XOMED SURGICAL PRODUCTS INC, S-1/A, 1996-10-01

XOMED SURGICAL PRODUCTS INC
S-1/A, 1996-10-01
SURGICAL & MEDICAL INSTRUMENTS & APPARATUS

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 1, 1996
REGISTRATION NO. 333-10515

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AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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XOMED SURGICAL PRODUCTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 3841 06-1393528
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION INDUSTRIAL IDENTIFICATION NO.)
OF INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
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6743 SOUTHPOINT DRIVE NORTH
JACKSONVILLE, FLORIDA 32216
(904) 296-9600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

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JAMES T. TREACE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
XOMED SURGICAL PRODUCTS, INC.
6743 SOUTHPOINT DRIVE NORTH
JACKSONVILLE, FLORIDA 32216
(904) 296-9600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)

---------------
Copies to:
MICHAEL A. SCHWARTZ, ESQ. BRUCE K. DALLAS, ESQ.
WILLKIE FARR & GALLAGHER DAVIS POLK & WARDWELL
ONE CITICORP CENTER 450 LEXINGTON AVENUE
153 EAST 53RD STREET NEW YORK, NEW YORK 10017
NEW YORK, NEW YORK 10022 (212) 450-4000
(212) 821-8000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.

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<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION

OCTOBER 1, 1996

2,500,000 Shares

[Logo]

Common Stock

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All of the shares of Common Stock offered hereby are being sold by Xomed
Surgical Products, Inc. ("Xomed" or the "Company"). Prior to this offering,
there has been no public market for the Common Stock of the Company. It is
currently estimated that the initial public offering price will be between
$19.00 and $21.00 per share. See "Underwriting" for the factors to be
considered in determining the initial public offering price. Up to $25.0
million of the net proceeds of this offering will be used to redeem shares of
the Company's Series C Redeemable Preferred Stock, all of which are owned by
existing stockholders of the Company. See "Use of Proceeds" and "Principal
Stockholders."

-----------

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS," PAGE 7.

-----------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.

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<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS COMPANY(1)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................. $ $ $
- --------------------------------------------------------------------------------
Total(2).................................. $ $ $
</TABLE>
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(1) Before deducting expenses of the offering estimated at $750,000.
(2) The Company has granted to the Underwriters a 30-day option to purchase up
to 375,000 additional shares of Common Stock solely to cover over-
allotments, if any. To the extent that the option is exercised, the
Underwriters will offer the additional shares at the Price to Public shown
above. If the option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."

-----------

The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject
to the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the
offices of Alex. Brown & Sons Incorporated, Baltimore, Maryland, on or about
, 1996.

Alex. Brown & Sons UBS Securities
INCORPORATED

THE DATE OF THIS PROSPECTUS IS , 1996.
<PAGE>

[COLOR PICTURES OF COMPANY'S MICROENDOSCOPY PRODUCTS SURROUNDING A MAN'S
HEAD AND NECK WITH CAPTION WHICH READS "XOMED MARKETS OVER 4,000 MICROSURGICAL
PRODUCTS WORLDWIDE ADDRESSING SURGICAL PROCEDURES IN THE THREE MAJOR
SUBSPECIALTIES OF SINUS AND RHINOLOGY, HEAD & NECK AND OTOLOGY. APPROXIMATELY
86% OF XOMED'S REVENUES IN THE FIRST SIX MONTHS OF 1996 WERE DERIVED FROM
DISPOSABLE OR IMPLANTABLE PRODUCTS."]

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IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

2
<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Prospectus. This Prospectus contains forward-looking
statements which 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 differences include, but are not
limited to, those discussed in "Risk Factors."

THE COMPANY

Xomed is a leading developer, manufacturer and marketer of a broad line of
surgical products for use by ear, nose and throat ("ENT") specialists. The
Company's broad line of products includes, in its core ENT market, powered
tissue-removal systems and other microendoscopy instruments, implantable
devices, nerve monitoring systems and disposable fluid-control products. The
Company also offers a line of ophthalmic and other products that includes hand
instruments and disposable products developed and manufactured by the Company
for use in various ophthalmic procedures and marketed under the Solan
trademark. For the first half of 1996, approximately 86% of Xomed's revenues
were derived from disposable or implantable products. The Company distributes
its products worldwide through a 62-person direct sales force in the U.S. and
selected other countries and through a network of 121 independent distributors.
Xomed is the only major manufacturer and marketer of ENT surgical products with
a direct U.S. sales force exclusively serving ENT specialists. Approximately
34% of the Company's net sales was derived from international markets during
the first half of 1996, as compared to 23% of the total 1993 net sales of the
Company and of Xomed-Treace, Inc., which the Company acquired in 1994. With
over 25 years of industry experience, Xomed believes that it has established a
long-standing reputation for innovative, high-quality products and is uniquely
positioned as the only major surgical products company focused on the ENT
market.

More than an estimated 20,000 ENT specialists practice worldwide, of which
approximately 9,000 practice in the United States. Diseases and conditions
addressed by ENT specialists affect sizable patient populations and include
chronic sinusitis, chronic infection of the middle ear, tonsils and adenoids,
nasal and laryngeal polyps and facial tumors. Increasingly, ENT surgeons are
expanding their practice to include facial plastic and reconstructive surgery.
The Company estimates that more than three million ENT procedures were
performed in the U.S. in 1995 and that the U.S. market for surgical
instruments, devices and supplies used by ENT specialists was approximately
$200 million in 1995.

Xomed believes that the ENT market is beginning a conversion from
conventional surgical approaches to less-traumatic approaches that involves the
use of advanced surgical tools, such as powered tissue-removal systems and
small-diameter surgical endoscopes, thereby minimizing patient trauma and
reducing procedure times. Xomed believes that the adoption of these less-
traumatic techniques may be driven by several factors, including economic
pressures and patient demand. Minimally invasive techniques have the potential
to expand the number of ENT procedures that can be performed in lower-cost
outpatient or day surgery settings. Patient demand is likely to increase due to
the reduced morbidity and improved outcomes. Xomed believes that the conversion
in the ENT market to less-traumatic approaches will be similar to recent
conversions in the general surgery market to less invasive techniques and the
orthopaedic surgery market to powered instrumentation systems.

Xomed's objective is to enhance its position in the ENT market. The principal
elements of its strategy to meet this objective include: (i) continued focus on
the ENT market; (ii) facilitation of the ENT market's conversion to less-
traumatic approaches; (iii) emphasis on product innovation through internal
research and development; (iv) maintenance of a broad product line, with
particular emphasis on disposable and implantable products; and (v) expansion
of the Company's global distribution network.

3
<PAGE>

In April 1996, Xomed acquired TreBay Medical Corporation, a microendoscopy
company ("TreBay"). The senior management of TreBay, including James T. Treace,
F. Barry Bays and Thomas E. Timbie, assumed senior management positions at
Xomed at the time of the acquisition. These executives were formerly associated
with Concept, Inc., a minimally invasive surgical products company that was
acquired by Bristol-Myers Squibb Company in 1990.

Up to $25.0 million of the net proceeds of this offering will be used to
redeem shares of the Company's outstanding Series C Redeemable Preferred Stock,
all of which are owned by existing stockholders of the Company. Approximately
78% of the outstanding Series C Redeemable Preferred Stock is held by Warburg,
Pincus Investors, L.P. ("WP Investors"). The holders of the Series C Redeemable
Preferred Stock have agreed that the shares of Series C Redeemable Preferred
Stock not redeemed will be exchanged following the closing of this offering for
shares of Common Stock at the initial public offering price. Upon completion of
this offering and the subsequent exchange of shares of Series C Redeemable
Preferred Stock for shares of Common Stock, WP Investors will beneficially own
approximately 48.1% of the outstanding shares of Common Stock. See "Use of
Proceeds" and "Principal Stockholders."

The Company's principal executive office is located at 6743 Southpoint Drive
North, Jacksonville, Florida 32216 and its telephone number is (904) 296-9600.

RISK FACTORS

The Common Stock offered hereby involves a high degree of risk. See "Risk
Factors."

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered......................... 2,500,000 shares
Common Stock to be outstanding after the
offering(1)................................. 6,879,362 shares(1)
Use of Proceeds.............................. Repayment of outstanding
indebted-ness ($20.7 million),
redemption of preferred stock (up
to $25.0 million) and, to the
extent of an exercise of the
Underwriters' over-allotment
option, for working capital and
general corporate purposes.
Nasdaq National Market symbol................ The Common Stock has been
approved for quotation on the
Nasdaq National Market under the
symbol "XOMD," subject to
official notice of issuance.
</TABLE>
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(1) Excludes 501,191 shares of Common Stock issuable upon the exercise of
outstanding stock options having a weighted average exercise price of $9.76
per share. An aggregate of 167,909 additional shares of Common Stock have
been reserved for future grants under the Xomed Surgical Products, Inc. 1996
Stock Option Plan (the "Stock Option Plan"). See "Management--1996 Stock
Option Plan."

Except as otherwise specified, information in this Prospectus assumes no
exercise of the Underwriters' over-allotment option and has been adjusted to
give effect to: (i) the conversion upon the closing of this offering of all
outstanding shares of Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock and the accrued and unpaid dividends thereon into
an aggregate of 766,991 shares of Common Stock and 2,191,674 shares of Non-
Voting Common Stock, respectively; (ii) the further conversion upon the closing
of this offering of all then-outstanding shares of Non-Voting Common Stock into
2,618,451 shares of Common Stock (collectively, the "Stock Conversion"); (iii)
the redemption of 239,234 shares of Series C Redeemable Preferred Stock from
the net proceeds of this offering; and (iv) the exchange within 30 days after
the closing of this offering of the remaining 60,225 shares of Series C
Redeemable Preferred Stock for 314,650 shares of Common Stock, based upon an
assumed initial offering price of $20.00 per share (the "Share Exchange").
Unless the context indicates or requires otherwise, as used in this Prospectus,
the "Company" or "Xomed" means Xomed Surgical Products, Inc. and all of its
subsidiaries and their respective predecessors.

4
<PAGE>

SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED
-------------------------------------- ----------------
JULY 1, JUNE 29,
1991 1992 1993 1994 1995 1995 1996
------ ------ ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
(1):
Sales, net............. $6,787 $8,160 $10,071 $42,475 $59,865 $29,424 $32,942
Gross profit........... 4,167 5,803 7,195 23,242 36,690 17,819 20,252
Selling, general and
administrative
expense............... 3,155 3,914 6,074 19,126 27,077 12,440 14,129
Research and
development expense... 84 211 311 1,958 2,405 1,158 1,719
Amortization of
intangibles........... 436 391 394 2,652 2,579 1,224 1,168
Write-off of acquired
research and
development (2)....... -- -- -- -- -- -- 2,380
Restructuring charges
(3)................... -- -- -- -- -- -- 3,093
Operating income (loss)
from continuing
operations............ 492 1,287 416 (494) 4,629 2,997 (2,237)
Income (loss) from
continuing operations. 231 669 219 (1,555) 325 427 (3,173)
Preferred stock
dividends............. -- 538
Income (loss) from
continuing operations
available to common
shareholders.......... $ 325 $(3,711)
PRO FORMA STATEMENT OF
OPERATIONS DATA (4):
Income (loss) from continuing
operations.......................... $ (149) $(3,787)
Income (loss) from continuing
operations per common share
available to common shareholders
(5)................................. $ (0.03) $ (0.82)
Weighted average common shares
outstanding (5)..................... 4,632 4,635
</TABLE>

<TABLE>
<CAPTION>
JUNE 29, 1996
---------------------------
PRO FORMA
ACTUAL AS ADJUSTED (6)(7)
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<S> <C> <C>
BALANCE SHEET DATA:
Working capital................................... $11,061 $16,248
Cost in excess of net assets acquired, net........ 45,963 45,963
Total assets...................................... 96,154 96,241
Long-term debt including Redeemable and Convert-
ible Preferred Stock............................. 88,872 12,209
Total shareholders' equity (deficit).............. (10,455) 68,845
</TABLE>

See accompanying notes on following page.

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The Other Statistical Sales Data presented below summarizes the total
worldwide sales of the Company and, in 1993 and 1994, those of Xomed-Treace,
Inc. prior to its acquisition by the Company on April 15, 1994. This
information does not purport to represent the total revenues that would have
been earned by the Company if this acquisition had occurred at an earlier date.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31, SIX MONTHS ENDED
------------------------- -----------------
JULY 1, JUNE 29,
1993 1994 1995 1995 1996
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
OTHER STATISTICAL SALES DATA:
Sales mix:
Core ENT products (8)........... $38,753 $39,573 $43,631 $21,532 $26,356
Other products.................. $16,682 $15,703 $16,234 $ 7,892 $ 6,586
Total Company and Xomed-Treace,
Inc........................... $55,435 $55,276 $59,865 $29,424 $32,942
Core ENT products sales growth
(8)............................. -- 2% 10% 11% 22%
Percent of sales disposables and
implants........................ 79% 83% 84% 85% 86%
Percent of sales outside of
U.S. ........................... 23% 26% 29% 31% 34%
</TABLE>

5
<PAGE>

(1) The statement of operations data includes the results of operations of
Xomed-Treace, Inc. since the date of its acquisition by the Company in
April 1994.

(2) The Company's acquisition of TreBay in April 1996 was accounted for under
the purchase method of accounting. Accordingly, the purchase price of
approximately $6.6 million was allocated to the individual TreBay assets
acquired and liabilities assumed, based upon their respective fair values
at the date of acquisition. The transaction resulted in cost in excess of
net assets acquired of approximately $4.4 million, of which $2.4 million
was allocated to in-process research and development and charged to expense
in the second quarter of 1996. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview."

(3) In the second quarter of 1996, the Company's new management team initiated
cost savings programs that resulted in reductions in the number of
employees at the Company's Mystic, Connecticut and Jacksonville, Florida
facilities. The Company incurred a restructuring charge of approximately
$3.1 million during the second quarter of 1996 primarily to reflect the
cost of severance payments to terminated employees. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Overview."
(4) Pro forma income (loss) from continuing operations has been adjusted to
reflect: (i) the Company's acquisition of TreBay as if the acquisition had
occurred on January 1, 1995 (see Notes to Consolidated Financial
Statements--Note 18--Pro Forma Statement of Operations (Unaudited)); (ii)
the capital contribution of accrued cumulative preferred stock dividends of
$7,559,000 in connection with the acquisition of TreBay; and (iii) the
Share Exchange.
(5) Pro forma income from continuing operations per common share available to
common shareholders and weighted average common shares outstanding have
been adjusted to give effect as of January 1, 1995 to: (i) the conversion
of all Series A Convertible Preferred Stock and Series B Convertible
Preferred Stock outstanding as of December 31, 1995 into Common Stock and
Non-Voting Common Stock, respectively; (ii) the conversion of 390,000
shares of Series A Convertible Preferred Stock issued in the April 1996
acquisition of TreBay into Common Stock; (iii) the exercise of all
outstanding options to purchase Common Stock; and (iv) the Share Exchange.

(6) Adjusted to give effect to the receipt of the estimated net proceeds of
this offering based upon an assumed initial public offering price of $20.00
per share and the application of the net proceeds therefrom. See "Use of
Proceeds."

(7) Pro forma to give effect to: (i) the repayment of $1,275,000 in principal
amount of the Company's term loan on July 1, 1996 and the scheduled
repayment of $1,275,000 in principal amount of the term loan on October 1,
1996; (ii) the accretion of dividends on the Series A Convertible Preferred
Stock, Series B Convertible Preferred Stock and the Series C Redeemable
Preferred Stock through October 1, 1996; (iii) the Stock Conversion; and
(iv) the Share Exchange.

(8) Core ENT Products are comprised of products for the sinus and rhinology,
head and neck and otology subspecialties within the overall ENT market.

6
<PAGE>

RISK FACTORS

In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the
shares of Common Stock offered by this Prospectus.

Possible Obsolescence from Rapid Technological Change; Uncertainty as to
Market Acceptance of Company's Products. The health care industry is
characterized by rapidly changing technology and frequent new product
introductions. The Company believes that its ability to develop and
commercialize new products and enhancements of existing products is critical
to its continued growth and profitability. There can be no assurance that the
Company will continue to be successful in identifying, developing and
marketing new products or enhancing its existing products. The Company's
business will be adversely affected if the Company incurs delays in developing
new products or enhancements or if such products or enhancements do not gain
market acceptance. Market acceptance of the Company's products will be
determined in large part by the Company's ability to demonstrate the surgical
advantages, safety and efficacy, cost effectiveness and performance features
of such products, as well as to train surgeons and other operating staff in
their use. The Company believes that use and acceptance by physicians and
hospitals will be essential for market acceptance of certain of its products,
and there can be no assurance that its products will be used or accepted.
There can be no assurance that products or technologies developed by others
will not render the Company's products or technologies noncompetitive or
obsolete.

Possible Adverse Effects of Significant Competition. The Company encounters
significant competition in all markets in which it participates. Many of the
Company's competitors and potential competitors have substantially greater
resources, including capital, name recognition, research and development
experience and regulatory, manufacturing and marketing capabilities. Many of
these competitors offer well established, broad product lines and ancillary
services not offered by the Company. Some of the Company's competitors have
long-term or preferential supply arrangements with hospitals, which may act as
a barrier to market entry. Other large health care companies may enter the
market for the Company's products in the future. Competing companies may
succeed in developing products that are more efficacious or less costly than
any that may be developed and marketed by the Company, and such companies also
may be more successful than the Company in production and marketing. Competing
companies may also exert competitive pricing pressures that may adversely
affect the Company's sales levels and margins. Rapid technological development
by others may result in the Company's products becoming obsolete before the
Company recovers a significant portion of the research, development and
commercialization expenses incurred with respect to those products. There can
be no assurance that the Company will be able to continue to compete
successfully with existing competitors or will be able to compete successfully
with new competitors.

Dependence on New Management and Other Key Personnel. The Company's future
success depends to a significant extent on the efforts and abilities of its
executive officers, the majority of whom have joined the Company since April
1996 in connection with the Company's acquisition of TreBay. At the time of
the TreBay acquisition, the Board of Directors determined to replace members
of the Company's senior management with members of the senior management of
TreBay who the Board believed were better suited to implement the Company's
business strategy. Although the Company's new management has extensive
experience in managing medical device companies, the inability of new
management to become integrated fully into the operations of the Company could
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, the loss of the services of certain of
these individuals or of other key personnel could have a similar adverse
effect on the Company. Although the Company has entered into an employment
agreement with each of James T. Treace, its President, Chief Executive Officer
and Chairman, and F. Barry Bays, its Senior Vice President, Operations and
Chief Operating Officer, that includes non-competition covenants, there can be
no assurance that either of these individuals or any other key employee will
not terminate his or her

7
<PAGE>

employment with the Company. At present, the Company maintains key man life
insurance on James T. Treace but anticipates terminating this coverage before
the end of 1996. The Company believes that its future success also will depend
significantly upon its ability to attract, motivate and retain additional
highly skilled managerial, operational, technical and sales and marketing
personnel. Competition for such personnel is intense, and there can be no
assurance that the Company will be successful in attracting, assimilating and
retaining the personnel it requires to grow and operate profitably. See
"Business--Employees" and "Management--Executive Officers and Directors."

Risks Associated with Newly Established International Sales Operations;
Currency Exchange Risks. Within the past two years the Company has established
direct sales operations in five countries. The failure of these new direct
sales operations to develop successfully may have a material adverse effect on
the Company's business, financial condition or results of operations.
International sales (including export sales) accounted for approximately 29%
of the Company's net sales in fiscal 1995 and 34% of net sales in the first
half of 1996, and the Company expects that international sales will continue
to be a significant portion of the Company's business. The Company's
international business may be affected by fluctuations in currency exchange
rates as well as increases in duty rates and difficulties in obtaining export
licenses. The Company's establishment of direct international sales operations
further increases its exposure to fluctuations in currency exchange rates,
which may adversely affect reported sales and earnings, because the sales of
these operations are denominated in local currency and not in U.S. dollars.

Seasonality and Quarterly Fluctuations; Recent Operating Loss. The Company's
sales and operating results have varied, and are expected to continue to vary,
significantly from quarter to quarter as a result of seasonal patterns, the
timing of new product introductions and promotional activities. The Company
believes that its business is seasonal in nature, with the third quarter of
each year typically having the lowest sales and the fourth quarter of each
year typically having the highest sales. Quarterly results of operations for
any particular quarter may not be indicative of results of operations for
future periods. There can be no assurance that future seasonal and quarterly
fluctuations will not adversely affect the Company's business, financial
condition and results of operations. For the first half of 1996, the Company
experienced an operating loss of $2.2 million. This operating loss resulted
from (i) allocating $2.4 million of the excess of the cost of the Company's
TreBay acquisition over the net assets acquired to in-process research and
development and charging such allocated amount to expense during the second
quarter of 1996 and (ii) a restructuring charge of approximately $3.1 million
during the second quarter of 1996 primarily to reflect the cost of severance
payments to terminated employees as well as other restructuring charges. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

Uncertainty Relating to Third-Party Reimbursement for Costs of
Products. Demand for the Company's products is likely to depend in part on the
extent to which reimbursement for the cost of such products and the procedures
in which such products are used will be available from government third-party
payors (including the Medicare and Medicaid programs), government health
administration authorities, private health insurers and other organizations.
These third-party payors may deny coverage if they determine that a procedure
was not reasonable or necessary as determined by the payor, was experimental
or was used for an unapproved indication. In addition, certain health care
providers are moving towards a managed care system in which such providers
contract to provide comprehensive health care for a fixed cost per person,
irrespective of the amount of care actually provided. Such providers, in an
effort to control health care costs are increasingly challenging the prices
charged for medical products and services and, in some instances, have
pressured medical suppliers to lower their prices. Although the Company
believes that the development of procedure-specific instrumentation for use in
less-traumatic procedures may in certain cases reduce overall operating time
and therefore reduce the aggregate cost of those procedures, there can be no
assurance that the development of such products will have this effect or that
third-party payors will reimburse the costs of such instrumentation. In
addition, although the Company does not depend upon reimbursement from third-
party payors with respect to its products used in surgical cosmetic
procedures, there can be no assurance these procedures

8
<PAGE>

will not become subject to third-party reimbursement in the future. The
Company is unable to predict what changes will be made in the reimbursement
methods utilized by third-party health care payors. Furthermore, the Company
could be adversely affected by changes in reimbursement policies of
governmental or private health care payors, particularly to the extent any
such changes affect reimbursement for procedures in which the Company's
products are used. If coverage and adequate reimbursement levels are not
provided by government or third-party payors for use of the Company's
technologies or products, the Company's business, financial position and
ability to market its technologies or products will be adversely affected.
Reimbursement and health care payment systems in international markets vary
significantly by country, and include both government sponsored health care
and private insurance. To the extent that any of the Company's products are
not entitled to reimbursement in an international market, market acceptance of
such products in such international market would be adversely affected. See
"Business--Third-Party Reimbursement."

Uncertainty of Effect of Potential Health Care Reform Measures. Federal,
state and local officials and legislators (and certain foreign government
officials and legislators) have proposed or are reportedly considering
proposing a variety of reforms to the health care systems in the U.S. and
abroad. The Company cannot predict what health care reform legislation, if
any, will be enacted in the U.S. or elsewhere. Significant changes in the
health care system in the U.S. or elsewhere are likely to have a substantial
impact over time on the manner in which the Company conducts its business.
Such changes could have a material adverse effect on the Company. See
"Business--Government Regulation."

Extensive Government Regulation. The Company's products, product development
activities, promotional and marketing activities and manufacturing processes
are subject to extensive and rigorous regulation by the U.S. Food and Drug
Administration ("FDA") and comparable agencies in foreign countries. In the
U.S., the FDA regulates the interstate commerce of medical devices as well as
the manufacturing, labeling, promotion and recordkeeping procedures for such
devices. In order for the Company to market its products in the U.S., the
Company must obtain from the FDA marketing clearance through what is known as
a 510(k) pre-market notification or obtain approval through a more detailed
application process resulting in what is known as pre-market approval ("PMA").
The process of obtaining marketing clearance for new medical devices from the
FDA can be costly and time consuming, and there can be no assurance that such
clearance will be granted for the Company's future products on a timely basis,
if at all, or that FDA review will not involve delays that will adversely
affect the Company's ability to commercialize additional products or expand
permitted uses of existing products.

Even if regulatory clearance to market a device is obtained from the FDA,
the clearance may entail limitations on the indicated uses of the device. The
clearance can also be withdrawn by the FDA due to the failure to comply with
regulatory standards or the occurrence of unforeseen problems following
initial clearance. The Company may be required to make further filings with
the FDA under certain circumstances such as the addition of new product
claims. The FDA could also limit or prevent the manufacture or distribution of
the Company's products and has the power to seize or require the recall of
such products. The Company has made modifications to its 510(k) cleared
devices which the Company believes do not require submission of new 510(k)s.
There can be no assurance, however, that the FDA would agree with any of the
Company's determinations and would not require the Company to submit new
510(k)s for any of the changes made to the devices and/or to stop marketing
until new 510(k)s are cleared by the FDA.

All of the products currently marketed by the Company either have received
marketing clearance pursuant to 510(k) pre-market notifications filed by the
Company and cleared by the FDA, or are exempt from obtaining marketing
clearance by virtue of their status as pre-amendment devices (i.e. devices
introduced into interstate commerce prior to May 28, 1976). A 510(k) pre-
market notification requires the manufacturer of a medical device to establish
that the device is "substantially equivalent" to medical devices legally
marketed in the U.S. For future products, there can be no assurance that the
FDA will concur in the Company's 510(k) request for clearance, or that the FDA
will not require the Company to

9
<PAGE>

file PMA applications. The process of obtaining a PMA can be expensive,
uncertain and lengthy, frequently requiring anywhere from one to several years
from the date of submission, if approval is obtained at all. Significant delay
or cost in obtaining, or failure to obtain FDA clearance to market products,
or any FDA limitations on the use of the Company's products, could have a
material adverse effect on the business, financial condition and results of
operations of the Company.

In addition, all of the products manufactured by the Company and its
contract manufacturers must be manufactured in compliance with the FDA's Good
Manufacturing Practice ("GMP") regulations. Ongoing compliance with GMP and
other applicable regulatory requirements is monitored through periodic
inspection by state and federal agencies, including the FDA. The FDA may
inspect the Company and its facilities from time to time to determine whether
the Company is in compliance with regulations relating to medical device
manufacturing companies, including regulations concerning manufacturing,
testing, quality control, record keeping and product labeling practices.

FDA regulations depend heavily on administrative interpretation, and there
can be no assurance that future interpretations made by the FDA or other
regulatory bodies, with possible retroactive effect, will not adversely affect
the Company. In addition, changes in the existing regulations or adoption of
new governmental regulations or policies could prevent or delay regulatory
approval of the Company's products.

Failure to comply with applicable regulatory requirements could result in,
among other things, warning letters, fines, injunctions, civil penalties,
recall or seizure of products, total or partial suspension of production,
refusal of the government to grant pre-market clearance or pre-market approval
for devices, withdrawal of approvals and criminal prosecution.

A portion of the Company's revenue is dependent upon sales of its products
outside the U.S. Foreign regulatory bodies have established varying
regulations governing product standards, packaging requirements, labeling
requirements, import restrictions, tariff regulations, duties and tax
requirements. After June 1998, medical devices may not be sold in European
Union ("EU") countries unless they display the CE mark, an international
symbol of adherence to quality assurance standards and compliance with
applicable European medical device directives. In order to obtain the right to
affix the CE mark to its products, the Company must obtain certification that
its processes meet European quality standards, including certification that
its design and manufacturing facility complies with ISO 9001 standards. There
can be no assurance that the Company will be able to obtain CE mark
certification for its products. The inability or failure of the Company or its
international distributors to comply with varying foreign regulations or the
imposition of new regulations could restrict or, in certain countries, result
in the prohibition of the sale of the Company's products internationally and
thereby adversely affect the Company's business, financial condition and
results of operations. See "Business--Government Regulation."

Uncertainty Regarding Patents and Proprietary Rights. The Company's success
will depend in part on its ability to develop patentable products, obtain
patent protection for its products both in the U.S. and in other countries and
enforce its patents. However, the patent positions of medical device companies
are generally uncertain and involve complex legal and factual questions. No
assurance can be given that patents will issue from any patent applications
owned by or licensed to the Company or that, if patents do issue, the claims
allowed will be sufficiently broad to protect the Company's technology. In
addition, no assurance can be given that any issued patents owned by or
licensed to the Company will not be challenged, invalidated or circumvented,
or that the rights granted thereunder will provide competitive advantages to
the Company. The Company also relies on unpatented trade secrets to protect
its proprietary technology, and no assurance can be given that others will not
independently develop or otherwise acquire substantially equivalent techniques
or otherwise gain access to the Company's proprietary technology or disclose
such technology or that the Company can ultimately protect meaningful rights
to such unpatented proprietary technology.

10
<PAGE>

Legislation is pending in Congress that may limit the ability of medical
device manufacturers in the future to obtain patents on surgical and medical
procedures. Any limitation or reduction in the patentability of medical and
surgical technology could have a material adverse effect on the Company's
ability to protect its proprietary methods and procedures.

The commercial success of the Company will also depend in part on its
neither infringing patents issued to others nor breaching the licenses upon
which the Company's products might be based. The Company's licenses of patents
and patent applications impose various commercialization, sublicensing,
insurance, royalty and other obligations on the Company. Failure of the
Company to comply with these requirements could result in conversion of the
licenses from being exclusive to nonexclusive in nature or termination of the
licenses.

The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights. Litigation, which
would likely result in substantial cost to the Company, may be necessary to
enforce any patents issued or licensed to the Company and/or to determine the
scope and validity of others' proprietary rights. In particular, competitors
of the Company and other third parties hold issued patents and are assumed by
the Company to hold pending patent applications which may result in claims of
infringement against the Company or other patent litigation. The Company also
may have to participate in interference proceedings declared by the U.S.
Patent and Trademark Office, which could result in substantial cost to the
Company, to determine the priority of inventions. Furthermore, the Company may
have to participate at substantial cost in International Trade Commission
proceedings to abate importation of products which would compete unfairly with
products of the Company.

The Company relies on confidentiality agreements with its collaborators,
employees, advisors, vendors and consultants. There can be no assurance that
these agreements will not be breached, that the Company would have adequate
remedies for any breach or that the Company's trade secrets will not otherwise
become known or be independently developed by competitors. Failure to obtain
or maintain patent and trade secret protection, for any reason, could have a
material adverse effect on the Company. See "Business--Patents, Trade Secrets
and Proprietary Rights."

Dependence upon Key Suppliers. Although the Company believes that there are
a number of possible vendors for most of the components and subassemblies
required for its products, certain materials, including thermoplastic
elastomer (TPE)-based materials and certain fluoropolymers used in certain of
its ventilation tubes, currently are obtained from a single source. Although
it is not presently the case, delays associated with any future material
shortages could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Suppliers."

Product Liability Risk; Limited Insurance Coverage. The manufacture and sale
of medical instrumentation entail significant risk of product liability claims
in the event that the use of such instrumentation is alleged to have resulted
in adverse effects on a patient. The Company has taken and will continue to
take what it believes are appropriate precautions, including maintaining
general liability and commercial liability insurance policies which include
coverage for product liability claims. Although the Company maintains what it
believes to be adequate insurance, there can be no assurance that the
Company's existing insurance coverage limits are adequate to protect the
Company from any liabilities it might incur in connection with the sale of its
products. In addition, the Company may require, or desire to obtain, increased
product liability coverage in the future. Product liability insurance is
expensive and in the future may not be available on acceptable terms, if at
all. A successful product liability claim or series of claims brought against
the Company in excess of its insurance coverage could have a material adverse
effect on the Company's business, financial condition and results of
operations. Additionally, it is possible that adverse product liability
actions could negatively affect the Company's ability to obtain and maintain
regulatory approval for its products, as well as damage the Company's
reputation in any or all markets in which it participates. See "Business--
Product Liability and Insurance."

11
<PAGE>

Environmental Matters. The past and present business operations of the
Company and the past and present ownership and operations of real property by
the Company are subject to extensive and changing federal, state, and local
environmental laws and regulations. The Company believes it is in material
compliance with all such applicable laws and regulations. The Company cannot
predict what environmental legislation or regulations will be enacted in the
future, how existing or future laws or regulations will be administered or
interpreted or what environmental conditions may be found to exist. Compliance
with more stringent laws or regulations or stricter interpretations of
existing laws may require additional expenditures by the Company, some of
which may be material. See "Business--Environmental Matters."

Proceeds of Offering to Benefit Existing Stockholders. Up to $25.0 million
of the net proceeds of this offering will be used to redeem shares of Series C
Redeemable Preferred Stock, all of which are owned by existing stockholders of
the Company. The holders of the Series C Redeemable Preferred Stock have
agreed that the shares of Series C Redeemable Preferred Stock not redeemed
will be exchanged following the closing of this offering for shares of Common
Stock at the initial public offering price. Approximately 78% of the
outstanding shares of Series C Redeemable Preferred Stock is held by WP
Investors, which will beneficially own approximately 48.1% of the outstanding
shares of Common Stock following the closing of this offering and the Share
Exchange. See "Use of Proceeds." See "Principal Stockholders" for the
estimated amounts to be received upon the redemption of Series C Redeemable
Preferred Stock (based upon an assumed initial offering price of $20.00 per
share) by each person owning beneficially more than 5% of the outstanding
Common Stock and each of the Company's directors and most highly compensated
executive officers.

Influence by Existing Stockholders. Upon completion of this offering and the
Share Exchange, WP Investors will beneficially own approximately 48.1% of the
outstanding shares of Common Stock. A stockholders agreement among the Company
and substantially all of its current stockholders provides that WP Investors
has the right to designate specified numbers of persons to the Company's Board
of Directors so long as WP Investors maintains specified levels of ownership
of the outstanding Common Stock. Upon completion of this offering, WP
Investors will have under the stockholders agreement the right to designate
three persons to be appointed or nominated to the Company's Board of
Directors. Such share ownership and minority representation on the Company's
Board of Directors may confer upon WP Investors significant influence over the
affairs and actions of the Company. See "Management--Stockholders Agreement"
and "Principal Stockholders."

Shares Eligible for Future Sale; Potential for Adverse Effect on Stock
Price. Sales of a substantial number of shares of Common Stock in the public
market or the prospect of such sales could adversely affect prevailing market
prices for the Common Stock. Upon completion of this offering and the Share
Exchange, the Company will have outstanding 6,879,362 shares of Common Stock,
assuming no exercise of the Underwriters' over-allotment option. Of these
shares, the 2,500,000 shares of Common Stock to be sold in this offering will
be freely tradable without restriction under the Securities Act of 1933, as
amended (the "Securities Act"), except for any such shares which may be
acquired by an "affiliate" of the Company. Subject to certain "lock-up"
agreements covering an aggregate of 4,050,926 shares held by existing
shareholders, approximately 108,900 shares of Common Stock (plus 137,816
shares issuable upon exercise of then vested options) will be eligible for
sale in the public market pursuant to Rule 701 under the Securities Act 90
days after the date of this offering, an additional 4,206,711 shares will be
eligible for sale in the public market subject to compliance with the resale
volume limitations and other restrictions of Rule 144 under the Securities Act
90 days after the date of this Prospectus and 48,399 shares will be eligible
for sale in the public market without restriction under Rule 144(k) under the
Securities Act. Promptly after the closing of this offering, the Company
intends to file a registration statement under the Securities Act covering the
sale of 669,100 shares of Common Stock reserved for issuance under the Stock
Option Plan. Upon completion of this offering, there will be outstanding
options to purchase a total of 501,191 shares of Common Stock. The holders of
approximately 4,340,429 shares of Common Stock, after

12
<PAGE>

giving effect to the Stock Conversion and the Share Exchange, will hold
certain registration rights with respect to their shares of Common Stock. The
sale of such shares could have a material adverse effect on the Company's
ability to raise capital in the public markets. See "Management--1996 Stock
Option Plan," "Description of Capital Stock--Registration Rights," "Shares
Eligible for Future Sale" and "Underwriting."

Anti-takeover Considerations. The Company has amended its Restated
Certificate of Incorporation to authorize the issuance of Preferred Stock
without stockholder approval and upon such terms as the Board of Directors may
determine. The issuance of Preferred Stock could have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
from acquiring or making a proposal to acquire, a majority of the outstanding
stock of the Company and could adversely affect the prevailing market price of
the Common Stock. The rights of the holders of Common Stock will be subject
to, and may be adversely affected by, the rights of holders of Preferred Stock
that may be issued in the future. The Company has no present plans to issue
any shares of Preferred Stock. In addition, the Company is subject to the
provisions of Section 203 of the Delaware General Corporation Law, which could
prohibit or delay a merger, takeover or other change in control of the Company
and therefore discourage attempts to acquire the Company. See "Description of
Capital Stock--Preferred Stock" and "Description of Capital Stock--Section 203
of Delaware General Corporation Law."

Immediate and Substantial Dilution to New Investors. Investors purchasing
shares of Common Stock in this offering will incur substantial and immediate
dilution in the pro forma net tangible book value of the Common Stock of
$16.30 per share from the initial public offering price. In addition, these
investors will incur additional dilution upon the exercise of outstanding
stock options. See "Dilution."

No Prior Public Market; Possible Volatility of Stock Price. Prior to this
offering, there has been no public market for the Common Stock. Although
application will be made for approval for quotation of the Common Stock on the
Nasdaq National Market, there can be no assurance that an active trading
market for the Common Stock will develop or be sustained following this
offering or that the market price of the Common Stock will not decline below
the initial public offering price. The initial public offering price will be
determined by negotiation between the Company and the Representatives of the
Underwriters based upon several factors and may not be indicative of future
market prices. The price at which the Common Stock will trade will depend upon
a number of factors, including, but not limited to, the Company's historical
and anticipated operating results and general market and economic conditions,
some of which factors are beyond the Company's control. Factors such as
quarterly fluctuations in the Company's financial and operating results,
announcements by the Company or others and developments affecting the Company,
its products, its clients, the markets in which it competes or the industry
generally, also could cause the market price of the Common Stock to fluctuate
substantially. In addition, the stock market has from time to time experienced
extreme price and volume fluctuations. These broad market fluctuations may
adversely affect the market price of the Common Stock. See "Underwriting."

Absence of Dividends on the Common Stock. The Company does not anticipate
paying cash dividends on the Common Stock in the foreseeable future. See
"Dividend Policy."

13
<PAGE>

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,500,000 shares of
Common Stock offered hereby are estimated to be $45.8 million ($52.7 million
if the Underwriters' over-allotment option is exercised in full), after
deducting estimated underwriting discounts and expenses, assuming an initial
public offering price of $20.00 per share. Of the net proceeds of this
offering, $20.7 million will be used to repay the entire principal amount and
accrued interest under the Company's secured term loan facility (the "Term
Loan"). The Company will use the balance of the net proceeds of this offering,
after repayment of the Term Loan, plus the net proceeds from the sale of any
shares covered by the Underwriters' over-allotment option, for the redemption
of up to a maximum of $25.0 million of Series C Redeemable Preferred Stock,
with such redemption to be effected on the earlier of the closing date of the
sales of shares covered by the over-allotment option or the 30th day after the
date of the first closing of this offering. All of the Series C Redeemable
Preferred Stock is owned by existing stockholders of the Company. In the Share
Exchange, all shares of Series C Redeemable Preferred Stock remaining
outstanding immediately following the redemption will be exchanged for shares
of Common Stock, with the number of shares of Common Stock to be issued in
such exchange to be determined by dividing the aggregate redemption price of
such Series C Redeemable Preferred Stock, plus accrued but unpaid dividends,
by the per share initial public offering price. Based upon an assumed initial
public offering price of $20.00 per share, 239,234 shares of Series C
Redeemable Preferred Stock having an aggregate redemption price of $25.0
million would be redeemed and the remaining 60,225 shares of Series C
Redeemable Preferred Stock would be exchanged in the Share Exchange for
314,650 shares of Common Stock. Of this $25.0 million that would be used to
effect the redemption, approximately $19.5 million will be received by WP
Investors and $1.4 million in the aggregate will be received by executive
officers of the Company. In the case of certain of these executive officers, a
substantial portion of the amounts they receive will be used to repay loans
from WP Investors used to purchase shares of the Company. See "Principal
Stockholders." The balance of the net proceeds of any exercise of the
Underwriters' over-allotment option will be used for working capital and
general corporate purposes.

The principal amount of the Term Loan is due in twenty quarterly
installments commencing July 1, 1994 and ending April 15, 1999. The
indebtedness under the Term Loan bears interest, at the Company's election,
either at an annual rate of 1% plus a "base rate" (8.25% at September 2,
1996), or at 2.25% plus a "LIBOR rate" (5.58% at September 2, 1996).

Pending application of the proceeds as described above, the Company intends
to invest such proceeds in government securities and other short-term
interest-bearing securities.

DIVIDEND POLICY

The Company has never paid cash dividends on its Common Stock. The Company
currently intends to retain any earnings to fund its business and therefore
does not anticipate paying cash dividends in the foreseeable future. In
addition, the Company's existing credit agreement restricts the Company's
ability to pay dividends to its stockholders. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."

14
<PAGE>

CAPITALIZATION

The following table sets forth: (i) the current portion of long-term debt
and capital lease obligations and the capitalization of the Company as of June
29, 1996; and (ii) such current portion of long-term debt and capital lease
obligations and capitalization as adjusted on a pro forma basis for (a) the
sale by the Company of the 2,500,000 shares of Common Stock offered hereby at
an assumed initial public offering price of $20.00 per share and the
application of the estimated net proceeds therefrom as described in "Use of
Proceeds," (b) the Stock Conversion and (c) the Share Exchange. This table
should be read in conjunction with the Consolidated Financial Statements and
Notes thereto appearing elsewhere in this Prospectus:
<TABLE>
<CAPTION>
JUNE 29, 1996
---------------------
PRO FORMA
AS
ACTUAL ADJUSTED(1)
-------- -----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C> <C>
Short-term obligations:
Current portion of long-term debt and capital lease
obligations....................................... $ 5,236 $ 136
Long-term debt:
Term Loan (1)...................................... 18,113 --
Revolving Credit Facility and Note Payable under
capital lease obligations......................... 12,209 12,209
Series C Redeemable Preferred Stock, $1.00 par value,
600,000 shares authorized; 299,459 shares issued and
outstanding actual, no shares issued and outstanding
pro forma as adjusted (2)........................... 30,619 --
Series A Convertible Preferred Stock, $1.00 par
value, 1,200,000 shares authorized; 744,652 shares
issued and outstanding actual, no shares issued and
outstanding pro forma as adjusted................... 7,241 --
Series B Convertible Preferred Stock, $1.00 par
value, 3,500,000 shares authorized; 2,127,838 shares
issued and outstanding actual, no shares issued and
outstanding pro forma as adjusted................... 20,690 --
Undesignated Preferred Stock, $.01 par value,
1,000,000 shares authorized (3), no shares issued
and outstanding actual or pro forma as adjusted..... -- --
Shareholders' equity (deficit):
Common Stock, $.01 par value, 30,000,000 shares
authorized (3); 679,270 shares issued and
outstanding actual (3), 6,879,362 shares issued
and outstanding pro forma as adjusted (4)......... 7 69
Non-Voting Common Stock, $.01 par value, 4,000,000
shares authorized; 426,777 shares issued and
outstanding actual, no shares issued and
outstanding pro forma as adjusted (5)............. 4 --
Accumulated deficit................................ (10,391) (11,478)
Shareholders' notes receivable..................... (187) (187)
Additional paid-in capital......................... 112 80,441
-------- --------
Total shareholders' equity (deficit)............. (10,455) 68,845
-------- --------
Total capitalization........................... $ 83,653 $ 81,190
======== ========
</TABLE>
- -------
(1) On July 1, 1996, the Company repaid $1,275,000 million in principal amount
of the Term Loan and is obligated to repay an additional $1,275,000
million in principal amount of the Term Loan on October 1, 1996. The
Company expects cash flow from operations and available borrowings under
its revolving credit facility to be adequate to make the October payment.
Includes accretion of dividends on the Series A Convertible Preferred
Stock, Series B Convertible Preferred Stock and the Series C Redeemable
Preferred Stock through October 1, 1996 of $107,000, $306,000 and
$674,000, respectively, and the redemption of up to $25,000,000 of the
Series C Redeemable Preferred Stock.
(2) Gives effect, based upon an assumed initial offering price of $20.00 per
share, to the redemption of 239,234 shares of Series C Redeemable
Preferred Stock from the net proceeds of this offering and the Share
Exchange.
(3) Gives effect to an amendment to the Company's Restated Certificate of
Incorporation filed on September 12, 1996.
(4) Does not include 501,191 shares of Common Stock issuable upon the exercise
of outstanding stock options. An aggregate of 167,909 additional shares of
Common Stock have been reserved for future grants under the Company's
stock plans. See "Management--1996 Stock Option Plan."

(5) As part of the Stock Conversion, all outstanding shares of Non-Voting
Common Stock will be converted into shares of Common Stock upon the
closing of this offering.

