated in writing, no party who signs this
Note, whether as maker, guarantor, accommodation maker or endorser, shall be
released from liability. All such parties agree that Lender may renew or
extend (repeatedly and for any length of time) this loan, or release any
party or guarantor or collateral; or impair, fail to realize upon or
perfect Lender's security interest in the collateral; and take any other
action deemed necessary by Lender without the consent of or notice to anyone.
All such parties also agree that Lender may modify this loan without the
consent of or notice to anyone other than the party with whom the modification
is made.

BORROWER:

GYNECARE, INC.

BY: /s/ M M Farnsworth
------------------------

NAME: M M Farnsworth, TITLE: CFO
---------------- -----

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

<PAGE>

EXHIBIT 11.1

COMPUTATION OF NET LOSS
PER SHARE (1)
<TABLE>
<CAPTION>

THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
1997 1996 1997 1996
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Primary and Fully Diluted:
Weighted average common shares outstanding for the period . . . 8,295,000 8,160,000 8,297,000 8,157,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2,951,000) $ (2,606,000) $ (5,975,000) $ (4,654,000)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------

Net loss per share. . . . . . . . . . . . . . . . . . . . . . . ($0.36) ($0.32) ($0.72) ($0.57)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------

</TABLE>
(1) Primary and fully diluted calculations are substantially the same.

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED BALANCE SHEETS AND STATEMENTS OF OPERATIONS FOUND ON PAGES 3 AND 4 OF
THE COMPANY'S FORM 10-Q FOR THE YEAR-TO-DATE, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 5,592
<SECURITIES> 2,337
<RECEIVABLES> 371
<ALLOWANCES> 0
<INVENTORY> 406
<CURRENT-ASSETS> 8,885
<PP&E> 1,360
<DEPRECIATION> 0
<TOTAL-ASSETS> 13,017
<CURRENT-LIABILITIES> 1,927
<BONDS> 0
0
0
<COMMON> 8
<OTHER-SE> 10,698
<TOTAL-LIABILITY-AND-EQUITY> 13,017
<SALES> 572
<TOTAL-REVENUES> 572
<CGS> 807
<TOTAL-COSTS> 807
<OTHER-EXPENSES> 2,287
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,975)
<EPS-PRIMARY> ($0.72)
<EPS-DILUTED> ($0.72)

</TABLE>