15
<PAGE>

DILUTION

The historical net tangible book deficit of the Company at June 29, 1996 was
$(56,418,000) or approximately $(51.01) per share. The pro forma net tangible
book deficit of the Company at June 29, 1996 was $(20,318,000) or
approximately $(4.64) per share. Pro forma net tangible book value per share
represents the amount of total assets, excluding intangibles (excess of cost
over fair value of net assets acquired) less total liabilities, divided by the
aggregate number of shares of Common Stock outstanding as of June 29, 1996 (on
a pro forma basis after giving effect to the accretion of dividends on the
Series A Convertible Preferred Stock, Series B Convertible Preferred Stock and
Series C Redeemable Preferred Stock through October 1, 1996 of $1,087,000 in
the aggregate, the scheduled principal payments of $2,550,000 in the aggregate
on the Term Loan through October 1, 1996, the Stock Conversion and the Share
Exchange). After giving effect to the receipt of the net proceeds from the
sale of the 2,500,000 shares of Common Stock offered hereby, assuming an
initial public offering price of $20.00 per share and after deducting the
estimated underwriting discount and offering expenses to be paid by the
Company, the pro forma net tangible book value of the Company at June 29, 1996
would have been $25,432,000, or $3.70 per share. This represents an immediate
increase in net tangible book value of $8.34 per share of Common Stock to
existing stockholders and an immediate dilution of approximately $16.30 per
share to new investors purchasing shares in this offering. The following table
illustrates the per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $20.00
Historical net tangible book deficit per share............... $(51.01)
Increase per share related to pro forma adjustments.......... 46.37
Increase per share attributable to new investors............. 8.34
-------
Pro forma net tangible book value per share after this 3.70
offering..................................................... ------
Dilution per share to new investors........................... $16.30
======
</TABLE>

The following table sets forth, on a pro forma basis as of June 29, 1996,
the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price per share paid by
existing stockholders and by the new investors purchasing shares of Common
Stock from the Company in this offering (before deducting estimated
underwriting discount and offering expenses):

<TABLE>
<CAPTION>
SHARES
PURCHASED(1) TOTAL CONSIDERATION AVERAGE
----------------- ------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 4,379,362 64% $34,760,651 41% $ 7.94
New investors................. 2,500,000 36% $50,000,000 59% $20.00
--------- --- ----------- ---
Total......................... 6,879,362 100% $84,760,651 100%
========= === =========== ===
</TABLE>
- --------
(1) The foregoing tables exclude shares that were issuable upon exercise of
options outstanding at June 29, 1996. As of June 29, 1996, there were
options outstanding to purchase an aggregate of 441,191 shares at a
weighted average exercise price of $9.63 per share. Between June 29, 1996
and August 20, 1996, the Company granted options to purchase an aggregate
of 60,000 shares of Common Stock at a weighted average exercise price of
$10.65 per share. To the extent that outstanding options are exercised in
the future, there will be further dilution to new investors. See
"Management--1996 Stock Option Plan."

16
<PAGE>

SELECTED CONSOLIDATED FINANCIAL DATA

The following table summarizes certain selected consolidated financial data,
which should be read in conjunction with the Company's Consolidated Financial
Statements and Notes thereto included elsewhere herein and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
Company, prior to April 15, 1994, consisted solely of Merocel Corporation. The
selected consolidated financial data for all years presented has been derived
from the Company's audited financial statements, which have been audited by
Ernst & Young LLP, the Company's independent auditors. The selected
consolidated financial data as of and for the six months ended July 1, 1995
and June 29, 1996 have been derived from the Company's unaudited financial
statements. In the opinion of management, the unaudited financial statements
have been prepared on the same basis as the audited financial statements and
include all adjustments, consisting of normal recurring adjustments, necessary
for a fair presentation of the financial position and the results of
operations as of such dates and for such periods. The results for the six
months ended June 29, 1996 are not necessarily indicative of the results to be
expected for the entire year or the periods following in 1996.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED
----------------------------------------- -----------------
JULY 1, JUNE 29,
1991 1992 1993 1994(1) 1995 1995 1996
------ ------ ------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA (1):
Sales, net............. $6,787 $8,160 $10,071 $42,475 $59,865 $29,424 $ 32,942
Cost of sales.......... 2,620 2,357 2,876 15,350 22,256 10,686 12,690
Amortization of
acquisition costs
allocated to inventory. -- -- -- 3,883 919 919 --
------ ------ ------- ------- ------- ------- --------
Gross profit........... 4,167 5,803 7,195 23,242 36,690 17,819 20,252
Operating Expenses:
Selling, general and
administrative ....... 3,155 3,914 6,074 19,126 27,077 12,440 14,129
Research and
development........... 84 211 311 1,958 2,405 1,158 1,719
Amortization of
intangibles (2)....... 436 391 394 2,652 2,579 1,224 1,168
Write-off of acquired
research and
development........... -- -- -- -- -- -- 2,380
Restructuring charges.. -- -- -- -- -- -- 3,093
------ ------ ------- ------- ------- ------- --------
Total operating 3,675 4,516 6,779 23,736 32,061 14,822 22,489
expenses.............. ------ ------ ------- ------- ------- ------- --------
Operating income (loss)
from continuing
operations............ 492 1,287 416 (494) 4,629 2,997 (2,237)
Interest expense....... (125) (73) (102) (2,148) (3,063) (1,579) (1,536)
Other income (expense), 38 47 26 313 114 (136) 64
net................... ------ ------ ------- ------- ------- ------- --------
Income (loss) from
continuing operations
before income tax
expense (benefit)..... 405 1,261 340 (2,329) 1,680 1,282 (3,709)
Income tax expense 174 592 121 (774) 1,355 855 (536)
(benefit)............. ------ ------ ------- ------- ------- ------- --------
Income (loss) from
continuing operations. 231 669 219 (1,555) 325 427 (3,173)
Discontinued Operations
(3):
Income from operations
of discontinued
surgical drapes
segment (net of tax).. -- -- -- 463 306 295 --
Loss on disposal of
surgical drapes -- -- -- -- (2,485) -- --
segment (net of tax).. ------ ------ ------- ------- ------- ------- --------
Net income (loss)...... $ 231 $ 669 $ 219 $(1,092) $(1,854) $ 722 $ (3,173)
====== ====== ======= ======= ======= ======= ========
PRO FORMA STATEMENT OF
OPERATIONS DATA (4):
Income (loss) from
continuing operations. $ (149) $ (3,249)
Preferred stock -- 538
dividends............. ------- --------
Income (loss) from
continuing operations
available to common
shareholders (5)...... (149) (3,787)
Interest expense, net 1,300 581
of taxes.............. ------- --------
Supplementary income
(loss) from continuing $ 1,151 $ (3,206)
operations (6)........ ======= ========
Pro forma per share
Income (loss) from
continuing operations
available to common $ (.03) $ (.82)
shareholders.......... ======= ========
Supplementary income
(loss) from continuing
operations available
to common $ .16 $ (.45)
shareholders.......... ======= ========
Pro forma weighted
average common shares 4,632 4,635
outstanding (5)....... ======= ========
Supplementary pro forma
weighted average
common shares 7,132 7,135
outstanding (6)....... ======= ========
</TABLE>
See accompanying notes.

17
<PAGE>

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
JULY 1, JUNE 29,
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......... $ 2,146 $ 2,108 $ 3,126 $12,744 $12,234 $10,407 $11,061
Cost in excess of net
assets acquired, net... -- -- -- 54,300 46,381 53,182 45,963
Total assets............ 7,968 8,483 9,484 95,720 93,123 92,937 96,154
Long-term debt including
redeemable preferred
stock.................. 9,760 10,157 11,308 89,985 90,488 87,803 88,872
Total shareholders' eq-
uity (deficit)......... (1,725) (1,054) (834) (7,336) (13,058) (8,553) (10,455)
</TABLE>
- --------
(1) The statement of operations data includes the results of operations of
Xomed-Treace, Inc. since the date of its acquisition by the Company in
April 1994.
(2) Amortization of intangibles includes amortization of foreign distribution
rights of $838,000, $162,000 and $162,000, respectively, for the years
ended December 31, 1994 and 1995 and the six months ended July 1, 1995.
(3) In July 1995, the Company sold its surgical drapes segment to an unrelated
third party and simultaneously acquired from this party prosthetic implant
device and ventilation tube product lines. The Company has treated the
surgical drapes segment as a discontinued operation, and a loss on
disposition of $2,485,000 (after income tax benefit of $1,386,000) was
recorded upon completion of the transaction. The Company has restated its
Statement of Operations to reflect its treatment of this segment as a
discontinued operation. Income from continuing operations is after income
tax expense of $309,000, $203,000 and $197,000 for the years ended
December 31, 1994 and 1995 and for the six months ended July 1, 1995,
respectively.
(4) The pro forma income from continuing operations has been adjusted to
reflect: (i) the acquisition of TreBay as if the acquisition had occurred
on January 1, 1995 (see Notes to Consolidated Financial Statements--Note
18--Pro Forma Balance Sheet and Statement of Operations (Unaudited)); (ii)
the capital contribution of accrued cumulative preferred stock dividends
of $7,559,000 in connection with the acquisition of TreBay; and (iii) the
Share Exchange.
(5) Pro forma income from continuing operations per common share and weighted
average common shares outstanding have been adjusted to give effect as of
January 1, 1995 to: (i) the conversion of all Series A Convertible
Preferred Stock and Series B Convertible Preferred Stock outstanding as of
December 31, 1995 into Common Stock and Non-Voting Common Stock,
respectively; (ii) the conversion of 390,000 shares of Series A
Convertible Preferred Stock issued in the April 1996 acquisition of TreBay
into Common Stock; (iii) the exercise of all outstanding options to
purchase Common Stock; and (iv) the Share Exchange.
(6) Supplementary pro forma net income per share is computed upon the basis
stated above in notes 4 and 5 and giving effect to the sale by the Company
of the 2,500,000 shares of Common Stock offered hereby and the repayment
of approximately $23,213,000 of principal amount of the Term Loan and
$25,000,000 of Series C Redeemable Preferred Stock as if the offering was
effected January 1, 1995. Interest expense, net of tax benefit, totaling
$1,299,770 and $580,632 for the year ended December 31, 1995 and six
months ended June 29, 1996 has been eliminated as a result of the assumed
repayment of the Term Loan.

18
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Prospectus contains forward-looking statements which 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 differences include, but are not limited to, those discussed in "Risk
Factors."

OVERVIEW

The Company is a leading developer, manufacturer and marketer of a broad
line of surgical products for use by ENT specialists. The Company's broad line
of products includes, in its core ENT market, powered tissue-removal systems
and other microendoscopy instruments, implantable devices, nerve monitoring
systems and disposable fluid-control products. The Company also offers a line
of ophthalmic and other products. The Company distributes its products on a
worldwide basis through a 62-person direct sales organization in the U.S. and
selected other countries and through a network of 121 independent
distributors.

BACKGROUND

The business of Xomed, Inc. was established in 1970 to manufacture and
distribute ventilation tube implants for the middle ear. In 1979, the business
was acquired by Bristol-Myers Squibb Company ("Bristol-Myers"). In 1989,
Bristol-Myers acquired Treace Medical, Inc. and merged the two companies
together forming Xomed-Treace, Inc. On April 15, 1994, Bristol-Myers sold
Xomed-Treace, Inc. to the Company for a purchase price of approximately $81.0
million (the "Xomed Acquisition"). The Company is a Delaware corporation
formerly known as Merocel/Xomed Holdings, Inc., which was organized for the
purpose of acquiring all of the outstanding stock of Merocel Corporation
("Merocel") and of Xomed-Treace, Inc. and Xomed-Treace, P.R. Inc.
(collectively, "Xomed-Treace"). Merocel, which was formed in 1970,
manufactures and markets a line of disposable fluid-control products primarily
used in sinus surgery and rhinology. The Company, prior to April 15, 1994,
consisted solely of Merocel.

In July 1995, the Company sold its surgical drapes segment to an unrelated
party and simultaneously acquired from this party several otology product
lines (the "Otology Acquisition"). In April 1996, the Company acquired TreBay,
a microendoscopy products company. The senior management of TreBay, including
James T. Treace, F. Barry Bays and Thomas E. Timbie, assumed senior management
positions at the Company at the time of the Company's acquisition of TreBay.

XOMED ACQUISITION

The Xomed Acquisition has significantly affected the Company's results of
operations following the April 15, 1994 consummation of the transaction. The
Xomed Acquisition has been accounted for under the purchase method of
accounting. Accordingly, the purchase price of approximately $81.0 million was
allocated to the assets acquired and liabilities assumed based upon their
respective fair values at date of acquisition. The excess of the purchase
price over the fair market value of the net assets acquired of approximately
$56.0 million was allocated to goodwill. Of this amount, $49.9 million related
to continuing operations and $6.1 million related to the surgical drapes
segment which was sold in July 1995 and has been presented as discontinued
operations. As a result, amortization of intangibles (over a 25-year life) has
been significantly increased. Further, the value of inventory of continuing
operations was increased by $4.8 million and was charged to cost of goods sold
for the 1994 period following the Xomed Acquisition ($3.9 million) and the
first quarter of 1995 ($0.9 million) (the "Inventory Valuation Adjustment").
These costs reduced gross profit in these periods. Other intangible assets
relating to foreign distribution rights were valued in connection with the
acquisition, and as a result, amortization of intangibles was increased

19
<PAGE>

by $0.8 million for the 1994 period following the Xomed Acquisition and $0.2
million for the first quarter of 1995 (the "International Distribution Rights
Amortization"). In addition, interest expense increased due to the increased
borrowings to finance the Xomed Acquisition.

The Xomed Acquisition and the Company's initial working capital were funded
primarily through the issuance of $43.5 million of preferred stock and from
the incurrence of approximately $45.9 million in long-term debt. In connection
with the Xomed Acquisition, management implemented a restructuring plan for
Xomed-Treace that included the closing of manufacturing operations in Puerto
Rico and the elimination of certain overhead in other facilities.

DISCONTINUED OPERATIONS

In connection with the Xomed Acquisition on April 15, 1994, the tangible
assets related to the surgical drapes segment, which consisted primarily of
inventory and equipment, were separately identified and recorded at fair
value. The goodwill related to this segment was also determined as of April
15, 1994 based on an independent valuation. In the July 1995 Otology
Acquisition, the Company decided to dispose of the surgical drapes segment and
finalized an agreement to exchange the segment's assets for cash, notes
receivable, inventory and fixed assets of several otology product lines of an
unrelated entity. There were no significant intangibles such as customer lists
or patents acquired in connection with the Otology Acquisition, nor was any
work force transferred. Due to the significance of the monetary assets
received, the transaction was recorded at fair value which resulted in a loss
on discontinuance of approximately $2.5 million (after a $1.4 million tax
benefit) in the third quarter of 1995. See Note 3 to Notes to Consolidated
Financial Statements. There was no intent to dispose of the surgical drapes
segment at the time of the Xomed Acquisition. The surgical drapes segment has
been presented as discontinued operations.

CHANGE IN DISTRIBUTION CHANNELS

On January 1, 1996 the Company effected two changes in its product
distribution to focus the Company's resources on its core product lines of
sinus and rhinology, head and neck and otology. The first involved changing
from distributing its ophthalmic product line through its direct sales force
to distributing this line through an independent dealer network. As a result
of this change, the Company's net sales were approximately $0.9 million lower
in the first half of 1996 than they would have been if the ophthalmic product
line had continued to be distributed through the Company's direct sales force.

The second change involved moving the distribution of the Company's Merocel
fluid-control products from an independent dealer network to the Company's
U.S. direct sales force. As a result of this change, the Company's net sales
were approximately $0.5 million higher in the first half of 1996 than they
would have been if the Merocel product line had continued to be distributed
through independent dealers.

ACQUISITION OF TREBAY

The Company's acquisition of TreBay in April 1996 has been accounted for
under the purchase method of accounting. Accordingly, the purchase price of
approximately $6.6 million was allocated to the individual assets acquired and
liabilities assumed, based upon their respective fair values at the date of
acquisition. The transaction resulted in cost in excess of net assets acquired
of $4.4 million, of which $2.4 million was allocated to in-process research
and development and charged to expense in the second quarter of 1996. The in-
process research and development was valued based upon an independent
valuation utilizing management's projections of cash flows and cost to achieve
technological feasibility of the products. Estimated costs to achieve
technological feasibility are approximately $420,000 which are expected to be
incurred over the next three years and are related to clinical testing and
product design modifications. The acquisition was funded through the issuance
of $2.8 million of redeemable preferred stock and $3.7 million of convertible
preferred stock.

RESTRUCTURING CHARGES

During the second quarter of 1996, the Company's new management team
initiated cost savings programs that resulted in reductions of 50 employees at
the Company's three domestic locations. The

20
<PAGE>

reductions included 20 management and administrative employees at the
Company's Mystic, Connecticut manufacturing facility, 17 management and
administrative employees at the Company's Jacksonville, Florida headquarters
and 13 management and production employees at the Company's St. Louis,
Missouri manufacturing facility. The restructuring eliminated redundant
overhead at the sites, and the Company expects these actions to yield cost
savings primarily in general and administrative expense. The Company incurred
a restructuring charge of approximately $3.1 million during the second quarter
of 1996 primarily to reflect the cost of the severance payments to terminated
employees. Most of the affected employees were terminated in the second
quarter of 1996 with severance beginning at that time. The Company expects to
have paid out approximately 70% of the severance payments by December 31,
1996.

OTHER RECENT EVENTS

In December 1995, the Company became the exclusive worldwide distributor of
Implantech Associates, Inc.'s line of facial plastic implants to the ENT
market. In April 1996, the Company became the exclusive distributor of BOSS
Instruments Ltd.'s line of hand instrumentation products to the U.S. ENT
market. The Company introduced in the second quarter of 1996 its Wizard Plus
powered tissue-removal system and NIM-2(R) XL nerve monitoring system. In
connection with the introduction of these new products, the Company reserved
significant numbers of the initial products manufactured as samples to be used
by its sales force in marketing efforts, which resulted in a charge to
selling, general and administrative expenses of approximately $0.6 million
during the first half of 1996.

SEASONALITY

The Company's sales and operating results have varied, and are expected to
continue to vary significantly from quarter to quarter as a result of seasonal
patterns. The Company believes that its business is seasonal in nature, with
the third quarter of each year typically having the lowest sales and the
fourth quarter of each year typically having the highest sales. There can be
no assurance that future seasonal fluctuations will not adversely affect the
Company's business, financial condition and results of operations.

CURRENCY EXCHANGE RISKS

The Company's international business may be affected by fluctuations in
currency exchange rates. The Company's establishment of direct international
sales operations further increases its exposure to fluctuations in currency
exchange rates because the sales of these operations are denominated in local
currency and not in U.S. dollars, in contrast to its international sales
through local distributors which are denominated in U.S. dollars. At present,
the Company does not engage in hedging transactions to protect against
uncertainty in the level of future exchange rates between particular foreign
currencies and the U.S. dollar because a majority of the sales of the
Company's direct international sales operations are denominated in what the
Company believes to be relatively stable currencies.

SIX MONTHS ENDED JUNE 29, 1996 COMPARED TO SIX MONTHS ENDED JULY 1, 1995

Net Sales. Net sales increased 12.0% to $32.9 million in the first half of
1996 from $29.4 million in the comparable period in 1995. In the core
businesses of sinus and rhinology, head and neck and otology, sales increased
22.4% in the first half of 1996 over the prior comparable period, which
resulted in these product lines representing 80.0% of the Company's revenue
during the first half of 1996 as compared to 73.2% in the first half of 1995.
These increases were principally the result of sales generated from several
new products introduced recently including the Company's Wizard and Wizard
Plus powered tissue-removal systems, the Activent anti-microbial vent tube
line, an otology implant line acquired in the Otology Acquisition in the third
quarter of 1995 and a line of facial implant products. In addition, several
existing product lines showed strong sales growth over the prior period
including the Merocel fluid-control products and the NIM-2(R) XL nerve
monitoring system. The increase in Merocel products sales was

21
<PAGE>

due partly to price increases resulting from moving the distribution of these
products, effective on January 1, 1996, from an independent dealer network to
the Company's U.S. direct sales force. Sales were adversely affected, however,
by a change in the distribution system for the Company's ophthalmic product
line. On January 1, 1996, the Company commenced distribution of its ophthalmic
line through an independent dealer network, with the Company selling to
dealers at wholesale prices. During the first half of 1995, these products
were distributed through the Company's direct sales force at retail pricing.
This change was made to better focus the direct sales force on the ENT market.
Although unit volume in the ophthalmic business was comparable between the two
periods, net sales decreased as a result of the price differential from
changing the distribution channel. Associated ophthalmic operating expenses
also declined. Sales also increased in several other product lines due to
increased penetration of international markets through recently established
direct sales sites. International sales increased 25.2% during the period and
represented 34.3% of the Company's revenue in the first half of 1996 compared
to 30.7% in the first half of 1995.

Cost of Sales. Cost of sales increased 9.3% to $12.7 million in the first
half of 1996 from $11.6 million in the first half of 1995. As a percent of
sales, cost of sales decreased to 38.5% in the first half of 1996 from 39.4%
in the prior comparable period. In accounting for the Xomed Acquisition, the
Company effected the Inventory Valuation Adjustment by which a portion of the
excess cost of the acquisition over book value of the net assets acquired was
allocated to inventory. This allocation resulted in an increase in inventory
value of $5.3 million, of which $4.8 million was allocated to the inventory of
continuing operations. The inventory valued on this basis was charged to cost
of sales on a FIFO basis as it was sold. This increased cost of sales in the
first half of 1995 by $0.9 million. No such adjustment affected 1996. Without
this charge, cost of sales would have increased 18.8% to $12.7 million in the
first half of 1996 from $10.7 million in the prior comparable period and cost
of sales as a percent of sales would have increased to 38.5% in the first half
of 1996 from 36.3% in the prior comparable period. This increase was primarily
due to the change in the distribution method described above for the
ophthalmic line which resulted in lower average selling prices. This increase
was partially offset by an increase in the ratio of higher margin disposable
and implantable products to equipment and instrumentation products, as well as
the change in the distribution of the Merocel product line which resulted in a
higher average selling price.

Gross Profit. Gross profit as a percent of sales increased to 61.5% in the
first half of 1996 from 60.6% in the prior comparable quarter. Without the
effects of the Inventory Valuation Adjustment discussed above, gross profit as
a percent of sales would have decreased to 61.5% in the first half of 1996
from 63.7% in the prior comparable period for the reasons discussed above.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 13.6% to $14.1 million in the first half of
1996 from $12.4 million in the prior comparable period. This increase was due
primarily to higher commissions on a larger sales base, an increase in the
average commission rate, the operating expenses of a new direct sales
subsidiary in Germany, which began operations in the first quarter of 1996,
and promotional expenses related to the Company's line of sinus endoscopy
systems. As a percent of sales, selling, general and administrative expenses
increased to 42.9% in the first half of 1996 from 42.3% in the comparable 1995
period. The Company believes that certain restructuring actions taken in the
second quarter of 1996 should result in savings that will reduce these
expenses as a percent of sales. There can be no assurances, however, that
management will be able to decrease selling, general and administrative
expenses as a percentage of sales through such restructuring actions.

Research and Development. Research and development expenses increased 48.5%
to $1.7 million in the first half of 1996 from $1.2 million in the first half
of 1995 and increased as a percent of sales to 5.2% from 3.9% during the same
period. This increase is primarily the result of project expenses related to
the development of the new XPS powered tissue-removal system and the
Powerforma drill system. Although it has in the past relied in part on
strategic acquisitions and licensing of third-party technology

22
<PAGE>

to develop its broad line of ENT products, the Company believes it has a
strong base of proprietary engineering, manufacturing and bio-material
capabilities upon which to build its future research and development efforts.
The Company plans to increase research and development expenses while
maintaining spending as a percent of sales to a ratio similar to that in the
first half of 1996.

Amortization. Amortization expense in the first half of 1996 and in the
first half of 1995 related principally to approximately $49.9 million of
goodwill related to continuing operations generated from the Xomed Acquisition
in April 1994, which is being amortized over 25 years.

Write-off of Acquired Research and Development. The TreBay acquisition was
accounted for under the purchase method of accounting. Accordingly, the
purchase price of approximately $6.6 million was allocated to the individual
TreBay assets acquired and liabilities assumed, based upon their respective
fair values at the date of acquisition. The transaction resulted in cost in
excess of net assets acquired of approximately $4.4 million, of which $2.4
million was allocated to in-process research and development and charged to
expense in the second quarter of 1996.

Restructuring Charges. During the second quarter of 1996, the Company's new
management team initiated cost savings programs that resulted in reductions of
50 employees at the Company's three domestic locations. The reductions
included 20 management and administrative employees at the Company's Mystic,
Connecticut manufacturing facility, 17 management and administrative employees
at the Company's Jacksonville, Florida headquarters and 13 management and
production employees at the Company's St. Louis, Missouri manufacturing
facility. The restructuring eliminated redundant overhead at the sites, and
the Company expects these actions to yield cost savings primarily in general
and administrative expense. The Company incurred a restructuring charge of
approximately $3.1 million during the second quarter of 1996 primarily to
reflect the cost of the severance payments to terminated employees. Most of
the affected employees were terminated in the second quarter of 1996 with
severance beginning at that time. The Company expects to have paid out
approximately 70% of the severance payments by December 31, 1996.

Interest and Other. Interest expense during the first half of 1996 was
consistent with the prior comparable period at approximately $1.5 million.
Interest expense related principally to the Term Loan and the Company's
secured revolving credit facility (the "Revolving Credit Facility") as
described below in "--Liquidity and Capital Resources." Other income of
$64,000 in the second half of 1996 was $200,000 higher than the $136,000 of
expense reported in the first half of 1995 related principally to royalty
income on a product licensed to a third party.

Income Taxes. The benefit for income taxes in the first half of 1996 of $.5
million was $1.4 million lower than the $0.9 million expense recorded in the
prior comparable period. The tax benefit in 1996 resulted primarily from the
recording of the restructuring expense discussed above. The Company's
effective tax rate in the first half of 1996 was 14% as compared to 67% in the
prior comparable period. The Company's effective tax rate was low in 1996 due
to the lack of tax benefit related to the write-off of in-process research and
development costs and high in 1995 due principally to losses incurred by
foreign direct sales subsidiaries during their start-up stages, the related
tax benefits of which were not recorded because of uncertainty as to their
ultimate realization. Without the effect of the write-off of in-process
research and development, the 1996 effective tax rate is 40%. The 1996
effective tax rate assumes that the foreign direct sales subsidiaries become
profitable during the year. There can be no assurance that the foreign
subsidiaries will be profitable in 1996. A failure of the foreign subsidiaries
to be profitable in 1996 could result in an effective tax rate higher than the
40% currently being utilized.

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

The principal reason for the increases in the Company's operating data from
1994 to 1995 was the effect on results of operations and the related balance
sheet data of the Xomed Acquisition in April 1994. The year ended December 31,
1995 contains a full year of operating results of Xomed-Treace compared to
eight and one-half months in 1994. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Overview" and Note 1 to
Notes to Consolidated Financial Statements.

Net Sales. Net sales increased 40.9% to $59.9 million in 1995 from $42.5
million in 1994, principally as a result of the inclusion of Xomed-Treace's
operations for the full year 1995 as compared to eight and one-half months in
1994. In addition, new product sales increased from the Company's Wizard

23
<PAGE>

powered tissue-removal system, which was introduced during the third quarter
of 1995, a line of sinus microendoscopy instrumentation and sales generated
from the acquisition of an otology implant line acquired in the Otology
Acquisition during the third quarter of 1995. New international direct sales
operations were established in Canada and Australia during the third quarter
of 1994 and in the United Kingdom and France during the first quarter of 1995,
which resulted in increased penetration of existing and new products in these
markets as well as higher pricing for these products because of the change to
distributing directly rather than through wholesale distribution channels.

Cost of Sales. Cost of sales increased 20.5% to $23.2 million in 1995 from
$19.2 million in 1994 principally as a result of the inclusion of Xomed-
Treace's operations for the full year 1995 as compared to eight and one-half
months in 1994. As a percent of sales, cost of sales decreased to 38.7% in
1995 from 45.3% in 1994. Cost of sales included charges related to the
Inventory Valuation Adjustment from the Xomed Acquisition consisting of $0.9
million in 1995 and $3.9 million in 1994. Without the impact of this change,
cost of sales as a percent of sales would have increased to 37.2% in 1995 from
36.1% in 1994. The increase in cost of sales as a percent of sales is
principally due to the inclusion of Xomed-Treace's operations for a full year
in 1995 as compared to eight and one-half months in 1994. Xomed-Treace's
product lines had generally higher cost products as a percent of sales than
the Merocel product line. The increase from the product mix change described
above was partially offset by higher margins on sales achieved through
international direct sales operations established during 1994 and early 1995.

Gross Profit. Gross profit as a percent of sales increased to 61.3% in 1995
from 54.7% in 1994 principally due to the effect of the change in amortization
related to the Inventory Valuation Adjustment previously discussed. Without
the impact of this adjustment, gross profit as a percent of sales would have
decreased to 62.8% from 63.9% for the reasons described above.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 41.6% to $27.1 million in 1995 from $19.1
million in 1994. Of the increase, $5.4 million or 67.8% represents the
inclusion of Xomed-Treace's operations for the full year 1995 as compared to
eight and one-half months in 1994. The balance of the increase is due to
higher international expenses related to the establishment of direct sales
operations in Canada, Australia, the United Kingdom and France during the
latter part of 1994 and early 1995 and expenses associated with the
integration of the prosthetic implant devices and ventilation tube product
line acquired during the year in the Otology Acquisition. Selling, general and
administrative expenses increased slightly as a percent of sales to 45.2% in
1995 from 45.0% in 1994.

Research and Development. Research and development expenses increased 22.8%
to $2.4 million in 1995 from $2.0 million in 1994 principally as a result of
the inclusion of Xomed-Treace's operations for the full year 1995 as compared
to eight and one-half months in 1994. The increase was partially offset by
savings from restructuring actions implemented in 1994.

Amortization. Amortization decreased 2.8% to $2.6 million in 1995 from $2.7
million in 1994. The net decrease represents an increase due to the inclusion
of Xomed-Treace's operations for the full year 1995 as compared to eight and
one-half months in 1994, which was more than offset by International
Distribution Rights Amortization that was greater in 1995 than in the 1994
period.

Interest and Other. Interest expense increased 42.6% to $3.1 million in 1995
from $2.1 million in 1994 principally as a result of incurring a full year of
interest expense in 1995 related to the Xomed Acquisition in April 1994. Other
income of $0.3 million in 1994 represented royalty income from a product
licensed to a third party.

Income Taxes. A tax provision of $1.4 million was recorded in 1995 compared
with a tax benefit of $0.8 million in 1994. The tax benefit in 1994 was
primarily due to losses generated by amortization expenses related to the
Xomed Acquisition in that year. The effective tax rate increased to 81% in
1995

24
<PAGE>

from 33% in 1994. The increase was primarily due to losses incurred by foreign
direct sales subsidiaries in 1995 during their start-up stages whose related
tax benefits were not recorded due to uncertainty about their ultimate
realization.

YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993

The principal reason for the increases in the Company's operating data from
1993 to 1994 is the effect on results of operations and the related balance
sheet data of the Xomed Acquisition in April 1994. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Overview" and Note 1 to Notes to Consolidated Financial Statements.

Net Sales. Net sales increased 321.8% to $42.5 million in 1994 from $10.1
million in 1993, primarily as a result of the inclusion of Xomed-Treace's
operations for eight and one-half months in 1994.

Cost of Sales. Cost of sales increased 668.7% to $19.2 million in 1994 from
$2.9 million in 1993. This increase was principally due to the inclusion of
Xomed-Treace's operations for eight and one-half months in 1994. As a percent
of sales, cost of sales increased to 45.3% in 1994 from 28.6% in 1993. Cost of
sales in 1994 included $3.9 million related to the Inventory Valuation
Adjustment from the Xomed Acquisition. Without the impact of this charge, cost
of sales as a percent of sales would have increased to 36.1% in 1994 from
28.6% in 1993 principally due to the inclusion of Xomed-Treace's operations
for eight and one-half months in 1994. Xomed-Treace's product lines had
generally higher cost products as a percent of sales than the Merocel product
line. The increase from the product mix change described above was partially
offset by higher margins on sales achieved through international direct sales
operations established during 1994.

Gross Profit. Gross profit as a percent of sales decreased to 54.7% in 1994
from 71.4% in 1993, primarily due to the Inventory Valuation Adjustment of
$3.9 million in 1994. Without the impact of this change, gross profit as a
percent of sales would have decreased to 63.9% in 1994 from 71.4% in 1993 for
the reasons described above.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 214.9% to $19.1 million in 1994 from $6.1
million in 1993. Of the increase, $12.4 million or 95% represents the
inclusion of Xomed-Treace's operations for eight and one-half months in 1994.
As a percent of sales, selling, general and administrative expenses decreased
to 45.0% in 1994 from 60.3% in 1993 due to greater economies of scale
resulting from the Xomed Acquisition.

Research and Development. Research and development expenses increased 529.6%
to $2.0 million in 1994 from $0.3 million in 1993 principally as a result of
the inclusion of Xomed-Treace's operations for eight and one-half months in
1994.

Amortization. Amortization increased 573.1% to $2.7 million in 1994 from
$0.4 million in 1993. This increase is due to the inclusion of Xomed-Treace's
operations in 1994 and relates principally to amortization of goodwill created
in the Xomed Acquisiton. The goodwill from this transaction is being amortized
over 25 years.

Interest and Other. Interest expense increased to $2.1 million in 1994 from
$0.1 million in 1993 principally due to the Term Loan and the Revolving Credit
Facility that were established in April 1994 in connection with the Xomed
Acquisition as described in "--Liquidity and Capital Resources." Other income
of $0.3 million in 1994 represented royalty income from a product licensed to
a third party.

Income Taxes. A tax benefit of $0.8 million was recorded in 1994 compared
with a tax provision of $0.1 million in 1993. The tax benefit in 1994 was
primarily due to losses generated by amortization expenses related to the
Xomed Acquisition in that year.

25
<PAGE>

SALES COMPOSITION

Xomed-Treace was acquired by the Company in a purchase transaction on April
15, 1994. These companies were non-related entities and, under generally
accepted accounting principles, the historical financial statements of the
companies are required to be presented separately for periods prior to the
Xomed Acquisition. However, solely to enable the assessment of the revenue
trends of the two companies for analytical purposes, the total of the sales of
the Company and Xomed-Treace are presented for periods prior to the
acquisition as well as for periods subsequent thereto. This data does not
purport to represent the revenues that would have been earned by the Company
if the Xomed Acquisition had occurred at an earlier date.

SALES BY MARKET

The Company derives and Xomed-Treace derived sales from various markets
within the ENT industry. Sinus and rhinology, head and neck and otology are
the three core markets in which the Company operates. In addition to products
for these markets, the Company and Xomed-Treace have other product offerings,
including a line of ophthalmic products, which the Company has recently
converted from distributing through its direct sales force to distributing
through independent dealers. The following table summarizes the Company's and
Xomed-Treace's worldwide product line sales during the periods indicated and
has been prepared by summarizing the historical data of Merocel with Xomed-
Treace for periods prior to the Xomed Acquisition:

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, SIX MONTHS ENDED
-------------------------- ----------------
JULY 1, JUNE 29,
1993 1994 1995 1995 1996
------- ------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SALES:
Sinus and Rhinology
The Company..................... $ 8,086 $13,389 $17,038 $ 8,531 $10,920
Xomed-Treace.................... 6,187 2,252(1) -- -- --
------- ------- ------- ------- -------
Total Company and Xomed-Treace
Sales......................... $14,273 $15,641 $17,038 $ 8,531 $10,920
======= ======= ======= ======= =======
Head and Neck
The Company..................... $ -- $ 9,847 $14,187 $ 6,781 $ 7,831
Xomed-Treace.................... 13,000 3,119(1) -- -- --
------- ------- ------- ------- -------
Total Company and Xomed-Treace
Sales......................... $13,000 $12,966 $14,187 $ 6,781 $ 7,831
======= ======= ======= ======= =======
Otology
The Company..................... $ -- $ 7,395 $12,406 $ 6,220 $ 7,605
Xomed-Treace.................... 11,480 3,571(1) -- -- --
------- ------- ------- ------- -------
Total Company and Xomed-Treace
Sales......................... $11,480 $10,966 $12,406 $ 6,220 $ 7,605
======= ======= ======= ======= =======
Total Core Business
The Company.................. $ 8,086 $30,631 $43,631 $21,532 $26,356
Xomed-Treace................. 30,667 8,942(1) -- -- --
------- ------- ------- ------- -------
Total Company and Xomed-
Treace Sales $38,753 $39,573 $43,631 $21,532 $26,356
======= ======= ======= ======= =======
Ophthalmic and Other
The Company..................... $ 1,985 $11,844 $16,234 $ 7,892 $ 6,586
Xomed-Treace.................... 14,697 3,859(1) -- -- --
------- ------- ------- ------- -------
Total Company and Xomed-Treace
Sales......................... $16,682 $15,703 $16,234 $ 7,892 $ 6,586
======= ======= ======= ======= =======
Total
The Company.................. $10,071 $42,475 $59,865 $29,424 $32,942
Xomed-Treace................. 45,364 12,801(1) -- -- --
------- ------- ------- ------- -------
Total Company and Xomed-
Treace Sales $55,435 $55,276 $59,865 $29,424 $32,942
======= ======= ======= ======= =======
</TABLE>
- --------

(1) Three and one-half months ended April 15, 1994, the period prior to the
Xomed Acquisition. Sales subsequent to the Xomed Acquisition are included
with the Company.

26
<PAGE>

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, SIX MONTHS ENDED
------------------- ----------------
JULY 1, JUNE 29,
1993 1994 1995 1995 1996
----- ----- ----- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
PERCENTAGE OF TOTAL COMPANY AND XOMED-
TREACE SALES:
Sinus and Rhinology.................... 25.7% 28.3% 28.5% 29.0% 33.1%
Head and Neck.......................... 23.5 23.5 23.7 23.1 23.8
Otology................................ 20.7 19.8 20.7 21.1 23.1
----- ----- ----- ----- -----
Total Company and Xomed-Treace Core
Business............................ 69.9 71.6 72.9 73.2 80.0
Ophthalmic and Other................... 30.1 28.4 27.1 26.8 20.0
----- ----- ----- ----- -----
Total Company and Xomed-Treace...... 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>

SALES BY GEOGRAPHIC MARKET

The Company distributes its products on a worldwide basis through a 62-
person direct sales force in the U.S. and selected other countries and through
a network of 121 independent distributors. The Company's core ENT products are
sold in the U.S. only on a direct sales basis.

Prior to its acquisition in 1994, Xomed-Treace's sales and distribution were
conducted jointly with Zimmer International, a division of Bristol-Myers and a
former affiliate. Since that time, the Company has developed its own
international sales and distribution network. Approximately 29.4% of the
Company's net sales in 1995 and 34.3% of its net sales during the first half
of 1996 were made outside the U.S. through direct operations in the United
Kingdom, Canada, France, Germany and Australia, as well as through 102
independent international distributors, many of whom distribute the Company's
products exclusively. The following table summarizes the Company's U.S. and
international sales for the periods indicated and has been prepared by
summarizing the historical data of Merocel with Xomed-Treace for periods prior
to the Xomed Acquisition:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, SIX MONTHS ENDED
--------------------------- -----------------
JULY 1, JUNE 29,
1993 1994 1995 1995 1996
------- ------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SALES:
U.S.
The Company................... $ 5,796 $30,943 $42,249 $20,398 $21,639
Xomed-Treace.................. 36,969 9,991(1) -- -- --
------- ------- ------- ------- -------
Total Company and Xomed-
Treace U.S. Sales.......... $42,765 $40,934 $42,249 $20,398 $21,639
======= ======= ======= ======= =======
International
The Company................... $ 4,275 $11,532 $17,616 $ 9,026 $11,303
Xomed-Treace.................. 8,395 2,810(1) -- -- --
------- ------- ------- ------- -------
Total Company and Xomed-
Treace International Sales. $12,670 $14,342 $17,616 $ 9,026 $11,303
======= ======= ======= ======= =======
Total
The Company................... $10,071 $42,475 $59,865 $29,424 $32,942
Xomed-Treace.................. 45,364 12,801(1) -- -- --
------- ------- ------- ------- -------
Total Company and Xomed-
Treace Sales............... $55,435 $55,276 $59,865 $29,424 $32,942
======= ======= ======= ======= =======
PERCENTAGE OF TOTAL COMPANY AND
XOMED-TREACE SALES:
U.S........................... 77.1% 74.1% 70.6% 69.3% 65.7%
International................. 22.9 25.9 29.4 30.7 34.3
------- ------- ------- ------- -------
Total Company and Xomed-
Treace..................... 100.0% 100.0% 100.0% 100.0% 100.0%
======= ======= ======= ======= =======
</TABLE>
- --------

(1) Three and one-half months ended April 15, 1994, the period prior to the
Xomed Acquisition. Sales subsequent to the acquisition are included with
the Company.

27
<PAGE>

SALES BY PRODUCT TYPE

The Company places particular emphasis on disposable products and
implantable devices, which represented 86.3% of sales during the first half of
1996, as compared with 78.9% of the total of the Company's and Xomed-Treace's
sales in 1993. One of the Company's principal objectives is to continue to
develop additional disposable products for use with its instrumentation
systems. Recently, the Company introduced the Typhoon line of disposable
blades, which is the only blade system in the market place that is
interchangeable among the various power hand pieces on the market. The
following table summarizes the Company's sales of equipment and
instrumentation products as well as disposable and implantable products for
the periods indicated and has been prepared by summarizing the historical data
of Merocel with Xomed-Treace for periods prior to the Xomed Acquisition:

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, SIX MONTHS ENDED
--------------------------- -----------------
JULY 1, JUNE 29,
1993 1994 1995 1995 1996
------- ------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SALES:
Equipment and Instrumentation
Products
The Company.................. $ -- $ 7,271 $ 9,396 $ 4,448 $ 4,513
Xomed-Treace................. 11,685 2,275(1) -- -- --
------- ------- ------- ------- -------
Total Company and Xomed-
Treace Sales.............. $11,685 $ 9,546 $ 9,396 $ 4,448 $ 4,513
Disposable and Implantable
Products
The Company.................. $10,071 $35,204 $50,469 $24,976 $28,429
Xomed-Treace................. 33,679 10,526(1) -- -- --
------- ------- ------- ------- -------
Total Company and Xomed-
Treace Sales.............. $43,750 $45,730 $50,469 $24,976 $28,429
Total
The Company.................. $10,071 $42,475 $59,865 $29,424 $32,942
Xomed-Treace................. 45,364 12,801(1) -- -- --
------- ------- ------- ------- -------
Total Company and Xomed-
Treace Sales.............. $55,435 $55,276 $59,865 $29,424 $32,942
======= ======= ======= ======= =======
PERCENTAGE OF TOTAL COMPANY AND
XOMED-TREACE SALES:
Equipment and Instrumentation
Products.................... 21.1% 17.3% 15.7% 15.1% 13.7%
Disposable and Implantable
Products.................... 78.9 82.7 84.3 84.9 86.3
------- ------- ------- ------- -------
Total Company and Xomed-
Treace.................... 100.0% 100.0% 100.0% 100.0% 100.0%
======= ======= ======= ======= =======
</TABLE>
- --------

(1) Three and one-half months ended April 15, 1994, the period prior to the
Xomed Acquisition. Sales subsequent to the acquisition are included with
the Company.

DISCUSSION OF TOTAL SALES COMPOSITION

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

Net sales increased 8.3% to $59.9 million in 1995 from the total of the
Company's and Xomed-Treace's net sales of $55.3 million in 1994. In the core
businesses, sales increased 10.3% in 1995 over the 1994 total, which resulted
in these product lines representing 72.9% of the Company's revenue during 1995
as compared to 71.6% in the total of 1994 revenue. This increase was primarily
the result of increased volume across several product lines, most notably in
the NIM-2(R) nerve monitoring system. In addition, new product sales increased
from the Company's Wizard powered tissue-removal system which was introduced
during the third quarter of 1995, a line of sinus microendoscopy
instrumentation and sales generated from the acquisition of an otology implant
line acquired in the Otology Acquisition during the third quarter of 1995. New
international direct sales operations were established in Canada and Australia
during the third quarter of 1994 and in the United Kingdom and

28
<PAGE>

France during the first quarter of 1995, which resulted in increased
penetration of existing and new products in these markets, as well as higher
pricing for these products because of the change to distributing directly
rather than through wholesale distribution channels. International sales
increased 22.8% during the year and represented 29.4% of the Company's revenue
in 1995 compared to 25.9% in the total 1994 revenue of the Company and Xomed-
Treace.

YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993

Total net sales of the Company and Xomed-Treace decreased slightly to $55.3
million in 1994 from the total net sales of $55.4 million in 1993. The
decrease was the result of distribution channel changes and disruptions during
1994 related to the Xomed Acquisition in April 1994 and a subsequent sales
force restructuring which resulted in sales force turnover and lost revenues.
In addition, during 1994 the medical device industry in general experienced a
slowdown as a result of concern over healthcare reform. During this time,
capital equipment purchases were postponed and the number of surgical
procedures performed in various subspecialties grew slower or declined
relative to historical levels. Despite these factors, the Company's and Xomed-
Treace's core businesses grew 2.1% in total net worldwide sales in 1994 over
the total of 1993 net sales primarily due to the Merocel fluid-control
products and the international otology product line. The total of the Company
and Xomed-Treace international net sales increased 13.2% during the year and
represented 25.9% of the Company's and Xomed-Treace's revenue in 1994 compared
to 22.9% in 1993.

LIQUIDITY AND CAPITAL RESOURCES

The Company historically has financed its operations (including capital
expenditures) through cash flows from operations. Since the Xomed Acquisition
in April 1994, which was financed in part by the incurrence of $45.9 million
of debt under the Term Loan and the Revolving Credit Facility, all cash flow
generated from operations has been applied to repay the outstanding principal
on the Term Loan or the Revolving Credit Facility. By June 29, 1996, the
aggregate principal balance of the Term Loan and the Revolving Credit Facility
had been reduced to $35.0 million.

During the six months ended June 29, 1996, the Company generated cash from
operating activities of $1.4 million as compared with $4.4 million in the
prior comparable period. In the first half of 1996, the Company used $2.0
million of cash to increase inventories while in the prior comparable period,
the Company generated cash from inventory reductions of $1.4 million. The
inventory increase in 1996 principally related to new products introduced
during the latter part of 1995 and early 1996. In addition, the restructuring
expense of $3.1 million recorded during the first half of 1996 lowered cash
flow from operations by $0.6 million after taking into account the increase in
accrued restructuring costs of $2.5 million. During 1995, the Company
generated cash flow from operations of $6.3 million compared with $4.0 million
in 1994. The change in cash flow between the years relates principally to the
inclusion of the operations of Xomed-Treace for eight and one-half months in
1994 as compared with a full year in 1995. Working capital at June 29, 1996
was $11.1 million as compared with $10.4 million at July 1, 1995. The increase
in working capital relates principally to an increase in inventory which was
partially offset by increases in accrued restructuring costs and the current
portion of long-term debt. Working capital at December 31, 1995 was $12.2
million as compared to $12.7 million at December 31, 1994. The Company
believes cash flow from operations combined with the amounts available for
borrowing under the Revolving Credit Facility will be sufficient to finance
working capital needs for the forseeable future.

Cash generated in investing activities was $0.5 million in the first half of
1996 as compared to cash used in investing activities of $1.4 million in the
prior comparable period. During the second quarter of 1996, the Company
acquired TreBay by issuing preferred stock. The assets acquired in this
transaction included $2.0 million in cash, which is reported as a source of
cash from investing activities. In addition, certificates of deposit related
to a foreign subsidiary matured during the first half of 1996 generating $0.3
million in cash. Capital expenditures were $1.7 million during each of the
first half of 1996 and 1995 and

29
<PAGE>

related principally to purchases of manufacturing equipment. Cash used in
investing activities was $4.0 million in 1995 as compared with $83.4 million
in 1994, during which period $80.9 million related to the Xomed Acquisition.

Cash used in financing activities was $1.7 million in the first half of 1996
as compared with $2.9 million in the first half of 1995. In general, all cash
generated from operations that is not used in investing activities is used to
reduce outstanding debt under the Term Loan and the Revolving Credit Facility.
Cash used in financing activities in 1995 of $2.1 million compared with cash
provided by financing activities of $78.3 million in 1994, during which period
cash was received from the establishment of the Term Loan and the Revolving
Credit Facility as well as from the issuance of preferred stock related to the
Xomed Acquisition.

Under the terms of the Revolving Credit Facility, the Company may borrow up
to $14.0 million for working capital and operating needs. The amount available
to the Company at any given time is based upon various percentages of the
Company's outstanding inventories and accounts receivable as determined
periodically throughout the year (the "Borrowing Base"). Any excess of the
principal amount outstanding under the Revolving Credit Facility over the
Borrowing Base must be repaid by the Company. The outstanding principal under
the Revolving Credit Facility is due and payable on April 15, 1999. Management
expects that the Borrowing Base will remain at a level for the next twelve
months that will not require the Company to make any repayments of principal
outstanding under the Revolving Credit Facility during such period. At August
1, 1996, the Borrowing Base under the Revolving Credit Facility was $13.8
million, of which $12.0 million was outstanding and $1.8 million was available
for additional borrowing. The Revolving Credit Facility is secured by
substantially all the assets of the Company, contains restrictions regarding
payment of dividends, incurrence of additional debt and capital expenditures
and requires compliance with various financial covenants. The indebtedness
under the Revolving Credit Facility bears interest, at the Company's election,
either at an annual rate of 1% plus a "base rate" (8.25% at September 2,
1996), or at 2 1/4% plus a "eurodollar rate" (5.58% at September 2, 1996).

The Company was not in compliance as of December 31, 1995 or March 30, 1996
with a financial covenant of the Term Loan and the Revolving Credit Facility
that requires the consolidated shareholders' equity of the Company at the end
of each fiscal quarter to be not less than $47 million plus 50% of the
Company's annual net income on a cumulative basis. Waivers were obtained for
this noncompliance, which resulted primarily from the write-off of goodwill in
connection with the sale of the Company's surgical drapes segment. The
acquisition of TreBay in the second quarter of 1996 increased the Company's
shareholders' equity and brought the Company into compliance with this
covenant. In addition, as of June 29, 1996, the Company was not in compliance
with financial covenants under the Term Loan and the Revolving Credit Facility
that require the Company, for any consecutive four quarter period, to maintain
a ratio of operating cash flow to financial obligations of not less than 1.25
to 1.0 and a ratio of earnings before interest and taxes to interest expense
of not less than 3.5 to 1.0. This noncompliance, for which the Company
obtained waivers on September 3, 1996, resulted primarily from (i) the
$3.1 million charge associated with the restructuring actions taken by the
Company in the second quarter of 1996; and (ii) the $2.4 million charge in the
second quarter of 1996 for costs allocated to in-process research and
development in connection with the acquisition of TreBay. In conjunction with
the September 3, 1996 waivers, the Company obtained amendments to the two
financial covenants that, among other things, offset the effect of the
foregoing charges and made the covenants less rigorous for the four-quarter
period ending September 28, 1996. The Company currently anticipates that it
will be in compliance with the amended financial covenants in the future,
although there can be no assurance of such future compliance.

Of the net proceeds of this offering, $20.7 million will be used to repay
the entire principal amount of and accrued interest on the Term Loan. The
Company will use the balance of the net proceeds of this offering, after
repayment of the Term Loan, plus the net proceeds from the sale of any shares
covered by the Underwriters' over-allotment option, for the redemption of up
to a maximum of $25.0 million of Series C Redeemable Preferred Stock. In the
Share Exchange, all shares of Series C Redeemable Preferred

30
<PAGE>

Stock remaining outstanding immediately following the redemption will be
exchanged for shares of Common Stock, with the number of shares of Common
Stock to be issued in such exchange to be determined by dividing the aggregate
redemption price of such Series C Redeemable Preferred Stock, plus accrued but
unpaid dividends, by the per share initial public offering price. Based upon
an assumed initial public offering price of $20.00 per share, 239,234 shares
of Series C Redeemable Preferred Stock having an aggregate redemption price of
$25.0 million would be redeemed and the remaining 60,225 shares of Series C
Redeemable Preferred Stock would be exchanged in the Share Exchange for
314,650 shares of Common Stock.

31
<PAGE>

BUSINESS

OVERVIEW

Xomed is a leading developer, manufacturer and marketer of a broad line of
surgical products for use by ENT specialists. The Company's broad line of
products includes, in its core ENT market, powered tissue-removal systems and
other microendoscopy instruments, implantable devices, nerve monitoring
systems and disposable fluid-control products. The Company also offers a line
of ophthalmic and other products. For the first half of 1996, approximately
86% of Xomed's revenues were derived from disposable or implantable products.
The Company distributes its products on a worldwide basis through a 62-person
direct sales organization in the U.S. and selected other countries and through
a network of 121 independent distributors. Xomed is the only major
manufacturer and marketer of ENT surgical products with a direct U.S. sales
force exclusively serving ENT specialists. Approximately 34% of the Company's
net sales was derived from international markets during the first half of
1996, as compared to 23% of the total 1993 net sales of the Company and of
Xomed-Treace, which the Company acquired in 1994. With over 25 years of
industry experience, Xomed believes that it has established a long-standing
reputation for innovative, high-quality products and is uniquely positioned as
the only major surgical products company focused on the ENT market.

Xomed believes that the ENT market is beginning a conversion from
conventional surgical approaches to less-traumatic approaches that involves
the use of advanced surgical tools, such as powered tissue-removal systems and
small-diameter surgical endoscopes, thereby minimizing patient trauma and
reducing procedure times. Xomed believes that the adoption of these less-
traumatic techniques may be driven by several factors, including economic
pressures and patient demand. Minimally invasive techniques have the potential
to expand the number of ENT procedures that can be performed in lower-cost
outpatient or day surgery settings. Patient demand is likely to increase due
to the reduced morbidity and improved outcomes. Xomed believes that the
conversion in the ENT market to less-traumatic approaches will be similar to
recent conversions in the general surgery market to less invasive techniques
and the orthopaedic surgery market to powered instrumentation systems.

INDUSTRY BACKGROUND

More than an estimated 20,000 ENT specialists, also known as
otorhinolaryngologists, currently practice in the U.S., Canada, Western
Europe, Japan, Australia, South America and the Middle East (collectively,
"worldwide"), with approximately 9,000 of those specialists practicing in the
U.S. The Company estimates that sales in the U.S. market for medical
instruments, devices and supplies used by ENT surgeons were approximately $200
million in 1995. ENT practitioners specialize in the diagnosis and treatment
of diseases and conditions affecting the ear, nose and throat. ENT surgeons
are also typically experts in tumor-related diseases of the head and neck.
Increasingly, ENT surgeons are expanding their practice to include facial
plastic and reconstructive surgery. Of the estimated 9,000 ENT specialists in
the U.S., an estimated 3,300 currently practice facial plastic and
reconstructive surgery.

Diseases and conditions addressed by ENT specialists affect sizable patient
populations. The Company estimates that ENT surgeons performed over three
million procedures in the U.S. in 1995. The following chart summarizes common
conditions currently treated by ENT surgeons and the Company's estimates of
the number of procedures performed in the U.S. in 1995.

32
<PAGE>

<TABLE>
<CAPTION>
NUMBER OF
ENT PROCEDURES IN
SUBSPECIALTY INDICATION/CONDITION PROCEDURE U.S. IN 1995(1)
------------ -------------------- --------- ----------------
<C> <S> <C> <C>
Sinus and Chronic sinusitis (sinus Sinus surgeries(2) 320,000
Rhinology (nose) inflammation)
Cosmetic reconstruction, Septoplasty/rhinoplasty 414,000
trauma or congenital
defects
Head and Neck Chronic infection of Tonsillectomy/adenoidectomy 684,000
tonsils or adenoids
Vocal cord polyps or Surgical removal 78,000
lesions
Acoustic neuromas or Skull-base surgery 134,000
mastoid infection
Facial tumors Surgical resection 36,000
Facial cosmetic Face lifts/facial sculpting/ 700,000
augmentation brow lifts and others
Chronic snoring or sleep Uvulopharyngoplasty 93,000
disorders
Otology (ear) Acute otitis media Myringotomy with vent tubes 1,098,000
(middle ear infection)
Conductive hearing loss Middle ear reconstruction 58,000
</TABLE>
- --------

(1) Reflect outpatient procedures except in the case of sinus surgeries and
the vocal cord polyp or lesion procedures which include both outpatient
and inpatient procedures.

(2) Sinus surgeries include removal of polyps (polypectomy) and removal of
diseased and inflamed tissue (ethmoidectomy and sinusotomy).

MARKET OPPORTUNITY

ENT procedures currently pose the following challenges:

(i) In many of these procedures, the target tissue is adjacent to critical
anatomy, including the brain, sensory centers and facial motor nerves,
limiting the surgeon's maneuverability and requiring very small,
precise movements;

(ii) The anatomy in the region generally contains many blood vessels,
leading to significant blood loss during surgery that may obscure the
surgeon's vision, as well as increase patient complications, or
morbidity;

(iii) The affected areas are often very small in size and require the
surgeon to perform microsurgery through the use of magnifying devices
such as small-diameter surgical endoscopes ("microendoscopy"); and

(iv) The affected areas are often behind significant bony structures,
including the skull, the penetration of which can entail significant
patient trauma and lengthy procedure times.

Conventional hand-held surgical instruments typically used during ENT
procedures do not provide the surgeon with sufficient power or precision to
minimize trauma and blood loss during the procedure and can contribute to
unnecessary pain, swelling and scarring following the procedure. In addition,
the need to repeatedly remove and reinsert conventional hand-held
instrumentation from the surgical site during procedures can increase patient
trauma and operating time. The Company believes that the limitations of
conventional hand-held surgical instruments create a significant opportunity
for the development of instruments designed for specific ENT procedures,
including powered tissue-removal instrumentation and visualization products,
that will make these procedures easier and faster to perform and less
traumatic to the patient.

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The Company believes that the following factors will drive growth in the
market for surgical instruments, devices and supplies for ENT surgeons:

Advancements in Procedure-Specific Instrumentation. The Company believes
that the introduction of new tools and instrumentation will enable ENT
surgeons to better address the current challenges of ENT procedures. For
example, powered cutting devices adapted for use in particular surgical
procedures will allow surgeons to cut and extract tissue and penetrate bone
with more speed, control and precision than conventional hand-held
instruments, thereby minimizing patient trauma and reducing procedure times.
The Company anticipates that the blades for these newly developed powered
cutting devices will be disposable and thus sales of these blades will
represent a significant portion of the market growth of these devices. By
providing ENT surgeons with greater access to difficult-to-reach surgical
sites and reducing trauma to the patient, new procedure-specific instruments
potentially will increase the total number of procedures performed.

Clinical and Cost Benefits for Patient, Surgeon and Payor. The Company
believes that the adoption of these less-traumatic ENT procedures may be
driven, in part, by economic pressures. Due to the reduced patient morbidity
associated with less-traumatic techniques, certain procedures previously
performed in hospitals and requiring longer stays can now be performed in
lower-cost outpatient or day surgery settings. In addition, powered tissue-
removal instrumentation allows for reduced operating times.

Demand From Significant Patient Populations. Sizable patient populations
suffer from conditions which can be treated by ENT surgical procedures. As
less-traumatic instrumentation and techniques become available, the portion of
these patients who will elect to undergo these procedures is likely to
increase. In particular, patient demand for endoscopic sinus surgery as well
as facial plastic surgery will, in the Company's view, increase as the pain
and morbidity associated with these procedures is reduced through better
instrumentation and techniques.

Ease of Market Conversion. The Company believes that ENT surgeons will
readily adopt new devices and instrumentation designed to meet the challenges
of specific surgical procedures because of the advantages they offer over
conventional instrumentation. The Company further believes that physicians
will require minimal additional training (usually two to three days) to use
these instruments. In addition to its functional advantages, powered
instrumentation should, in the Company's view, be attractive to ENT surgeons
because it requires only a relatively modest capital investment.

STRATEGY

The Company's objective is to enhance its position in the ENT market. The
principal elements of its strategy to meet this objective are outlined below.

Focus on the ENT Market. The Company believes that, as the only major
provider of surgical products with a direct sales force exclusively serving
the ENT surgeon, it is well-positioned to participate in any growth in the ENT
surgical market. The Company intends to continue to develop and maintain close
relationships with ENT specialists from whom it has gained significant brand
recognition and loyalty. The Company believes that it presently sells products
to substantially all the ENT specialists in the U.S. Accordingly, the Company
believes that a significant opportunity exists to increase penetration of its
existing customer base.

Facilitate ENT Market Conversion to Less-Traumatic Approaches. The Company
believes that the ENT market is beginning a conversion to less-traumatic
approaches that is similar to recent conversions in the general surgery market
to less invasive techniques and the orthopaedic surgery market to powered
instrumentation systems. The Company intends to facilitate conversion of high
volume ENT procedures to less-traumatic techniques. The procedures targeted by
the Company include sinus surgery, the removal of tonsils and adenoids, face
and brow lifts and facial sculpting. To facilitate this conversion, the
Company

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plans to continue its collaborative efforts with leading ENT surgeons to
create products that allow physicians to re-engineer standard operating
procedures to reduce patient trauma and operating time. The Company believes
that the development of powered tissue-removal instrumentation systems for use
in ENT procedures will play a central role in this conversion and accordingly
will continue in its efforts to develop and introduce such powered
instrumentation.

Continue to Innovate; Emphasize Internal Research and Development. The
Company plans to develop new proprietary products and product enhancements
primarily through internal research and development efforts. The Company
expects that it will invest approximately $3.7 million in research and
development in 1996. The Company has introduced numerous technological
advancements in the ENT market.

Maintain a Broad Line of ENT Products; Emphasize Disposable and Implantable
Products. The Company seeks to maintain a broad product line that addresses
all of the surgical needs of ENT specialists. The Company's current product
line consists of approximately 4,000 stock keeping units (SKUs), including
equipment, disposable products and implantable devices. The Company places
particular emphasis on disposable products and implantable devices, which
represented 86% of the Company's sales during the first half of 1996, as
compared with 79% of the total 1993 sales of the Company and of Xomed-Treace,
which the Company acquired in 1994. One of the Company's principal objectives
is to continue to develop additional disposable products for use with its
instrumentation systems.

Continue to Expand its Global Distribution Network. The Company believes
that significant growth opportunities exist through the expansion of its
global distribution network. The Company distributes its products worldwide
through a 62-person direct sales force in the U.S. and selected other
countries and through a network of 121 independent distributors. The Company's
core ENT products are sold in the U.S. only on a direct sales basis.
Approximately 29% of the Company's net sales in 1995 and 34% of its net sales
in the first half of 1996 were made outside the U.S. through direct operations
in the United Kingdom, Canada, France, Germany and Australia, as well as
through 102 independent international distributors, many of whom distribute
the Company's products exclusively.

MAJOR ENT SUBSPECIALTIES

The three major ENT subspecialties within the ENT market are sinus and
rhinology, head and neck and otology. The following table sets forth the
Company's estimate of sales in the overall U.S. ENT market in 1995 for
surgical instruments and related products used in procedures within each of
these subspecialties:

<TABLE>
<CAPTION>
1995 U.S. SALES OF
SURGICAL PRODUCTS
ENT SUBSPECIALTY USED IN SUBSPECIALTY
---------------- --------------------
<S> <C>
Sinus and Rhinology $81 million
Head and Neck $80 million
Otology $36 million
</TABLE>

SINUS AND RHINOLOGY

The majority of surgical procedures within the sinus and rhinology
subspecialty address disease and inflammation of the sinuses, due to enlarged
tissue, deviated septum, infection, trauma or allergies.

Endoscopic Sinus Surgery. Large numbers of the U.S. population suffer from
chronic sinusitis. Although sinus medications provide temporary relief from
symptoms, they may not resolve the underlying cause of the disease or
inflammation and surgery is frequently required. ENT specialists utilize
several methods of treatment, including medication and surgical intervention,
to provide patients with symptomatic relief of sinus disease. In traditional
sinus surgical procedures, surgeons remove the affected

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tissue or obstruction, such as a polyp, through the use of forceps. However,
with traditional surgical instruments, ENT surgeons may have limited ability
to visualize and gain access to the deeper sinus cavities through the natural
sinus passageways and also experience significant difficulty gaining the
control needed to remove the tissue effectively. This can result in uneven
cutting and tearing, which in turn causes trauma to the surrounding tissue. In
some cases, bony structures and tissue obstruct the nasal passageway, further
complicating the procedure.

Although a less-traumatic method for performing sinus surgery with powered
tissue-removal instrumentation was introduced in 1993, much of the
instrumentation used at the time was originally designed for arthroscopic
procedures (less invasive knee surgery). Since this instrumentation was not
designed specifically for sinus surgery, its use for these procedures was
cumbersome and prone to clogging. Despite these limitations, approximately 20%
of all sinus surgeries in the U.S. were performed with this less-traumatic
method in 1995. Overall operating time of procedures performed with this
method can be reduced by approximately 25% from that of traditional surgical
methods due to the greater ease of accessing structures, the improved
visualization at the site and the quicker removal of tissue with powered
instrumentation.

Rhinoplasty and Septoplasty. Rhinoplasty involves the surgical
reconstruction of the nose to treat bone defects or trauma or to improve the
appearance of the nose cosmetically. ENT surgeons generally use either a bone
shaver or a rasp to shape or reduce the targeted area or a chisel to cut the
bone. The use of a shaver or rasp results in significant post-operative
swelling and the use of a chisel carries with it a significant risk of error.
Septoplasty, the surgical correction of a defect, disease or trauma to the
septum, is often done in conjunction with sinus surgery or rhinoplasty.

HEAD AND NECK

The head and neck subspecialty encompasses a wide range of procedures,
including laryngeal (throat) surgery, skull-base surgery, facial tumor removal
and facial plastic surgery.

Laryngeal Surgery. Throat-based procedures include the removal of the
tonsils (tonsillectomy) and adenoids (adenoidectomy), the removal of lesions,
polyps and tumors on the throat or vocal cords and the surgical reduction of
the uvula (the flap of tissue at the back of the throat and the soft palate).

Tonsillectomies and adenoidectomies, which are performed to treat chronic
inflammation and soreness, represented approximately 684,000 procedures in the
U.S. in 1995, less than 10% of which are estimated by the Company to have been
performed using powered tissue-removal instrumentation. In traditional
tonsillectomies, surgeons use either forceps or snares to grasp and pull the
tonsils out, or alternatively they cut away the tonsils with an electrocautery
device. The use of these instruments can cause swelling, pain and post-
operative bleeding. For adenoidectomies, surgeons traditionally utilize a
curette, a small hand instrument, to scrape out the inflamed tissue. Due to
the limited precision of a curette in removing this tissue, adenoidectomies
involve many of the same problems experienced in tonsillectomies.

Lesions, polyps or tumors on the throat or vocal cords are presently removed
using either hand instrumentation, an electrocautery device or a laser. The
use of hand instrumentation, electrocautery devices or lasers may result in
damage to the surrounding tissue. In addition, lasers and electrocautery
devices can destroy the affected tissue and thus prevent the subsequent
pathological testing of a tissue sample.

Uvulopharyngoplasty is a procedure in which the uvula and the soft palate
are surgically reduced in the throat to reduce snoring and breathing
interruptions (sleep apnea). The use of electrocautery devices or lasers to
perform this procedure is again associated with swelling and pain.

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<PAGE>

Skull-base Surgery. Skull-base surgery includes those procedures in which
the affected anatomy, generally a tumor, is located within or near the skull.
A common skull-base procedure is the removal of an acoustic neuroma, a benign
tumor located on the cranial nerve adjacent to the inner ear. The symptoms of
this condition include hearing loss, ringing in the ears, loss of balance,
pain and headaches. Surgical removal is the only treatment alternative for
persons with an acoustic neuroma; however, the traditional procedure involves
drilling through the dense bone behind the ear to access the nerve, a
procedure that generally takes between six to eight hours to perform and
frequently results in a residual hearing loss.

Facial Tumor Removal. ENT surgeons perform numerous procedures in order to
remove facial tumors from the head and neck area. Surgical resections in this
area are particularly critical procedures to perform because of the numerous
motor nerve branches within the surgical area. Due to the potential
complications from severing a nerve, the identification and monitoring of
nerves during most facial tumor procedures are becoming a standard of care.
These surgeries frequently require laser incisions in cosmetically important
areas and post-operative cosmetic and functional defects are common.

Facial Plastic Surgery. Approximately one-third of ENT surgeons in the U.S.
currently perform facial plastic procedures. The number of elective procedures
for cosmetic purposes is likely to increase in conjunction with the general
aging demographic trend of the U.S. The procedures covered in this area
include: the placement of facial implants to correct defects or augment
features in the face; correction and smoothing of wrinkles; facial lifts,
which involve stretching the muscles and skin of the face; and facial
sculpting, which involves the removal of fat around the neck. The Company
estimates that less than 10% of the facial sculpting in the U.S. presently is
performed using powered tissue-removal instrumentation.

Approximately 700,000 facial cosmetic augmentation procedures were performed
in the U.S. in 1995, of which face and brow lifts represented approximately
145,000. During this procedure, the surgeon peels the skin at the hair line,
pulls the facial muscles and skin taut and then stitches the long incision
made at the hair line. In addition to the post-operative swelling and bruising
from the procedure, the patient is left with a relatively large scar at the
hair line from the long incision needed to access the entire facial region.
During facial sculpting, the surgeon removes fat away from the neck area using
a suction cannula, a device which evacuates fat from the facial tissue. As a
result of the aggressive way in which the suction cannula evacuates the fat
from the neck area, the patient experiences significant swelling and bruising
following the surgical procedure.

OTOLOGY

Common otology procedures include myringotomies (which generally involve the
insertion of ventilation tubes in the middle ear) and stapedectomies (the
replacement of middle ear bones with middle ear prosthetic implants).

Ventilation tubes are used to treat chronic middle ear infection. Their
placement is one of the most common surgical procedures performed in children,
with over 1.0 million of these procedures performed in 1995 in the U.S.
Conductive hearing loss is caused by damage to the ossicular bone chain in the
middle ear from disease, trauma or aging. The replacement of diseased bones of
the middle ear with specially designed implants is the preferred method to
restore hearing to these patients, and approximately 58,000 reconstructive
middle ear procedures are performed in the U.S. each year. Re-engineering in
the design and material of the prostheses has, in recent years, improved
surgeon technique and patient hearing outcomes.

PRODUCTS

The Company designs, develops, manufactures, and markets surgical
instruments and related disposables and accessories for use by ENT surgeons.
The Company believes its broad product lines focused on ENT procedures allow
it to be a complete provider to its ENT customer base. The Company

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<PAGE>

also designs, develops and manufactures surgical products for use during
ophthalmic and orthopaedic procedures. Set forth below is a description of the
Company's products by related subspecialty:

SINUS AND RHINOLOGY

Approximately 28% of the Company's net sales in 1995 and 33% of its net
sales in the first half of 1996 were derived from a broad line of powered
tissue-removal instrumentation systems, visualization products, fluid-control
products and hand instruments designed for microendoscopic sinus surgery. The
Company has devoted a significant portion of its investment in research and
development to the development of procedure-specific products to capitalize on
and facilitate the conversion to microendoscopic sinus surgery.

Powered Tissue-Removal Instrumentation Systems. To date, the most
significant product innovation facilitating the conversion of sinus procedures
to less-traumatic techniques has come from the introduction of powered
instrumentation designed for ENT procedures. In 1995, the Company introduced
the first powered microdebrider product designed exclusively for use in ENT
procedures. The Company's Wizard Plus product cuts soft tissue and bone
through a unique oscillating blade design powered by a small, lightweight,
surgical handpiece. This system, which employs disposable blades, enables the
surgeon to target and remove diseased tissue endoscopically with less trauma
to adjacent healthy tissue and less bleeding. Integrated suction and
irrigation aid in cutting and removal of the tissue, and reduce the incidence
of blade clogging. In 1995, the Company introduced the Typhoon family of
disposable endoscopic blades for use with most competitors' power handpieces.
The Company anticipates introducing in the fourth quarter of 1996 its XPS
powered tissue-removal system. This new system, which will employ disposable
blades, will offer the ENT surgeon significantly increased power with limited
blade clogging.

Visualization Products. The Company produces and distributes a competitive
line of visualization endoscopic equipment designed for use in less-traumatic
sinus, head and neck and otology surgery. These products include the Sharpsite
rigid endoscopes, Lightstar Xenon light source and Digistar Plus digital
enhanced camera system which were all introduced in October 1995. The Digistar
Plus camera system uses a single microchip along with digital enhancement to
produce picture quality approaching that of more expensive products using
three-microchip technology. Exclusive to the Company is its proprietary
EndoScrub(R) endoscope lens cleaning system, which was introduced in 1992 and
allows the ENT surgeon to clean a scope lens during surgical procedures
without the need to remove and reposition the scope repeatedly.

Merocel Fluid-Control Products. The Company maintains a strong franchise
with its proprietary disposable fluid-control products (surgical sponges),
developed with proprietary polymer technology to control blood loss and
simultaneously minimize adhesions at the surgical site. Under its Merocel
brand name, the Company markets its fluid-control products in a broad array of
sizes and shapes, designed primarily for use in sinus and rhinology
procedures.

Hand Instrumentation. In April 1996, the Company became the exclusive
distributor for BOSS Instruments, Ltd. in the U.S. ENT market, and as a result
now provides a complete line of sinus surgery hand instrumentation. Over 400
patterns have been developed to provide surgeons with an ergonomic design and
performance that affords surgeons precision during surgical procedures.

Rhinology Products. The Company's products for use during surgical repair of
the nose include internal and external nasal splints, nasal catheters and
airway and irrigation catheters.

HEAD AND NECK

Approximately 24% of the Company's net sales in 1995 and in the first half
of 1996 were derived from products and devices related to the head and neck
anatomy. The Company has a strong brand

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<PAGE>

franchise in this product subspecialty with its nerve monitoring, powered
systems and facial plastic implant products. Surgical techniques are being
developed in the head and neck subspecialty which use the more precise tissue
removal of powered instrumentation systems, similar to those being used in
sinus surgery, to lessen trauma and bleeding. The Company believes there is
significant opportunity to capitalize on and facilitate the conversion of this
subspecialty to these new techniques.

Powered Tissue-Removal Instrumentation Systems. The Company is currently
developing powered tissue-removal instrumentation systems for use in various
head and neck procedures that incorporate the Company's technology for its
powered sinus tissue-removal instrumentation systems. These powered systems
are being designed for use in uvulopharyngoplasty and facial sculpting as well
as in the removal of polyps, lesions and tumors located on the vocal cords.
The Company anticipates that these powered systems will employ disposable
blades. In the case of vocal cord polyps, the Company believes that these new
procedures will not only decrease patient trauma associated with existing
methods but will also, unlike lasers and electrocautery devices, enable
samples of the affected tissue to be tested pathologically following surgical
removal. In the cases of uvuloplasty and facial sculpting, the Company
believes that the use of less-traumatic procedures employing powered tissue-
removal will increase patient demand for these procedures.

Powered Drill Systems. Precision, high-powered drilling is required in head
and neck surgery to access tumors or tissue behind bone structures. The
Company manufactures and markets a line of electric and air powered drilling
systems for such procedures, including the MPS 2000(R) electric drill system
which consists of a power console, surgical handpiece and disposable and
reusable cutting burrs. The Company anticipates introducing in the fourth
quarter of 1996 its Powerforma drill system to replace the MPS 2000(R)
electric drill system. This new system, which will employ disposable and
reusable cutting burrs, will provide the ENT surgeon with significantly
increased cutting speed and precision that will reduce the time necessary to
complete these head and neck surgical procedures.

Nerve Monitoring Systems. The Company's NIM-2(R) XL nerve monitor products,
which were first introduced in February 1995, identify and monitor crucial
motor nerve branches during various head and neck procedures. The
identification of nerves during many head and neck procedures is becoming a
standard of care because the inadvertent cutting of any branches of these
nerves could result in facial paralysis. The NIM-2(R) XL provides surgeons
with visual and audio indicators through a system which includes a battery-
powered electromyographic (EMG) monitor, disposable electrodes and nerve
stimulators.

Facial Plastics Products. Increasingly, ENT surgeons are performing more
facial plastic procedures, including face and brow lifts, facial sculpting and
cosmetic facial implants. The Company provides a broad array of products and
devices for the facial plastic market. In December 1995, the Company became
the exclusive worldwide distributor for Implantech Associates, Inc. in the ENT
market, and as a result now provides a broad line of facial plastic implants,
including implants to augment the chin, nose and cheek.

Hand Instrumentation. As the exclusive distributor for BOSS Instruments,
Ltd. in the U.S. ENT market, the Company provides a broad line of hand
instrumentation for facial plastic surgery. These products are designed to
increase surgeon precision and reduce patient swelling and recovery time.

Specialty Products. The Company's Laser-Shield II(R) is a laser resistant
endotracheal tube used in throat-related surgery performed with lasers. The
Company believes that the Laser-Shield II(R) is safer and more reliable than
current alternatives.

OTOLOGY

Approximately 21% of the Company's net sales in 1995 and 23% of its net
sales in the first half of 1996 were derived from otology products. The
Company possesses a strong franchise and significant

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<PAGE>

market share in this segment of the ENT market. The Company's otology products
include ventilation tubes, middle ear implants and instrumentation used to
repair conductive hearing loss and correct other problems associated with the
ear. The Company believes that the conversion of ENT procedures to less-
traumatic techniques is more likely to have a significant effect on the sinus
and rhinology and head and neck subspecialties than on the otology
subspecialty.

Ventilation Tubes. Vent tubes are small tubes surgically implanted into the
ear drum to provide ventilation to the middle ear. Vent tubes are primarily
used in younger children with severe middle ear infection. The Company markets
a full line of vent tubes, including its proprietary Activent anti-microbial
tube.

Middle Ear Implants. The Company develops and markets middle ear prostheses
used to reconstruct any or all of the three bones of the middle ear, primarily
in cases of otosclerosis and chronic middle ear infection. These permanent
implants are made of stainless steel, porous polyethylene, hydroxylapatite and
other bio-compatible materials.

Microsurgical Instruments. The Company sells a broad line of microsurgical
hand-held instruments such as otoscopes, vent tube inserters, disposable
blades, proprietary suction irrigators and specialized instruments to insert
and implant middle ear prostheses.

Specialty Products. The Company's specialty otology products include
absorbent dressings, ear plugs, ear protectors, disposable kits for ear
surgery and other disposable surgical instruments. They also include the
Company's proprietary Redi-Bur(R), the only disposable micro drill available
for ENT procedures. The Company also produces and markets the Skeeter(R)
otologic drill system which is designed for middle ear procedures.

OPHTHALMIC AND OTHER

Approximately 27% of the Company's net sales in 1995 and 20% of its net
sales in the first half of 1996 were derived from ophthalmic and other
products, with substantially all of such sales from ophthalmic products. The
Company develops and manufactures instruments and disposable products for use
during various ophthalmic procedures. These products are marketed under the
Solan trademark through distributors specializing in the ophthalmic products
market. These instruments include forceps, needle holders, hooks, probes and
scissors. The Company's disposable products relating to ophthalmic surgery and
procedures are micro knives, cannulae, trephines, blades, sponges, cauteries,
pen lights and other miscellaneous products and kits. The Company recently has
dedicated a senior executive to managing the marketing of its ophthalmic
products. In connection with its acquisition of TreBay in April 1996, the
Company acquired certain devices and disposable products for use during
orthopaedic surgery which the Company plans to market through distributors
under the TreBay name.

LAUNCH OF NEW PRODUCTS AND SALES POLICIES

The Company seeks to maintain inventory levels that provide its customers
with a high standard of service. In addition, the Company may build
inventories in advance of new product launches to support sales as well as to
provide its sales force with product samples. The Company generally allows its
customers to return products for any reason within 60 days of shipment.

SALES AND MARKETING

The Company has an established worldwide distribution system with an ENT-
focused direct sales force, international distributor alliances and
independent distributors for select product specialties and geographic
markets.

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<PAGE>

The Company sells to substantially all of the approximately 9,000 ENT
specialists in the U.S. through its direct sales force. The Company is the
only major manufacturer and marketer of ENT surgical products with a direct
sales force exclusively serving ENT specialists. The Company's U.S. sales
force focuses its efforts on developing and maintaining business relationships
with ENT specialists and those surgeons at leading academic institutions who
are considered to be influential in the ENT field. The ability of the Company
to build and maintain these relationships within the medical community
provides a powerful base for the distribution network and what the Company
believes to be a significant competitive advantage, especially in the area of
product development. The Company's direct U.S. sales representatives are
compensated exclusively through sales commissions. The Company's nine
marketing personnel specialize according to subspecialty within the ENT market
as well as by category of product.

In the international market, the Company sells through both a direct sales
force and through distributors. The Company maintains a direct sales presence
in Canada, the United Kingdom, France, Australia and Germany. The Company
sells its products to other countries in Europe, Asia Pacific, Africa, Central
and South America using distribution partners. Prior to its divestiture from
Bristol-Myers in 1994, the Company shared sales and service personnel with
Zimmer International, a division of Bristol-Myers, in selected countries. The
Company believes it has experienced significant international sales gains as a
result of creating in certain markets a dedicated sales force focused
exclusively on selling its products.

The Company has an exclusive arrangement with the International Center for
Otologic Training (ICOT), an organization affiliated with the Georgia Ear
Institute in Savannah, Georgia. The charter of ICOT is to train
internationally-based ENT surgeons, many from developing countries, in new and
advanced ENT surgical techniques. The Company provides financial support to
the ENT surgeons attending ICOT in the form of partial tuition. As a result of
this relationship with the Company, the Company believes that these physicians
and their affiliated hospitals will be more inclined to purchase the Company's
products upon returning to their respective countries.

The Company utilizes specialty distributors to market its non-ENT products
in the U.S. The Company's Solan ophthalmic products are marketed in the U.S.
through a network of dealers specializing in ophthalmic product sales. Outside
of the U.S., the Solan ophthalmic product line is marketed through the same
direct and independent distributor system as the Company's ENT product lines.
The TreBay brand of orthopaedic products is marketed in the U.S. through
independent orthopaedic product distributors.

PRODUCT DEVELOPMENT

The Company believes that it has a strong base of proprietary engineering,
manufacturing and bio-materials capabilities. Although it has in the past
relied in part on strategic acquisitions and licensing of third-party
technology to develop a broad line of ENT products, the Company believes it
has gained expertise in the core research and development areas relevant to
the production of new ENT surgical products. Primarily through internal
research and development efforts, the Company plans to continue to develop new
proprietary products, often in collaboration with leading ENT surgeons, that
allow surgeons to perform their current or future procedures in a less-
traumatic manner with more precision, less surgical time and greater
simplicity. The Company believes that the strong network it has built through
its marketing focus on ENT specialists gives it a competitive advantage in
implementing this strategy. The Company also from time to time may evaluate
strategic acquisitions and licensing of third party technology to further
expand and enhance its product line.

The Company has entered into royalty agreements or, in certain cases,
consulting agreements, with more than 30 ENT specialists as part of its
product development activities. The royalty agreements generally provide that
the specialist is entitled to a percentage of the revenues generated from the
Company's sales of products developed by the Company in collaboration with the
specialist. In addition, the royalty agreements generally provide that all
products developed in collaboration between the

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<PAGE>

specialist and the Company will be the exclusive property of the Company,
subject to the specialist's right to receive royalties. The Company is not
obligated to make material payments under any of the royalty or consulting
agreements.

The Company employs mechanical, electrical, materials and polymer engineers
to develop the various products offered or contemplated by the Company. The
Company's research and development department has a broad range of electro-
mechanical skills to address its variety of hand instruments, implants,
electrical powered systems, polymer products and disposable products.
Currently, the Company's research and development department consists of
eleven engineers experienced in various technical specialties that complement
the Company's core products.

The research and development engineers work closely with leading surgeons in
assessing new surgical procedures for opportunities to develop products that
will complement current products and new "state of the art" devices that fit
within the overall Company's business strategy of being the industry leader in
innovative microendoscopic instrumentation and implants. During 1993, 1994,
1995 and the first half of 1996, the Company (including Xomed-Treace for
periods prior to the Xomed Acquisition) spent $3.1 million, $2.7 million, $2.4
million and $1.7 million, respectively, in connection with research and
development activities. However, actual spending on research and development
projects was comparable during these three years. The Company expects that it
will invest approximately $3.7 million in research and development in 1996.

SUPPLIERS

Although most of the purchased components utilized by the Company in
manufacturing are available from more than one vendor, certain materials,
including TPE-based materials and certain fluoropolymers used in its
ventilation tubes, are only supplied by a single vendor. Although it is not
presently the case, if the supply of materials from a single source vendor
were interrupted in the future, replacement or alternative sources may not be
readily obtainable due to the regulatory requirements that the Company certify
as to the quality and suitability of the new or alternate material. In
addition, a new or supplemental filing would be required to be approved prior
to the Company's marketing a product containing new material. This approval
process may take a substantial period of time and there is no assurance that
the Company would be able to identify, certify or obtain the necessary
regulatory approval for the new material to be used in the Company's products.
In addition, certain suppliers could terminate or limit the sales of certain
materials to the Company for use in medical devices in an attempt to limit
their potential exposure to product liability claims. See "Risk Factors--
Dependence Upon Key Suppliers."

COMPETITION

The markets served by the Company are highly competitive. The Company
believes that the primary competitive factors affecting its business are the
reliability, cost-effectiveness, ease of use, safety and effectiveness of its
products, surgeon and purchaser familiarity with its instrumentation and
third-party reimbursement policies. For certain of the Company's potential
products, an important factor in competition may be the timing of market
introduction of its or its competitors' products. Accordingly, the relative
speed with which the Company can develop products and complete approval or
clearance processes and supply commercial quantities of the products to the
market are also important competitive factors. The Company believes that its
ability to compete successfully in the ENT markets will depend on its ability
to maintain market share of its core product base and to facilitate the
conversion of traditional surgical procedures to microendoscopy surgical
techniques using innovative technology developed by the Company. See "Risk
Factors--Possible Adverse Effects of Significant Competition."

The Company competes with Smith & Nephew ENT (a division of Smith & Nephew
plc formerly known as Richards Medical Company) in substantially all of the
Company's ENT product lines. Stryker Corporation, Smith & Nephew Endoscopy (a
division of Smith & Nephew plc) and Linvatec Corporation (a division of
Bristol-Myers) offer endoscopic equipment and sinus power systems that compete
with those

42
<PAGE>

of the Company. A number of other medical products companies offer products
which are directly competitive to certain products or product lines marketed
by the Company. Many of the Company's competitors and potential competitors
have substantially greater capital resources than the Company. Some of the
Company's competitors may have long term or preferential supply arrangements
with hospitals. Such arrangements may act as a barrier to market entry.

GOVERNMENT REGULATION

The Company's products, product development activities, promotional and
marketing activities and manufacturing processes are subject to extensive and
rigorous regulation by the FDA and comparable agencies in foreign countries.
In the U.S., the FDA regulates the interstate commerce of medical devices as
well as manufacturing, labeling, promotion and recordkeeping procedures for
such devices. For purposes of these regulations, the Company's products are
generally treated as medical "devices." In order for the Company to market its
products in the U.S., the Company must obtain from the FDA marketing clearance
through what is known as a 510(k) pre-market notification or obtain approval
through a more detailed application process resulting in what is known as PMA.
The process of obtaining marketing clearance for new medical devices from the
FDA can be costly and time-consuming, and there can be no assurance that such
clearance will be granted for the Company's products that are under
development or future products on a timely basis, if at all, or that FDA
review will not involve delays that will adversely affect the Company's
ability to commercialize additional products or expand permitted uses of
existing products.

A manufacturer may seek FDA clearance to distribute a new medical device by
filing a 510(k) pre-market notification. A 510(k) pre-market notification
requires the manufacturer of a medical device to establish that the device is
"substantially equivalent" to medical devices legally marketed in the U.S. The
510(k) pre-market notification must be accompanied by appropriate information
or data establishing the claim of substantial equivalence, which, depending on
the type of product, may require animal or human clinical data. If this
substantial equivalence is established to the satisfaction of the FDA, the
manufacturer will receive FDA clearance for marketing of the medical device.
If the manufacturer cannot establish substantial equivalence or if the FDA
determines that a device requires a more rigorous review, the FDA will require
that the manufacturer submit a PMA application prior to obtaining approval to
market the device in the U.S. The PMA process requires laboratory and animal
studies, the submission to the FDA of a request for permission to clinically
evaluate the medical device in humans under an Investigational Device
Exemption ("IDE"), the conduct of human studies meeting the requirements of
the institutional review board of the study institution, the written informed
consent of all participating patients, the submission of a PMA application,
the review of the human studies by an FDA-selected scientific advisory panel
and final review (including manufacturing facilities review) and approval by
the FDA. This process is expensive and time-consuming, generally taking more
than a year and often substantially longer.

All of the Company's currently-marketed products either have received FDA
marketing clearance pursuant to 510(k) pre-market notifications filed by the
Company and cleared by the FDA, or are exempt from obtaining marketing
clearance by virtue of their status as pre-amendment devices (i.e. devices
introduced into interstate commerce prior to May 28, 1976). Although the
Company anticipates that, at least in the near term, its products will be
evaluated under the 510(k) pre-market notification process, there can be no
assurance that the Company's current or future products may not be subjected
to the PMA process or that the Company's current or future products in
development will receive FDA marketing clearance.

Even if regulatory clearance to market a device is obtained from the FDA,
this clearance may entail limitations on the indicated uses of the device.
Marketing clearance can also be withdrawn by the FDA due to the failure to
comply with regulatory standards or the occurrence of unforeseen problems
following initial clearance. The Company may be required to make further
filings with the FDA under certain circumstances such as the addition of new
product claims. The Company has made modifications

43
<PAGE>

to its cleared products which the Company believes do not require submission
of new 510(k) notices. There can be no assurance, however, that the FDA would
agree with any of the Company's determinations and not require the Company to
submit new 510(k) notices for any of the changes made to its products and/or
to stop marketing until new 510(k)s are cleared by the FDA.

The Company is also required to register with the FDA as a medical device
manufacturer. As such, the Company's manufacturing facilities are subject to
inspection on a routine basis for compliance with GMP. These regulations
require that the Company manufacture its products and maintain its documents
in a prescribed manner with respect to manufacturing, testing and quality
control activities. As a medical device manufacturer, the Company is further
required to comply with FDA requirements regarding the reporting of
allegations of death or serious injury associated with the use of its medical
devices, as well as product malfunctions that would likely cause or contribute
to death or serious injury if the malfunction were to recur. Other FDA
requirements govern product labeling and prohibit a manufacturer from
marketing an approved device for unapproved applications. If the FDA believes
that a manufacturer is not in compliance with the law, it can institute
proceedings to detain or seize products, issue a recall, enjoin future
violations and assess civil and criminal penalties against the manufacturer,
its officers and employees.

The Company is also subject to numerous federal, state and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and disposal of hazardous or
potentially hazardous substances. There can be no assurance that the Company
will not be required to incur significant costs to comply with such laws and
regulations in the future or that such laws or regulations will not have a
material adverse effect upon the Company's ability to do business.

The Company may become subject to future legislation and regulations
concerning the manufacture and marketing of medical devices. This could
increase the cost and time necessary to begin marketing new products and could
affect the Company in other respects not presently foreseeable. The Company
cannot predict the effect of possible future legislation and regulations.

Sales of medical devices outside the U.S. are subject to foreign regulatory
requirements that vary widely from country to country. These laws and
regulations range from simple product registration requirements in some
countries to complex clearance and production controls in others. As a result,
the processes and time periods required to obtain foreign marketing approval
may be longer or shorter than those necessary to obtain FDA approval. These
differences may affect the efficiency and timeliness of international market
introduction of the Company's products, and there can be no assurance that the
Company will be able to obtain regulatory approvals or clearances for its
products in foreign countries.

For countries in the EU, in January 1995, CE mark certification procedures
became available for medical devices, the successful completion of which would
allow certified devices to be placed on the market in all EU countries. In
order to obtain the right to affix the CE mark to its products, medical device
companies must obtain certification that its processes meet European quality
standards, including certification that its design and manufacturing facility
complies with ISO 9001 standards. After June 1998, medical devices may not be
sold in EU countries unless they display the CE mark. The Company successfully
obtained certification under the ISO 9001 standards in November 1995. In
addition, international sales of medical devices manufactured in the U.S. but
not approved by the FDA for distribution in the U.S. are subject to FDA export
requirements. Under these requirements, the Company must assure that the
product is not in conflict with the laws of the country for which it is
intended for export, in addition to complying with the other requirements of
Sections 801(e) and/or 802 of the United States Food, Drug and Cosmetic Act.

44
<PAGE>

THIRD-PARTY REIMBURSEMENT

In the U.S., health care providers that purchase medical devices generally
rely on third-party payors, such as Medicare, Medicaid, private health
insurance plans and health maintenance organizations, to reimburse all or a
portion of the cost of the devices. The Medicare program is funded and
administered by the Health Care Financing Administration ("HCFA"), while the
Medicaid program is jointly funded by HCFA and the states, which administer
the program under general federal oversight. The Company believes its current
products and the procedures in which such products are used are generally
eligible for coverage under these third-party reimbursement programs. The
Company also believes that the products it is developing and the procedures in
which such products will be used will be eligible for third-party
reimbursement. The competitive position of certain of the Company's products
will be partially dependent upon the extent of coverage and adequate
reimbursement for such products and for the procedures in which such products
are used.

The federal government and certain state governments are currently
considering a number of proposals to reform the Medicare and Medicaid health
care reimbursement system. The Company is unable to evaluate what legislation
may be drafted and whether or when any such legislation will be enacted and
implemented. Certain of the proposals, if adopted, could have an adverse
effect on the Company's business, financial condition and results of
operations.

During the past several years, the major third-party payors have
substantially revised their reimbursement methodologies in an attempt to
contain their health care reimbursement costs. Medicare reimbursement for
inpatient hospital services is based on a fixed amount per admission based on
the patient's specific diagnosis. As a result, any illness to be treated or
procedure to be performed will be reimbursed only at a prescribed rate set by
the government that is known in advance to the health care provider. If the
treatment costs less, the provider is still reimbursed for the entire fixed
amount; if it costs more, the provider cannot bill the patient for the
difference. No separate payment is made in most cases for products such as the
Company's instrumentation when they are furnished or used in connection with
inpatient care. Many private third-party payors and some state Medicaid
programs have also adopted similar prospective payment systems.

Third-party payors have recently increased their emphasis on managed care,
which has led to an increased emphasis on cost-effective medical devices by
health care providers. In addition, through their purchasing power, these
payors often seek discounts, price reductions or other incentives from medical
products suppliers.

The Company intends to seek international reimbursement approvals for its
products, although there can be no assurance that such approvals will be
obtained in a timely manner or at all. Reimbursement and health care payment
systems in international markets vary significantly by country and include
both government sponsored health care and private insurance. To the extent
that any of the Company's products are not entitled to reimbursement in any
international market, market acceptance of such products in such international
market would be adversely affected.

PATENTS, TRADE SECRETS AND PROPRIETARY RIGHTS

Proprietary protection for the Company's products and know-how is important
to the Company's business. Thus, the Company's policy is to prosecute and
enforce its patents and proprietary technology. The Company intends to
continue to file patent applications to protect technology, inventions and
improvements that are considered important to the development of its business.
The Company also relies upon trade secrets, know-how, continuing technological
innovation and licensing opportunities to develop and maintain its competitive
position.

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<PAGE>

As of September 13, 1996, the Company held 56 U.S. patents and 21 foreign
patents, and had filed 20 additional U.S. patent applications and 13 patent
applications in certain major industrial countries. The Company is also
licensed under 9 patents owned by third parties.

The patent positions of medical device companies, including the Company, are
generally uncertain and involve complex legal and factual questions.
Consequently, even though the Company currently is prosecuting its patent
applications with the U.S. Patent and Trademark Office and certain foreign
patent authorities, the Company does not know whether any of its remaining
applications will result in the issuance of any patents or, if any patents are
issued, whether they will provide significant proprietary protection or will
be circumvented or invalidated. Because patent applications in the U.S. are
maintained in secrecy until patents issue, and since publication of
discoveries in the scientific or patent literature tend to lag behind actual
discoveries by several months and there may be material patents or
publications of which the Company is not aware, the Company cannot be certain
that it was the first creator of inventions claimed by pending patent
applications or that it was the first to file patent applications for such
inventions.

The medical device industry is characterized by frequent and substantial
intellectual property litigation, particularly with respect to newly developed
technology. Intellectual property litigation is complex and expensive, and the
outcome of such litigation is difficult to predict. Any future litigation,
regardless of the outcome, is likely to result in substantial expense to the
Company and significant diversion of the efforts of the Company's technical
and management personnel. An adverse determination in any such proceeding
could subject the Company to significant liabilities to third parties, require
disputed rights to be licensed from such parties if licenses to such rights
could be obtained, and/or require the Company to cease using such technology.
There can be no assurance that if such licenses were obtainable, they would be
obtainable at costs reasonable to the Company. If forced to cease using such
technology, there can be no assurance that the Company would be able to
develop or obtain alternate technology. Additionally, if third-party patents
containing claims affecting the Company's technology are issued and such
claims are determined to be valid, there can be no assurance that the Company
would be able to obtain licenses to such patents at costs reasonable to the
Company, if at all, or be able to develop or obtain alternative technology.
Accordingly, an adverse determination in a judicial or administrative
proceeding or failure to obtain necessary licenses could prevent the Company
from manufacturing, using or selling certain of its products, which could have
a material adverse effect on the Company's business, financial condition and
results of operations.

The Company's practice is to require its employees, consultants, outside
collaborators and researchers and other advisors to execute confidentiality
agreements upon the commencement of employment or consulting relationships
with the Company. These agreements provide that all confidential information
developed or made known to the individual during the course of the
individual's relationship with the Company is to be kept confidential and not
disclosed to third parties, subject to a right to publish certain information
in the scientific literature in certain circumstances and subject to other
specific exceptions. In the case of employees, the agreements provide that all
inventions conceived by the individual shall be the exclusive property of the
Company. There can be no assurance, however, that these agreements will
provide meaningful protection for the Company's trade secrets or adequate
remedies in the event of unauthorized use or disclosure of such information.

PRODUCT LIABILITY AND INSURANCE

The business of the Company entails the risk of product liability claims and
any such claims could have an adverse impact on the Company. The Company has
taken and will continue to take what it believes are appropriate precautions,
including maintaining general liability and commercial liability insurance
policies which include adequate coverage for product liability claims. The
Company evaluates its insurance requirements on an ongoing basis to enable it
to maintain adequate levels of coverage. There can be no assurance that
product liability claims will not exceed such insurance coverage limits or
that

46
<PAGE>

such insurance will be available on commercially reasonable terms or at all.
The Company currently is involved in certain legal proceedings involving
product liability claims. Based on information presently available to the
Company, the Company believes that it has adequate legal defenses or insurance
coverage for these actions, and that the ultimate outcome of these actions
will not have a material adverse effect on the Company.

MANUFACTURING AND PROPERTIES

The Company owns its 52,000 square-foot corporate headquarters and
manufacturing facility and leases a 36,863 square-foot warehouse and
distribution facility in Jacksonville, Florida. At its Jacksonville corporate
headquarters and manufacturing facility, which has 30,000 square feet
dedicated to manufacturing, the Company produces all of the products that it
manufactures other than fluid-control products and ophthalmology products. The
Company has numerous manufacturing capabilities at the Jacksonville facility,
including: injection molding; insert molding; CNC machining; CAD/CAM; form,
fill and seal; ETO sterilization utilizing a Joslyn reclamation system;
specialty surgical instrument manufacturing; tool design and manufacturing;
design and production of manufacturing equipment; electronics assembly; bar
code technology; and automated storage systems.

The Company also owns a 34,000 square-foot manufacturing facility and a
6,300 square-foot distribution facility in Mystic, Connecticut and leases a
6,400 square-foot manufacturing facility in St. Louis, Missouri. The Company's
Merocel product line of fluid-control products is manufactured at the Mystic
facility and its ophthalmic product line is manufactured in part at the St.
Louis facility.

Currently, the Company operates one manufacturing shift at each of its three
manufacturing facilities and has the ability to increase production levels of
its current product line without expanding its facilities. The Company
believes that the properties are adequate to serve the Company's business
operations for the foreseeable future. The Company believes that if it were
unable to renew the leases on any of its leased facilities, other suitable
facilities would be available to meet the Company's needs.

ENVIRONMENTAL MATTERS

The Company believes that it is in substantial compliance with all
applicable laws and regulations for the protection of the environment and the
health and safety of its employees. Compliance with federal, state and local
environmental regulations relating to the discharge of substances into the
environment, the disposal of hazardous waste and other related activities has
had and will continue to have an impact on the operations of the Company, but
has, since the formation of the Company, been accomplished without having a
material adverse effect on the operations of the Company. While it is
difficult to estimate the timing and ultimate costs to be incurred due to
uncertainties about the status of laws, regulations and technology, management
presently has no planned expenditures of a significant amount for future
environmental compliance.

EMPLOYEES

As of July 31, 1996, the Company had 455 full-time employees and 16
temporary employees, including 245 in production, 55 in professional and
technical positions, 51 in administration and 120 in sales and marketing. The
Company believes that its future success will depend in large part upon the
continued service of its senior management personnel, most of whom joined the
Company in April 1996, and upon the Company's continuing ability to attract
and retain highly qualified managerial, operational, technical and sales and
marketing personnel. Competition for highly qualified personnel is intense and
there can be no assurance that the Company will be able to retain its key
personnel or that it will be able to attract and retain additional qualified
personnel in the future. The Company has not experienced any work stoppage and
considers its relations with its employees to be satisfactory.

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<PAGE>

LITIGATION

The Company is currently involved in certain legal proceedings incidental to
the normal conduct of its business. The Company does not believe that any
liabilities relating to the legal proceedings to which it is a party are
likely to be, individually or in the aggregate, material to its consolidated
financial position or results of operations.

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<PAGE>

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth certain information with respect to the
executive officers and directors of the Company as of October 1, 1996:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
James T. Treace.................. 50 President, Chief Executive Officer and
Chairman of the Board of Directors
F. Barry Bays.................... 49 Senior Vice President, Operations and
Chief Operating Officer
Thomas E. Timbie................. 39 Vice President, Finance, Chief
Financial Officer and Secretary
John R. Treace................... 51 Vice President, U.S. Sales
R. Glen Coleman.................. 41 Vice President, Marketing
Guy K. Williamson................ 42 Vice President, International;
President, Xomed International, Inc.
Vice President, Research and
Fred B. Dinger, III.............. 35 Development
Vice President, Regulatory Affairs and
Dan H. Treace.................... 48 Quality Assurance
Vice President; President of Ophthalmic
Mark J. Fletcher................. 40 Products
Gerard Bussell................... 47 Vice President, Operations
Richard B. Emmitt (1)(2)......... 51 Director
Paul H. Klingenstein............. 40 Director
William R. Miller (1)............ 68 Director
Rodman W. Moorhead, III.......... 52 Director
James E. Thomas (2).............. 36 Director
Elizabeth H. Weatherman (1)(2)... 36 Director
</TABLE>
- --------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.

James T. Treace has been President, Chief Executive Officer and Chairman of
the Board of Directors of the Company since April 1996. From 1993 until its
acquisition by the Company in April 1996, Mr. Treace served as President,
Chairman of the Board of Directors and Chief Executive Officer of TreBay, an
ENT and orthopaedic product company founded in 1993 by Mr. Treace and Mr. F.
Barry Bays. From 1990 to 1993, Mr. Treace served as President of Linvatec
Corporation ("Linvatec"), a minimally invasive orthopaedic medical device
company formerly known as Concept, Inc. ("Concept"), which became a wholly
owned subsidiary of Bristol-Myers in 1990. Mr. Treace served as President and
Chief Executive Officer of Concept from 1981 until its acquisition by Bristol-
Myers in 1990. From 1966 to 1981, Mr. Treace served in a variety of positions
at Richards Medical Company (now known as Smith & Nephew ENT, a subsidiary of
Smith & Nephew plc), an orthopaedic and microsurgical ENT medical device
company. His positions at Richards Medical Company included General Manager
Veterinary Division, Sales Distributor, Executive Vice President of its
orthopaedic division, Vice President Research and Development and Senior Group
Vice President of Operations. Mr. Treace is the brother of John R. Treace and
Dan H. Treace.

F. Barry Bays has been Senior Vice President, Operations and Chief Operating
Officer of the Company since April 1996. From 1993 to April 1996, Mr. Bays
served as Vice President and Chief Operating Officer and a Director of TreBay.
From 1990 to 1993, Mr. Bays served as Executive Vice President and Chief
Operating Officer of Linvatec. From 1981 to 1990, Mr. Bays served as Executive
Vice President and Chief Operating Officer of Concept. From 1971 to 1981, Mr.
Bays served in a variety of positions at Richards Medical Company, including
Engineering Manager, Vice President of its orthopaedic division and Vice
President of Research and Development.

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<PAGE>

Thomas E. Timbie has been Vice President, Finance and Chief Financial
Officer of the Company since April 1996. From 1994 to April 1996, Mr. Timbie
served as Vice President and Chief Financial Officer of TreBay. From 1990 to
1994, Mr. Timbie held financial management positions at Linvatec, including
Senior Director, Working Capital from 1992 to 1994 and Assistant Controller
from 1990 to 1992. From 1987 to 1990, Mr. Timbie served as Director, Financial
Accounting and Reporting of Concept.

John R. Treace has been Vice President, U.S. Sales of the Company since
April 1996. From 1995 to April 1996, Mr. Treace served as Vice President,
Sales and Marketing of TreBay. From 1966 to 1994, Mr. Treace served in a
variety of positions at Richards Medical Company. His positions at Richards
Medical Company included Product Manager, Director of Marketing and Sales,
Group Vice President of Marketing and Sales and Sales Distributor. Mr. Treace
is the brother of James T. Treace and Dan H. Treace.

R. Glen Coleman has been Vice President, Marketing of the Company since
August 1996. From January 1983 to August 1996, Mr. Coleman held several
management positions at Linvatec, including Vice President, Global Marketing
from June 1996 to July 1996, Vice President, Sales from October 1993 to June
1996, Vice President and General Manager of its Concept Division from May 1991
to October 1993 and Vice President, Research and Development. From 1976 to
1983, Mr. Coleman held engineering and marketing positions within divisions of
Smith & Nephew plc.

Guy K. Williamson has been Vice President, International of the Company and
President, Xomed International, Inc. since July 1996. From January 1988 to
June 1996, Mr. Williamson held various positions within the Bristol-Myers
Medical Device Group, including Vice President, Zimmer International from
January 1994 to June 1996, General Manager, China and Hong Kong from February
1992 to December 1993, Vice President, Marketing and International
Administration, Linvatec from January 1988 to January 1992, and General
Manager Canada of Edward Weck Inc., a surgical products manufacturer, from
1980 to 1988.

Fred B. Dinger, III has been Vice President, Research and Development of the
Company since May 1996. From 1992 to 1996, Mr. Dinger held several positions
with Linvatec, including Vice President, Research and Development from 1994 to
1996, Director, New Product Development from 1993 to 1994 and Manager, Power
Systems Development from 1992 to 1993. From 1984 to 1992, Mr. Dinger was
Engineering Section Supervisor at Honeywell Incorporated.

Dan H. Treace has been Vice President, Regulatory Affairs and Quality
Assurance of the Company since May 1996. From 1994 to April 1996, Mr. Treace
served as Vice President and Quality Manager of TreBay. From 1989 to 1994, Mr.
Treace served as Vice President, Technical Affairs of Xomed-Treace, which was
acquired by the Company in 1994. From 1982 to 1989, Mr. Treace was President
of Treace Medical, Inc., a microsurgical ENT medical device company that he
founded in 1982 and that was acquired by Bristol-Myers in 1989 and merged with
the business of Xomed, Inc. to form Xomed-Treace, Inc. From 1970 to 1982, Mr.
Treace served in a variety of positions at Richards Medical Company, including
Product Manager, Director of Marketing, Sales Distributor and Group Director
of International Marketing. Mr. Treace is the brother of James T. Treace and
John R. Treace.

Mark J. Fletcher has been Vice President of the Company and President of
Ophthalmic Products since July 1996. From April 1996 to July 1996, Mr.
Fletcher served as Vice President, U.S. Marketing of the Company and from 1994
to April 1996, he served as Vice President, Sales and Marketing of the
Company. From 1988 to 1994, Mr. Fletcher held several senior management
positions with Stryker Corporation, a medical device company, including
Executive Vice President, Sales and Marketing from 1993 to 1994, Vice
President and General Manager, Stryker Medical, the Netherlands from 1992 to
1993, and Vice President, Sales, Medical Division from 1990 to 1992.

Gerard Bussell has been Vice President of Operations of the Company since
March 1996 and from 1993 to March 1996 was Director of Manufacturing
Operations and Director of Manufacturing of the

50
<PAGE>

Company. Prior to joining the Company, Mr. Bussell served in senior management
positions from 1979 to 1993 with Allergan, Inc., an ophthalmic products
company, including Senior Director, Worldwide Materials, and Managing
Director.

Richard B. Emmitt has served as a Director of the Company since April 1994
and from December 1990 to 1994 was a Director of Merocel, which became a
subsidiary of the Company in 1994. Mr. Emmitt has been a Managing Director of
The Vertical Group, Inc., an investment firm, since February 1989. He is also
a Director of SurvivaLink Corporation and Cardiotronics Systems, Inc.

Paul H. Klingenstein has served as a Director of the Company since April
1994. Mr. Klingenstein has been with Accel Partners, a venture capital firm,
since 1986, where he has been a General Partner since 1988. He is also a
Director of several privately held health care and biopharmaceutical
companies.

William R. Miller has served as a Director of the Company since April 1994
and from 1991 to 1994 was a Director of Merocel. In January 1991, Mr. Miller
retired as Vice Chairman of the Board of Directors of Bristol-Myers. From 1985
to January 1991 Mr. Miller was a Director of Bristol-Myers. Mr. Miller served
as Chairman of the Board of the Pharmaceutical Manufacturers Association from
1986 until 1987 and was Vice President and a member of the council of the
International Federation of Pharmaceutical Manufacturers Associations from
1988 until 1990. Mr. Miller is a member of the Board of Trustees of the Cold
Spring Harbor Laboratory and is a Director of ImClone Systems, Inc., Isis
Pharmaceuticals, Inc., St. Jude Medical, Inc. and Westvaco Corporation, as
well as several private companies. In addition, Mr. Miller serves as Chairman
of the Board of Directors of SIBIA Neurosciences, Inc. and Vion
Pharmaceuticals, Inc. (formerly OncoRx).

Rodman W. Moorhead, III has served as a Director of the Company since 1994
and was a Director of Merocel from 1990 to 1994. Since 1973, he has been with
E.M. Warburg, Pincus & Co., Inc. ("Warburg, Pincus"), a private investment
firm, where he currently serves as a Senior Managing Director. Mr. Moorhead is
also a Director of NeXstar Pharmaceuticals, Inc., Value Health, Inc. and a
number of privately held companies.

James E. Thomas has served as a Director of the Company since April 1994.
Since 1989, he has been with Warburg, Pincus, where he currently serves as a
Managing Director. Mr. Thomas is also a Director of Anergen, Inc., Celtrix
Pharmaceuticals, Inc., Menley & James Laboratories, Inc., and several
privately held companies.

Elizabeth H. Weatherman has served as a Director of the Company since April
1994 and was a Director of Merocel from December 1990 until 1994. Since 1988,
she has been with Warburg, Pincus, where she currently serves as a Managing
Director. Ms. Weatherman is also a Director of Cardiotronics Systems, Inc.,
VitalCom Inc. and several privately held health care companies.

Each director serves until the expiration of his term and thereafter until
his successor is duly elected and qualified. A stockholders agreement among
the Company and substantially all of its current stockholders provides that WP
Investors has the right to designate specified numbers of persons to the
Company's Board of Directors so long as WP Investors maintains specified
levels of ownership of the outstanding Class A Common Stock. See "--
Stockholders Agreement." Executive officers of the Company are elected
annually by the Board of Directors and serve at its discretion or until their
successors are duly elected and qualified.

The Board of Directors has established a Compensation Committee, which
provides recommendations concerning salaries and incentive compensation for
employees of, and consultants to, the Company and administers the Stock Option
Plan and the Company's 401(k) and Profit Sharing Plan (the "401(k) Plan").
During 1995, the Compensation Committee was composed of Richard B. Emmitt,
James E. Thomas and Elizabeth H. Weatherman. The current members of the
Compensation Committee

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<PAGE>

are Richard B. Emmitt, William R. Miller and Elizabeth H. Weatherman. The
Board of Directors has also established an Audit Committee, which reviews the
results and scope of the annual audit of the Company's financial statements
conducted by the Company's independent accountants, the scope of other
services provided by the Company's independent accountants, proposed changes
in the Company's financial and accounting standards and principles, and the
Company's policies and procedures with respect to its internal accounting,
auditing and financial controls and makes recommendations to the Board of
Directors on the engagement of the independent accountants, as well as other
matters which may come before the Audit Committee or at the direction of the
Board of Directors. The current members of the Audit Committee are Richard B.
Emmitt, James E. Thomas and Elizabeth H. Weatherman.

DIRECTORS' ANNUAL COMPENSATION

William R. Miller receives $1,000 in directors' fees per meeting from the
Company. No other member of the Board of Directors currently receives
directors' fees from the Company. The Company is obligated to reimburse its
Board members for all reasonable expenses incurred in connection with their
attendance at directors' meetings.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee is currently composed of Richard B. Emmitt,
William R. Miller and Elizabeth H. Weatherman.

EXECUTIVE COMPENSATION

Summary Compensation Table. As required by the rules and regulations of the
Securities and Exchange Commission, the following table sets forth information
regarding the compensation of the Company's Chief Executive Officer during
fiscal 1995 and the four other most highly compensated executive officers (the
"Executive Officer Group") for fiscal 1995. In April and May 1996, four
members of the Executive Officer Group were replaced. Information with respect
to the Company's new executive officers is included elsewhere in this section.

SUMMARY COMPENSATION TABLE

ANNUAL COMPENSATION

<TABLE>
<CAPTION>
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION COMPENSATION
--------------------------- -------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Mark K. Adams (1)................. $200,525 $58,890 $37,104(5) $2,345(8)
President and Chief Executive
Officer
Arthur Gertzman (2)............... 134,289 23,799 (6) 3,626(8)
Vice President, Research and
Development
Mark J. Fletcher.................. 140,000 4,200 17,224(7) --
Vice President, Sales and
Marketing
Marley Price (3).................. 116,029 2,644 -- 2,603(8)
Vice President, Operations
David R. Grant (4)................ 115,923 2,673 -- 2,594(8)
Vice President, Finance
</TABLE>
- --------
(1) Mr. Adams' last day of employment with the Company was May 20, 1996.
(2) Mr. Gertzman's last day of employment with the Company was April 30, 1996.
(3) Mr. Price's last day of employment with the Company was April 22, 1996.
(4) Mr. Grant's last day of employment with the Company was June 28, 1996.
(5) Represents $30,000 paid to Mr. Adams as a housing allowance and $7,104
paid to Mr. Adams as an automobile allowance.
(6) Other annual compensation in the form of perquisites and other personal
benefits has been omitted because the aggregate amount of such perquisites
and other personal benefits was less than $50,000 and constituted less
than 10% of the executive's total annual salary and bonus.
(7) Represents a reimbursement of Mr. Fletcher's moving expenses.
(8) Represents a matching contribution by the Company to the 401(k) Plan for
the benefit of the executive.

52
<PAGE>

James T. Treace joined the Company as its President, Chief Executive Officer
and Chairman of the Board of Directors in April 1996. Mr. Treace receives an
annual salary of $230,000 and will be eligible to receive an annual cash bonus
under the Company's Key Executive Bonus Program. On April 16, 1996, the
Company granted to Mr. Treace an option under the Stock Option Plan to
purchase 73,000 shares of Common Stock at an exercise price of $10.65 per
share.

F. Barry Bays joined the Company as its Senior Vice President, Operations
and Chief Operating Officer in April 1996. Mr. Bays receives an annual salary
of $175,000 and will be eligible to receive an annual cash bonus under the
Company's Key Executive Bonus Program. On April 16, 1996, the Company granted
to Mr. Bays an option under the Stock Option Plan to purchase 42,000 shares of
Common Stock at an exercise price of $10.65 per share.

John R. Treace joined the Company as its Vice President, U.S. Sales in April
1996. Mr. Treace receives an annual salary of $150,000 and will be eligible to
receive an annual cash bonus under the Company's Key Executive Bonus Program.
The Company granted to Mr. Treace on April 16, 1996 an option under the Stock
Option Plan to purchase 8,000 shares of Common Stock at an exercise price of
$10.65 per share and on June 14, 1996 an option under such plan to purchase
15,500 shares of Common Stock at an exercise price of $10.65 per share.

R. Glen Coleman joined the Company as its Vice President, Marketing in
August 1996. Mr. Coleman receives an annual salary of $150,000 and will be
eligible to receive an annual cash bonus under the Company's Key Executive
Bonus Program. On August 12, 1996, the Company granted to Mr. Coleman an
option under the Stock Option Plan to purchase 30,000 shares of Common Stock
at an exercise price of $10.65 per share.

Guy K. Williamson joined the Company as its Vice President, International
and President, Xomed International, Inc. in July 1996. Mr. Williamson receives
an annual salary of $150,000 and will be eligible to receive an annual cash
bonus under the Company's Key Executive Bonus Program. On July 1, 1996, the
Company granted to Mr. Williamson an option under the Stock Option Plan to
purchase 30,000 shares of Common Stock at an exercise price of $10.65 per
share.

OPTION GRANTS DURING 1995

During fiscal 1995, the Company granted options under the Stock Option Plan
to purchase an aggregate of 8,000 shares of Common Stock at an exercise price
of $9.58 per share. No stock options were granted to any member of the
Executive Officer Group during fiscal 1995.

In January 1996, the Company granted certain key employees options under the
Stock Option Plan to purchase an aggregate of 96,000 shares of Common Stock at
an exercise price of $9.58 per share. Included among these grants was a grant
to Mark J. Fletcher of an option to purchase 10,000 shares of Common Stock at
an exercise price of $9.58 per share. These options provide that the right to
purchase 25% of the shares of Common Stock subject to the options vests on
each of the first four anniversaries of the date of grant. The options expire
five years after the date of grant.

In April 1996, the Company granted certain employees options under the Stock
Option Plan to purchase an aggregate of 131,000 shares of Common Stock at an
exercise price of $10.65 per share. Included among these grants were grants to
James T. Treace, F. Barry Bays and John R. Treace of options to purchase
73,000, 42,000 and 8,000 shares of Common Stock, respectively. In June 1996,
the Company granted certain employees options under the Stock Option Plan to
purchase an aggregate of 79,500 shares of Common Stock at an exercise price of
$10.65 per share. Included among these grants were grants to John R. Treace
and Thomas E. Timbie of options to purchase 15,500 and 23,500 shares of Common
Stock, respectively. In July 1996, the Company granted to Guy K. Williamson
options under the Stock Option Plan to purchase 30,000 shares of Common Stock,
at an exercise price of $10.65 per share. On August 12,

53
<PAGE>

1996, the Company granted to R. Glen Coleman options under the Stock Option
Plan to purchase 30,000 shares of Common Stock, at an exercise price of $10.65
per share. These options provide that the right to purchase 25% of the shares
of Common Stock subject to the options vests on each of the first four
anniversaries of the date of grant. The options expire five years after the
date of grant.

FISCAL YEAR-END OPTION VALUES

The following table sets forth information concerning the number and value
of unexercised stock options held at the end of 1995 by each member of the
Executive Officer Group. No stock options were exercised by members of the
Executive Officer Group during fiscal 1995.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FY-END (#) FY-END
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE (1)
---- ------------------------- ------------------------------
<S> <C> <C>
Mark K. Adams........... 47,125/42,375 $801,325/$539,475
Arthur Gertzman......... 7,000/11,000 110,840/152,520
Mark J. Fletcher........ 5,000/15,000 52,100/156,300
Marley Price............ 2,000/6,000 20,840/62,520
David R. Grant.......... 2,000/6,000 20,840/62,520
</TABLE>
- --------
(1) There was no public trading market for the Common Stock on December 31,
1995. Accordingly, solely for purposes of this table, the values in this
column have been calculated on the basis of an assumed initial public
offering price of $20.00 per share, less the aggregate exercise price of
the options.

1996 STOCK OPTION PLAN

On April 15, 1996, the Board of Directors adopted and the stockholders
approved the Stock Option Plan. The Stock Option Plan was subsequently amended
and restated on June 14, 1996 and July 24, 1996 and approved by stockholders
on July 24, 1996. The Stock Option Plan is open to participation by directors,
officers, consultants, other key employees of the Company or of its
subsidiaries and certain other key persons who the Stock Option Committee (as
defined below) determines shall receive options under the Stock Option Plan.

The Stock Option Plan authorizes: (i) the grant of options to purchase
Common Stock intended to qualify as incentive stock options ("Incentive
Options"), as defined in Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"); and (ii) the grant of options that do not so qualify
("Non-Statutory Options"). The number of shares of Common Stock reserved for
issuance under the Stock Option Plan is 778,000 shares. As of August 20, 1996,
options to purchase an aggregate of 501,191 shares having a weighted average
exercise price of $9.76 per share were outstanding under the Stock Option
Plan, options for 108,900 shares had been exercised under the Stock Option
Plan and options to purchase 167,909 shares are available for grant under the
Stock Option Plan. The Stock Option Plan expires on April 16, 2004.

The Stock Option Plan is administered by a committee (the "Stock Option
Committee") appointed by the Board of Directors of the Company. The
Compensation Committee serves as the Stock Option Committee. The Stock Option
Committee has the sole authority, in its absolute discretion: (i) to determine
which of the eligible employees of the Company and its subsidiaries shall be
granted options; (ii) to authorize the granting of both Incentive Options and
Non-Statutory Options; (iii) to determine the times when options shall be
granted and the number of shares to be optioned; (iv) to determine the option
price of the shares subject to each option, which price shall be not less than
the fair market value of the Common Stock at the time the option was granted;
(v) to determine the time or times when each option becomes exercisable, the
duration of the exercise period and any other restrictions on the exercise of
options issued under the Stock Option Plan; (vi) to prescribe the form or
forms of the option agreements

54
<PAGE>

under the Stock Option Plan; (vii) to adopt, amend and rescind such rules and
regulations as, in its opinion, may be advisable in the administration of the
Stock Option Plan; and (viii) to construe and interpret the Stock Option Plan,
the rules and regulations and the option agreements under the Stock Option
Plan and to make all other determinations deemed necessary or advisable for
the administration of the Stock Option Plan. All decisions, determinations and
interpretations of the Stock Option Committee are final and binding on all
optionees.

Incentive Options may be granted only to officers and other key employees of
the Company or its subsidiaries. Non-Statutory Options may be granted to
directors, consultants, or other key persons who the Stock Option Committee
determines shall receive options under the Stock Option Plan.

No option may be exercised after the date ten years from the date of grant
of such option (five years in the case of Incentive Options of individuals
holding more than ten percent of the total combined voting power of all
classes of stock of the Company or of any parent or subsidiary thereof
("greater-than-ten-percent-stockholders")) (the "Termination Date"). The
exercise price for Non-Statutory Options may not be less than 50% of the fair
market value of the Common Stock on the date of grant. The exercise price for
Incentive Options may not be less than 100% of fair market value of the Common
Stock on the date of grant (110% in the case of a greater-than-ten-percent-
stockholder). The aggregate fair market value (determined as of the time the
option is granted) of the Common Stock with respect to which any Incentive
Options may be exercisable for the first time by the optionee in any calendar
year (under the Stock Option Plan or any other stock option plan of the
Company or any parent or subsidiary thereof) shall not exceed $100,000.

Options are non-transferable except by will or the laws of descent and
distribution. Generally, unless otherwise provided by the Stock Option
Committee, options granted under the Stock Option Plan terminate upon the
earliest of: (i) the expiration date of the option; (ii) the date of voluntary
termination of the optionee's employment by the optionee; (iii) the date of
termination of the optionee's employment by the Company for cause; (iv) three
months after the date of termination of the optionee's employment by the
Company without cause; (v) one year after the cessation of the optionee's
employment by reason of a disability within the meaning of Section 105(d)(4)
of the Code; and (vi) one year after the death of an optionee prior to the
Termination Date and while employed by the Company or a subsidiary thereof or
while entitled to exercise an option pursuant to (v) above (such option shall
be exercisable by the person to whom the optionee's rights under the option
pass by will or the applicable laws of descent and distribution). For purposes
of the Stock Option Plan, the Company shall have "cause" to terminate an
optionee's employment if the Company has cause to terminate the optionee's
employment under any existing employment agreement between the optionee and
the Company or, in the absence of such an employment agreement, upon (a)
determination by the Board of Directors that the optionee has ceased to
perform his duties to the Company (other than as a result of his incapacity
due to physical or mental illness or injury), which failure amounts to an
intentional and extended neglect of his duties to the Company, (b) the Board
of Directors' determination that the optionee has engaged or is about to
engage in conduct materially injurious to the Company, or (c) the optionee
having been convicted of a felony. If an option may be exercised during any
period after the termination of an optionee's employment with the Company,
such option may be exercised only to the extent that the optionee was entitled
to exercise such option at the time of such termination.

KEY EXECUTIVE BONUS PROGRAM

The Company maintains a Key Executive Bonus Program in which key management
personnel are eligible to participate. The plan allows participants to earn
bonuses up to stated percentages of their base salary. For 1995, the
percentages were as follows: 50% for the President, 30% for Vice Presidents,
25% for sales directors, 25% for regional sales managers, 25% for
international managers, 20% for first level managers and 10% for second level
managers. The bonuses are paid in part based on the Company's achievement of
operating results, and in part based on achievement of individual goals
established for the

55
<PAGE>

participant. During 1995, a total of 37 key managers participated in the bonus
plan. The Company presently intends to continue the bonus plan for 1996 and
future years.

401(K) PLAN

The Company presently maintains the 401(k) Plan for the benefit of
substantially all full-time employees. The 401(k) Plan is qualified under
Sections 401(a) and 401(k) of the Code. Participants in the plan may elect to
defer up to 16% of their eligible compensation and have such amount invested
in accordance with the investment alternatives available under the plan. The
Company may make matching contributions each year equal to 50% of participant
deferrals up to 4% of eligible compensation. The Company may also make
discretionary contributions.

EMPLOYMENT AGREEMENTS AND SEVERANCE AGREEMENT

In connection with its acquisition of TreBay, the Company executed
employment agreements with James T. Treace and F. Barry Bays. The Company
agreed to employ Mr. Treace as President, Chairman of the Board of Directors
and Chief Executive Officer at an annual salary of $230,000 and Mr. Bays as
Senior Vice President of Operations and Chief Operating Officer at an annual
salary of $175,000. In addition, Messrs. Treace and Bays are eligible for the
Key Executive Bonus Program adopted by the Company, which program provides for
a bonus in an amount up to and at the 50% level of an employee's salary upon
attainment of the bonus criteria. The employment agreements have an initial
term of three years, and may be extended upon good faith negotiations between
the parties, which negotiations shall begin not later than 90 days prior to
the expiration of the stated term of the agreement.

The agreements entitle these executive officers to participate in such
fringe benefits as shall be generally provided to the executives of the
Company, including medical insurance and retirement programs which may be
adopted from time to time by the Company. In addition, the Company has granted
to Messrs. Treace and Bays 73,000 and 42,000 stock options, respectively,
under the Stock Option Plan, and each of Messrs. Treace and Bays are eligible
for additional grants of stock options as target bonuses pursuant to corporate
performance objectives established by the Company's Compensation Committee.
The Compensation Committee will review each executive officer's compensation
and award such bonuses or make such increases to the annual salary as the
Compensation Committee, in its sole discretion, determines are merited.

The employment agreements contain covenants prohibiting the improper
disclosure and use of any of the Company's and its predecessors' trade
secrets, know-how and proprietary processes, as well as provisions assigning
to the Company all inventions made or conceived by the executive officer
during his employment with the Company. Each executive officer agreed with the
Company that until twelve months after the termination of his employment with
the Company he would not (whether as an officer, director, owner, employee,
partner or other direct or indirect participant) engage in any Competitive
Business (defined as the manufacturing, supplying, producing, selling,
distributing or providing for sale of (i) any product, device or instrument
manufactured from or using polyvinal acetal (PVAc) material or technology or
(ii) any eye, ear, nose or throat product, device or instrument (x) of a type
manufactured or sold by the Company or its subsidiaries or (y) in clinical
development sponsored by the Company or its subsidiaries, in each case, as of
the date of termination of employment).

The Company may terminate the employment of the executive officers under the
employment agreements (i) upon 30 days' notice if the employee becomes
physically or mentally incapacitated or is injured so that he is unable to
perform the services required of him and such inability to perform continues
for a period in excess of six months and is continuing at the time of such
notice; (ii) for cause upon notice of such termination to the employee; or
(iii) without cause upon 30 days' notice of such termination to the employee.
If an employment agreement is terminated pursuant to (i) above, the executive
officer shall receive salary continuation pay from the date of such
termination until April 16,

56
<PAGE>

1999, reduced by applicable payroll taxes and amounts received by the
executive officer under any Company-maintained disability insurance policy or
plan under Social Security or similar laws. If an employment agreement is
terminated pursuant to (ii) above, the executive officer shall receive no
salary continuation pay or severance pay. If an employment agreement is
terminated pursuant to (iii) above, the executive officer shall receive salary
continuation pay for a period of twelve months from and after the date of such
termination.

On May 10, 1996, the Company entered into a Separation Agreement with Mark
K. Adams (the "Separation Agreement"). Pursuant to the terms of the Separation
Agreement: (i) all options received by Mr. Adams under the Stock Option Plan
became fully vested; (ii) the Company agreed to provide to Mr. Adams an
allowance for outplacement services; (iii) the Company paid Mr. Adams a lump
sum of $249,532; (iv) the Company agreed to forgive a loan to Mr. Adams in the
amount of $300,007 in exchange for his surrender of 9,563 shares of Series A
Convertible Preferred Stock and 2,074 shares of Series C Redeemable Preferred
Stock held by him; and (v) the Company agreed to make monthly severance
payments to Mr. Adams at a rate of $175,000 per year for two years, with the
first year's payment guaranteed and payments in the second year payable only
until such time as he obtains full time employment elsewhere. Mr. Adams has
also agreed to provide consulting services to the Company for a period of two
years for no additional consideration. In addition, Mr. Adams has agreed with
the Company that, until May 10, 1998, he will not (whether as an officer,
director, owner, employee, partner or other direct or indirect participant)
engage in any Competitive Business (defined in substantially the same manner
as described above with respect to the employment agreements of James T.
Treace and F. Barry Bays). During this same two-year period, Mr. Adams has
agreed that he will not, directly or indirectly, employ or solicit for
employment any person then employed by the Company. Mr. Adams also has agreed
that he only will use confidential information with respect to the Company for
the benefit of the Company and only disclose this information to others with
the Company's prior approval.

STOCKHOLDERS AGREEMENT

Under a stockholders agreement among the Company and substantially all of
its existing stockholders, the parties agree to take all action within their
respective power, including but not limited to, the voting of capital stock of
the Company, required to cause the Board of Directors of the Company to
consist of seven members. The stockholders agreement provides that, so long as
WP Investors owns 40% or more of the total number of outstanding shares of
Common Stock, WP Investors will have the right to designate three persons to
be appointed or nominated for election to the Company's Board of Directors. If
at any time WP Investors owns less than 40%, but 20% or more, of the total
number of outstanding shares of Common Stock, WP Investors will have the right
to designate two persons to be appointed or nominated for election to the
Company's Board of Directors. If at any time WP Investors owns less than 20%,
but 10% or more, of the total number of outstanding shares of Common Stock, WP
Investors will have the right to designate one person to be appointed or
nominated for election to the Company's Board of Directors. WP Investors has
informed the Company that it intends, upon the closing of this offering, to
convert all of its Non-Voting Common Stock into Common Stock, provided that,
in no event will such conversion result in its holding more than 49% of the
outstanding shares of Common Stock following such conversion. Upon completion
of this offering and the Share Exchange, WP Investors will have under the
stockholders agreement the right to designate three persons to be appointed or
nominated to the Company's Board of Directors. In addition, the stockholders
agreement provides each current stockholder with certain rights to inspect the
Company's properties and its books and records and to discuss its affairs with
management so long as the stockholder holds at least 2% of the combined
outstanding Common Stock and Non-Voting Common Stock.

57
<PAGE>

CERTAIN TRANSACTIONS

As part of the financing of the Xomed Acquisition, the Company issued to
certain institutional investors, including WP Investors, an aggregate of: (i)
340,454 shares of Series A Convertible Preferred Stock for approximately
$3,261,549 in aggregate consideration; (ii) 2,127,838 shares of Series B
Convertible Preferred Stock for approximately $20,384,688 in aggregate
consideration; and (iii) 198,561 shares of Series C Redeemable Preferred Stock
for approximately $19,856,100 in aggregate consideration. Of the shares issued
by the Company, WP Investors purchased all of the shares of Series B
Convertible Preferred Stock for approximately $20,384,688 in aggregate
consideration and 171,173 of the shares of Series C Redeemable Preferred Stock
for approximately $17,173,000 in aggregate consideration.

The Company is a party to a stockholders agreement with substantially all of
its existing stockholders relating to, among other things, the composition of
the Company's Board of Directors. See "Management--Stockholders Agreement."

On November 7, 1995, TreBay loaned $883,000 to James T. Treace, its
President and Chief Executive Officer. Following the Company's acquisition of
TreBay in April 1996, Mr. Treace became the Company's President and Chief
Executive Officer. The loan is payable on demand at any time following
November 7, 2000 and matures on November 7, 2002. Interest accrues on the loan
at an annual rate of 10% and is payable, at Mr. Treace's election, upon each
anniversary of the loan or its maturity. The loan is secured by a pledge of
40,280 shares of Series A Convertible Preferred Stock and 2,940 shares of
Series C Redeemable Preferred Stock. The entire amount to be received from the
redemption of Mr. Treace's shares of Series C Redeemable Preferred Stock
securing the loan will be used to repay a portion of the loan. See "Principal
Stockholders."

58
<PAGE>

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information with regard to the
beneficial ownership of the Common Stock as of October 1, 1996, and as
adjusted to reflect the sale of the shares of Common Stock being offered
hereby, by (i) each person known by the Company to own beneficially more than
5% of the outstanding shares of Common Stock; (ii) each director of the
Company, its Chief Executive Officer, certain of its other most highly
compensated current executive officers of the Company and each member of the
Executive Officer Group; and (iii) all current directors and executive
officers of the Company as a group. Except as otherwise noted, the named
beneficial holder has sole voting and investment power.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY
NAMES AND ADDRESSES OF OWNED BEFORE SHARES BENEFICIALLY
BENEFICIAL HOLDERS OFFERING OWNED AFTER OFFERING
---------------------- ------------------------ --------------------------
NUMBER(1) PERCENT(3) NUMBER(1)(2) PERCENT(3)
--------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
5% Stockholders:
Warburg, Pincus Investors,
L.P. (4)................. 2,997,453 75.3% 3,306,204(5) 48.1%
466 Lexington Avenue
New York, NY 10017
Accel IV L.P. ............ 259,880 6.5% 287,594(6) 4.2%
1 Embarcadero Center
San Francisco, CA 94111
Directors and executive of-
ficers:
James T. Treace........... 136,172(7) 3.4% 150,587(7) 2.2%
F. Barry Bays............. 80,596(8) 2.0% 88,907(8) 1.3%
R. Glen Coleman........... -- (9) * -- (9) *
Guy K. Williamson......... -- (10) * -- (10) *
Thomas E. Timbie.......... 17,643(11) * 18,831(11) *
Mark J. Fletcher.......... 10,000(12) * 10,000(12) *
John R. Treace............ 11,007(13) * 11,488(13) *
Dan H. Treace............. 11,873(14) * 12,446(14) *
Richard B. Emmitt......... 159,594(15) 4.0% 173,193(15) 2.5%
Paul H. Klingenstein...... 277,470(16) 7.0% 307,060(16) 4.5%
William R. Miller......... 5,500 * 5,500 *
Rodman W. Moorhead, III... 2,997,453(17) 75.3% 3,306,204(17) 48.1%
James E. Thomas........... 2,997,453(17) 75.3% 3,306,204(17) 48.1%
Elizabeth H. Weatherman... 2,997,453(17) 75.3% 3,306,204(17) 48.1%
Mark K. Adams (18)........ 80,000 2.0% 80,000 1.2%
David R. Grant (19)....... 9,679 * 10,283 *
Arthur Gertzman (20)...... 7,840 * 8,143 *
Marley Price (21)......... -- * -- *
All current directors and
executive officers as a
group (16 persons)
(15)(16)(17)............. 3,708,308 92.4% 4,085,217 59.1%
</TABLE>
- --------
*Less than 1%.

(1) Except as otherwise indicated, the persons in this table have sole voting
and investment power with respect to all shares of Common Stock shown as
beneficially owned by them, subject to community property laws where
applicable and subject to the information contained in the footnotes to
this table. Amounts shown for each stockholder include all shares of
Common Stock obtainable upon the Stock Conversion (except that shares
obtainable with respect to accreted dividends upon the conversion of
preferred stock are not included in shares beneficially owned before this
offering), together with shares subject to stock options exercisable
within 60 days of October 1, 1996. Shares not outstanding but deemed
beneficially owned by virtue of the right of a person or group to acquire
them within 60 days are treated as outstanding only for purposes of
determining the number of and percent owned by such person or group.
(2) Amounts shown for each stockholder include all shares of Common Stock
issuable in the Share Exchange, based upon an assumed initial offering
price of $20.00 per share.

59
<PAGE>

(3) The number of shares of Common Stock deemed outstanding before this
offering consists of 679,270 shares of Common Stock outstanding as of
October 1, 1996, 744,652 shares of Common Stock issuable upon conversion
of outstanding shares of Series A Convertible Preferred Stock, 426,777
shares of Common Stock issuable upon conversion of outstanding shares of
Non-Voting Common Stock and 2,127,838 shares of Common Stock issuable
upon conversion of the shares of Non-Voting Common Stock which are
issuable upon conversion of outstanding shares of Series B Convertible
Preferred Stock. The number of shares of Common Stock deemed outstanding
after this offering includes an additional 2,500,000 shares of Common
Stock being offered for sale by the Company in this offering, 314,650
shares of Common Stock issued in the Share Exchange and 86,175 shares of
Common Stock issued in the Stock Conversion with respect to accreted
dividends on preferred stock.
(4) The sole general partner of WP Investors is Warburg, Pincus & Co., a New
York general partnership ("WP"). Lionel I. Pincus is the managing partner
of WP and may be deemed to control it. E.M. Warburg, Pincus & Company, a
New York general partnership that has the same general partners as WP
("E.M. Warburg"), manages WP Investors. WP has a 20% interest in the
profits of WP Investors and, through its wholly-owned subsidiary,
Warburg, Pincus, owns 1.13% of the limited partnership interests in WP
Investors. Messrs. Moorhead and Thomas and Ms. Weatherman, each a
director of the Company, are Managing Directors of Warburg, Pincus and
general partners of WP and E.M. Warburg. As such, Messrs. Moorhead and
Thomas and Ms. Weatherman may be deemed to have an indirect pecuniary
interest (within the meaning of Rule 16a-1 under the Exchange Act) in an
indeterminate portion of the shares beneficially owned by WP Investors,
Warburg, Pincus, and WP.

(5) Includes 244,915 shares of Common Stock issuable within 30 days of the
closing of this offering in exchange for 46,874 shares of Series C
Redeemable Preferred Stock. An additional 186,217 shares of Series C
Redeemable Preferred Stock held by WP Investors will be redeemed from the
net proceeds of this offering for approximately $19.5 million.

(6) Includes 19,918 shares of Common Stock issuable within 30 days of the
closing of this offering in exchange for 3,812 shares of Series C
Redeemable Preferred Stock. An additional 15,144 shares of Series C
Redeemable Preferred Stock held by such person will be redeemed from the
net proceeds of this offering for approximately $1.6 million.

(7) Includes 1,083 shares of Common Stock subject to options exercisable
within 60 days of October 1, 1996, but does not include 76,250 shares of
Common Stock subject to options that will not be exercisable within 60
days of such date. Shares beneficially owned after this offering include
10,362 shares of Common Stock issuable within 30 days of the closing of
this offering in exchange for 1,983 shares of Series C Redeemable
Preferred Stock. An additional 7,879 shares of Series C Redeemable
Preferred Stock held by Mr. Treace will be redeemed from the net proceeds
of this offering for approximately $823,356. Mr. Treace has pledged
certain of his shares to the Company to secure repayment of a loan, and
the entire amount received from the redemption of Mr. Treace's shares of
Series C Redeemable Preferred Stock pledged to the Company will be used
to repay a portion of such loan. Mr. Treace has pledged 91,929 shares of
Common Stock and 6,711 shares of Series C Redeemable Preferred Stock to
WP Investors to secure repayment of a loan of $1,649,998 from WP
Investors used to purchase such shares. The loan bears interest at an
annual rate of 7% and matures on April 16, 2001. The entire amount
received from the redemption of Mr. Treace's shares of Series C
Redeemable Preferred Stock pledged to WP Investors and half of the amount
received from the redemption of any of Mr. Treace's shares that are not
pledged to WP Investors or the Company will be used to repay a portion of
the loan. See "Certain Transactions."

(8) Includes 2,708 shares of Common Stock subject to options exercisable
within 60 days of October 1, 1996, but does not include 50,125 shares of
Common Stock subject to options that will not be exercisable within 60
days of such date. Shares beneficially owned after this offering include
5,974 shares of Common Stock issuable within 30 days of the closing of
this offering in exchange for 1,143 shares of Series C Redeemable
Preferred Stock. An additional 4,543 shares of Series C Redeemable
Preferred Stock held by Mr. Bays will be redeemed from the net proceeds
of this offering for approximately $474,744. Mr. Bays has pledged 52,928
shares of Common Stock and 3,864 shares of Series C Redeemable Preferred
Stock to WP Investors to secure repayment of a loan of $949,998 from WP
Investors used to purchase such shares. The loan bears interest at an
annual rate of 7% and matures on April 16, 2001. The entire amount
received from the redemption of Mr. Bays' shares of Series C Redeemable
Preferred Stock pledged to WP Investors and half of the amount received
from the redemption of any of Mr. Bays' shares of Series C Redeemable
Preferred Stock that are not pledged will be used to repay a portion of
the loan.

(9) Does not include 30,000 shares of Common Stock subject to options that
will not be exercisable within 60 days of October 1, 1996.

(10) Does not include 30,000 shares of Common Stock subject to options that
will not be exercisable within 60 days of October 1, 1996.

(11) Includes 6,500 shares of Common Stock subject to options exercisable
within 60 days of October 1, 1996, but does not include 23,500 shares of
Common Stock subject to options that will not be exercisable within 60
days of such date. Shares beneficially owned after this offering include
854 shares of Common Stock issuable within 30 days of the closing of this
offering in exchange for 163 shares of Series C Redeemable Preferred
Stock. An additional 650 shares of Series C Redeemable Preferred Stock
held by Mr. Timbie will be redeemed from the net proceeds of this
offering for approximately $84,959. Mr. Timbie has pledged 11,143 shares
of Common Stock and 813 shares of Series C Redeemable Preferred Stock to
WP Investors to secure repayment of a loan of $200,004 from WP Investors
used to purchase such shares. The loan bears interest at an annual rate
of 7% and matures on April 16, 2001 and the entire amount received from
the redemption of Mr. Timbie's shares of Series C Redeemable Preferred
Stock pledged to the Company will be used to repay a portion of such
loan.

(12) Represents shares of Common Stock subject to options exercisable within
60 days of October 1, 1996, but does not include 20,000 shares of Common
Stock subject to options that will not be exercisable within 60 days of
such date.

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(13) Includes 6,500 shares of Common Stock subject to options exercisable
within 60 days of October 1, 1996, but does not include 23,500 shares of
Common Stock subject to options that will not be exercisable within 60
days of such date. Shares beneficially owned after this offering include
346 shares of Common Stock issuable within 30 days of the closing of this
offering in exchange for 66 shares of Series C Redeemable Preferred
Stock. An additional 263 shares of Series C Redeemable Preferred Stock
held by Mr. Treace will be redeemed from the net proceeds of this
offering for approximately $27,484.

(14) Includes 6,500 shares of Common Stock subject to options exercisable
within 60 days of October 1, 1996, but does not include 23,500 shares of
Common Stock subject to options that will not be exercisable within 60
days of such date. Shares beneficially owned after this offering include
412 shares of Common Stock issuable within 30 days of the closing of this
offering in exchange for 78 shares of Series C Redeemable Preferred
Stock. An additional 314 shares of Series C Redeemable Preferred Stock
held by Mr. Treace will be redeemed from the net proceeds of this
offering for approximately $32, 813.

(15) Includes only shares held by Vertical Fund Associates, L.P. ("Vertical
Fund"). Mr. Emmitt is a Managing Director of The Vertical Group, Inc.,
the general partner of Vertical Fund. As such, Mr. Emmitt may be deemed
to have an indirect pecuniary interest (within the meaning of Rule 16a-1
of the Exchange Act) in an indeterminate portion of the shares
beneficially held by Vertical Fund. Mr. Emmitt disclaims beneficial
ownership of the shares held by Vertical Fund. Shares beneficially owned
after this offering include 11,897 shares of Common Stock held by
Vertical Fund issuable within 30 days of the closing of this offering in
exchange for 2,277 shares of Series C Redeemable Preferred Stock. An
additional 9,046 shares of Series C Redeemable Preferred Stock held by
Vertical Fund will be redeemed from the net proceeds of this offering for
approximately $945,307.

(16) Includes only shares held by Accel IV L.P., Accel Keiretsu L.P., Accel
Investors '94 L.P. and Prosper Partners (collectively, the "Funds"). Mr.
Klingenstein is (i) a general partner of the general partner of Accel IV
L.P.; (ii) an officer of the general partner of Accel Keiretsu L.P.;
(iii) a general partner of Accel Investors '94 L.P.; and (iv) attorney-
in-fact for Prosper Partners. As such, Mr. Klingenstein may be deemed to
have an indirect pecuniary interest (within the meaning of Rule 16a-1 of
the Exchange Act) in an indeterminate portion of the shares beneficially
held by the Funds. Mr. Klingenstein disclaims beneficial ownership of the
shares held by the Funds. Shares beneficially owned after this offering
by the Funds include 21,266 shares of Common Stock issuable within 30
days of the closing of this offering in exchange for 4,070 shares of
Series C Redeemable Preferred Stock. An additional 16,169 shares of
Series C Redeemable Preferred Stock held by the Funds will be redeemed
from the net proceeds of this offering for approximately $1.7 million.

(17) Includes only shares held by WP Investors, of which Messrs. Moorhead and
Thomas and Ms. Weatherman may be deemed to have beneficial ownership.
Messrs. Moorhead and Thomas and Ms. Weatherman disclaim beneficial
ownership of the shares held by WP Investors.

(18) Mr. Adams's last day of employment with the Company was May 20, 1996.
Includes 60,000 shares of Common Stock subject to options exercisable
within 60 days of October 1, 1996.

(19) Mr. Grant's last day of employment with the Company was June 28, 1996.
Includes 4,000 shares of Common Stock subject to options exercisable
within 60 days of September 13, 1996. Shares beneficially owned after
this offering include 434 shares of Common Stock issuable within 30 days
of the closing of this offering in exchange for 83 shares of Series C
Redeemable Preferred Stock. An additional 330 shares of Series C
Redeemable Preferred Stock held by Mr. Grant will be redeemed from the
net proceeds of this offering for approximately $34,485.

(20) Mr. Gertzman's last day of employment with the Company was April 30,
1996. Shares beneficially owned after this offering include 218 shares of
Common Stock issuable within 30 days of the closing of this offering in
exchange for 42 shares of Series C Redeemable Preferred Stock. An
additional 165 shares of Series C Redeemable Preferred Stock held by Mr.
Gertzman will be redeemed from the net proceeds of this offering for
approximately $17,243.

(21) Mr. Price's last day of employment with the Company was April 22, 1996.

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DESCRIPTION OF CAPITAL STOCK

GENERAL

The authorized capital stock of the Company consists of (i) 30,000,000
shares of Common Stock, par value $.01 per share; (ii) 4,000,000 shares of
Non-Voting Common Stock, par value $.01 per share; (iii) 1,200,000 shares of
Series A Convertible Preferred Stock, par value $1.00 per share; (iv)
3,500,000 shares of Series B Convertible Preferred Stock, par value $1.00 per
share; (v) 600,000 shares of Series C Redeemable Preferred Stock, par value
$1.00 per share; and (vi) 1,000,000 shares of Preferred Stock, par value $.01
per share.

COMMON STOCK

As of August 20, 1996, there were outstanding 679,270 shares of Common Stock
held of record by 15 persons. Upon the closing of this offering, there will be
outstanding 6,879,362 shares of Common Stock, after giving effect to the Stock
Conversion and the Share Exchange and assuming no exercise of the
Underwriters' over-allotment option or exercise of outstanding options to
purchase an aggregate of 501,191 shares of Common Stock.

Holders of Common Stock are entitled to one vote per share in all matters to
be voted on by the stockholders of the Company and do not have cumulative
voting rights. Subject to preferences that may be applicable to any Preferred
Stock outstanding at the time, holders of Common Stock are entitled to receive
ratably such dividends, if any, as may be declared from time to time by the
Board of Directors out of funds legally available therefor. In the event of a
liquidation, dissolution or winding up of the Company, holders of Common Stock
are entitled to share ratably in all assets remaining after payment of the
Company's liabilities and the liquidation preference, if any, of any
outstanding Preferred Stock. Holders of shares of Common Stock have no
preemptive, subscription, redemption or conversion rights. There are no
redemption or sinking fund provisions applicable to the Common Stock. All of
the outstanding shares of Common Stock are, and the shares offered by the
Company in this offering will be, when issued and paid for, fully paid and
non-assessable. The rights, preferences and privileges of holders of Common
Stock are, subject to, and may be adversely affected by, the rights of the
holders of shares of any series of Preferred Stock which the Company may
designate and issue in the future. See "Dividend Policy."

NON-VOTING COMMON STOCK

As of October 1, 1996, there were outstanding 426,777 shares of Non-Voting
Common Stock held of record by one institution. Upon the closing of this
offering, there will be outstanding no shares of Non-Voting Common Stock,
after giving effect to the conversion into shares of Non-Voting Common Stock
of all outstanding shares of Series B Convertible Preferred Stock and the
subsequent conversion of all then outstanding Non-Voting Common Stock into
shares of Common Stock.

Holders of Non-Voting Common Stock are not entitled to vote on any matter to
be voted on by the stockholders, except as required by law. Holders of shares
of Non-Voting Common Stock other than WP Investors or its affiliates may elect
at any time to convert their shares of Non-Voting Common Stock into an
equivalent number of fully paid and nonassessable shares of Common Stock. WP
Investors and its affiliates may elect to convert shares of Non-Voting Common
Stock that they hold into an equivalent number of fully paid and nonassessable
shares of Common Stock so long as after giving effect to the conversion WP
Investors and its affiliates collectively own beneficially and of record no
more than 50% of the then outstanding shares of Common Stock. Except with
respect to voting rights and the conversion rights of the Non-Voting Common
Stock, shares of Non-Voting Common Stock have the same powers, rights and
qualifications (including relative, participating, optional and other special
rights, dividend rights, and rights on liquidation, dissolution or winding up)
as shares of Common Stock and rank pari passu with shares of Common Stock.

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PREFERRED STOCK

As of October 1, 1996, there were outstanding 744,652 shares of Series A
Convertible Preferred Stock held of record by 16 persons, 2,127,838 shares of
Series B Convertible Preferred Stock held of record by one institution and
299,459 shares of Series C Redeemable Preferred Stock held of record by 22
persons.

The holders of the Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock have agreed that, upon the closing of this
offering the outstanding shares of Series A Convertible Preferred Stock and
the accrued and unpaid dividends thereon will convert into 766,991 shares of
Common Stock and the outstanding shares of Series B Convertible Preferred
Stock and the accrued and unpaid dividends thereon will automatically convert
into 2,191,674 shares of Non-Voting Common Stock. Immediately thereafter, the
holder of all then outstanding shares of Non-Voting Stock will convert such
shares into Common Stock. Upon the closing of this offering, the Company
intends to amend the Restated Certificate to eliminate the Series A
Convertible Preferred Stock and the Series B Convertible Preferred Stock. Upon
the closing of the Share Exchange, the Company intends to amend its Restated
Certificate of Incorporation (the "Restated Certificate") to eliminate the
Series C Redeemable Preferred Stock.

The holders of shares of Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock are entitled to receive quarterly cash dividends
(to the extent of legally available funds) at the rate of six percent per
annum. At the option on the Company, dividends on the Series A Convertible
Preferred Stock and Series B Convertible Preferred Stock may be paid in
additional shares of Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock, respectively, instead of in cash. Dividends on
the Series A Convertible Preferred Stock and Series B Convertible Preferred
Stock must be paid before any dividends may be set apart or paid upon the
Common Stock or Non-Voting Common Stock in any year. Dividends on the Series A
Convertible Preferred Stock and Series B Convertible Preferred Stock began
accruing from April 16, 1996 and are cumulative, whether or not in any fiscal
year there are net profits or surplus available for the payment of dividends
in such fiscal year.

Holders of Series C Redeemable Preferred Stock are not entitled to vote on
any matter to be voted on by the stockholders, except as required by law. The
holders of shares of Series C Redeemable Preferred Stock are entitled to
receive quarterly cash dividends (to the extent of legally available funds) at
the rate of nine percent per annum. At the option of the Company, dividends on
the Series C Redeemable Preferred Stock may be paid in additional shares of
Series C Redeemable Preferred Stock instead of in cash. Dividends on the
Series C Redeemable Preferred Stock must be paid before any dividends may be
set apart for or paid upon the Common Stock or Non-Voting Common Stock in any
year. Dividends on the Series C Redeemable Preferred Stock began accruing from
April 16, 1996 and are cumulative, whether or not in any fiscal year there are
net profits or surplus available for the payment of dividends in such fiscal
year.

The Company is obligated on April 15, 2001 to redeem all outstanding shares
of Series C Preferred Stock (to the extent that such redemption does not
violate any applicable provisions of Delaware law) at a price of $100 per
share, plus an amount equal to any and all dividends accrued and unpaid, but
without interest (the "Series C Redemption Price"). The Company may at any
time, and with the affirmative vote or written consent of the holders of
record of a majority of the shares of Series C Redeemable Preferred Stock then
outstanding, redeem shares of Series C Redeemable Preferred Stock at the
Series C Redemption Price.

The Company will use the balance of the net proceeds of this offering, after
repayment of the Term Loan, plus the net proceeds from the sale of any shares
covered by the Underwriters' over-allotment option, for the redemption of up
to a maximum of $25.0 million of Series C Redeemable Preferred Stock. In the
Share Exchange, all shares of Series C Redeemable Preferred Stock remaining
outstanding immediately following the redemption will be exchanged for shares
of Common Stock, with the number

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of shares of Common Stock to be issued in such exchange to be determined by
dividing the aggregate redemption price of such Series C Redeemable Preferred
Stock, plus accrued but unpaid dividends, by the per share initial public
offering price.

The Board of Directors has the authority, without any further vote or action
by the stockholders, to provide for the issuance of up to 1,000,000 shares of
Preferred Stock from time to time in one or more series with such
designations, rights, preferences and limitations as the Board of Directors
may determine, including the consideration received therefor. The Board also
will have the authority to determine the number of shares comprising each
series, dividend rates, redemption provisions, liquidation preferences,
sinking fund provisions, conversion rights and voting rights without approval
by the holders of Common Stock. Although it is not possible to state the
effect that any issuance of Preferred Stock might have on the rights of
holders of Common Stock, the issuance of Preferred Stock may have one or more
of the following effects: (i) to restrict Common Stock dividends if Preferred
Stock dividends have not been paid; (ii) to dilute the voting power and equity
interest of holders of Common Stock to the extent that any Preferred Stock
series has voting rights or is convertible into Common Stock; or (iii) to
prevent current holders of Common Stock from participating in the Company's
assets upon liquidation until any liquidation preferences granted to holders
of Preferred Stock are satisfied. In addition, the issuance of Preferred Stock
may, under certain circumstances, have the effect of discouraging a change in
control of the Company by, for example, granting voting rights to holders of
Preferred Stock that require approval by the separate vote of the holders of
Preferred Stock for any amendment to the Restated Certificate or any
reorganization, consolidation, merger or other similar transaction involving
the Company. As a result, the issuance of such Preferred Stock may discourage
bids for the Common Stock at a premium over the market price therefor, and
could have a materially adverse effect on the market value of the Common
Stock. See "Risk Factors--Anti-takeover Considerations."

REGISTRATION RIGHTS

In connection both with the formation of the Company and its acquisition of
TreBay, the Company granted certain rights with respect to the registration of
an aggregate of 4,340,429 shares of Common Stock held by certain stockholders
(the "Investors"), after giving effect to the Stock Conversion and the Share
Exchange (collectively, the "Registrable Securities"). Such registration
rights also extend to any capital stock of the Company issued as a dividend or
other distribution with respect to, or in exchange for or in replacement of,
the shares of Common Stock referred to above and any additional shares of
Common Stock which any of the Investors may hereafter acquire. Certain of the
Investors hold options to purchase an aggregate of 298,416 shares of Common
Stock. The shares obtained upon the exercise of such options also will be
Registrable Securities. A holder or holders of the Registrable Securities
(each a "Holder") who (i) prior to this offering, are a Holder or Holders of
more than 50% of the then outstanding Registrable Securities; or (ii)
following this offering, are a Holder or Holders of more than 20% of the then
outstanding Registrable Securities (each, an "Initiating Holder") are entitled
to request that the Company file a registration statement under the Securities
Act covering the sale of some or all of the Registrable Securities owned by
such holders, subject to certain conditions. The Company is required to effect
no more than two such registrations (three if the prior two registrations did
not include WP Investors as an Initiating Holder). The Company is not required
to effect any such registration if the anticipated aggregate public offering
price of the shares of Common Stock proposed to be registered is less than
$5.0 million. If officers or directors of the Company holding other securities
of the Company shall request inclusion in any such registration, or if holders
of securities of the Company other than Registrable Securities who are
entitled, by contract with the Company or otherwise, to have securities
included in such a registration (the "Other Stockholders") request such
inclusion, the Holders shall offer to include the securities of such officers,
directors and Other Stockholders in any underwriting involved in such
registration, provided, among other conditions, that the underwriter
representative of any such offering has the right, subject to certain
conditions, to limit the number of Registrable Securities included in the
registration. In addition, in the event that the Company proposes to register
any of its securities under the Securities Act (other

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than registrations relating solely to employee benefit plans or pursuant to
Rule 145 or on a form which does not permit secondary sales or does not
include substantially the same information as would be required to be included
in a registration statement covering the sale of Registrable Securities),
either for its own account or for the account of other security holders or
holders exercising their respective demand registration rights, holders of
Registrable Securities may require the Company to include all or a portion of
their Registrable Securities in the registration and in any underwriting
involved therein, provided, among other conditions, that the underwriter
representative of any such offering has the right, subject to certain
conditions, to limit the number of Registrable Securities included in the
registration. Further, once the Company is qualified to use Form S-3 to
register securities under the Securities Act, the holders of Registrable
Securities shall have the right to request three registrations on Form S-3 to
register all or a portion of such shares under the Securities Act, subject to
certain conditions. In general, all fees, costs and expenses of such
registrations (other than underwriting discounts and selling commissions
applicable to sales of the Registrable Securities and all fees and
disbursements of counsel for each of the Holders) will be borne by the
Company.

LIMITATIONS ON DIRECTORS' LIABILITY

The Restated Certificate and Restated By-laws limit the liability of
directors and officers to the maximum extent permitted by Delaware law.
Delaware law provides that directors of a corporation will not be personally
liable for monetary damages for breach of their fiduciary duties as directors,
including gross negligence, except liability for (i) breach of the directors'
and officers' duty of loyalty; (ii) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of the law; (iii)
the unlawful payment of a dividend or unlawful stock purchase or redemption;
and (iv) any transaction from which the director or officer derives an
improper personal benefit. Delaware law does not permit a corporation to
eliminate a director's or an officer's duty of care, and this provision of the
Restated Certificate has no effect on the availability of equitable remedies,
such as injunction or rescission, based upon a director's breach of the duty
of care.

These provisions will not limit liability under state or federal securities
laws. The Company believes that these provisions will assist the Company in
attracting and retaining qualified individuals to serve as directors.

POSSIBLE ISSUANCES OF PREFERRED STOCK

The Company has amended its Restated Certificate to authorize the issuance
of Preferred Stock without stockholder approval and upon such terms as the
Board of Directors may determine. This amendment could have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from acquiring or making a proposal to acquire, a majority of the
outstanding stock of the Company. The rights of the holders of Common Stock
will be subject to, and may be adversely affected by, the rights of holders of
Preferred Stock that may be issued in the future. The Company has no present
plans to issue any shares of Preferred Stock. See "Description of Capital
Stock--Preferred Stock" and "Risk Factors--Anti-takeover Considerations."

SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW

The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("Section 203"). Under Section 203, certain "business
combinations" between a Delaware corporation whose stock generally is publicly
traded or held of record by more than 2,000 stockholders and an "interested
stockholder" are prohibited for a three-year period following the date that
such a stockholder became an interested stockholder, unless (i) the
corporation has elected in its original certificate of incorporation not to be
governed by Section 203 (the Company did not make such an election); (ii) the
business combination was approved by the Board of Directors of the corporation
before the other party to the business combination became an interested
stockholder; (iii) upon consummation of the transaction

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that made it an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the
commencement of the transaction (excluding voting stock owned by directors who
are also officers or held in employee benefit plans in which the employees do
not have a confidential right to tender or vote stock held by the plan); or
(iv) the business combination was approved by the Board of Directors of the
corporation and ratified by two-thirds of the voting stock which the
interested stockholder did not own. The three-year prohibition also does not
apply to certain business combinations proposed by an interested stockholder
following the announcement or notification of certain extraordinary
transactions involving the corporation and a person who had not been an
interested stockholder during the previous three years or who became an
interested stockholder with the approval of the majority of the corporation's
directors. The term "business combination" is defined generally to include
mergers or consolidations between a Delaware corporation and an interested
stockholder, transactions with an interested stockholder involving the assets
or stock of the corporation or its majority-owned subsidiaries and
transactions which increase an interested stockholder's percentage ownership
of stock. The term "interested stockholder" is defined generally as a
stockholder who, together with affiliates and associates, owns (or, within
three years prior, did own) 15% or more of a Delaware corporation's voting
stock. Section 203 could prohibit or delay a merger, takeover or other change
in control of the Company and therefore could discourage attempts to acquire
the Company.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar of the Company's Common Stock is First
Union Bank of North Carolina.

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SHARES ELIGIBLE FOR FUTURE SALE

Prior to the offering there has been no market for the shares of the Common
Stock of the Company. The Company can make no predictions as to the effect, if
any, that sales of shares or the availability of shares for sale will have on
the market price prevailing from time to time. Nevertheless, sales of
significant amounts of the Common Stock in the public market, or the
perception that such sales may occur, could adversely affect prevailing market
prices. See "Risk Factors--Shares Eligible for Future Sale; Potential for
Adverse Effect on Stock Price."

Upon completion of this offering, the Company expects to have 6,879,362
shares of Common Stock outstanding, assuming no exercise of the Underwriters'
over-allotment option. Of these shares, the 2,500,000 shares of Common Stock
sold in this offering will be freely tradeable without restriction under the
Securities Act, except for any such shares which may be acquired by an
"affiliate" of the Company (an "Affiliate") as that term is defined in Rule
144 under the Securities Act, which shares will be subject to the resale
limitations of Rule 144.

An aggregate of approximately 4,379,362 shares of Common Stock held by
existing stockholders upon completion of this offering and the Share Exchange
will be "restricted securities" (as that phrase is defined in Rule 144) and
may not be resold in the absence of registration under the Securities Act or
pursuant to exemptions from such registration, including among others, the
exemption provided by Rule 144 under the Securities Act. Except as described
below, ninety days after the date of this Prospectus, approximately 108,900
shares of Common Stock (plus 137,816 shares issuable upon exercise of then
vested options) will be eligible for sale in the public market pursuant to
Rule 701 under the Securities Act. In addition, approximately 4,206,711 shares
will be eligible for sale in the public market under Rule 144, subject to the
volume limitations and other restrictions described below, 90 days after the
date of this Prospectus and 48,399 shares will be eligible for sale without
restriction under Rule 144(k).

In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, if a period of at least two years has elapsed
since the later of the date the "restricted securities" were acquired from the
Company and the date they were acquired from an Affiliate, then the holder of
such restricted securities (including an Affiliate) is entitled to sell a
number of shares within any three-month period that does not exceed the
greater of 1% of the then outstanding shares of the Common Stock
(approximately 68,794 shares immediately after this offering) or the average
weekly reported volume of trading of the Common Stock on the Nasdaq National
Market during the four calendar weeks preceding such sale. The holder may only
sell such shares through unsolicited brokers' transactions. Sales under Rule
144 are also subject to certain requirements pertaining to the manner of such
sales, notices of such sales and the availability of current public
information concerning the Company. Affiliates may sell shares not
constituting restricted shares in accordance with the foregoing volume
limitations and other requirements but without regard to the two-year holding
period. Under Rule 144(k), if a period of at least three years has elapsed
between the later of the date restricted securities were acquired from the
Company and the date they were acquired from an Affiliate, as applicable, a
holder of such restricted securities who is not an Affiliate at the time of
the sale and has not been an Affiliate for at least three months prior to the
sale would be entitled to sell the shares immediately without regard to the
volume limitations and other conditions described above.

Any employee of the Company who purchased his or her shares of Common Stock
pursuant to a written compensation plan or contract may be entitled to rely on
the resale provisions of Rule 701 under the Securities Act, which permits
nonaffiliates to sell their Rule 701 shares without having to comply with the
current public information, holding period, volume limitation or notice
provision of Rule 144 and permits affiliates to sell their Rule 701 shares
without having to comply with Rule 144's holding period restrictions.

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The Company intends to file as soon as practicable after the closing of this
offering a registration statement on Form S-8 under the Securities Act to
register approximately 669,100 shares of Common Stock reserved for issuance
under the Stock Option Plan, including, in some cases, shares for which an
exemption under Rule 144 or Rule 701 would also be available, thus permitting
the resale of shares issued under the Stock Option Plan by non-affiliates in
the public market without restriction under the Securities Act. Such
registration statement is expected to become effective immediately upon
filing, whereupon shares registered thereunder will become eligible for sale
in the public market, subject to vesting and, in certain cases, subject to the
lock-up agreements described below. At the date of this Prospectus, options to
purchase an aggregate of 501,191 shares of Common Stock are outstanding under
the Stock Option Plan.

Notwithstanding the foregoing, in connection with this offering, the Company
and certain of its executive officers, directors and stockholders, who will
own an aggregate of approximately 4,093,014 shares of Common Stock after this
offering and the Share Exchange, have agreed that, without the prior written
consent of Alex. Brown & Sons Incorporated on behalf of the Underwriters, they
will not offer, sell, sell short or otherwise dispose of any shares of Common
Stock or other capital stock of the Company, or any other securities
convertible, exchangeable or exercisable for Common Stock or derivatives of
Common Stock owned by such person or request the registration for the offer or
sale of any of the foregoing (or as to which such person has the right to
direct the disposition of) for a period of 180 days after the date of this
Prospectus, directly or indirectly. In its sole discretion and at any time
without notice, Alex. Brown & Sons Incorporated may release all or any portion
of the shares subject to lock-up agreements.

The holders of approximately 4,340,429 shares, after giving effect to the
Stock Conversion and the Share Exchange, will be entitled to certain
registration rights with respect to their shares. See "Description of Capital
Stock--Registration Rights."

68
<PAGE>

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives,
Alex. Brown & Sons Incorporated and UBS Securities LLC, have severally agreed
to purchase from the Company the following respective numbers of shares of
Common Stock at the initial public offering price less the underwriting
discounts and commissions set forth on the cover page of this Prospectus:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Alex. Brown & Sons Incorporated...................................
UBS Securities LLC................................................
---------
Total........................................................... 2,500,000
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all shares of the Common Stock offered hereby if any of such shares
are purchased.

The Company has been advised by the Representatives of the Underwriters that
the Underwriters propose to offer the shares of Common Stock to the public at
the public offering price set forth on the cover page of this Prospectus and
to certain dealers at such price less a concession not in excess of $ per
share. The Underwriters may allow, and such dealers may reallow, a concession
not in excess of $ per share to certain other dealers. After the initial
public offering, the offering price and other selling terms may be changed by
the Representatives of the Underwriters.

The Company has granted to the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to 375,000
additional shares of Common Stock at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the
same percentage thereof that the number of shares of Common Stock to be
purchased by it shown in the above table bears to 2,500,000, and the Company
will be obligated, pursuant to the option, to sell such shares to the
Underwriters. The Underwriters may exercise such option only to cover over-
allotments made in connection with the sale of the Common Stock offered
hereby. If purchased, the Underwriters will offer such additional shares on
the same terms as those on which the 2,500,000 shares are being offered.

Up to five percent of the shares of Common Stock offered hereby may be
reserved for sale to the Company's employees and certain other persons. Sales
of shares to such persons will be at the initial public offering price. The
number of shares available for sale to the general public may be reduced to
the extent such persons purchase such reserved shares. Any reserved shares not
so purchased will be offered by the Underwriters to the general public on the
same terms as the other shares offered hereby.

The Company has agreed to indemnify the Underwriters and certain controlling
persons against certain liabilities, including liabilities under the
Securities Act.

The Company and each of its directors and executive officers and certain of
its shareholders have agreed not to offer, sell or otherwise dispose of any
shares of Common Stock for a period of 180 days

69
<PAGE>

after the date of this Prospectus without the prior written consent of Alex.
Brown & Sons Incorporated, except that the Company may issue, and grant
options to purchase, shares of Common Stock under the Stock Option Plan, and
other currently outstanding options. See "Shares Eligible for Future Sale."

The Representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.

Prior to this offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price of the Common
Stock will be determined by negotiations between the Company and the
Representatives of the Underwriters. The material factors to be considered in
such negotiations are prevailing market conditions, the results of operations
of the Company in recent periods, the market capitalization and stages of
development of other companies which the Company and the Representatives of
the Underwriters believe to be comparable to the Company, estimates of the
business potential of the Company and the present stage of the Company's
development.

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Willkie Farr & Gallagher, New York, New York. Certain legal matters
relating to this offering will be passed upon for the Underwriters by Davis
Polk & Wardwell, New York, New York.

EXPERTS

The consolidated financial statements as of December 31, 1995 and for each
of the three years in the period ended December 31, 1995 of the Company, the
combined financial statements as of December 31, 1993 and April 15, 1994 and
for the year ended December 31, 1993 and for the three and one-half months
ended April 15, 1994 of Xomed, Inc. and the financial statements as of
December 31, 1994 and December 31, 1995 and for each of the two years in the
period ended December 31, 1995 of TreBay Medical Corporation included in this
Prospectus and Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as stated in their reports appearing herein and
elsewhere in the registration statement and have been so included in reliance
on their reports given on their authority as experts in accounting and
auditing.

ADDITIONAL INFORMATION

The Company has filed with the Commission under the Securities Act a
Registration Statement on Form S-1 with respect to the Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in
the Registration Statement in accordance with the rules and regulations of the
Commission. For further information pertaining to the Company and the Common
Stock offered hereby, reference is made to the Registration Statement,
including the exhibits thereto and the financial statements, notes and
schedules filed as a part hereof. Statements contained in this Prospectus as
to the contents of any contract or other document are not necessarily complete
and, in each instance, reference is made to the copy of such contract or
document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. The Registration
Statement may be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549
and at the Commission's Regional Offices in New York (Seven World Trade
Center, New York, New York 10007) and Chicago (Suite 1400, Citicorp Center,
500 West Madison Street, Chicago, Illinois 60611). Copies of such material can
be obtained from the public reference section of the Commission at prescribed
rates by writing to the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549. The Commission maintains a Web
site that contains reports and information statements and other materials that
are filed through the Commission's Electronic Data Gathering, Analysis, and
Retrieval System. The Web site can be accessed at http://www.sec.gov.

70
<PAGE>

The Company intends to distribute to its stockholders annual reports
containing audited financial statements and quarterly reports containing
unaudited interim financial information for the first three quarters of each
fiscal year of the Company.

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

Xomed(R), EndoScrub(R), NIM-2(R), NIM-2(R) XL, Laser-Shield II(R), MPS
2000(R), Redi-Bur (R) and Skeeter(R) are registered trademarks of the Company.
Wizard, Wizard Plus, Activent, Typhoon, Sharpsite, Lightstar, Digistar Plus,
XPS and Powerforma are trademarks of the Company. This Prospectus also
includes trademarks of companies other than the Company.

71
<PAGE>

INDEX TO FINANCIAL STATEMENTS

XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES

<TABLE>
<S> <C>
Report of Independent Auditors............................................. F-2
Consolidated Balance Sheets at December 31, 1995 and 1994, and June 29,
1996 (Unaudited) and July 1, 1995 (Unaudited)............................. F-4
Consolidated Statements of Operations for the Three Years Ended December
31, 1995 and the Six Months Ended June 29, 1996 (Unaudited) and July 1,
1995 (Unaudited).......................................................... F-5
Consolidated Statements of Changes in Shareholders' Equity for the Three
Years Ended December 31, 1995 and the Six Months Ended June 29, 1996 (Un-
audited) ................................................................. F-6
Consolidated Statements of Cash Flows for the Three Years Ended December
31, 1995 and the Six Months Ended June 29, 1996 (Unaudited) and July 1,
1995 (Unaudited).......................................................... F-8
Notes to Consolidated Financial Statements................................. F-9
</TABLE>

XOMED, INC.

<TABLE>
<S> <C>
Report of Independent Auditors............................................ F-26
Combined Balance Sheets at December 31, 1993 and April 15, 1994........... F-27
Combined Statements of Income and Retained Earnings for the Year Ended
December 31, 1993 and Three and One-Half Months Ended April 15, 1994..... F-28
Combined Statements of Cash Flows for the Year Ended December 31, 1993 and
the Three and
One-Half Months Ended April 15, 1994..................................... F-29
Notes to Combined Financial Statements.................................... F-30
</TABLE>

TREBAY MEDICAL CORPORATION

<TABLE>
<S> <C>
Report of Independent Auditors............................................ F-36
Balance Sheets at December 31, 1994 and 1995 and April 1, 1995 (Unaudited)
and March 30, 1996 (Unaudited)........................................... F-37
Statements of Operations for the Two Years Ended December 31, 1995 and the
Three Months Ended April 1, 1995 (Unaudited) and March 30, 1996 (Unau-
dited)................................................................... F-38
Statements of Shareholders' Equity for the Two Years Ended December 31,
1995 and the Three Months Ended March 30, 1996 (Unaudited)............... F-39
<CAPTION>
Statements of Cash Flows for the Two Years Ended December 31, 1995 and the
Three Months Ended April 1, 1995 (Unaudited) and March 30, 1996
(Unaudited).............................................................. F-40
<S> <C>
Notes to Financial Statements............................................. F-41
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT AUDITORS

Board of Directors
Xomed Surgical Products, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of Xomed
Surgical Products, Inc. and Subsidiaries (the Company) as of December 31, 1994
and 1995, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Xomed Surgical Products, Inc. and Subsidiaries at December 31, 1994 and
1995, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1995 in
conformity with generally accepted accounting principles.

Ernst & Young LLP

Jacksonville, Florida
June 19, 1996, except for the 4th paragraph of footnote No. 8 for which the
date is September 3, 1996

F-2
<PAGE>

[THIS PAGE INTENTIONALLY LEFT BLANK]

F-3
<PAGE>

XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31,
----------------
PRO FORMA
JULY 1, JUNE 29, JUNE 29,
1994 1995 1995 1996 1996
------- ------- ------- -------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents... $ 260 $ 417 $ 446 $ 521 $ 521
Accounts receivable, less
allowance for doubtful
accounts of $358 and $483
at December 31, 1994 and
1995, respectively......... 8,889 11,951 9,104 9,666 9,666
Other receivables........... 479 1,348 444 225 225
Inventories................. 12,529 11,994 11,104 14,412 14,412
Prepaid expenses............ 668 564 448 507 507
Income taxes receivable..... 442 274 -- -- --
Deferred income taxes....... 1,816 1,379 1,816 2,718 2,718
------- ------- ------- ------- -------
Total current assets......... 25,083 27,927 23,362 28,049 28,049
Investments.................. 1,199 861 861 531 531
Notes receivable from
officers.................... 332 332 332 -- --
Property, plant and
equipment, net.............. 13,854 15,355 14,541 16,383 16,383
Cost in excess of net assets
acquired, net............... 54,300 46,381 53,182 45,963 45,963
Other assets................. 952 2,068 659 3,999 3,999
Deferred income taxes........ -- 199 -- 1,229 1,229
------- ------- ------- ------- -------
Total assets................. $95,720 $93,123 $92,937 $96,154 $96,154
======= ======= ======= ======= =======
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Accounts payable............ $ 2,177 $ 5,841 $ 3,099 $ 4,616 $ 4,616
Accrued expenses............ 5,061 4,512 4,667 4,075 4,075
Accrued restructuring
costs...................... 1,740 695 578 3,061 3,061
Current portion long-term
debt and capital lease ob-
ligations.................. 3,361 4,645 4,611 5,236 136
------- ------- ------- ------- -------
Total current liabilities.... 12,339 15,693 12,955 16,988 11,888
Long-term debt and capital
lease obligations, less
current portion............. 36,106 32,719 31,980 30,322 12,209
Deferred income taxes........ 732 -- 732 749 749
Redeemable preferred stock:
Series C, nonvoting,
cumulative, $1.00 par
value, 600,000 shares
authorized, 299,459 shares
issued and outstanding
(aggregate liquidation
value of $30,619).......... 28,996 31,454 30,224 30,619 --
Redeemable convertible pre-
ferred stock:
Series A, convertible,
voting, cumulative, $1.00
par value; 1,200,000 shares
authorized, 744,652 shares
issued and outstanding
(aggregate liquidation
value of $7,241)........... 3,632 3,841 3,736 7,241 --
Series B, convertible,
nonvoting, cumulative,
$1.00 par value; 3,500,000
shares authorized,
2,127,838 shares issued and
outstanding (aggregate
liquidation value of
$20,690)................... 21,251 22,474 21,863 20,690 --
Shareholders' equity
(deficit):
Common stock:
Common Stock, voting, $.01
par value; 30,000,000
shares authorized, 679,270
shares issued and
outstanding............... 6 6 6 7 70
Common Stock, non-voting,
$.01 par value; 4,000,000
shares authorized, 426,777
shares issued and
outstanding............... 4 4 4 4 --
Accumulated deficit......... (6,997) (12,719) (8,214) (10,391) (10,391)
Shareholders' notes receiv-
able....................... (349) (349) (349) (187) (187)
Additional paid-in capital.. -- -- -- 112 81,816
------- ------- ------- ------- -------
Total shareholders' equity
(deficit)................... (7,336) (13,058) (8,553) (10,455) 71,308
------- ------- ------- ------- -------
Total liabilities and
shareholders' equity........ $95,720 $93,123 $92,937 $96,154 $96,154
======= ======= ======= ======= =======
</TABLE>

See accompanying notes.

F-4
<PAGE>

XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31, SIX MONTHS ENDED
------------------------- -----------------
JULY 1, JUNE 29,
1993 1994 1995 1995 1996
------- ------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales, net....................... $10,071 $42,475 $59,865 $29,424 $ 32,942
Cost of sales.................... 2,876 19,233 23,175 11,605 12,690
------- ------- ------- ------- --------
Gross profit..................... 7,195 23,242 36,690 17,819 20,252
Operating expenses:
Selling, general and adminis-
trative....................... 6,074 19,126 27,077 12,440 14,129
Research and development....... 311 1,958 2,405 1,158 1,719
Amortization of intangibles.... 394 2,652 2,579 1,224 1,168
Write-off of acquired research
and development............... -- -- -- -- 2,380
Restructuring charges.......... -- -- -- -- 3,093
------- ------- ------- ------- --------
Total operating expenses......... 6,779 23,736 32,061 14,822 22,489
------- ------- ------- ------- --------
Operating income (loss) from
continuing operations........... 416 (494) 4,629 2,997 (2,237)
Interest expense................. (102) (2,148) (3,063) (1,579) (1,536)
Other income (expense), net...... 26 313 114 (136) 64
------- ------- ------- ------- --------
Income (loss) from continuing
operations before income tax
expense (benefit)............... 340 (2,329) 1,680 1,282 (3,709)
Income tax expense (benefit)..... 121 (774) 1,355 855 (536)
------- ------- ------- ------- --------
Income (loss) from continuing
operations...................... 219 (1,555) 325 427 (3,173)
Discontinued operations:
Income from operations of dis-
continued surgical drapes seg-
ment (less applicable income
tax expense of $309, $203 and
$197 for the period ended De-
cember 31, 1994, 1995 and July
1, 1995, respectively)........ -- 463 306 295 --
Loss on disposal of surgical
drapes segment (less applica-
ble income tax benefit of -- -- (2,485) -- --
$1,386)....................... ------- ------- ------- ------- --------
Net income (loss)................ $ 219 $(1,092) $(1,854) $ 722 $ (3,173)
======= ======= ======= ======= ========
Pro forma:
Income (loss) from continuing
operations.................... $ (149) $ (3,249)
Preferred stock dividends...... -- 538
------- --------
Income (loss) from continuing
operations available to common
shareholders.................. (149) (3,787)
Interest expense, net of taxes. 1,300 581
------- --------
Supplementary income (loss) $ 1,151 $ (3,206)
from continuing operations.... ======= ========
Pro forma per share:
Income (loss) from continuing
operations available to common $ (.03) $ (.82)
shareholders.................. ======= ========
Supplementary income (loss)
from continuing operations
available to common $ .16 $ (.45)
shareholders.................. ======= ========
Pro forma weighted average common 4,632 4,635
shares outstanding.............. ======= ========
Supplementary pro forma weighted
average common shares 7,132 7,135
outstanding..................... ======= ========
</TABLE>
See accompanying notes.

F-5
<PAGE>

XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
<S> <C>
Balance at December 31, 1992...................................................
Net income.....................................................................
Stock options exercised........................................................
Accretion of cumulative preferred stock dividends..............................
Balance at December 31, 1993...................................................
Acquisition of Merocel, April 15, 1994:
Forgiveness of accretion of cumulative preferred stock dividends..............
Exchange of outstanding shares................................................
Issuance of shares............................................................
Net loss.......................................................................
Stock repurchase, August 1994..................................................
Stock sale.....................................................................
Dividends paid, August 1994....................................................
Accretion of cumulative preferred stock dividends..............................
Shareholders' notes receivable.................................................
Balance at December 31, 1994...................................................
Net loss.......................................................................
Stock options exercised........................................................
Accretion of cumulative preferred stock dividends..............................
Balance at December 31, 1995...................................................
Unaudited:
Net loss......................................................................
Accretion of cumulative preferred stock dividends.............................
Forgiveness of cumulative preferred stock dividends...........................
Stock options exercised.......................................................
Shareholders stock returned...................................................
Acquisition of TreBay Medical.................................................
Balance at June 29, 1996.......................................................
</TABLE>

See accompanying notes.

F-6
<PAGE>

XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
NON-VOTING
COMMON STOCK COMMON STOCK SHAREHOLDERS' ADDITIONAL PREDECESSOR
- ----------------- -------------- ACCUMULATED NOTE PAID-IN BASIS
SHARES AMOUNT SHARES AMOUNT DEFICIT RECEIVABLE CAPITAL ADJUSTMENT TOTAL
- -------- ------ ------- ------ ----------- ------------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
290,355 $ 3 -- $-- $(1,180) $ -- $287 $(1,677) $ (2,567)
-- -- -- -- 219 -- -- -- 219
1,375 -- -- -- -- -- 1 -- 1
-- -- -- -- (757) -- -- -- (757)
- -------- --- ------- ---- -------- ----- ---- ------- --------
291,730 3 -- -- (1,718) -- 288 (1,677) (3,104)
-- -- -- -- 2,270 -- -- -- 2,270
(291,730) (3) -- -- (3,653) -- (288) 1,677 (2,267)
574,471 6 426,777 4 -- -- -- -- 10
-- -- -- -- (1,092) -- -- -- (1,092)
(1,351) -- -- -- -- -- -- -- --
-- -- -- -- -- -- -- -- --
-- -- -- -- (105) -- -- -- (105)
-- -- -- -- (2,699) -- -- -- (2,699)
-- -- -- -- -- (349) -- -- (349)
- -------- --- ------- ---- -------- ----- ---- ------- --------
573,120 6 426,777 4 (6,997) (349) -- -- (7,336)
-- -- -- -- (1,854) -- -- -- (1,854)
19,000 -- -- -- -- -- 22 -- 22
-- -- -- -- (3,868) -- (22) -- (3,890)
- -------- --- ------- ---- -------- ----- ---- ------- --------
592,120 6 426,777 4 (12,719) (349) -- -- (13,058)
-- -- -- -- (3,173) -- -- -- (3,173)
-- -- -- -- (2,058) -- -- -- (2,058)
-- -- -- -- 7,559 -- -- -- 7,559
87,150 1 -- -- -- -- 112 -- 113
-- -- -- -- -- 162 -- -- 162
-- -- -- -- -- -- -- -- --
- -------- --- ------- ---- -------- ----- ---- ------- --------
679,270 $ 7 426,777 $ 4 $(10,391) $(187) $112 $ -- $(10,455)
======== === ======= ==== ======== ===== ==== ======= ========
</TABLE>

F-7
<PAGE>

XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED
-------------------------- -----------------
JULY 1, JUNE 29,
1993 1994 1995 1995 1996
------ -------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)............... $ 219 $ (1,092) $ (1,854) $ 722 $ (3,173)
Adjustments to reconcile net
income (loss) to net cash
provided by
operating activities:
Depreciation................... 349 1,549 2,038 1,014 1,209
Amortization of intangibles.... 394 2,825 2,702 1,346 1,168
Loss on disposal of property
and equipment................. -- 742 4,963 -- --
Write-off of acquired research
and development............... -- -- -- -- 2,380
Changes in operating assets
and liabilities net of
effects of
purchased business
(Increase) decrease in
accounts and other
receivables, net............ (587) (1,038) (3,228) (180) 3,545
(Increase) decrease in
inventories, net............ (62) 3,786 535 1,425 (1,990)
Decrease (increase) in
deferred income taxes....... 49 628 (494) -- (2,711)
(Increase) decrease in other
assets...................... (88) (538) 130 732 315
Increase (decrease) in
accounts payable and accrued
expenses.................... 298 2,442 2,510 528 (1,736)
(Decrease) increase in
accrued restructuring -- (5,315) (1,045) (1,162) 2,366
costs....................... ------ -------- -------- ------- --------
Net cash provided by operating
activities..................... 572 3,989 6,257 4,425 1,373
INVESTING ACTIVITIES
Purchases of property and equip-
ment........................... (448) (2,183) (2,969) (1,701) (1,668)
Loans to officers............... -- (332) -- -- --
Proceeds from certificates of
deposit........................ -- -- 338 338 330
Purchase of other assets........ -- -- (1,388) -- (32)
Other........................... -- -- -- (166)
Purchases of businesses......... (155) (80,873) -- -- 2,000
------ -------- -------- ------- --------
Net cash (used in) provided by
investing activities........... (603) (83,388) (4,019) (1,363) 464
FINANCING ACTIVITIES
Proceeds from issuance of debt.. -- 45,919 -- -- --
Proceeds from revolving line of
credit......................... 600 9,275 28,810 11,611 14,706
Payments on revolving line of
credit......................... (117) (15,692) (24,986) (11,708) (13,725)
Payments on term notes payable.. -- (2,684) (5,732) (2,500) (2,771)
Payments on capital lease obli-
gation......................... -- (117) (195) (279) (56)
Issuance of stock............... 1 43,503 22 -- 113
Repurchases of redeemable pre- -- (1,870) -- -- --
ferred stock................... ------ -------- -------- ------- --------
Net cash provided by (used in) 484 78,334 (2,081) (2,876) (1,733)
financing activities........... ------ -------- -------- ------- --------
Net increase (decrease) in cash
and cash equivalents........... 453 (1,065) 157 186 104
Cash and cash equivalents at be- 872 1,325 260 260 417
ginning of period.............. ------ -------- -------- ------- --------
Cash and cash equivalents at end $1,325 $ 260 $ 417 $ 446 $ 521
of period...................... ====== ======== ======== ======= ========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid during the period
for:
Interest....................... $ 102 $ 2,205 $ 3,118 $ 1,681 $ 1,172
====== ======== ======== ======= ========
Taxes.......................... $ 161 $ 428 $ 228 $ -- $ --
====== ======== ======== ======= ========
Increase in preferred stock
attributable to accretion of
cumulative
preferred stock dividends:
Series A....................... $ 699 $ 143 $ 209 $ 104 $ 52
Series B....................... -- 866 1,223 614 306
Series C....................... -- 143 2,458 1,228 614
------ -------- -------- ------- --------
$ 699 $ 1,152 $ 3,890 $ 1,946 $ 972
====== ======== ======== ======= ========
Non-Cash financing and investing
activities
Note receivable accepted in ex-
change for surgical drapes
segment -- -- $ 1,125 -- --
assets........................ ====== ======== ======== ======= ========
Purchase of business with pre-
ferred stock, net of cash re- -- -- -- -- $ 4,583
ceived........................ ====== ======== ======== ======= ========
</TABLE>

See accompanying notes.

F-8
<PAGE>

XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

DECEMBER 31, 1995

1. ORGANIZATION

Xomed Surgical Products, Inc. (the Company), a Delaware corporation was
organized on April 5, 1994 for the purpose of acquiring on April 15, 1994, all
of the outstanding stock of Xomed-Treace, Inc. and Xomed-Treace, P.R. Inc.
(collectively Xomed-Treace) and Merocel Corporation (Merocel). The Company had
no operations or material assets prior to this transaction. As the owners of
the Company were also owners of Merocel, these transactions have been
accounted for as if Xomed-Treace were acquired by Merocel. Therefore, the
assets and liabilities of Merocel were not revalued and are presented in the
accompanying balance sheet at historical cost. All operating results and
changes in shareholders' equity as reported for the periods prior to April 15,
1994 represent those of Merocel.

The acquisition of Xomed-Treace has been accounted for under the purchase
method of accounting. Accordingly, the purchase price of approximately $81,000
was allocated to the individual assets acquired and liabilities assumed of
Xomed-Treace based upon their respective fair values at the date of
acquisition. The transaction resulted in cost in excess of net assets acquired
of $55,988. The acquisition was funded primarily through the issuance of
preferred stock ($43,502) and proceeds from long-term debt.

Xomed is a leading developer, manufacturer and marketer of a broad line of
surgical products for use by ear, nose and throat (ENT) specialists. The
Company's broad line of products, includes in its core ENT market, powered
tissue-removal systems and other microendoscopy instruments, implantable
devices, nerve monitoring systems and disposable fluid-control products. The
Company also offers a line of ophthalmic and other products.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements of the Company includes the accounts
of Merocel and subsidiary and Xomed-Treace and subsidiaries. Significant
intercompany transactions and balances between entities have been eliminated.

Basis of Presentation--Unaudited Interim Financial Statements

The accompanying unaudited financial statements as of July 1, 1995 and June
29, 1996 have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the six
months ended June 29, 1996 is not necessarily indicative of the results that
may be expected for the year ended December 31, 1996.

Cash and Cash Equivalents

The Company considers all highly liquid short-term investments with original
maturities of three months or less when purchased to be cash equivalents.

F-9
<PAGE>

XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

DECEMBER 31, 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Inventory Valuation

Inventories are generally stated at average cost on a first-in, first-out
valuation basis not in excess of market. Market for raw materials is based on
replacement costs and for work-in-process and finished goods on net realizable
value.

Investments

Investments consist of certificates of deposit with maturities ranging from
one to three years and are stated at cost which approximates market value.
These certificates of deposit were purchased in connection with a tax
exemption grant from the government of Puerto Rico, for a period not to exceed
five years.

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Expenditures for
maintenance and repairs are charged to income as incurred. Additions,
improvements and major replacements are capitalized. The costs and accumulated
depreciation related to assets sold or retired are removed from the accounts
and any gain or loss is credited or charged to income. Depreciation is
computed using the straight-line method based on the estimated useful lives of
the related asset categories as follows--building and building improvements 27
to 35 years and machinery and equipment 3 to 15 years.

Income Taxes

The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standard No. 109, "Accounting for Income Taxes", which
requires the use of the liability method of accounting for deferred income
taxes.

Revenue Recognition

The Company recognizes revenue when inventory is shipped to the customer.

Research and Development

Expenditures related to research and development of new products and
processes, including research related to product alternatives, are expensed as
incurred.

Translation Adjustments

The remeasurement gains and losses of foreign currencies related to foreign
operations are included in income (loss) from operations and totaled $50,000
(loss) and $67,000 (gain) for the years ended December 31, 1994 and 1995,
respectively. There were no foreign operations in 1993.

F-10
<PAGE>

XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

DECEMBER 31, 1995

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

New Accounting Pronouncements

In March 1995, the FASB issued Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
which requires impairment losses to be recorded on identifiable long-lived
assets used in operations and related goodwill when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. If an asset is determined to
be impaired, a loss is to be recorded based upon the difference between fair
value of the asset and its carrying value. Fair value is to be estimated based
on estimated selling prices or discounted future cash flows. Statement No. 121
also addresses the accounting for the expected disposition of long-lived
assets.

The FASB also issued Statement No. 123, Accounting for Stock-Based
Compensation, which provides an alternative for income statement recognition
of costs associated with stock-based employee compensation plans and requires
expanded disclosures with respect to such plans.

The Company will adopt Statement No. 121 and the disclosure requirements of
No. 123 in 1996 and, based on current information, does not believe the effect
of adoption will be material to the financial position or results of
operations of the Company.

3. DISCONTINUED OPERATIONS

During mid 1995, the Company approved a plan to dispose of and finalized an
agreement for the disposal of all operating assets, inventory, patents and
license agreements of its surgical drapes segment in exchange for cash, notes
receivable, inventory and fixed assets related to several otology product
lines of a nonrelated entity. Management decided the surgical drapes were not
part of the Company's core business and disposed of this product line in
exchange for the head and neck product line of another entity which is more
compatible with the Company's other products. There was no intent to dispose
of the surgical drapes segment at the time of the Xomed-Treace acquisition.
The operating results of the otology product lines were not significant to the
Company's overall results of operations during 1995.

Certain financial information related to the surgical drapes product line,
which was acquired from Xomed-Treace on April 15, 1994, is as follows:
<TABLE>
<CAPTION>
SIX
YEAR ENDED MONTHS
DECEMBER 31, ENDED
------------------ JULY 1,
1993 1994 1995 1995
---- ------ ------ -------
<S> <C> <C> <C> <C>
Sales................................................ $-- $5,586 $5,385 $3,699
==== ====== ====== ======
Pre-tax income....................................... $-- $ 772 $ 509 $ 493
==== ====== ====== ======
Income tax expense................................... $-- $ 309 $ 203 $ 198
==== ====== ====== ======
Net income........................................... $-- $ 463 $ 306 $ 295
==== ====== ====== ======
</TABLE>

F-11
<PAGE>

XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

DECEMBER 31, 1995
3. DISCONTINUED OPERATIONS (CONTINUED)

The surgical drapes business accounts consisted principally of inventory,
fixed assets and related goodwill aggregating approximately $7,100 on the date
of disposition. Interest expense attributed to the drapes business was $79 and
$56 for 1994 and 1995, respectively. The Company realized a net loss of
$2,485, after income tax benefits of $1,386, on this transaction and has
restated its financial statements for the discontinued operations. The loss on
disposal was computed as the difference between the carrying value of the
surgical drapes segment assets disposed of and the estimated fair value of the
assets received related to the otology product lines. There were no
significant intangibles such as customer lists or patents acquired in
connection with the otology product lines, nor was any work force transferred.
The components of the loss on disposal are as follows:

<TABLE>
<S> <C>
Cash and notes receivable acquired................................ $ 2,250
Less: Transaction fees............................................ (316)
Goodwill related to the surgical drapes segment................. (5,805)
-------
Pre-tax loss...................................................... 3,871
Tax benefit....................................................... (1,386)
-------
Net loss on disposition........................................... $ 2,485
=======
</TABLE>

The inventory and fixed assets of the otology product lines acquired were
recorded at fair values of $1,170 and $154, respectively, which approximated
the aggregate carrying value of assets disposed of related to the surgical
drapes business.

Included in other receivables and other assets at December 31, 1995 are
notes receivable of approximately $1,000 and $750, respectively, related to
this transaction. As part of the transaction both parties agreed to
manufacture their existing products through the end of 1995 and supply those
products to the other party at cost. As a result of this agreement, amounts
totaling $1,704 and $1,564 are included in trade receivables and accounts
payable, respectively, at December 31, 1995.

4. INVENTORIES

Inventories are summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31, JUNE
--------------- JULY 1, 29,
1994 1995 1995 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Finished goods................................. $ 6,581 $ 6,695 $ 5,881 $ 7,519
Work in process................................ 1,675 1,572 2,219 1,867
Raw materials and packaging.................... 4,273 3,727 3,004 5,026
------- ------- ------- -------
$12,529 $11,994 $11,104 $14,412
======= ======= ======= =======
</TABLE>

F-12
<PAGE>

XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

DECEMBER 31, 1995

5. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment, at cost, less allowances for depreciation, is
as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1994 1995
------- -------
<S> <C> <C>
Land and land improvements.............................. $ 1,413 $ 1,413
Building and building improvements...................... 5,525 6,061
Machinery and equipment................................. 8,026 10,625
------- -------
14,964 18,099
Allowances for depreciation............................. (2,315) (4,353)
------- -------
12,649 13,746
Capital projects in process............................. 1,205 1,609
------- -------
$13,854 $15,355
======= =======
</TABLE>

Depreciation expense, including expense on assets under capital lease
obligations, is approximately $349, $1,549 and $2,038 for the years ended
December 31, 1993, 1994 and 1995, respectively.

6. COST IN EXCESS OF NET ASSETS ACQUIRED

The cost in excess of net assets acquired relates to goodwill in the
acquisition of Xomed-Treace, which is being amortized over 25 years on the
straight line basis and is summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1994 1995
------- -------
<S> <C> <C>
Cost in excess of net assets acquired at purchase
date................................................. $55,988 $55,988
Other/purchase price adjustments...................... (105) (105)
Surgical drape product line disposition............... -- (5,805)
Amortization.......................................... (1,583) (3,697)
------- -------
Cost in excess of net assets acquired at end of peri-
od................................................... $54,300 $46,381
======= =======
</TABLE>

The recoverability of goodwill is periodically assessed by the Company at
the product line level. Cash flows and profitability of each product line as
well as changes in the operations of businesses acquired are reviewed to
determine if impairment exists. If this review indicates that goodwill will
not be recoverable, the Company's carrying value of the goodwill is reduced by
the estimated shortfall of cash flows.

The $5,805 reduction of goodwill ($6,100 at purchase date) relates to the
disposal of the surgical drapes segment in July 1995 and is included in loss
on disposal of discontinued operations.

7. ACCRUED RESTRUCTURING COSTS

Incident to the acquisition of Xomed-Treace, the Company initiated a plan to
restructure certain of its operations and established a reserve of $3,258 as
part of the cost of the acquired business associated primarily with closing a
plant facility and significantly reducing the Company's work force. The
preacquisition contingencies were included as part of the cost of the acquired
business pursuant to SFAS 38. Included in accrued restructuring costs of
$1,740 and $695 at December 31, 1994 and 1995, respectively, are the remaining
estimated costs associated with closing a plant facility and significantly
reducing the Company's work force.

F-13
<PAGE>

XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

DECEMBER 31, 1995
8. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

The Company was obligated under long-term debt and capital lease obligations
as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1994 1995
------- -----------
<S> <C> <C> <C>
Term notes payable to financial institutions in
quarterly principal installments ranging from $975
to $1,775 through April 15, 1999, plus interest
payable quarterly (interest at LIBOR (5.71875% at
December 31, 1995) plus 2.25% or lender's base
rate plus 1%)..................................... $31,750 $25,985
Revolving line-of-credit agreement with interest
payable quarterly and all outstanding principal
due April 15, 1999 (interest at LIBOR (5.71875% at
December 31, 1995) plus 2.25% or lender's base
rate plus 1%)..................................... 6,942 10,765
Note payable under capital lease obligation to ven-
dor in quarterly principal and interest install-
ments of $38 through October 1, 1998. The Note
carries interest at 10.8% and is collateralized by
equipment with a net book value of $592 at Decem-
ber 31, 1995. Total future interest payments are
$93............................................... 775 614
------- -------
39,467 37,364
Less current portion............................... 3,361 4,645
------- -------
$36,106 $32,719
======= =======
</TABLE>

Annual maturities of long-term debt and the capital lease obligations
outstanding at December 31, 1995 are as follows:

<TABLE>
<CAPTION>
REVOLVING
LINE-OF- TERM NOTES CAPITAL LEASE
YEAR ENDING DECEMBER 31, CREDIT PAYABLE OBLIGATIONS TOTAL
------------------------ --------- ---------- ------------- -------
<S> <C> <C> <C> <C>
1996................................ $ -- $ 4,500 $145 $ 4,645
1997................................ -- 6,100 136 6,236
1998................................ -- 7,100 333 7,433
1999................................ 10,765 8,285 -- 19,050
-------- -------- ---- -------
$ 10,765 $ 25,985 $614 $37,364
======== ======== ==== =======
</TABLE>

Commencing March 31, 1995, the Company was required to make additional
principal payments on the term notes payable based on excess cash flow, if
any, from the preceding year. Also, the Company is required to pay at least
50% of the proceeds from any sale of capital stock or other securities (net of
any fees, commissions or expenses incurred in the sale of such securities),
which are required to be registered under the Securities Act of 1933, toward
the outstanding principal on the term notes at the time of such sale.

During 1995, the Company was required to make an additional principal
payment of $1,440 based on excess cash flow. Also, the Company was required to
make an additional principal payment of $1,125 based on the proceeds from the
disposal of the surgical drapes segment.

F-14
<PAGE>

XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

DECEMBER 31, 1995

8. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (CONTINUED)

Under the terms of the revolving line-of-credit, the Company may borrow up
to a maximum capacity of $14,000 to be used for working capital and operating
needs. The amount available to the Company at any given time is based upon
various percentages of the Company's outstanding inventories and accounts
receivable as determined periodically throughout the year (borrowing base).
Any principal amounts outstanding on the line-of-credit in excess of the
borrowing base must be repaid by the Company. In any event, all outstanding
principal on the line-of-credit is due and payable on April 15, 1999.
Management expects that the borrowing base will remain at a sufficient level
for the next 12 months such that no payment on the line-of-credit will be
required. Accordingly, the line-of-credit outstanding at December 31, 1995 is
classified as long-term. The Company pays a quarterly commitment fee equal to
0.5% per annum on the average daily unused balance on the line-of-credit
during the preceding calendar quarter from April 15, 1994 through April 15,
1999.

The Company was not in compliance as of December 31, 1995 or March 30, 1996
with a financial covenant of the term notes and the revolving line-of-credit
that requires the consolidated shareholders equity of the Company at the end
of each fiscal quarter to be not less than $47 million plus 50% of the
Company's annual net income on a cumulative basis. Waivers were obtained for
this noncompliance, which resulted primarily from the write-off of goodwill in
connection with the sale of the Company's surgical drape segment. The
acquisition of TreBay Medical Corporation (Trebay) in the second quarter of
1996 increased the Company's shareholders equity and brought the Company into
compliance with this covenant. In addition, as of June 29, 1996, the Company
was not in compliance with financial covenants under the term notes and the
revolving line-of-credit that require the Company, for any consecutive four
quarter period, to maintain a ratio of operating cash flow to financial
obligations of not less than 1.25 to 1.0 and a ratio of earnings before
interest and taxes to interest expense of not less than 3.5 to 1.0. This
noncompliance, for which the Company obtained waivers on September 3, 1996,
resulted primarily from (i) the $3.1 million charge associated with the
restructuring actions taken by the Company in the second quarter of 1996; and
(ii) the $2.4 million charge in the second quarter of 1996 for costs allocated
to in-process research and development in connection with the acquisition of
TreBay. In conjunction with the September 3, 1996 waivers, the Company
obtained amendments to the two financial covenants that, among other things,
offset the effect of the foregoing charges and made the covenants less
rigorous for the four quarter period ending September 28, 1996. The Company
currently anticipates that it will be in compliance with the amended financial
covenants in the future, although there can be no assurance of such future
compliance. The revolving line of credit and term notes payable have been
classified as long term or short term in accordance with their scheduled
payment terms.

Both the term notes and line-of-credit are collateralized by all assets of
the Company except for those collateralized under the capital lease
obligations. The debt agreements have restrictions regarding payment of
dividends, incurrence of additional debt and require compliance with various
financial covenants.

9. SHAREHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK

On April 15, 1994, the Company issued 574,471 shares of Common Stock;
426,777 shares of Non-Voting Common Stock; 340,454 shares of Series A
Convertible Preferred Stock; 2,127,838 shares of Series

F-15
<PAGE>

XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

DECEMBER 31, 1995

9. SHAREHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK (CONTINUED)

B Convertible Preferred Stock; and 289,853 shares of Series C Redeemable
Preferred Stock in exchange for the outstanding stock of Merocel and the
acquisition of Xomed, except that cash equal to the redemption value of
$100.00 per share was received for 198,561 shares of the Series C Redeemable
Preferred Stock. The acquisition of Merocel was accounted for under the
historical cost basis due to the common ownership between the Company and
Merocel, and the acquisition of Xomed-Treace was accounted for under the
purchase method of accounting.

The following securities were issued by the Company in connection with
raising the funds necessary to complete the acquisition of Xomed-Treace:

<TABLE>
<CAPTION>
CASH VALUE NUMBER OF
DESCRIPTION PER SHARE SHARES VALUE
----------- ---------- --------- -----------
<S> <C> <C> <C>
Redeemable Preferred
Stock Series C.......................... $100 198,561 $19,856,100
Series A and B Convertible $23,646,237
Preferred Stock......................... $9.58 2,468,292 -----------
$43,502,337
===========
</TABLE>

The shares were valued based upon cash proceeds received by individual stock
issue, which the Company believes is representative of fair market value. The
$81.0 million purchase price for Xomed-Treace was funded through the issuance
of the above preferred shares and bank borrowings.

As a result of the acquisition of Merocel and Xomed-Treace at April 15,
1994, the accumulated deficit includes $3,653 which consists primarily of the
predecessor basis adjustment related to the original acquisition of Merocel,
the excess of the carrying value of the stock issued over the net assets
received in the acquisition of Merocel and the retained deficit of Xomed-
Treace.

In August 1994, the Company repurchased 18,698 shares of its outstanding
Series C Redeemable Preferred Stock, which were originally issued at April 15,
1994, from holders of the stock. The stock was repurchased at a price of
$1,870 which represented the amount originally paid by the shareholders for
the stock. The repurchase was the result of the partial refund of the purchase
price by the seller for Xomed (see Note 1). In addition, cash dividends of
$105 were paid in August 1994 to the remaining holders of the Series C
Redeemable Preferred Stock, also from the proceeds of the partial refund of
the Xomed purchase price.

Also in August 1994, the Company issued 23,761 shares of its Series A
Convertible Preferred Stock and 1,908 shares of its Series C Redeemable
Preferred Stock to certain officers and members of management (purchasers) of
the Company. The Series A Convertible Preferred Stock was issued at $9.58 per
share (equal to its redemption value) for a total price of approximately $227.
The Series C Redeemable Preferred Stock was issued at $100.00 per share (equal
to its redemption value) for a total price of approximately $191. Of the total
purchase price for all shares issued of $418, the Company has received $69 in
cash and the remaining $349 of notes receivable have been reflected as a
component of shareholders' equity in the accompanying balance sheets (see Note
13).

F-16
<PAGE>

XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

DECEMBER 31, 1995

9. SHAREHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK (CONTINUED)

During the year ended December 31, 1995, the Company issued 19,000 of Common
Stock under the employee stock incentive plan. The stock was issued at option
prices of between $1.00 to $2.00 per share and resulted in $22 of additional
paid-in capital (see Note 11).

Common Stock

Each share of Common Stock and Non-Voting Common Stock (collectively Common
Equity) entitles its holder to receive dividends as declared by the Company's
Board of Directors, subject to the preferences and other rights of the Series
A, Series B and Series C Redeemable Preferred Stock. Each share of Non-Voting
Common Stock is convertible into one share of Common Stock at the election of
the shareholder.

Subsequent to year end, the Company amended and restated its Restated
Certificate of Incorporation to, among other things, (i) change the
designation of its Class A Common Stock to "Common Stock," (ii) change the
designation of its Class B Common Stock to "Non-Voting Common Stock," (iii)
increase the number of authorized shares of Common Stock to 30,000,000 and
(iv) authorize a class of undesignated Preferred Stock, par value $.01 per
share.

Redeemable Preferred Stock

Each share of Series A and Series B Convertible Preferred Stock
(collectively Convertible Preferred Stock) entitles its holder to receive an
annual cumulative cash dividend at the rate of six percent per annum, payable
on a quarterly basis. At the election of the Board of Directors, dividends may
be paid in shares of Series A or Series B Convertible Preferred Stock,
respectively, in lieu of cash. Dividends are cumulative and must be paid prior
to any dividends being paid on the Common Equity. The Company at its option,
with the majority consent of the holders of the Convertible Preferred Stock,
may redeem any or all of the outstanding shares of the Convertible Preferred
Stock at a price of $9.58 per share, plus accrued dividends. At December 31,
1995, dividends in arrears on the Series A and Series B Convertible Preferred
Stock were $352 ($0.97 per share) and $2,089 ($0.98 per share), respectively
(see Note 17). The Series A Convertible Preferred Stock is voting along with
the Common Equity on an as converted basis, whereas the Series B has no voting
rights.

In any event, all outstanding shares of the Convertible Preferred Stock at
April 15, 2001 are required to be redeemed on that date by the Company at
$9.58 per share, plus accrued dividends. Each share of Convertible Preferred
Stock, at the election of the holder, may be converted for one share of like
Common Equity (the conversion rate being subject to adjustment from time-to-
time). All shares of Convertible
Preferred Stock will be automatically converted into shares of Common Equity
at the conversion rate in effect upon the closing of an underwritten public
offering made pursuant to an effective registration statement under the
Securities Act of 1933.

Each share of Series C Redeemable Preferred Stock (Series C Preferred Stock)
entitles its holder to receive an annual cumulative cash dividend at the rate
of nine percent per annum, payable on a quarterly basis. At the election of
the Board of Directors, dividends may be paid in shares of Series C Preferred
Stock in lieu of cash. Dividends are cumulative and must be paid prior to any
dividends being paid on the Common Equity. The Company at its option, with the
majority consent of the holders of the Series C

F-17
<PAGE>

XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

DECEMBER 31, 1995

9. SHAREHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK (CONTINUED)

Preferred Stock, may redeem any or all of the outstanding shares of the Series
C Preferred Stock at a price of $100.00 per share, plus accrued dividends. At
December 31, 1995, dividends in arrears on Series C Preferred Stock were
$4,148 ($15.19 per share, see Note 17).

In any event, all outstanding shares of the Series C Preferred Stock at
April 15, 2001 are required to be redeemed on that date by the Company at
$100.00 per share, plus accrued dividends.

The following table presents changes in redeemable preferred stock (dollars
in thousands):

<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
---------------- ------------------- -----------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------- ------- --------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1992................... 68,900 $ 8,268 8,498 $ 985 -- --
Accretion of dividends.. -- 689 -- 68 -- --
------- ------- --------- -------- ------- --------
Balance at December 31,
1993................... 68,900 8,957 8,498 1,053 -- --
Acquisition of Merocel
and Xomed-Treace, April
15, 1994:
Forgiveness of
accretion of
dividends............. -- (2,067) -- (203) -- --
Exchange of shares
outstanding........... (68,900) (6,890) (8,498) (850) -- --
Issuance of shares..... 340,454 3,262 2,127,838 20,385 289,853 28,985
Repurchase of preferred
stock.................. -- -- -- -- (18,698) (1,870)
Issuance of preferred
stock.................. 23,761 227 -- -- 1,908 191
Accretion of dividends.. -- 143 -- 866 -- 1,690
------- ------- --------- -------- ------- --------
Balance at December 31,
1994................... 364,215 3,632 2,127,838 21,251 273,063 28,996
Accretion of dividends.. -- 209 -- 1,223 -- 2,458
------- ------- --------- -------- ------- --------
Balance at December 31,
1995................... 364,215 3,841 2,127,838 22,474 273,063 31,454
Accretion of dividends. -- 159 -- 611 -- 1,287
Forgiveness of
dividends............. -- (404) -- (2,395) -- (4,761)
Shareholders stock
returned.............. (9,563) (91) -- -- (2,074) (208)
Issuance of shares in
acquisition of TreBay
Medical .............. 390,000 3,736 -- -- 28,470 2,847
------- ------- --------- -------- ------- --------
Balance at June 29,
1996................... 744,652 $ 7,241 2,127,838 $ 20,690 299,459 $ 30,619
======= ======= ========= ======== ======= ========
</TABLE>

10. RETIREMENT BENEFITS

Retirement benefits are provided to all eligible employees through the
participation in defined contribution plans maintained by the Company which
comply with the provisions of Section 401(k) of the Internal Revenue Code (the
"Savings Plans"). The provisions of the Savings Plans differ with respect to
employee contributions, employer matching percentages and profit sharing
depending on the country in which the employees work. Expense recorded by the
Company for the various plans for the years ended December 31, 1993, 1994 and
1995 was approximately $401, $295 and $520, respectively.

F-18
<PAGE>

XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

DECEMBER 31, 1995

11. EMPLOYEE STOCK INCENTIVES

The Company has reserved an aggregate of 415,000 shares of its Common Stock
(see Note 9) for grant or sale to key employees of the Company. These shares
may be issued in such amounts and in such a manner (including stock options,
restricted stock grants, stock bonuses, or other stock incentive programs) as
determined by the Company's Board of Directors from time-to-time. The options
are granted at exercise prices equal to the fair market value of common stock
on the date of grant. The following table summarizes option activity which may
be exercised at various dates through January 2000:

<TABLE>
<CAPTION>
JUNE 29,
1993 1994 1995 1996
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Options outstanding beginning
of the period................ 91,950 132,850 257,100 251,350
Options granted............... 45,900 131,000 8,000 361,666
Options exercised............. (5,000) (6,750) (6,750) (87,150)
Options canceled.............. -- -- (7,000) (75,175)
---------- ---------- ---------- -----------
Options outstanding end of pe-
riod......................... 132,850 257,100 251,350 450,691
========== ========== ========== ===========
Range of option prices on op-
tions granted................ $1.00-2.00 $9.58 $9.58 $9.58-10.65
========== ========== ========== ===========
Range of option prices on op-
tions exercised.............. $1.00 $1.00-2.00 $1.00-2.00 $1.00-2.00
========== ========== ========== ===========
</TABLE>

12. INCOME TAXES

The provision for income taxes (benefit) from continuing operations consists
of the following:

<TABLE>
<CAPTION>
1993 1994 1995
---- ----- ------
<S> <C> <C> <C>
Current:
Federal.............................................. $ 30 $(292) $ 206
State................................................ 41 (47) 33
---- ----- ------
71 (339) 239
Deferred............................................... 50 (435) 1,116
---- ----- ------
$121 $(774) $1,355
==== ===== ======
</TABLE>

Income tax expense (benefit) from continuing operations reconciled to the
amount computed at statutory rates is as follows:

<TABLE>
<CAPTION>
1993 1994 1995
---- ----- ------
<S> <C> <C> <C>
Federal tax (benefit) at statutory rate.............. $116 $(815) $ 588
State income taxes (benefit) (net of federal income
tax effect)......................................... 14 (78) 136
Unrecognized loss from foreign operations............ -- 45 387
Loss from unconsolidated subsidiary for tax purposes. -- 114 192
Other, net........................................... (9) (40) 52
---- ----- ------
$121 $(774) $1,355
==== ===== ======
</TABLE>

F-19
<PAGE>

XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

DECEMBER 31, 1995

12. INCOME TAXES (CONTINUED)

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred income taxes are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1994 1995
------ ------
<S> <C> <C> <C>
Deferred income tax assets:
Amortization of goodwill........................... $ -- $ 84
Net operating loss carryforwards................... 872 --
Losses from foreign operations and unconsolidated
subsidiary........................................ 159 579
Severance accruals................................. 687 275
Patents............................................ 405 358
Inventory.......................................... 350 291
AMT credit......................................... -- 161
Non-deductible accrued expenses.................... 124 778
------ ------
2,597 2,526
Valuation allowance................................ (159) (579)
------ ------
2,438 1,947
------ ------
Deferred income tax liabilities:
Amortization of goodwill........................... (1,160) --
Depreciation....................................... (152) (339)
Deductible prepaid expenses........................ (42) (30)
------ ------
(1,354) (369)
------ ------
$1,084 $1,578
====== ======

The valuation allowance at December 31, 1994 and 1995 related to recurring
losses from foreign operations and an unconsolidated subsidiary which
management believes the ultimate realization of the related tax benefits is not
more likely than not at the present time.

13. RELATED PARTY TRANSACTIONS

At December 31, 1994 and 1995, the Company had notes receivable from its
officers for advances made to acquire the Company's stock (see Note 9) and for
other purposes as follows:

<CAPTION>
DECEMBER 31,
--------------
1994 1995
------ ------
<S> <C> <C> <C>
Total notes outstanding.............................. $ 681 $ 681
Shareholders' notes receivable....................... (349) (349)
------ ------
Other notes receivable............................... $ 332 $ 332
====== ======
</TABLE>

F-20
<PAGE>

XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 1995

13. RELATED PARTY TRANSACTIONS (CONTINUED)

The notes bear interest at rates ranging from 7% to 8% and are due in annual
installments payable from the annual bonuses (if any) paid to the officers. In
any event, all remaining principal, including accrued interest thereon, is due
and payable on August 15, 1998.

The loans made to the officers to acquire the Company's stock and other
notes from officers have been reflected as shareholders' notes receivable as a
component of shareholder's equity and non-current notes receivable from
officers, respectively, in the accompanying balance sheets.

14. LEASE COMMITMENTS

The Company was committed under noncancelable operating leases with terms in
excess of one year involving certain property and equipment. Annual minimum
rental commitments under these leases are as follows:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1996........................................................... $ 549
1997........................................................... 509
1998........................................................... 297
1999........................................................... 138
2000 and thereafter............................................ 224
------
$1,717
======
</TABLE>

15. CONTINGENCIES

The Company is subject to various claims and legal proceedings covering a
wide range of matters that arise in the ordinary course of its business
activities, including product liability claims. Management believes that any
liability that may ultimately result from the resolution of these matters will
not have a material adverse effect on the financial condition or results of
operations of the Company.

16. SEGMENT INFORMATION

The Company's subsidiaries operate distribution facilities in a number of
foreign countries. Currently, international subsidiaries are present in
Canada, Australia, United Kingdom, France and Germany. These subsidiaries
represent approximately 14% of 1995 total sales of the Company, with France
representing the largest portion of this with 4% of total sales. Inter-area
sales are not significant to the total sales of any one geographic area.

<TABLE>
<CAPTION>
INFORMATION ABOUT THE COMPANY'S OPERATIONS IN DIFFERENT GEOGRAPHIC
AREAS
----------------------------------------------------------------------
1994 1995
----------------------------------- ----------------------------------
UNITED INTERNATIONAL UNITED INTERNATIONAL
STATES OPERATIONS CONSOLIDATED STATES OPERATIONS CONSOLIDATED
------- ------------- ------------ ------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Sales................... $40,716 $1,759 $42,475 $51,644 $ 8,221 $59,865
Income (loss) from
operations............. $(2,102) $ (227) $(2,329) $ 2,801 $(1,121) $ 1,680
Identifiable assets..... $93,709 $2,011 $95,720 $87,873 $ 5,250 $93,123
</TABLE>

F-21
<PAGE>

XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 1995

16. SEGMENT INFORMATION (CONTINUED)

The Company had export sales of $12.7 million in 1994 and $9.4 million in
1995 representing 30% and 15% of total sales, respectively.

17. SUBSEQUENT EVENTS

In April 1996, the Company acquired all of the outstanding stock of TreBay
which was involved in the development of ear, nose and throat surgical
specialties. The acquisition will be accounted for under the purchase method
of accounting. Accordingly, the purchase price of approximately $6.6 million
will be allocated to the individual assets acquired and liabilities assumed
based upon their respective fair values at the date of acquisition. The
transaction resulted in cost in excess of net assets acquired of approximately
$4.4 million, of which $2.4 million was allocated to in-process research and
development and was subsequently written off. Also, as part of the acquisition
accrued cumulative preferred stock dividends of approximately $7.6 million at
March 30, 1996 were waived by the holders, and accounted for as a capital
contribution by the Company.

The executive management of TreBay replaced former management of the
Company. As a result of the above transaction and a plan by new management to
combine certain operations and provide severance benefits to terminated
employees the Company recorded restructuring charges of approximately $3.1
million related principally to termination benefits during the quarter ending
June 29, 1996.

F-22
<PAGE>

XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 1995

18. PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED)

Pro Forma Statement of Operations

The following unaudited pro forma statements of operations for the year
ended December 31, 1995 and for six months ended June 29, 1996 reflects: 1)
the statement of operations of the Company for the periods presented as if
TreBay was purchased on January 1, 1995; and 2) excludes the discontinued
operations of the Company for the year ended December 31, 1995. The pro forma
statement of operations should be read in conjunction with the financial
statements and notes thereto included elsewhere herein.

<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 29, 1996 MARCH 30, 1996
---------------- ------------------
PRO
XOMED TREBAY ADJUSTMENTS FORMA
---------------- ------------------ ----------- -------
<S> <C> <C> <C> <C>
Sales, net.............. $32,942 $ 279 $-- $33,221
Cost of sales........... 12,690 219 -- 12,909
------- ----- ---- -------
Gross profit............ 20,252 60 -- 20,312
Operating Expenses:
Selling, general and
administrative....... 14,129 299 (154)(a) 14,274
Research and develop-
ment................. 1,719 138 (66)(a) 1,791
Amortization of intan-
gibles............... 1,168 -- -- 1,168
Write-off of acquired
research and
development.......... 2,380 -- -- 2,380
Restructuring charges. 3,093 -- -- 3,093
------- ----- ---- -------
Total operating ex- 22,489 437 (220) 22,706
penses................. ------- ----- ---- -------
Operating income (loss)
from continuing opera- (2,237) (377) 220 (2,394)
tions.................. ------- ----- ---- -------
Interest expense........ (1,536) -- -- (1,536)
Other income (expense), 64 54 -- 118
net.................... ------- ----- ---- -------
Income (loss) before in-
come tax expense (bene-
fit)................... (3,709) (323) 220 (3,812)
Income tax expense (ben- (536) -- (27)(a) (563)
efit).................. ------- ----- ---- -------
Net income (loss)....... $(3,173) $(323) $247 $(3,249)
======= ===== ====
Preferred stock divi- 538
dends.................. -------
Net (loss) attributable
to common shareholders. $(3,787)
-------
Pro forma net (loss) per $ (.82)
share (b).............. =======
Pro forma weighted aver-
age shares outstanding
(b).................... 4,635
=======
</TABLE>
- --------

(a) Elimination of general and administrative expenses which are duplicative
and will not be incurred subsequent to the purchase date, amortization of
acquired developed research and development, non-cash compensation expense
related to stock options granted, closing of the TreBay facility and
calculation of income tax benefit on the TreBay loss after adjustments.

(b) See Note 19.

F-23
<PAGE>

XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 1995

18. PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED) (CONTINUED)

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
----------------
XOMED TREBAY ADJUSTMENTS PRO FORMA
------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Sales, net............................ $59,865 $450 $ -- $60,315
Cost of sales......................... 23,175 528 -- 23,703
------- ------- ------ -------
Gross profit.......................... 36,690 (78) -- 36,612
Operating expenses:
Selling, general and administrative.. 27,077 1,084 (713)(a) 27,448
Research and development............. 2,405 443 (49)(a) 2,799
Amortization......................... 2,579 -- -- 2,579
------- ------- ------ -------
Total operating expenses.............. 32,061 1,527 (762) 32,826
------- ------- ------ -------
Operating income (loss) from
continuing operations................ 4,629 (1,605) 762 3,786
Interest expense...................... (3,063) -- -- (3,063)
Other income (expense), net........... 114 109 -- 223
------- ------- ------ -------
Income (loss) before income tax
expense (benefit).................... 1,680 (1,496) 762 946
Income tax expense (benefit).......... 1,355 -- (260)(a) 1,095
------- ------- ------ -------
Net income (loss)..................... $ 325 $(1,496) $1,022 $ (149)
======= ======= ======
Dividends on preferred stock.......... --
-------
Net income available to common
shareholders......................... $ (149)
=======
Pro forma net income (loss) per
share(b)............................. $ (0.03)
=======
Pro forma weighted average shares
outstanding(b)....................... 4,632
=======
</TABLE>
- --------

(b) See Note 19.

19. PRO FORMA AND SUPPLEMENTARY PRO FORMA NET INCOME PER SHARE

Pro forma net income per share is computed based on the weighted average
number of shares of common stock outstanding assuming conversion on January 1,
1995 of: 1) all Series A and B Convertible Preferred Stock outstanding as of
December 31, 1995; 2) 390,000 shares of Series A Convertible Preferred Stock
issued in the purchase of TreBay; 3) all stock options including the options
issued after December 31, 1995 which have been assumed to be outstanding as of
January 1, 1995; and 4) the conversion of 60,225 shares of Series C Preferred
Stock into 314,650 shares of Common Stock on the date of the initial public
offering, based upon an assumed initial public offering price of $20.00 per
share.

The terms of the Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock provide that both series will automatically
convert into Common Stock and Non-Voting Common Stock, respectively, with the
consent of the holders of a majority of the aggregate outstanding shares of
both series considered together. The Company has circulated an Exchange
Agreement to certain of its stockholders that, among other things, provides
for a consent to such conversion. All holders of Series A

F-24
<PAGE>

XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 1995

19. PRO FORMA AND SUPPLEMENTARY PRO FORMA NET INCOME PER SHARE (CONTINUED)

Convertible Preferred Stock and Series B Convertible Preferred Stock have
signed the Exchange Agreement.

Supplementary pro forma net income per share is computed upon the basis
stated above and giving effect to the Company's proposed initial public
offering of 2,500,000 shares of Common Stock and paydown of approximately
$23,213,000 of term notes payable and $25,000,000 of Series C Preferred Stock
as if the offering was effective January 1, 1995. Interest expense, net of tax
benefit, totaling $1,299,770 and $580,632 for the year ended December 31, 1995
and six months ended June 29, 1996 has been eliminated as a result of the
assumed paydown of debt.

20. PRO FORMA JUNE 29, 1996 BALANCE SHEET

The pro forma June 29, 1996 balance sheet reflects the Company's financial
position as of that date adjusted to give effect to receipt of the proceeds
from the public offering of 2,500,000 shares of Common Stock, paydown of $23.2
million of debt and $22.5 million of Series C Redeemable Preferred Stock, the
simultaneous conversion of the remaining balance of the Series C Redeemable
Preferred Stock of $8.1 million, Series A Convertible Preferred Stock of $7.2
million and Series B Convertible Preferred Stock of $20.7 million into Common
Stock and conversion of the Non-Voting Common Stock into Common Stock.

F-25
<PAGE>

REPORT OF INDEPENDENT AUDITORS

Board of Directors
Xomed, Inc.

We have audited the accompanying combined balance sheets of Xomed, Inc.
(formerly Xomed-Treace, Inc. and Xomed Treace P.R. Inc.) (the Company) as of
December 31, 1993 and April 15, 1994, and the related combined statements of
income and retained earnings and cash flows for the year ended December 31,
1993 and the three and one-half months ended April 15, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Xomed, Inc. at
December 31, 1993 and April 15, 1994, and the combined results of their
operations and their cash flows for the year ended December 31, 1993 and the
three and one-half months ended April 15, 1994 in conformity with generally
accepted accounting principles.

Ernst & Young LLP

Jacksonville, Florida
May 31, 1996

F-26
<PAGE>

XOMED, INC.

COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31, APRIL 15,
1993 1994
------------ ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 417 $ 90
Accounts receivable, less allowance for doubtful
accounts
of $328--1993 and $278--1994......................... 8,005 6,438
Other receivables..................................... -- 427
Inventories........................................... 9,800 10,124
Prepaid expenses...................................... 290 220
------- -------
Total current assets.................................... 18,512 17,299
Investments............................................. 1,199 1,199
Property, plant and equipment, net...................... 9,785 10,403
Goodwill................................................ 7,711 7,413
Other assets............................................ 326 309
------- -------
Total assets............................................ $37,533 $36,623
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................... $ 2,727 $ 1,992
Accrued expenses...................................... 2,351 1,264
Due to parent......................................... 7,164 7,532
Current portion capital lease obligation.............. 267 178
------- -------
Total current liabilities............................... 12,509 10,966
Obligation under capital lease.......................... 686 715
------- -------
Total liabilities....................................... 13,195 11,681
Shareholders' equity:
Common stock, $1.00 par value; 1,000 shares
authorized,
issued and outstanding............................... 1 1
Additional paid-in capital............................ 12,579 12,579
Retained earnings..................................... 11,758 12,362
------- -------
Total shareholders' equity.............................. 24,338 24,942
------- -------
Total liabilities and shareholders' equity.............. $37,533 $36,623
======= =======
</TABLE>

See accompanying notes.

F-27
<PAGE>

XOMED, INC.

COMBINED STATEMENT OF INCOME AND RETAINED EARNINGS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
THREE AND
ONE-HALF
YEAR ENDED MONTHS ENDED
DECEMBER 31, APRIL 15,
1993 1994
------------ ------------
<S> <C> <C>
Sales, net........................................... $45,364 $12,801
Cost of sales........................................ 20,692 6,086
------- -------
Gross profit......................................... 24,672 6,715
Operating expenses:
Selling, general and administrative................. 15,065 5,371
Research and development............................ 2,766 692
Amortization of intangibles......................... 807 298
------- -------
Total operating expenses............................. 18,638 6,361
Operating income from continuing operations.......... 6,034 354
Other income, net.................................... 334 17
------- -------
Income from continuing operations before income tax
expense............................................. 6,368 371
Allocation for income tax expense.................... 2,420 141
------- -------
Income from continuing operations.................... 3,948 230
Discontinued operations:
Income from operations of discontinued surgical
drapes segment (less applicable income taxes of
$1,243 and $230 at December 31, 1993 and April 15,
1994, respectively)............................... 2,029 374
------- -------
Net income........................................... 5,977 604
Retained earnings, beginning of period............... 5,781 11,758
------- -------
Retained earnings, end of period..................... $11,758 $12,362
======= =======
</TABLE>

See accompanying notes.

F-28
<PAGE>

XOMED, INC.

COMBINED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
THREE AND
ONE-HALF
YEAR ENDED MONTHS ENDED
DECEMBER 31, APRIL 15,
1993 1994
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income........................................... $ 5,977 $ 604
Adjustments to reconcile net income to cash flow
provided
by operating activities:
Depreciation and amortization...................... 1,810 642
Loss on disposal of assets......................... -- 230
(Increase) decrease in accounts and other receiv-
able, net......................................... (1,660) 1,140
Decrease (increase) in inventories, net............ 1,660 (324)
Decrease in prepaid expenses and other assets...... 152 87
Increase (decrease) in accounts payable and accrued
expenses.......................................... 1,444 (1,822)
(Decrease) increase due to parent.................. (6,360) 367
------- -------
Net cash provided by operating activities............ 3,023 924
INVESTING ACTIVITIES
Purchases of property, plant and equipment........... (2,018) (1,170)
Purchases of other assets............................ (495) --
------- -------
Net cash used in investing activities................ (2,513) (1,170)
FINANCING ACTIVITIES
Proceeds from capital lease obligation............... 90 --
Principal payments on capital lease obligation....... (267) (81)
------- -------
Net cash used in financing activities................ (177) (81)
------- -------
Increase (decrease) in cash and cash equivalents..... 333 (327)
Cash and cash equivalents, beginning of period....... 84 417
------- -------
Cash and cash equivalents, end of period............. $ 417 $ 90
======= =======
</TABLE>

See accompanying notes.

F-29
<PAGE>

XOMED, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

APRIL 15, 1994

1. ORGANIZATION

Xomed-Treace, Inc. and Xomed-Treace, P.R., Inc. (collectively, Xomed, Inc.
or the Company) designs, manufactures and sells otolaryngology/head and neck
and ophthalmology surgical specialties to domestic and foreign hospitals,
medical care facilities and physicians. The Company performs ongoing credit
evaluations of its customers' financial condition and generally no collateral
is required. Xomed-Treace, Inc. and Xomed-Treace, P.R. Inc. are wholly-owned
subsidiaries of Bristol-Myers Squibb Company ("BMS"). As of April 15, 1994,
the Company was purchased by Xomed Surgical Products, Inc. (see Note 13).

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Combination

The combined financial statements of the Company include the accounts of
Xomed-Treace, Inc. and Xomed-Treace, P.R. Inc. Significant intercompany
transactions and balances between entities have been eliminated.

Cash and Cash Equivalents

The Company considers all highly liquid short-term investments with original
maturities of three months or less to be cash equivalents.

Inventory Valuation

Inventories are stated at the lower of cost, as determined on the average
cost method, or market. Market for raw materials is based on replacement costs
and for other inventory classifications on net realizable value.

Investments

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Expenditures for
maintenance and repairs are charged to income as incurred. Additions,
improvements and major replacements are capitalized. The costs and accumulated
depreciation related to assets sold or retired are removed from the accounts
and any gain or loss is credited or charged to income. Depreciation is
computed using the straight-line method based on the estimated useful lives of
the related assets which are as follows--buildings and improvements 27 to 35
years and machinery and equipment 3 to 15 years.

Income Taxes

The Company files federal consolidated tax returns with BMS. Under a tax
sharing agreement BMS allocates federal and state income tax expense to the
Company at an effective tax rate of approximately

F-30
<PAGE>

XOMED, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

APRIL 15, 1994

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

38% and makes all income tax payments on the Company's behalf. The balance
sheet does not reflect any current or deferred income tax assets or
liabilities as such amounts will be realized by BMS. Amounts payable or
receivable from BMS related to income taxes are included in due to parent in
the 1993 and 1994 balance sheets. Management believes the allocation method
used to estimate income tax expense approximates tax expense calculated on a
separate return basis as there was no significant permanent differences.

Use of Estimates

New Accounting Pronouncements

The Company will adopt Statement No. 121 and No. 123 in 1996 and, based on
current information, does not believe the effect of adoption will be material
to the financial condition or results of operations of the Company.

3. DISCONTINUED OPERATIONS

The Company was acquired by Xomed Surgical Products, Inc., the successor
company, in April 1994. During July 1995, the successor company sold the
surgical drapes segment and disclosed the effect of the transaction as
discontinued operations. The surgical drapes segment in the accompanying
financial statements has been reported as discontinued operations to be
consistent with the presentation in the successor company financial
statements.

Certain financial information related to the discontinued operations of the
surgical drapes segment is as follows:
<TABLE>
<CAPTION>
THREE AND ONE-
YEAR ENDED HALF MONTHS
DECEMBER 31, ENDED APRIL 15,
1993 1994
------------ ---------------
<S> <C> <C>
Sales........................................ $8,480 $1,915
====== ======
Pre-tax income............................... $3,272 $ 604
====== ======
Income tax expense........................... $1,243 $ 230
====== ======
Net income................................... $2,029 $ 374
====== ======
</TABLE>

F-31
<PAGE>

XOMED, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

APRIL 15, 1994

4. INVENTORIES

<TABLE>
<CAPTION>
APRIL
DECEMBER 31, 15,
1993 1994
------------ -------
<S> <C> <C>
Finished goods.................................... $ 9,504 $11,438
Work in process................................... 866 714
Raw materials and packaging....................... 6,768 6,474
------- -------
17,138 18,626
Less reserves for slow-moving/obsolescence........ 7,338 8,502
------- -------
$ 9,800 $10,124
======= =======
</TABLE>

The reserve for slow-moving/obsolescence on January 1, 1993 was $6,621.
Write-offs for the periods ended December 31, 1993 and April 15, 1994 were
$343 and $242, respectively, and the provision for the reserve was $1,060 and
$1,406, respectively.

5. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment, less allowances for depreciation, is a
follows:

<TABLE>
<CAPTION>
DECEMBER 31, APRIL 15,
1993 1994
------------ ---------
<S> <C> <C>
Land and land improvements....................... $ 911 $ 911
Building and building improvements............... 3,988 4,065
Machinery and equipment.......................... 8,466 9,921
------- -------
13,365 14,897
Less allowances for depreciation................. 6,490 6,812
------- -------
6,875 8,085
Capital projects in process...................... 2,910 2,318
------- -------
$ 9,785 $10,403
======= =======
</TABLE>

Depreciation expense for the year ended December 31, 1993 and the three and
one-half months ended April 15, 1994 was approximately $1,014 and $343,
respectively, and is reflected in selling, general and administrative
expenses.

6. GOODWILL

Goodwill represents the excess of cost over net tangible identifiable assets
received in business acquisitions and is being amortized on the straight-line
basis over periods of 10 and 40 years.

<TABLE>
<CAPTION>
APRIL
DECEMBER 31, 15,
1993 1994
------------ -------
<S> <C> <C>
Goodwill.......................................... $12,936 $12,936
Less accumulated amortization..................... 5,225 5,523
------- -------
$ 7,711 $ 7,413
======= =======
</TABLE>

F-32
<PAGE>

XOMED, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

APRIL 15, 1994
7. ACCRUED EXPENSES

Accrued expenses consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31, APRIL 15,
1993 1994
------------ ---------
<S> <C> <C>
Payroll and related costs........................ $1,154 $ 467
Other............................................ 1,197 797
------ ------
$2,351 $1,264
====== ======
</TABLE>

8. OBLIGATION UNDER CAPITAL LEASE

The Company was obligated under a capital lease as follows:

<TABLE>
<CAPTION>
DECEMBER 31, APRIL 15,
1993 1994
------------ ---------
<S> <C> <C>
Note payable under capital lease obligation to
vendor in quarterly installments ranging from
$34 to $69 which includes interest through Oc-
tober 1, 1997, with interest payable at rates
ranging from 6% to 10.8% collateralized by
equipment with a net book value of approxi-
mately $890 at April 15, 1994................. $953 $893
Less current portion........................... 267 178
---- ----
$686 $715
==== ====
</TABLE>

Annual maturities of the capital lease obligations for the eight and one-
half month period ending December 31, 1994 and years ending 1995 through 1998
are as follows:

<TABLE>
<CAPTION>
PERIOD ENDING DECEMBER 31,
--------------------------
<S> <C>
1994.............................................................. $138
1995.............................................................. 189
1996.............................................................. 87
1997.............................................................. 87
1998.............................................................. 392
----
$893
====
</TABLE>

9. RETIREMENT AND POSTRETIREMENT BENEFITS

Retirement benefits are provided to all eligible employees through the
Bristol-Myers Squibb Retirement Income Plan and the Bristol-Myers Squibb
Puerto Rico Retirement Income Plan (the "Pension Plans"). The Pension Plans
are noncontributory, defined benefit plans. Benefits are based primarily on
years of credited service and on participants' compensation. The Company's
employees also participate in defined contribution plans maintained by BMS
which comply with the provisions of Section 401(k) of the Internal Revenue
Code (the "Savings Plans").

F-33
<PAGE>

XOMED, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

APRIL 15, 1994

9. RETIREMENT AND POSTRETIREMENT BENEFITS (CONTINUED)

The assets, projected benefit obligations and the related costs associated
with the Pension Plans of the Company are not separately identifiable. The
Company receives an allocation from BMS to record its estimated share of
pension expense. Pension expense allocated to the Company by BMS was
approximately $1,273 and $263 for the year ended December 31, 1993 and the
three and one-half months ended April 15, 1994, respectively.

Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement
Benefits". Statement No. 106 requires that postretirement health costs be
recorded in the financial statements as earned by employees. The Company
receives an allocation from BMS to record its estimated share of
postretirement benefit expense. The allocated expense was $303 and $89 for the
year ended December 31, 1993 and the three and one-half months ended April 15,
1994, respectively. The liability associated with the adoption of this
Statement is not separately identifiable and has not been reflected in the
accompanying financial statements.

10. RELATED PARTY TRANSACTIONS

The Company is charged for various services provided by BMS. The more
significant services include employee benefits and insurance. BMS provides
medical and life insurance benefits for certain employees and allocates the
related costs to the Company as the benefits are paid by BMS. The expense
allocated to the Company by BMS for these benefits was approximately $2,275
and $511 for the year ended December 31, 1993 and the three and one-half
months ended April 15, 1994, respectively. The charges for benefits provided
by BMS are based on the number of employees times a fixed charge per employee.
Management believes these charges are reasonable and compare favorably to
actual costs of medical and life insurance coverage from an unrelated entity.

The Company provides certain products to other BMS subsidiaries which sell
in international markets. Net sales to these BMS subsidiaries were $6,794 and
$782 and related cost of sales were $3,678 and $402 for the year ended
December 31, 1993 and the three and one-half months ended April 15, 1994,
respectively. No direct sales costs such as commissions and marketing were
charged to the Company by these BMS subsidiaries; therefore, no such amounts
have been recorded in the accompanying financial statements. Additionally, the
Company is not charged interest on its outstanding intercompany balances,
which amounted to $7,164 and $7,841 as of December 31, 1993 and April 15,
1994.

11. LEASE COMMITMENTS

At April 15, 1994, the Company was committed under noncancelable operating
leases with terms in excess of one year involving certain property and
equipment. Minimum rental commitments under these leases for the eight and
one-half month period ending December 31, 1994 and year ending December 31,
1995 are as follows:

<TABLE>
<CAPTION>
PERIOD ENDING DECEMBER 31,
--------------------------
<S> <C>
1994................................................................. $229
1995................................................................. 27
----
$256
====
</TABLE>

Rental expenses for the above commitments for the year ended December 31,
1993 and the three and one-half month period ended April 15, 1994 was
approximately $421 and $158, respectively.

F-34
<PAGE>

XOMED, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

APRIL 15, 1994
12. CONTINGENCIES

The Company is subject to various claims and legal proceedings covering a
wide range of matters that arise in the ordinary course of its business
activities, including product liability claims. Management believes that any
liability that ultimately results from the resolution of these matters will
not have a material adverse effect on the financial position or results of
operations of the Company.

13. SUBSEQUENT EVENT: SALE OF XOMED, INC.

On April 15, 1994, all of the outstanding stock of Xomed, Inc. was acquired
from BMS by Xomed Surgical Products, Inc. for approximately $81,000. The
acquisition was funded primarily through the issuance of preferred stock
($43,502) and proceeds from long-term debt.

F-35
<PAGE>

REPORT OF INDEPENDENT AUDITORS

Board of Directors
TreBay Medical Corporation

We have audited the accompanying balance sheets of TreBay Medical
Corporation (the Company) as of December 31, 1994 and 1995, and the related
statements of operations, shareholders' equity and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of TreBay Medical Corporation
at December 31, 1994 and 1995, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted
accounting principles.

Ernst & Young LLP

Jacksonville, Florida
May 31, 1996

F-36
<PAGE>

TREBAY MEDICAL CORPORATION

BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31,
-------------- APRIL 1, MARCH 30,
1994 1995 1995 1996
------ ------ -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................. $ 668 $ 297 $1,130 $ 345
Investments............................... 2,960 1,448 1,937 1,000
Accounts receivable, less allowance for
doubtful accounts of $5 and $74 at
December 31, 1994 and 1995, respectively. 38 127 28 174
Other receivables......................... 24 44 50 55
Inventories............................... 127 404 218 424
Other current assets...................... 15 34 38 37
------ ------ ------ ------
Total current assets........................ 3,832 2,354 3,401 2,035
Investments................................. 1,505 703 1,504 701
Note receivable from officer................ -- 883 -- 883
Equipment and leasehold improvements, net... 480 503 509 479
Cost in excess of net assets acquired, net.. 141 -- 140 --
Other assets................................ 65 86 62 105
------ ------ ------ ------
Total assets................................ $6,023 $4,529 $5,616 $4,203
====== ====== ====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................... $ 133 $ 117 $ 76 $ 115
Accrued expenses.......................... 72 98 65 101
Current portion capital lease obligations. 12 13 12 13
------ ------ ------ ------
Total current liabilities................... 217 228 153 229
Long-term capital lease obligations, less
current portion............................ 45 31 42 28
Deferred rent and other..................... 10 15 10 14
------ ------ ------ ------
Total liabilities........................... 272 274 205 271
Shareholders' equity:
Common stock, $.01 par value, 1,000,000
shares authorized, 650,000 shares issued
and outstanding.......................... 7 7 7 7
Additional paid-in capital................ 6,480 6,480 6,480 6,480
Accumulated deficit....................... (736) (2,232) (1,076) (2,555)
------ ------ ------ ------
Total shareholders' equity.................. 5,751 4,255 5,411 3,932
------ ------ ------ ------
Total liabilities and shareholders' equity.. $6,023 $4,529 $5,616 $4,203
====== ====== ====== ======
</TABLE>

See accompanying notes.

F-37
<PAGE>

TREBAY MEDICAL CORPORATION

STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, THREE MONTHS ENDED
-------------- ------------------
APRIL 1, MARCH 30,
1994 1995 1995 1996
----- ------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Sales, net................................... $ 82 $ 450 $ 47 $ 279
Cost of sales................................ 42 528 84 219
----- ------- ----- -----
Gross profit................................. 40 (78) (37) 60
Operating expenses:
Selling, general and administrative......... 721 1,084 269 299
Research and development.................... 211 443 97 138
----- ------- ----- -----
Total operating expenses..................... 932 1,527 366 437
----- ------- ----- -----
Loss from operations......................... (892) (1,605) (403) (377)
Interest income.............................. 171 250 68 55
Other expense, net........................... (15) (141) (5) (1)
----- ------- ----- -----
Net loss..................................... $(736) $(1,496) $(340) $(323)
===== ======= ===== =====
</TABLE>

See accompanying notes.

F-38
<PAGE>

TREBAY MEDICAL CORPORATION

STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
-------------- RETAINED PAID-IN
SHARES AMOUNT DEFICIT CAPITAL TOTAL
------- ------ -------- ---------- -------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994.......... -- $ -- $ -- $ -- $ --
Issuance of common stock............ 650,000 7 -- 6,480 6,487
Net loss ........................... -- -- (736) -- (736)
------- ----- ------- ------ -------
Balance at December 31, 1994........ 650,000 7 (736) 6,480 5,751
Net loss ........................... -- -- (1,496) -- (1,496)
------- ----- ------- ------ -------
Balance at December 31, 1995........ 650,000 7 (2,232) 6,480 4,255
Net loss ........................... -- -- (323) -- (323)
------- ----- ------- ------ -------
Balance at March 30, 1996........... 650,000 $ 7 $(2,555) $6,480 $3,932
======= ===== ======= ====== =======
</TABLE>

See accompanying notes.

F-39
<PAGE>

TREBAY MEDICAL CORPORATION

STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, THREE MONTHS ENDED
--------------- ----------------------------
1994 1995 APRIL 1, 1995 MARCH 30, 1996
------ ------- ------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss........................ $ (736) $(1,496) $ (340) $(323)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and amortization. 25 130 26 37
Write-off of costs in excess
of net assets acquired....... -- 131 -- --
Bond discount amortization.... (72) (61) (22) (2)
Increase in accounts and other
receivables, net............. (35) (109) (16) (58)
Increase in inventories....... (100) (277) (91) (20)
Increase (decrease) in
deferred rent................ 10 5 -- (1)
Increase in other assets...... (82) (923) (20) (22)
Increase (decrease) in
accounts payable and accrued
expenses..................... 163 9 (64) 1
------ ------- ------ -----
Net cash used in operating ac-
tivities....................... (827) (2,591) (527) (388)
INVESTING ACTIVITIES
Purchases of investments........ (6,142) (1,818) -- --
Purchases of property, plant and
equipment...................... (399) (142) (54) (13)
Purchase of River Medical, Inc.,
net of cash acquired........... (201) -- -- --
Proceeds from maturity of
investments.................... 1,752 4,193 1,046 452
------ ------- ------ -----
Net cash (used in) provided by
investing activities........... (4,990) 2,233 992 439
FINANCING ACTIVITIES
Proceeds from sale of common
stock.......................... 6,487 -- -- --
Principal payments on capital
lease obligations.............. (2) (13) (3) (3)
------ ------- ------ -----
Net cash provided by (used in)
financing activities........... 6,485 (13) (3) (3)
------ ------- ------ -----
Net increase (decrease) in cash
and cash equivalents........... 668 (371) 462 48
Cash and cash equivalents at
beginning of period............ -- 668 668 297
------ ------- ------ -----
Cash and cash equivalents at end
of period...................... $ 668 $ 297 $1,130 $ 345
====== ======= ====== =====
</TABLE>

See accompanying notes.

F-40
<PAGE>

TREBAY MEDICAL CORPORATION

NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

DECEMBER 31, 1995

1. ORGANIZATION

TreBay Medical Corporation (the Company), a Delaware corporation, was formed
in December of 1993 and commenced operations in January 1994. The Company did
not report significant operating revenues in 1994 and was deemed to be a
development stage company until January 1, 1995. The Company develops and
markets microsurgical products for ear, nose and throat surgeons and
orthopaedic surgical instruments.

Basis of Presentation--Unaudited Interim Financial Statements

The accompanying unaudited financial statements as of April 1, 1995 and
March 30, 1996 have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three months ended March 30, 1996 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1996.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash and Cash Equivalents

The Company considers all highly liquid short-term investments with original
maturities of three months or less when purchased to be cash equivalents.

Inventory Valuation

Investments

Investments consist of U.S. Treasury and Government Agency notes. All
investments are classified as held- to-maturity and are carried at amortized
cost.

Equipment and Leasehold Improvements

Equipment and leasehold improvements are stated at cost. Expenditures for
maintenance and repairs are charged to income as incurred. Depreciation is
computed using the straight-line method based on the estimated useful lives of
the related assets not exceeding ten years.

Income Taxes

F-41
<PAGE>

TREBAY MEDICAL CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

DECEMBER 31, 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Use of Estimates

New Accounting Pronouncements

The Company will adopt Statements No. 121 and No. 123 in 1996 and, based on
current information, does not believe the effect of adoption will be material
to the financial condition or results of operations of the Company.

3. INVENTORIES

Inventories are summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1994 1995
------ ------
<S> <C> <C>
Finished goods........................................... $ 43 $ 173
Work in process.......................................... 10 11
Raw materials and packaging.............................. 74 220
------ ------
$127 $404
====== ======
</TABLE>

4. EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Equipment and leasehold improvements, at cost, less allowances for
depreciation, are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1994 1995
------ ------
<S> <C> <C>
Equipment............................................... $ 260 $ 478
Leasehold improvements.................................. 74 131
------ ------
334 609
Allowances for depreciation............................. (21) (141)
------ ------
313 468
Capital projects in process............................. 167 35
------ ------
$ 480 $ 503
====== ======
</TABLE>

F-42
<PAGE>

TREBAY MEDICAL CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

DECEMBER 31, 1995
4. EQUIPMENT AND LEASEHOLD IMPROVEMENTS (CONTINUED)

Depreciation expense, including expense on assets under capital lease
obligations, was approximately $21 and $120 for the years ended December 31,
1994 and 1995, respectively.

5. COST IN EXCESS OF NET ASSETS ACQUIRED

In June 1994, the Company acquired River Medical, Inc. for $204 in an
acquisition accounted for as a purchase. Assets acquired included accounts
receivable, inventory and equipment and liabilities assumed consisted of
accounts payable. Costs in excess of net assets acquired amounted to
approximately $145, which was being amortized over 15 years. In December 1995,
management determined that the business acquired from River Medical, Inc. had
no significant continuing value. As a result, the remaining cost in excess of
net assets acquired of $131 was written off.

6. INVESTMENTS

The following is a summary of investments, all of which are U.S. Treasury
and Government Agency notes to be held-to-maturity:

<TABLE>
<CAPTION>
DECEMBER 31, 1994
---------------------------
AMORTIZED FAIR UNREALIZED
COST VALUE LOSS
--------- ------ ----------
<S> <C> <C> <C>
Due within one year........................... $2,960 $2,939 $21
Due in one to three years..................... 1,505 1,464 41
<CAPTION>
DECEMBER 31, 1995
---------------------------
AMORTIZED FAIR UNREALIZED
COST VALUE GAIN
--------- ------ ----------
<S> <C> <C> <C>
Due within one year........................... $1,448 $1,450 $2
Due in one to three years..................... 703 709 6
</TABLE>

Fair value is determined by quoted market price.

7. CAPITAL LEASE OBLIGATIONS

The Company leases certain equipment under agreements classified as capital
leases. These leases have terms ranging from three to five years.

Annual maturities under capital lease obligations outstanding at December
31, 1995 are as follows:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1996.............................................................. $13
1997.............................................................. 12
1998.............................................................. 12
1999.............................................................. 7
---
$44
===
</TABLE>

F-43
<PAGE>

TREBAY MEDICAL CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

DECEMBER 31, 1995

8. EMPLOYEE STOCK OPTION PLANS
The Company has granted options to key employees to acquire 68,609 shares of
common stock at $10 a share, which was the estimated fair market value of the
stock at the date of grant. In addition, the Company has reserved 3,613 options
to be granted at a later date. As a result of the acquisition of the Company by
Xomed Surgical Products, Inc. on April 16, 1996 (See Note 13), 43,332 of the
options became immediately exercisable. The remaining 25,277 options granted
become exercisable at 25% a year from December 1995 through December 1998.

9. RELATED PARTY TRANSACTION

At December 31, 1995, the Company had a note receivable from an officer in
the amount of $883 which is due on demand. The note bears interest at 10%
compounded annually and is secured by 88,333 shares of stock of the Company.

10. INCOME TAXES

At December 31, 1995, the Company had accumulated net operating losses for
financial reporting and tax purposes of approximately $2.2 million and $1.6
million, respectively, to be carried forward to future periods. These
carryforwards expire for tax purposes beginning in 2009. Due to a history of
net operating losses, the Company's management has concluded that it is more
likely than not that the tax benefit of the carryforward will not be realized
and has established a valuation allowance to offset the deferred tax asset
related to the net operating loss carryforward for 1994 and 1995.

11. LINE OF CREDIT AGREEMENT

The Company has a $150 line of credit payable on demand. The line of credit
bears interest at prime, payable monthly and is secured by $225 of the
Company's investments. There was no balance outstanding at year end.

12. LEASE COMMITMENTS

The Company was committed under a noncancelable operating lease with a term
in excess of one year related to the building it occupies. Annual minimum lease
commitments under the lease are as follows:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1996............................................................. $ 56
1997............................................................. 57
1998............................................................. 59
1999............................................................. 30
----
$202
====
</TABLE>

The Company's rental expense was $40 and $68 for the years ending 1994 and
1995, respectively.

13. SUBSEQUENT EVENTS

In April 1996, the Company was acquired by Xomed Surgical Products, Inc. in
an acquisition accounted for under the purchase method of accounting. The
purchase price was approximately $6.6 million.

F-44
<PAGE>

[COLOR PICTURE OF WORLD MAP WITH NOTATIONS INDICATING LOCATIONS OF THE
COMPANY'S DIRECT OPERATIONS AND DISTRIBUTORS WITH CAPTION WHICH READS "XOMED IS
THE ONLY MAJOR MANUFACTURER AND MARKETER OF ENT SURGICAL PRODUCTS WITH A DIRECT
U.S. SALES FORCE EXCLUSIVELY SERVING ENT SPECIALISTS. THE COMPANY DISTRIBUTES
ITS PRODUCTS WORLDWIDE THROUGH A 62-PERSON DIRECT SALES FORCE IN THE U.S. AND IN
SELECTED OTHER COUNTRIES, AS WELL AS THROUGH A NETWORK OF 121 INDEPENDENT
DISTRIBUTORS."]

[COLOR PICTURES OF NEW COMPANY PRODUCTS WITH CAPTION WHICH READS
"THROUGH FOCUSED INTERNAL RESEARCH AND DEVELOPMENT, XOMED'S STRATEGY IS TO
CONTINUE ITS EMPHASIS ON PRODUCT INNOVATION."]

<PAGE>

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

NO PERSON HAS BEEN AUTHORIZED IN CON- NECTION WITH THE OFFERING MADE HEREBY
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTA-TION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESEN-TATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UN-DERWRITER.
THIS PROSPECTUS DOES NOT CONSTI-TUTE AN OFFER TO SELL OR A SOLICITATION OF ANY
OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE
IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUN- DER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CON- TAINED HEREIN IS CORRECT AS OF ANY DATE SUBSE-QUENT TO THE
DATE HEREOF.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 14
Dividend Policy........................................................... 14
Capitalization............................................................ 15
Dilution.................................................................. 16
Selected Consolidated Financial Data...................................... 17
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 19
Business.................................................................. 32
Management................................................................ 49
Certain Transactions...................................................... 58
Principal Stockholders.................................................... 59
Description of Capital Stock.............................................. 62
Shares Eligible for Future Sale........................................... 67
Underwriting.............................................................. 69
Legal Matters............................................................. 70
Experts................................................................... 70
Additional Information.................................................... 70
Index to Financial Statements............................................. F-1
</TABLE>

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

UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECT- ING TRANSACTIONS IN THE COMMON STOCK OF-FERED HEREBY, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.

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

2,500,000 Shares

[LOGO]

Common Stock

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

PROSPECTUS

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

Alex. Brown & Sons
INCORPORATED

UBS Securities

, 1996

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

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered which will be paid
solely by the Company. All the amounts shown are estimates, except the SEC
registration fee, the NASD filing fee and the Nasdaq National Market listing
fee:

<TABLE>
<CAPTION>
AMOUNT
-------
<S> <C>
SEC registration fee............................................. $20,819
NASD filing fee.................................................. 6,538
Nasdaq listing fee............................................... 34,699
Transfer agent and registrar fees and expenses................... *
Printing and engraving expenses.................................. *
Legal fees and expenses.......................................... *
Accounting fees and expenses..................................... *
Blue Sky fees and expenses....................................... *
Miscellaneous expenses .......................................... *
-------
Total.......................................................... $ *
=======
</TABLE>

- --------
* To be completed by amendment.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

The Company's Restated Certificate of Incorporation (the "Restated
Certificate") provides that the Company shall indemnify each person who is or
was a director, officer or employee of the Company to the fullest extent
permitted under Section 145 of the Delaware General Corporation Law. Section
145 of the Delaware General Corporation Law empowers a Delaware corporation to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or
in the right of such corporation) by reason of the fact that such person is or
was a director, officer, employee or agent of such corporation, or is or was
serving at the request of such corporation as a director, officer, employee or
agent of another corporation or enterprise. A corporation may indemnify such
person against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding if he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. A
corporation may, in advance of the final disposition of any civil, criminal,
administrative or investigative action, suit or proceeding, pay the expenses
(including attorneys' fees) incurred by any officer or director in defending
such action, provided that the director or officer undertakes to repay such
amount if it shall ultimately be determined that he is not entitled to be
indemnified by the corporation.

A Delaware corporation may indemnify officers and directors in an action by
or in the right of the corporation to procure a judgment in its favor under
the same conditions, except that no indemnification is permitted without
judicial approval if the officer or director is adjudged to be liable to the
corporation. Where an officer or director is successful on the merits or
otherwise in the defense of any action referred to above, the corporation must
indemnify him against the expenses (including attorneys' fees) which he
actually and reasonably incurred in connection therewith. The indemnification
provided is not deemed to be exclusive of any other rights to which an officer
or director may be entitled under any corporation's bylaw, agreement, vote or
otherwise.

II-1
<PAGE>

The Restated Certificate provides that a director of the Company will not be
personally liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the
Delaware General Corporation Law, which concerns unlawful payments of
dividends, stock purchases or redemption, or (iv) for any transaction from
which the director derived an improper personal benefit.

While the Restated Certificate provides directors with protection from
awards for monetary damages for breaches of their duty of care, it does not
eliminate such duty. Accordingly, the Restated Certificate will have no effect
on the availability of equitable remedies such as an injunction or rescission
based on a director's breach of his or her duty of care. The provisions of the
Restated Certificate described above apply to an officer of the Company only
if he or she is a director of the Company and is acting in his or her capacity
as director, and do not apply to officers of the Company who are not
directors.

Reference is made to the Underwriting Agreement (Exhibit 1) which provides
for indemnification of the Company, its directors, officers and controlling
persons.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

The following information is furnished with regard to all securities sold by
the Company within the past three years which were not registered under the
Securities Act.

On April 15, 1994, in connection with the Xomed Acquisition, the Company:

1. Issued an aggregate of 573,120 shares of Common Stock, 426,777 shares of
Non-Voting Common Stock and 91,292 shares of Series C Redeemable
Preferred Stock to the stockholders of Merocel in exchange for an
aggregate consideration of 291,730 shares of Merocel Common Stock,
68,900 shares of Merocel Series A Preferred Stock and 8,498 shares of
Merocel Series B Preferred Stock;

2. Issued an aggregate of 340,454 shares of Series A Convertible Preferred
Stock to certain institutional investors for an aggregate consideration
of $3,261,549.32;

3. Issued 2,127,838 shares of Series B Convertible Preferred Stock to WP
Investors for an aggregate consideration of $20,384,688.04; and

4. Issued an aggregate of 198,561 shares of Series C Redeemable Preferred
Stock to certain institutional investors for an aggregate consideration
of $19,856,100.

On August 15, 1994, the Company issued 9,563 shares of Series A Convertible
Preferred Stock to Mark K. Adams for an aggregate consideration of $91,613.54
in connection with the concurrent execution of an Employment Agreement and
Loan and Pledge Agreement with Mr. Adams.

On August 15, 1994, the Company issued 768 shares of Series C Redeemable
Preferred Stock to Mark K. Adams for an aggregate consideration of $76,800 in
connection with the concurrent execution of an employment agreement and loan
and pledge agreement with Mr. Adams.

On August 15, 1994, the Company issued 5,679 shares of Series A Convertible
Preferred Stock to David R. Grant for an aggregate consideration of $54,404.82
in connection with the concurrent execution of a Loan, Stock Purchase and
Pledge agreement with Mr. Grant.

On August 15, 1994, the Company issued 456 shares of Series C Redeemable
Preferred Stock to David R. Grant for an aggregate consideration of $45,600 in
connection with the concurrent execution of a Loan, Stock Purchase and Pledge
agreement with Mr. Grant.

On August 15, 1994, the Company issued 5,679 shares of Series A Convertible
Preferred Stock to Thomas J. Drury for an aggregate consideration of
$54,404.82 in connection with the concurrent execution of a Loan, Stock
Purchase and Pledge agreement with Mr. Drury.

II-2
<PAGE>

On August 15, 1994, the Company issued 456 shares of Series C Redeemable
Preferred Stock to Thomas J. Drury for an aggregate consideration of $45,600
in connection with the concurrent execution of a Loan, Stock Purchase and
Pledge agreement with Mr. Grant.

On August 15, 1994, the Company issued 2,840 shares of Series A Convertible
Preferred Stock to Arthur A. Gertzman for an aggregate consideration of
$27,207.20 in connection with the concurrent execution of a Loan, Stock
Purchase and Pledge agreement with Mr. Gertzman.

On August 15, 1994, the Company issued 228 shares of Series C Redeemable
Preferred Stock to Arthur A. Gertzman for an aggregate consideration of
$22,800 in connection with the concurrent execution of a Loan, Stock Purchase
and Pledge agreement with Mr. Gertzman.

On April 15, 1996, in connection with the Company's acquisition of TreBay,
the Company:

1. Issued an aggregate of 390,000 shares of Series A Convertible Preferred
Stock and 28,470 shares of Series C Redeemable Preferred Stock to
certain stockholders of TreBay for an aggregate consideration of 650,000
shares of TreBay Common Stock; and

2. Issued stock options (outside of the Stock Option Plan) to purchase an
aggregate of 41,166 shares of Common Stock for an aggregate exercise
price of $385,313.76 to certain optionholders of TreBay for an aggregate
consideration of stock options to purchase an aggregate of 68,609 shares
of TreBay Common Stock.

The sales described in this Item 15 were made in reliance upon the exemption
from registration set forth in Section 4(2) of the Securities Act relating to
sales by an issuer not involving any public offering. The foregoing
transactions did not involve a distribution or public offering. No
underwriters were engaged in connection with the foregoing issuances of
securities and no commissions or discounts were paid.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
1 Form of Underwriting Agreement
+3.1.1 Restated Certificate of Incorporation
+3.1.2 Second Restated Certificate of Incorporation
+3.2.1 By-Laws
+3.2.2 Restated By-Laws
*4 Specimen of Registrant's Common Stock certificate
*5 Opinion of Willkie Farr & Gallagher as to the Legality of the
Common Stock
+10.1 Stockholders Agreement, dated as of April 16, 1996, among the
Company, Warburg, Pincus Investors, L.P., Accel IV L.P., Accel
Investors '94 L.P., Accel Keiretsu L.P., Elmore C. Patterson
Partners, Prosper Partners, Vertical Fund Associates, L.P.,
Vertical Medical Partners, L.P., Vertical Partners, L.P., Mark K.
Adams, Solomon Rosenblatt, Ronald J. Cercone, William R. Miller,
Robert A. Reeves, First Union Capital Partners, Inc., James T.
Treace, John R. Treace, Daniel H. Treace and F. Barry Bays.
+10.2 Credit Agreement, dated as of April 15, 1994, by and among
Merocel/Xomed Holdings, Inc., Merocel Corporation, Xomed-Treace,
Inc., Xomed-Treace, P.R. Inc., Bank of Boston Connecticut, certain
other lenders which are or may become parties and Bank of Boston
Connecticut, as Agent.
</TABLE>

II-3
<PAGE>

<TABLE>
<CAPTION>
<C> <S>
+10.3 Fourth Amendment and Waiver Agreement, dated as of June 7, 1996, by and
among Xomed Surgical Products, Inc., formerly known as Merocel/Xomed
Holdings, Inc., Merocel Corporation, Xomed, Inc., formerly known as
Xomed-Treace, Inc., Xomed-Treace, P.R. Inc., TreBay Medical
Corporation, Bank of Boston Connecticut, Chemical Bank, Bank of
Scotland, Internationale Nederlanden (U.S.) Capital Corporation and
Bank of Boston Connecticut, as Agent.
+10.4 Third Amendment and Waiver Agreement, dated as of April 15, 1996, by
and among Xomed Surgical Products, Inc., formerly known as
Merocel/Xomed Holdings, Inc., Merocel Corporation, Xomed, Inc.,
formerly known as Xomed-Treace, Inc., Xomed-Treace, P.R. Inc., Bank of
Boston Connecticut, Chemical Bank, Bank of Scotland, Internationale
Nederlanden (U.S.) Capital Corporation and Bank of Boston Connecticut,
as Agent.
+10.5 Second Amendment and Waiver Agreement, dated as of July 3, 1995, by and
among Merocel/Xomed Holdings, Inc., Merocel Corporation, Xomed-Treace,
Inc., Xomed-Treace, P.R. Inc., Bank of Boston Connecticut, Chemical
Bank, Bank of Scotland, Internationale Nederlanden (U.S.) Capital
Corporation and Bank of Boston Connecticut, as Agent.
+10.6 Amendment and Waiver Agreement, dated as of March 31, 1995, by and
among Merocel/Xomed Holdings, Inc., Merocel Corporation, Xomed-Treace,
Inc., Xomed-Treace, P.R. Inc., Bank of Boston Connecticut, Chemical
Bank, Bank of Scotland, Internationale Nederlanden (U.S.) Capital
Corporation and Bank of Boston Connecticut, as Agent.
+10.7 First Amendment Agreement, dated as of June 24, 1994, by and among
Merocel/Xomed Holdings, Inc., Merocel Corporation, Xomed-Treace, Inc.,
Xomed-Treace, P.R. Inc., Bank of Boston Connecticut, Chemical Bank,
Bank of Scotland, Internationale Nederlanden (U.S.) Capital Corporation
and Bank of Boston Connecticut, as Agent.
+10.8 1996 Stock Option Plan
+10.9 Employment Agreement, dated as of April 16, 1996, between the Company
and James T. Treace.
+10.10 Employment Agreement, dated as of April 16, 1996, between the Company
and F. Barry Bays.
+10.11 Fifth Amendment and Waiver Agreement, dated as of September 3, 1996, by
and among Xomed Surgical Products, Inc., formerly known as
Merocel/Xomed Holdings, Inc., Merocel Corporation, Xomed, Inc.,
formerly known as Xomed-Treace, Inc., Xomed-Treace, P.R. Inc., TreBay
Medical Corporation, Bank of Boston Connecticut, The Chase Manhattan
Bank (formerly known as Chemical Bank), Bank of Scotland,
Internationale Nederlanden (U.S.) Capital Corporation and Bank of
Boston Connecticut, as Agent.
+10.12 Separation Agreement, dated as of May 10, 1996, between the Company and
Mark K. Adams.
*10.13 Agreement, dated as of September 12, 1996, by and among the Company,
Warburg, Pincus Investors, L.P., Accel IV L.P., Accel Investors '94
L.P., Accel Keiretsu L.P., Elmore C. Patterson Partners, Prosper
Partners, Vertical Fund Associates, L.P., Mark K. Adams, Solomon
Rosenblatt, Ronald J. Cercone, William R. Miller, Robert A. Reeves,
First Union Capital Partners, Inc., James T. Treace, John R. Treace,
Dan H. Treace, F. Barry Bays, Thomas E. Timbie, Thomas Drury and David
R. Grant.
+21 Subsidiaries
*23.1 Consent of Willkie Farr & Gallagher (included in their opinion filed as
Exhibit 5.1)
23.2 Consent of Ernst & Young LLP
+24 Power of Attorney
+27 Financial Data Schedule
</TABLE>

- --------
* To be filed by amendment.
+ Previously filed.

(b) Financial Statement Schedules

None.

ITEM 17. UNDERTAKINGS

(1) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.

II-4
<PAGE>

(2) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to its Restated Certificate, Bylaws, the Underwriting
Agreement or otherwise, the Registrant has been advised that, in the opinion
of the Securities and Exchange Commission, such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.

(3) The Registrant hereby undertakes that:

(a) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of the Registration
Statement as of the time it was declared effective.

(b) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.

II-5
<PAGE>

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED IN JACKSONVILLE, FLORIDA ON OCTOBER 1, 1996.

Xomed Surgical Products, Inc.

By: /s/ Thomas E. Timbie
----------------------------------
Name: Thomas E. Timbie
Title: Vice President, Finance
and Chief Financial Officer

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES
INDICATED.

SIGNATURES TITLE DATE

* President, Chief
- ------------------------------------- Executive Officer October 1, 1996
JAMES T. TREACE and Chairman of the
Board of Directors
(Principal
Executive Officer)

Vice President,
/s/ Thomas E. Timbie Finance and Chief October 1, 1996
- ------------------------------------- Financial Officer
THOMAS E. TIMBIE (Principal
Financial and
Accounting Officer)

* Director
- ------------------------------------- October 1, 1996
RICHARD B. EMMITT

* Director
- ------------------------------------- October 1, 1996
PAUL H. KLINGENSTEIN

* Director
- ------------------------------------- October 1, 1996
WILLIAM R. MILLER

* Director
- ------------------------------------- October 1, 1996
RODMAN W. MOORHEAD, III

II-6
<PAGE>

SIGNATURES TITLE DATE

* Director
- ------------------------------------- October 1, 1996
JAMES E. THOMAS

* Director
- ------------------------------------- October 1, 1996
ELIZABETH H. WEATHERMAN

Thomas E. Timbie, by signing his name below, signs this document on behalf
of each of the above-named persons specified by an asterisk (*), pursuant to
powers of attorney duly executed by such persons, filed with the Securities
and Exchange Commission in the Registrant's Registration Statement on August
20, 1996.

Attorney-in-fact
/s/ Thomas E. Timbie
- -------------------------------------
THOMAS E. TIMBIE

II-7
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
1 Form of Underwriting Agreement
23.2 Consent of Ernst & Young LLP
</TABLE>

<PAGE>

EXHIBIT 1

2,500,00 Shares

XOMED SURGICAL PRODUCTS, INC.

Class A Common Stock

($.01 Par Value)

Form of

UNDERWRITING AGREEMENT
----------------------

_______________, 1996

Alex. Brown & Sons Incorporated
UBS Securities LLC
As Representatives of the
Several Underwriters
c/o Alex. Brown & Sons Incorporated
135 East Baltimore Street
Baltimore, Maryland 21202

Ladies and Gentlemen:

Xomed Surgical Products, Inc., a Delaware corporation (the "Company"),
proposes to sell to the several underwriters (the "Underwriters") named in
Schedule I hereto for whom you are acting as representatives (the
"Representatives") an aggregate of 2,500,000 shares of the Company's Class A
Common Stock, $.01 par value (the "Firm Shares"). The respective amounts of the
Firm Shares to be so purchased by the several Underwriters are set forth
opposite their names in Schedule I hereto. The Company also proposes to sell at
the Underwriters' option an aggregate of up to 375,000 additional shares of
the Company's Class A Common Stock (the "Option Shares").

As the Representatives, you have advised the Company (a) that you are
authorized to enter into this Agreement on behalf of the several Underwriters,
and (b) that the several Underwriters are willing, acting severally and not
jointly, to purchase the numbers of Firm Shares set forth opposite their
respective names in Schedule I, plus their pro rata portion of the Option
Shares if you elect to exercise the Over-allotment option in whole or in part
for the
<PAGE>

accounts of the several Underwriters. The Firm Shares and the Option
Shares (to the extent the aforementioned option is exercised) are herein
collectively called the "Shares."

In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:

1. Representations and Warranties of the Company.
---------------------------------------------

The Company represents and warrants to each of the Underwriters as follows:

(a) A registration statement on Form S-1 (File No. 333-10515) with
respect to the Shares has been carefully prepared by the Company in conformity
with the requirements of the Securities Act of 1933, as amended (the "Act"), and
the Rules and Regulations (the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder and has been filed with the
Commission. Copies of such registration statement, including any amendments
thereto, the preliminary prospectuses (meeting the requirements of the Rules and
Regulations) contained therein and the exhibits, financial statements and
schedules, as finally amended and revised, have heretofore been delivered by the
Company to you. Such registration statement, together with any registration
statement filed by the Company pursuant to Rule 462 (b) of the Act, herein
referred to as the "Registration Statement," which shall be deemed to include
all information omitted therefrom in reliance upon Rule 430A and contained in
the Prospectus referred to below, has become effective under the Act and no
post-effective amendment to the Registration Statement has been filed as of the
date of this Agreement. "Prospectus" means (a) the form of prospectus first
filed with the Commission pursuant to Rule 424(b) or (b) the last preliminary
prospectus included in the Registration Statement filed prior to the time it
becomes effective or filed pursuant to Rule 424(a) under the Act that is
delivered by the Company to the Underwriters for delivery to purchasers of the
Shares, together with the term sheet or abbreviated term sheet filed with the
Commission pursuant to Rule 424(b)(7) under the Act. Each preliminary
prospectus included in the Registration Statement prior to the time it becomes
effective is herein referred to as a "Preliminary Prospectus." Any reference
herein to any Prospectus shall be deemed to include any supplements or
amendments thereto, filed with the Commission after the date of filing of the
Prospectus under Rules 424(b) or 430A, and prior to the termination of the
offering of the Shares by the Underwriters.

(b) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Delaware, with
corporate power and authority to own or lease its properties and conduct its
business as described in the Registration Statement. Each of the subsidiaries of
the Company as listed in Exhibit 21 to Item 16(a) of the Registration Statement
(collectively, the "Subsidiaries") has been duly organized and is validly
existing as a corporation in good standing under the laws of

2
<PAGE>

the jurisdiction of its incorporation, with corporate power and authority to own
or lease its properties and conduct its business as described in the
Registration Statement. The Subsidiaries are the only subsidiaries, direct or
indirect, of the Company. The Company and each of the Subsidiaries are duly
qualified to transact business in all jurisdictions in which the conduct of
their business requires such qualification. The outstanding shares of capital
stock of each of the Subsidiaries have been duly authorized and validly issued,
are fully paid and non-assessable and are owned by the Company or another
Subsidiary free and clear of all liens, encumbrances and equities and claims;
and no options, warrants or other rights to purchase, agreements or other
obligations to issue or other rights to convert any obligations into shares of
capital stock or ownership interests in the Subsidiaries are outstanding.

(c) The outstanding shares of Class A Common Stock of the Company have
been duly authorized and validly issued and are fully paid and non-assessable;
the Shares to be issued and sold by the Company have been duly authorized and
when issued and paid for as contemplated herein will be validly issued, fully
paid and non-assessable; and no preemptive rights of stockholders exist with
respect to any of the Shares or the issue and sale thereof. Neither the filing
of the Registration Statement nor the offering or sale of the Shares as
contemplated by this Agreement gives rise to any rights, other than those which
have been waived or satisfied, for or relating to the registration of any shares
of Class A Common Stock.

(d) The information set forth under the caption "Capitalization" in the
Prospectus is true and correct. All of the Shares conform to the description
thereof contained in the Registration Statement. The form of certificates for
the Shares conforms to the corporate law of the jurisdiction of the Company's
incorporation.

(e) The Commission has not issued an order preventing or suspending the
use of any Prospectus relating to the proposed offering of the Shares nor
instituted proceedings for that purpose. The Registration Statement contains,
and the Prospectus and any amendments or supplements thereto will contain, all
statements which are required to be stated therein by, and will conform, to the
requirements of the Act and the Rules and Regulations. The Registration
Statement and any amendment thereto do not contain, and will not contain, any
untrue statement of a material fact and do not omit, and will not omit, to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading. The Prospectus and any amendments and
supplements thereto do not contain, and will not contain, any untrue statement
of material fact; and do not omit, and will not omit, to state any material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading;
provided, however, that the Company makes no representations or warranties as to
information contained in or omitted from the Registration Statement or the
Prospectus, or any such amendment or supplement, in

3
<PAGE>

reliance upon, and in conformity with, written information furnished to the
Company by or on behalf of any Underwriter through the Representatives,
specifically for use in the preparation thereof.

(f) The consolidated financial statements of the Company and the
Subsidiaries, together with related notes and schedules as set forth in the
Registration Statement, present fairly the financial position and the results of
operations and cash flows of the Company and the consolidated Subsidiaries, at
the indicated dates and for the indicated periods. Such financial statements
and related schedules have been prepared in accordance with generally accepted
principles of accounting, consistently applied throughout the periods involved,
except as disclosed therein, and all adjustments necessary for a fair
presentation of results for such periods have been made. The summary financial
and statistical data included in the Registration Statement presents fairly the
information shown therein and such data has been compiled on a basis consistent
with the financial statements presented therein and the books and records of the
Company. The pro forma financial statements and other pro forma financial
information included in the Registration Statement and the Prospectus present
fairly the information shown therein, have been prepared in accordance with the
Commission's rules and guidelines with respect to pro forma financial
statements, have been properly compiled on the pro forma bases described
therein, and, in the opinion of the Company, the assumptions used in the
preparation thereof are reasonable and the adjustments used therein are
appropriate to give effect to the transactions or circumstances referred to
therein.

(g) Ernst & Young LLP, who have certified certain of the financial
statements filed with the Commission as part of the Registration Statement, are
independent public accountants as required by the Act and the Rules and
Regulations.

(h) There is no action, suit, claim or proceeding pending or, to the
knowledge of the Company, threatened against the Company or any of the
Subsidiaries before any court or administrative agency or otherwise which if
determined adversely to the Company or any of its Subsidiaries might result in
any material adverse change in the earnings, business, management, properties,
assets, rights, operations, condition (financial or otherwise) or prospects of
the Company and of the Subsidiaries taken as a whole or to prevent the
consummation of the transactions contemplated hereby, except as set forth in the
Registration Statement.

(i) The Company and the Subsidiaries have good and marketable title to all
of the properties and assets reflected in the financial statements (or as
described in the Registration Statement) hereinabove described, subject to no
lien, mortgage, pledge, charge or encumbrance of any kind except those reflected
in such financial statements (or as described in the Registration Statement) or
which are not material in amount. The

4
<PAGE>

Company and the Subsidiaries occupy their leased properties under valid and
binding leases conforming in all material respects to the description thereof
set forth in the Registration Statement.

(j) The Company and the Subsidiaries have filed all Federal, State, local
and foreign income tax returns which have been required to be filed and have
paid all taxes indicated by said returns and all assessments received by them or
any of them to the extent that such taxes have become due and are not being
contested in good faith. All tax liabilities have been adequately provided for
in the financial statements of the Company.

(k) Since the respective dates as of which information is given in the
Registration Statement, as it may be amended or supplemented, there has not been
any material adverse change or any development involving a prospective material
adverse change in or affecting the earnings, business, management, properties,
assets, rights, operations, condition (financial or otherwise), or prospects of
the Company and its Subsidiaries taken as a whole, whether or not occurring in
the ordinary course of business, and there has not been any material transaction
entered into or any material transaction that is probable of being entered into
by the Company or the Subsidiaries, other than transactions in the ordinary
course of business and changes and transactions described in the Registration
Statement, as it may be amended or supplemented. The Company and the
Subsidiaries have no material contingent obligations which are not disclosed in
the Company's financial statements which are included in the Registration
Statement.

(l) Neither the Company nor any of the Subsidiaries is or with the giving
of notice or lapse of time or both, will be, in violation of or in default under
its Charter or By-Laws or under any agreement, lease, contract, indenture or
other instrument or obligation to which it is a party or by which it, or any of
its properties, is bound and which default is of material significance in
respect of the condition, financial or otherwise of the Company and its
Subsidiaries taken as a whole or the business, management, properties, assets,
rights, operations, condition (financial or otherwise) or prospects of the
Company and the Subsidiaries taken as a whole. The execution and delivery of
this Agreement and the consummation of the transactions herein contemplated and
the fulfillment of the terms hereof will not conflict with or result in a breach
of any of the terms or provisions of, or constitute a default under, any
indenture, mortgage, deed of trust or other agreement or instrument to which the
Company or any Subsidiary is a party, or of the Charter or by-laws of the
Company or any order, rule or regulation applicable to the Company or any
Subsidiary of any court or of any regulatory body or administrative agency or
other governmental body having jurisdiction.

(m) Each approval, consent, order, authorization, designation, declaration
or filing by or with any regulatory, administrative or other governmental body
necessary in connection with the execution and delivery by the Company of this
Agreement and the

5
<PAGE>

consummation of the transactions herein contemplated (except
such additional steps as may be required by the Commission, the National
Association of Securities Dealers, Inc. (the "NASD") or such additional steps as
may be necessary to qualify the Shares for public offering by the Underwriters
under state securities or Blue Sky laws) has been obtained or made and is in
full force and effect.

(n) The Company and each of the Subsidiaries holds all material licenses,
certificates and permits from governmental authorities which are necessary to
the conduct of their businesses; and neither the Company nor any of the
Subsidiaries has infringed any patents, patent rights, trade names, trademarks
or copyrights, which infringement is material to the business of the Company and
the Subsidiaries taken as a whole. The Company knows of no material
infringement by others of patents, patent rights, trade names, trademarks or
copyrights owned by or licensed to the Company.

(o) Neither the Company, nor to the Company's best knowledge, any of its
affiliates, has taken or may take, directly or indirectly, any action designed
to cause or result in, or which has constituted or which might reasonably be
expected to constitute, the stabilization or manipulation of the price of the
shares of Class A Common Stock to facilitate the sale or resale of the Shares.

(p) Neither the Company nor any Subsidiary is an "investment company"
within the meaning of such term under the Investment Company Act of 1940 and the
rules and regulations of the Commission thereunder.

(q) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.

(r) The Company and each of its Subsidiaries carry, or are covered by,
insurance in such amounts and covering such risks as is adequate for the conduct
of their respective businesses and the value of their respective properties and
as is customary for companies engaged in similar industries.

(s) The Company is in compliance in all material respects with all
presently applicable provisions of the Employee Retirement Income Security Act
of 1974, as amended, including the regulations and published interpretations
thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred
with respect to any "pension

6
<PAGE>

plan" (as defined in ERISA) for which the Company would have any liability; the
Company has not incurred and does not expect to incur liability under (i) Title
IV of ERISA with respect to termination of, or withdrawal from, any "pension
plan" or (ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as
amended, including the regulations and published interpretations thereunder (the
"Code"); and each "pension plan" for which the Company would have any liability
that is intended to be qualified under Section 401(a) of the Code is so
qualified in all material respects and nothing has occurred, whether by action
or by failure to act, which would cause the loss of such qualification.

(t) The Company confirms as of the date hereof that it is in compliance
with all provisions of Section 1 of Laws of Florida, Chapter 92-198, An Act
------
Relating to Disclosure of doing Business with Cuba, and the Company further
- --------------------------------------------------
agrees that if it commences engaging in business with the government of Cuba or
with any person or affiliate located in Cuba after the date the Registration
Statement becomes or has become effective with the Commission or with the
Florida Department of Banking and Finance (the "Department"), whichever date is
later, or if the information reported in the Prospectus, if any, concerning the
Company's business with Cuba or with any person or affiliate located in Cuba
changes in any material way, the Company will provide the Department notice of
such business or change, as appropriate, in a form acceptable to the Department.

(u) The Company and its Subsidiaries possess all certificates,
authorizations and permits issued by the appropriate federal, state, local or
foreign regulatory authorities, including without limitation the Food and Drug
Administration of the U.S. Department of Health and Human Services (the "FDA"),
necessary to conduct their respective businesses as described in the Prospectus,
except where failure to possess such certificates, authorizations or permits
would not, singly or in the aggregate, have a material adverse effect on the
Company and its Subsidiaries, taken as a whole, and neither the Company nor any
such Subsidiary has received any notice of proceedings relating to the
revocation or any other modification of any such certificate, authorization or
permit which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would result in a material adverse change in the
condition, financial or otherwise, or in the earnings, business or operations of
the Company and its Subsidiaries, taken as a whole, except as described in or
contemplated by the Prospectus.

(v) The Company and its Subsidiaries (i) are in compliance with any and all
applicable foreign, federal, state and local laws and regulations relating to
the protection of human health and safety, the environment or hazardous or toxic
substances or wastes, pollutants or contaminants ("Environmental Laws"), (ii)
have received all permits, licenses or other approvals required of them under
applicable Environmental Laws to conduct their respective businesses and (iii)
are in compliance with all terms and

7
<PAGE>

conditions of any such permit, license or approval, except where such
noncompliance with Environmental Laws, failure to receive required permits,
licenses or other approvals or failure to comply with the terms and conditions
of such permits, licenses or approvals would not, singly or in the aggregate,
have a material adverse effect on the Company and its Subsidiaries, taken as a
whole.

(w) In the ordinary course of its business, the Company conducts a
periodic review of the effect of Environmental Laws on the business, operations
and properties of the Company and its Subsidiaries, in the course of which it
identifies and evaluates associated costs and liabilities (including, without
limitation, any capital or operating expenditures required for clean-up, closure
of properties or compliance with Environmental Laws or any permit, license or
approval, any related constraints on operating activities and any potential
liabilities to third parties). On the basis of such review, the Company has
reasonably concluded that such associated costs and liabilities would not,
singly or in the aggregate, have a material adverse effect on the Company and
its Subsidiaries, taken as a whole.

2. Purchase, Sale and Delivery of the Firm Shares.
----------------------------------------------

(a) On the basis of the representations, warranties and covenants herein
contained, and subject to the conditions herein set forth, the Company agrees to
sell to the Underwriters and each Underwriter agrees, severally and not jointly,
to purchase, at a price of $_____ per share, the number of Firm Shares set forth
opposite the name of each Underwriter in Schedule I hereof, subject to
adjustments in accordance with Section 9 hereof.

(b) Payment for the Firm Shares to be sold hereunder is to be made by wire
transfer of federal or other immediately available funds to the order of the
Company against delivery of certificates therefor to the Representatives for the
several accounts of the Underwriters. Such payment and delivery are to be made
at the offices of Alex. Brown & Sons Incorporated, 135 East Baltimore Street,
Baltimore, Maryland, at 10:00 a.m., Baltimore time, on the [third] business day
after the date of this Agreement or at such other time and date not later than
five business days thereafter as you and the Company shall agree upon, such time
and date being herein referred to as the "Closing Date." (As used herein,
"business day" means a day on which the New York Stock Exchange is open for
trading and on which banks in New York are open for business and are not
permitted by law or executive order to be closed.) The certificates for the Firm
Shares will be delivered in such denominations and in such registrations as the
Representatives request in writing not later than the second full business day
prior to the Closing Date, and will be made available for inspection by the
Representatives at least one business day prior to the Closing Date.

8
<PAGE>

(c) In addition, on the basis of the representations and warranties herein
contained and subject to the terms and conditions herein set forth, the Company
hereby grants an option to the several Underwriters to purchase the Option
Shares at the price per share as set forth in the first paragraph of this
Section 2. The option granted hereby may be exercised in whole or in part by
giving written notice (i) at any time before the Closing Date and (ii) only once
thereafter within 30 days after the date of this Agreement, by you, as
Representatives of the several Underwriters, to the Company setting forth the
number of Option Shares as to which the several Underwriters are exercising the
option, the names and denominations in which the Option Shares are to be
registered and the time and date at which such certificates are to be delivered.
The time and date at which certificates for Option Shares are to be delivered
shall be determined by the Representatives but shall not be earlier than three
nor later than 10 full business days after the exercise of such option, nor in
any event prior to the Closing Date (such time and date being herein referred to
as the "Option Closing Date"). If the date of exercise of the option is three
or more days before the Closing Date, the notice of exercise shall set the
Closing Date as the Option Closing Date. The number of Option Shares to be
purchased by each Underwriter shall be in the same proportion to the total
number of Option Shares being purchased as the number of Firm Shares being
purchased by such Underwriter bears to __________, adjusted by you in such
manner as to avoid fractional shares. The option with respect to the Option
Shares granted hereunder may be exercised only to cover over-allotments in the
sale of the Firm Shares by the Underwriters. You, as Representatives of the
several Underwriters, may cancel such option at any time prior to its expiration
by giving written notice of such cancellation to the Company. To the extent, if
any, that the option is exercised, payment for the Option Shares shall be made
on the Option Closing Date by wire transfer of federal or other immediately
available funds to the order of the Company against delivery of certificates
therefor at the offices of Alex. Brown & Sons Incorporated, 135 East Baltimore
Street, Baltimore, Maryland.

3. Offering by the Underwriters.
----------------------------

It is understood that the several Underwriters are to make a public
offering of the Firm Shares as soon as the Representatives deem it advisable to
do so. The Firm Shares are to be initially offered to the public at the initial
public offering price set forth in the Prospectus. The Representatives may from
time to time thereafter change the public offering price and other selling
terms. To the extent, if at all, that any Option Shares are purchased pursuant
to Section 2 hereof, the Underwriters will offer them to the public on the
foregoing terms.

It is further understood that you will act as the Representatives for the
Underwriters in the offering and sale of the Shares in accordance with a Master
Agreement Among Underwriters entered into by you and the several other
Underwriters.

9
<PAGE>

4. Covenants of the Company.
------------------------

The Company covenants and agrees with the several Underwriters that:

(a) The Company will (A) use its best efforts to cause the Registration
Statement to become effective or, if the procedure in Rule 430A of the Rules and
Regulations is followed, to prepare and timely file with the Commission under
Rule 424(b) of the Rules and Regulations a Prospectus in a form approved by the
Representatives containing information previously omitted at the time of
effectiveness of the Registration Statement in reliance on Rule 430A of the
Rules and Regulations, (B) not file any amendment to the Registration Statement
or supplement to the Prospectus of which the Representatives shall not
previously have been advised and furnished with a copy or to which the
Representatives shall have reasonably objected in writing or which is not in
compliance with the Rules and Regulations and (C) file on a timely basis all
reports and any definitive proxy or information statements required to be filed
by the Company with the Commission subsequent to the date of the Prospectus and
prior to the termination of the offering of the Shares by the Underwriters.

(b) The Company will advise the Representatives promptly (A) when the
Registration Statement or any post-effective amendment thereto shall have become
effective, (B) of receipt of any comments from the Commission, (C) of any
request of the Commission for amendment of the Registration Statement or for
supplement to the Prospectus or for any additional information, and (D) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or the use of the Prospectus or of the institution of any
proceedings for that purpose. The Company will use its best efforts to prevent
the issuance of any such stop order preventing or suspending the use of the
Prospectus and to obtain as soon as possible the lifting thereof, if issued.

(c) The Company will cooperate with the Representatives in endeavoring to
qualify the Shares for sale under the securities laws of such jurisdictions as
the Representatives may reasonably have designated in writing and will make such
applications, file such documents, and furnish such information as may be
reasonably required for that purpose, provided the Company shall not be required
to qualify as a foreign corporation or to file a general consent to service of
process in any jurisdiction where it is not now so qualified or required to file
such a consent. The Company will, from time to time, prepare and file such
statements, reports, and other documents, as are or may be required to continue
such qualifications in effect for so long a period as the Representatives may
reasonably request for distribution of the Shares.

(d) The Company will deliver to, or upon the order of, the
Representatives, from time to time, as many copies of any Preliminary Prospectus
as the Representatives may

10
<PAGE>

reasonably request. The Company will deliver to, or upon the order of, the
Representatives during the period when delivery of a Prospectus is required
under the Act, as many copies of the Prospectus in final form, or as thereafter
amended or supplemented, as the Representatives may reasonably request. The
Company will deliver to the Representatives at or before the Closing Date, four
signed copies of the Registration Statement and all amendments thereto including
all exhibits filed therewith, and will deliver to the Representatives such
number of copies of the Registration Statement (including such number of copies
of the exhibits filed therewith that may reasonably be requested) and of all
amendments thereto, as the Representatives may reasonably request.

(e) The Company will comply with the Act and the Rules and Regulations,
and the Securities Exchange Act of 1934 (the "Exchange Act"), and the rules and
regulations of the Commission thereunder, so as to permit the completion of the
distribution of the Shares as contemplated in this Agreement and the Prospectus.
If during the period in which a prospectus is required by law to be delivered by
an Underwriter or dealer, any event shall occur as a result of which, in the
judgment of the Company or in the reasonable opinion of the Underwriters, it
becomes necessary to amend or supplement the Prospectus in order to make the
statements therein, in the light of the circumstances existing at the time the
Prospectus is delivered to a purchaser, not misleading, or, if it is necessary
at any time to amend or supplement the Prospectus to comply with any law, the
Company promptly will either (i) prepare and file with the Commission an
appropriate amendment to the Registration Statement or supplement to the
Prospectus or (ii) prepare and file with the Commission an appropriate filing
under the Securities Exchange Act of 1934 which shall be incorporated by
reference in the Prospectus so that the Prospectus as so amended or supplemented
will not, in the light of the circumstances when it is so delivered, be
misleading, or so that the Prospectus will comply with the law.

(f) The Company will make generally available to its security holders, as
soon as it is practicable to do so, but in any event not later than 15 months
after the effective date of the Registration Statement, an earning statement
(which need not be audited) in reasonable detail, covering a period of at least
12 consecutive months beginning after the effective date of the Registration
Statement, which earning statement shall satisfy the requirements of Section
11(a) of the Act and Rule 158 of the Rules and Regulations and will advise you
in writing when such statement has been so made available.

(g) The Company will, for a period of five years from the Closing Date,
deliver to the Representatives copies of annual reports and copies of all other
documents, reports and information furnished by the Company to its stockholders
or filed with any securities exchange pursuant to the requirements of such
exchange or with the Commission pursuant to the Act or the Securities Exchange
Act of 1934, as amended. The Company will deliver to the Representatives
similar reports with respect to significant subsidiaries,

11
<PAGE>

as that term is defined in the Rules and Regulations, which are not consolidated
in the Company's financial statements.

(h) No offering, sale, short sale or other disposition of any shares of
Class A Common Stock of the Company or other securities convertible into or
exchangeable or exercisable for shares of Class A Common Stock or derivative of
Class A Common Stock (or agreement for such) will be made for a period of 180
days after the date of this Agreement, directly or indirectly, by the Company
otherwise than hereunder or with the prior written consent of Alex. Brown &
Sons Incorporated.

(i) The Company will use its best efforts to have the Shares included for
quotation on [The Nasdaq National Market].

(j) The Company has caused each officer and director [and specific
shareholders] of the Company to furnish to you, on or prior to the date of this
agreement, a letter or letters, in form and substance satisfactory to the
Underwriters, pursuant to which each such person shall agree not to offer, sell,
sell short or otherwise dispose of any shares of Class A Common Stock of the
Company or other capital stock of the Company, or any other securities
convertible, exchangeable or exercisable for Common Shares or derivative of
Common Shares owned by such person or request the registration for the offer or
sale of any of the foregoing (or as to which such person has the right to
direct the disposition of) for a period of 180 days after the date of this
Agreement, directly or indirectly, except with the prior written consent of
Alex. Brown & Sons Incorporated ("Lockup Agreements").

(k) The Company shall apply the net proceeds of its sale of the Shares as
set forth in the Prospectus and shall file such reports with the Commission with
respect to the sale of the Shares and the application of the proceeds therefrom
as may be required in accordance with Rule 463 under the Act.

(l) The Company shall not invest, or otherwise use the proceeds received
by the Company from its sale of the Shares in such a manner as would require the
Company or

any of the Subsidiaries to register as an investment company under the
Investment Company Act of 1940, as amended (the "1940 Act").

(m) The Company will maintain a transfer agent and, if necessary under the
jurisdiction of incorporation of the Company, a registrar for the Class A Common
Stock.

(n) The Company will not take, directly or indirectly, any action designed
to cause or result in, or that has constituted or might reasonably be expected
to constitute, the stabilization or manipulation of the price of any securities
of the Company.

12
<PAGE>

5. Costs and Expenses.
------------------

The Company will pay all costs, expenses and fees incident to the
performance of the obligations of the Company under this Agreement, including,
without limiting the generality of the foregoing, the following: accounting
fees of the Company; the fees and disbursements of counsel for the Company; the
cost of printing and delivering to, or as requested by, the Underwriters copies
of the Registration Statement, Preliminary Prospectuses, the Prospectus, this
Agreement, the Underwriters' Selling Memorandum, the Underwriters' Invitation
Letter, the Nasdaq Application, the Blue Sky Survey and any supplements or
amendments thereto; the filing fees of the Commission; the filing fees and
expenses (including legal fees and disbursements) incident to securing any
required review by the NASD of the terms of the sale of the Shares; the
Application Fee of The Nasdaq National Market; and the expenses, including the
fees and disbursements of counsel for the Underwriters, incurred in connection
with the qualification of the Shares under State securities or Blue Sky laws.
The Company agrees to pay all costs and expenses of the Underwriters, including
the fees and disbursements of counsel for the Underwriters, incident to the
offer and sale of directed shares of the Class A Common Stock by the
Underwriters to employees and persons having business relationships with the
Company and its Subsidiaries. The Company shall not, however, be required to
pay for any of the Underwriters expenses (other than those related to
qualification under NASD regulation and State securities or Blue Sky laws)
except that, if this Agreement shall not be consummated because the conditions
in Section 6 hereof are not satisfied, or because this Agreement is terminated
by the Representatives pursuant to Section 11 hereof, or by reason of any
failure, refusal or inability on the part of the Company to perform any
undertaking or satisfy any condition of this Agreement or to comply with any of
the terms hereof on its part to be performed, unless such failure to satisfy
said condition or to comply with said terms be due to the default or omission of
any Underwriter, then the Company shall reimburse the several Underwriters for
reasonable out-of-pocket expenses, including fees and disbursements of counsel,
reasonably incurred in connection with investigating, marketing and proposing to
market the Shares or in contemplation of performing their obligations hereunder;
but the Company shall not in any event be liable to any of the several
Underwriters for damages on account of loss of anticipated profits from the sale
by them of the Shares.

6. Conditions of Obligations of the Underwriters.
---------------------------------------------

The several obligations of the Underwriters to purchase the Firm Shares on
the Closing Date and the Option Shares, if any, on the Option Closing Date are
subject to the accuracy, as of the Closing Date or the Option Closing Date, as
the case may be, of the representations and warranties of the Company contained
herein, and to the performance by the Company of its covenants and obligations
hereunder and to the following

13
<PAGE>

additional conditions:

(a) The Registration Statement and all post-effective amendments thereto
shall have become effective and any and all filings required by Rule 424 and
Rule 430A of the Rules and Regulations shall have been made, and any request of
the Commission for additional information (to be included in the Registration
Statement or otherwise) shall have been disclosed to the Representatives and
complied with to their reasonable satisfaction. No stop order suspending the
effectiveness of the Registration Statement, as amended from time to time, shall
have been issued and no proceedings for that purpose shall have been taken or,
to the knowledge of the Company, shall be contemplated by the Commission and no
injunction, restraining order, or order of any nature by a Federal or state
court of competent jurisdiction shall have been issued as of the Closing Date
which would prevent the issuance of the Shares.

(b) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, the opinion of Willkie, Farr &
Gallagher, counsel for the Company, dated the Closing Date or the Option Closing
Date, as the case may be, addressed to the Underwriters (and stating that it may
be relied upon by counsel to the Underwriters) to the effect that:

(i) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Delaware, with
corporate power and authority to own or lease its properties and conduct its
business as described in the Registration Statement; each of the Subsidiaries
has been duly organized and is validly existing as a corporation in good
standing under the laws of the jurisdiction of its incorporation, with corporate
power and authority to own or lease its properties and conduct its business as
described in the Registration Statement; the Company and each of the
Subsidiaries are duly qualified to transact business in all jurisdictions in
which the conduct of their business requires such qualification, or in which the
failure to qualify would have a materially adverse effect upon the business of
the Company and the Subsidiaries taken as a whole; and the outstanding shares of
capital stock of each of the Subsidiaries have been duly authorized and validly
issued and are fully paid and non-assessable and are owned by the Company or a
Subsidiary; and, to the best of such counsel's knowledge, the outstanding shares
of capital stock of each of the Subsidiaries is owned free and clear of all
liens, encumbrances and equities and claims, and no options, warrants or other
rights to purchase, agreements or other obligations to issue or other rights to
convert any obligations into any shares of capital stock or of ownership
interests in the Subsidiaries are outstanding.

(ii) The Company has authorized and outstanding capital stock as set forth
under the caption "Capitalization" in the Prospectus; the authorized shares of
the

14
<PAGE>

Company's Class A Common Stock have been duly authorized; the outstanding
shares of the Company's Class A Common Stock have been duly authorized and
validly issued and are fully paid and non-assessable; all of the Shares conform
to the description thereof contained in the Prospectus; the certificates for the
Shares, assuming they are in the form filed with the Commission, are in due and
proper form; the shares of Class A Common Stock, including the Option Shares, if
any, to be sold by the Company pursuant to this Agreement have been duly
authorized and will be validly issued, fully paid and non-assessable when issued
and paid for as contemplated by this Agreement; and no preemptive rights of
stockholders exist with respect to any of the Shares or the issue or sale
thereof.

(iii) Except as described in or contemplated by the Prospectus, to the
knowledge of such counsel, there are no outstanding securities of the Company
convertible or exchangeable into or evidencing the right to purchase or
subscribe for any shares of capital stock of the Company and there are no
outstanding or authorized options, warrants or rights of any character
obligating the Company to issue any shares of its capital stock or any
securities convertible or exchangeable into or evidencing the right to purchase
or subscribe for any shares of such stock; and except as described in the
Prospectus, to the knowledge of such counsel, no holder of any securities of the
Company or any other person has the right, contractual or otherwise, which has
not been satisfied or effectively waived, to cause the Company to sell or
otherwise issue to them, or to permit them to underwrite the sale of, any of the
Shares or the right to have any Common Shares or other securities of the Company
included in the Registration Statement or the right, as a result of the filing
of the Registration Statement, to require registration under the Act of any
shares of Class A Common Stock or other securities of the Company.

(iv) The Registration Statement has become effective under the Act and, to
the best of the knowledge of such counsel, no stop order proceedings with
respect thereto have been instituted or are pending or threatened under the Act.

(v) The Registration Statement, the Prospectus and each amendment or
supplement thereto comply as to form in all material respects with the
requirements of the Act or the Securities Exchange Act of 1934, as applicable
and the applicable rules and regulations thereunder (except that such counsel
need express no opinion as to the financial statements and related schedules
included therein).

(vi) The statements under the captions "Certain Transactions," "Shares
Eligible for Future Sale," "Description of Capital Stock" and "Underwriters" in
the Prospectus, and in Items 14 and 15 in the Registration Statement, insofar as

15
<PAGE>

such statements constitute a summary of documents referred to therein or matters
of law, fairly summarize in all material respects the information called for
with respect to such documents and matters.

(vii) Such counsel does not know of any contracts or documents required to
be filed as exhibits to or incorporated by reference in the Registration
Statement or described in the Registration Statement or the Prospectus which are
no so filed, incorporated by reference or described as required, and such
contracts and documents as are summarized in the Registration Statement or the
Prospectus are fairly summarized in all material respects.

(viii) Such counsel knows of no material legal or governmental proceedings
pending or threatened against the Company or any of the Subsidiaries except as
set forth in the Prospectus.

(ix) The execution and delivery of this Agreement and the consummation of
the transactions herein contemplated do not and will not conflict with or result
in a breach of any of the terms or provisions of, or constitute a default under,
the Charter or by-laws of the Company, or any agreement or instrument known to
such counsel to which the Company or any of the Subsidiaries is a party or by
which the Company or any of the Subsidiaries may be bound.

(x) This Agreement has been duly authorized, executed and delivered by the
Company.

(xi) No approval, consent, order, authorization, designation, declaration
or filing by or with any regulatory, administrative or other governmental body
is necessary in connection with the execution and delivery of this Agreement and
the consummation of the transactions herein contemplated (other than as may be
required by the NASD or as required by State securities and Blue Sky laws as to
which such counsel need express no opinion) except such as have been obtained or
made, specifying the same.

(xii) The Company is not, and will not become, as a result of the
consummation of the transactions contemplated by this Agreement, and application
of the net proceeds therefrom as described in the Prospectus, required to
register as an investment company under the 1940 Act.

(xiii) The Company and each of the Subsidiaries holds all material
licenses, certificates and permits from governmental authorities which are
necessary to the conduct of their businesses.

16
<PAGE>

(xiv) The Company and its Subsidiaries possess all certificates,
authorizations and permits issued by the appropriate federal, state, local or
foreign regulatory authorities necessary to conduct their respective businesses
as described in the Prospectus, except where failure to possess such
certificates, authorizations or permits would not, singly or in the aggregate,
have a material adverse effect on the Company and its Subsidiaries, taken as a
whole (provided that such counsel need express any opinion with respect to
matters relating to the Food and Drug Administration of the U.S. Department of
Health and Human Services (the "FDA")), and neither the Company nor any such
Subsidiary has received any notice of proceedings relating to the revocation or
any other modification of any such certificate, authorization or permit which,
singly or in the aggregate, if the subject of an unfavorable decision, ruling or
finding, would result in a material adverse change in the condition, financial
or otherwise, or in the earnings, business or operations of the Company and its
Subsidiaries, taken as a whole, except as described in or contemplated by the
Prospectus.

(xv) The Company (A) is in compliance with any and all applicable
Environmental Laws, (B) has received all permits, licenses or other approvals
required of it under applicable Environmental Laws to conduct its business and
(C) is in compliance with all terms and conditions of any such permit, license
or approval, except where such noncompliance with Environmental Laws, failure to
receive required permits, licenses or other approvals or failure to comply with
the terms and conditions of such permits, licenses or approvals would not,
singly or in the aggregate, have a material adverse effect on the Company.

In rendering such opinion Willkie, Farr & Gallagher may rely as to matters
governed by the laws of states other than New York or Federal laws on local
counsel in such jurisdictions, provided that in each case Willkie, Farr &
Gallagher shall state that they believe that they and the Underwriters are
justified in relying on such other counsel. In addition to the matters set
forth above, such opinion shall also include a statement to the effect that
nothing has come to the attention of such counsel which leads them to believe
that (i) the Registration Statement, at the time it became effective under the
Act (but after giving effect to any modifications incorporated therein pursuant
to Rule 430A under the Act) and as of the Closing Date or the Option Closing
Date, as the case may be, contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, and (ii) the Prospectus, or any
supplement thereto, on the date it was filed pursuant to the Rules and
Regulations and as of the Closing Date or the Option Closing Date, as the case
may be, contained an untrue statement of a material fact or omitted to state a
material fact necessary in order to make the statements, in the light of the
circumstances under which they are made, not misleading (except that such
counsel need express no view as to financial statements, schedules and
statistical information therein). With respect to such

17
<PAGE>

statement, Willkie, Farr & Gallagher may state that their belief is based upon
the procedures set forth therein, but is without independent check and
verification.

(c) The Representatives shall have received from Davis Polk & Wardwell,
counsel for the Underwriters, an opinion dated the Closing Date or the Option
Closing Date, as the case may be, substantially to the effect specified in
subparagraphs (ii) (but only with respect to the penultimate clause thereof),
(iv), (v), (vi) (but only with respect to "Description of Capital Stock" and
"Underwriters"), (x) and (xii) of Paragraph (b) of this Section 6, and that the
Company is a duly organized and validly existing corporation under the laws of
the State of Delaware. In addition to the matters set forth above, such opinion
shall also include a statement to the effect that nothing has come to the
attention of such counsel which leads them to believe that (i) the Registration
Statement, or any amendment thereto, as of the time it became effective under
the Act (but after giving effect to any modifications incorporated therein
pursuant to Rule 430A under the Act) as of the Closing Date or the Option
Closing Date, as the case may be, contained an untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, and (ii) the
Prospectus, or any supplement thereto, on the date it was filed pursuant to the
Rules and Regulations and as of the Closing Date or the Option Closing Date, as
the case may be, contained an untrue statement of a material fact or omitted to
state a material fact, necessary in order to make the statements, in the light
of the circumstances under which they are made, not misleading (except that such
counsel need express no view as to financial statements, schedules and
statistical information therein). With respect to such statement, Davis Polk &
Wardwell may state that their belief is based upon the procedures set forth
therein, but is without independent check and verification.

(d) The Representatives shall have received at or prior to the Closing
Date from Davis Polk & Wardwell a memorandum or summary, in form and substance
satisfactory to the Representatives, with respect to the qualification for
offering and sale by the Underwriters of the Shares under the State securities
or Blue Sky laws of such jurisdictions as the Representatives may reasonably
have designated to the Company.

(e) The Underwriters shall have received on the Closing Date an opinion of
Epstein, Edell & Retzer, patent counsel for the Company, dated the Closing Date,
to the effect that:

(i) Such counsel represents the Company in certain matters relating to
intellectual property and is familiar with the technology used by the Company in
its business.

(ii) The statements in the Registration Statement and the Prospectus under

18
<PAGE>

the captions "Risk Factors--Uncertainty Regarding Patents and Proprietary
Rights," and "Business--Patents, Trade Secrets and Proprietary Information," to
the best of such counsel's knowledge and belief, are accurate and complete
statements or summaries of the matters therein set forth and nothing has come to
such counsel's attention that causes such counsel to believe that the above-
described portions of the Registration Statement and the Prospectus contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.

(iii) To the best of such counsel's knowledge there are no legal or
governmental proceedings pending relating to patent rights, trade secrets,
trademarks, service marks or other proprietary information or materials of the
Company, and to the best of such counsel's knowledge no such proceedings are
threatened or contemplated by governmental authorities or others.

(iv) Such counsel does not know of any contracts or other documents,
relating to the Company's patents, trade secrets, trademarks or service marks or
other proprietary information or materials of a character required to be filed
as an exhibit to the Registration Statement or required to be described in the
Registration Statement or Prospectus that are not filed or described as
required.

(v) Such counsel has reviewed the Company's patent applications filed in
the U.S. and outside the U.S. (the "Applications") and based upon such review, a
review of the prior art references made known to counsel and discussions with
the Company's scientific personnel, the Company is not infringing or otherwise
violating patents, trade secrets, trademarks or service marks or other
proprietary information or materials, of others, and to the best of such
counsel's knowledge, there are no infringements by others of any of the
Company's patents, trade secrets, trademarks or service marks or other
proprietary information or materials which in the judgment of such counsel could
affect materially the use thereof by the Company.

(vi) The Applications have been properly prepared and filed on behalf of
the Company, and are being diligently pursued by the Company; the inventions
described in the Applications are assigned or licensed to the Company; to such
counsel's knowledge, except for patents where the Company has obtained a field
of use license, no other entity or individual has any right or claim in any of
the inventions, Applications, or any patent to be issued therefrom, and in such
counsel's opinion each of the Applications discloses patentable subject matter.

(vii) To the best of such counsel's knowledge, the Company owns or

19
<PAGE>

possesses sufficient licenses or other rights to use all patents, trade secrets,
trademarks or service marks or other proprietary information or materials
necessary to conduct the business now being or proposed to be conducted by the
Company as described in the Prospectus.

(f) The Underwriters shall have received on the Closing Date an opinion of
Olson, Frank & Weeda, FDA counsel to the Company, dated the Closing Date, to the
effect that:

(i) Such counsel represents the Company in certain matters relating to
the United States Federal Food and Drug Cosmetic Act and related governmental
regulatory matters.

(ii) The statements in the Prospectus with respect to the receipt of FDA
marketing clearance with respect to all of its currently-marketed products are
true, correct and complete in all material respects and such counsel is not
aware of any facts that would be a basis for the withdrawal of any such
approvals by the FDA.

(iii) The statements in the Prospectus under the captions "Risk Factors--
Government Regulation," and "Business Government Regulation," in each case
insofar as such statements constitute summaries of the legal matters, documents
or proceedings referred to therein, fairly present the information called for
with respect to such legal matters, documents and proceedings and fairly
summarize the matters referred to therein.

(g) You shall have received, on each of the dates hereof, the Closing Date
and the Option Closing Date, as the case may be, a letter dated the date hereof,
the Closing Date or the Option Closing Date, as the case may be, in form and
substance satisfactory to you, of Ernst & Young LLP confirming that they are
independent public accountants within the meaning of the Act and the applicable
published Rules and Regulations thereunder and stating that in their opinion the
financial statements and schedules examined by them and included in the
Registration Statement comply in form in all material respects with the
applicable accounting requirements of the Act and the related published Rules
and Regulations; and containing such other statements and information as is
ordinarily included in accountants' "comfort letters" to Underwriters with
respect to the financial statements and certain financial and statistical
information contained in the Registration Statement and Prospectus.

(h) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, a certificate or certificates of the
Chief Executive Officer and the Chief Financial Officer of the Company to the
effect that, as of the Closing Date or the Option Closing Date, as the case may
be, each of them severally

20
<PAGE>

represents as follows:

(i) The Registration Statement has become effective under the Act and no
stop order suspending the effectiveness of the Registrations Statement has been
issued, and no proceedings for such purpose have been taken or are, to his
knowledge, contemplated by the Commission;

(ii) The representations and warranties of the Company contained in
Section 1 hereof are true and correct as of the Closing Date or the Option
Closing Date, as the case may be;

(iii) All filings required to have been made pursuant to Rules 424 or 430A
under the Act have been made;

(iv) He or she has carefully examined the Registration Statement and the
Prospectus and, in his or her opinion, as of the effective date of the
Registration Statement, the statements contained in the Registration Statement
were true and correct, and such Registration Statement and Prospectus did not
omit to state a material fact required to be stated therein or necessary in
order to make the statements therein not misleading, and since the effective
date of the Registration Statement, no event has occurred which should have been
set forth in a supplement to or an amendment of the Prospectus which has not
been so set forth in such supplement or amendment; and

(v) Since the respective dates as of which information is given in the
Registration Statement and Prospectus, there has not been any material adverse
change or any development involving a prospective material adverse change in or
affecting the condition, financial or otherwise, of the Company and its
Subsidiaries taken as a whole or the earnings, business, management, properties,
assets, rights, operations, condition (financial or otherwise) or prospects of
the Company and the Subsidiaries taken as a whole, whether or not arising in the
ordinary course of business.

(i) The Company shall have furnished to the Representatives such further
certificates and documents confirming the representations and warranties,
covenants and conditions contained herein and related matters as the
Representatives may reasonably have requested.

(j) The Firm Shares and Option Shares, if any, have been approved for
designation upon notice of issuance on [The Nasdaq National Market].

(k) The Lockup Agreements described in Section 4(j) are in full force and
effect.

21
<PAGE>

The opinions and certificates mentioned in this Agreement shall be deemed
to be in compliance with the provisions hereof only if they are in all material
respects satisfactory to the Representatives and to Davis Polk & Wardwell,
counsel for the Underwriters.

If any of the conditions hereinabove provided for in this Section 6 shall
not have been fulfilled when and as required by this Agreement to be fulfilled,
the obligations of the Underwriters hereunder may be terminated by the
Representatives by notifying the Company of such termination in writing or by
telegram at or prior to the Closing Date or the Option Closing Date, as the case
may be.

In such event, the Company and the Underwriters shall not be under any
obligation to each other (except to the extent provided in Sections 5 and 8
hereof).

7. Conditions of the Obligations of the Company.
--------------------------------------------

The obligations of the Company to sell and deliver the portion of the
Shares required to be delivered as and when specified in this Agreement are
subject to the conditions that at the Closing Date or the Option Closing Date,
as the case may be, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and in effect or proceedings
therefor initiated or threatened.

8. Indemnification.
---------------

(a) The Company agrees to indemnify and hold harmless each Underwriter and
each person, if any, who controls any Underwriter within the meaning of the Act,
against any losses, claims, damages or liabilities to which such Underwriter or
any such controlling person may become subject under the Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) arise out of or are based upon (i) any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto, or (ii) the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading; and will reimburse each Underwriter and
each such controlling person upon demand for any legal or other expenses
reasonably incurred by such Underwriter or such controlling person in connection
with investigating or defending any such loss, claim, damage or liability,
action or proceeding or in responding to a subpoena or governmental inquiry
related to the offering of the Shares, whether or not such Underwriter or
controlling person is a party to any action or proceeding; provided, however,
that the Company will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or

22
<PAGE>

alleged untrue statement, or omission or alleged omission made in the
Registration Statement, any Preliminary Prospectus, the Prospectus, or such
amendment or supplement, in reliance upon and in conformity with written
information furnished to the Company by or through the Representatives
specifically for use in the preparation thereof. This indemnity agreement will
be in addition to any liability which the Company may otherwise have.

(b) Each Underwriter severally and not jointly will indemnify and hold
harmless the Company, each of its directors, each of its officers who have
signed the Registration Statement and each person, if any, who controls the
Company within the meaning of the Act, against any losses, claims, damages or
liabilities to which the Company or any such director, officer, or controlling
person may become subject under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions or proceedings in respect thereof)
arise out of or are based upon (i) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement, any
Preliminary Prospectus, the Prospectus or any amendment or supplement thereto,
or (ii) the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances under which they were made; and
will reimburse any legal or other expenses reasonably incurred by the Company or
any such director, officer, or controlling person in connection with
investigating or defending any such loss, claim, damage, liability, action or
proceeding; provided, however, that each Underwriter will be liable in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission has been made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or such
amendment or supplement, in reliance upon and in conformity with written
information furnished to the Company by or through the Representatives
specifically for use in the preparation thereof. This indemnity agreement will
be in addition to any liability which such Underwriter may otherwise have.

(c) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may be
sought pursuant to this Section 8, such person (the "indemnified party") shall
promptly notify the person against whom such indemnity may be sought (the
"indemnifying party") in writing. No indemnification provided for in Section
8(a) or (b) shall be available to any party who shall fail to give notice as
provided in this Section 8(c) if the party to whom notice was not given was
unaware of the proceeding to which such notice would have related and was
materially prejudiced by the failure to give such notice, but the failure to
give such notice shall not relieve the indemnifying party or parties from any
liability which it or they may have to the indemnified party for contribution or
otherwise than on account of the provisions of Section 8(a) or (b). In case any
such proceeding shall be brought against any indemnified party and it shall
notify the indemnifying party of the

23
<PAGE>

commencement thereof, the indemnifying party shall be entitled to participate
therein and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party and shall pay as incurred the
fees and disbursements of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own counsel
at its own expense. Notwithstanding the foregoing, the indemnifying party shall
pay as incurred (or within 30 days of presentation) the fees and expenses of the
counsel retained by the indemnified party in the event (i) the indemnifying
party and the indemnified party shall have mutually agreed to the retention of
such counsel, (ii) the named parties to any such proceeding (including any
impleaded parties) include both the indemnifying party and the indemnified party
and representation of both parties by the same counsel would be inappropriate
due to actual or potential differing interests between them or (iii) the
indemnifying party shall have failed to assume the defense and employ counsel
acceptable to the indemnified party within a reasonable period of time after
notice of commencement of the action. It is understood that the indemnifying
party shall not, in connection with any proceeding or related proceedings in the
same jurisdiction, be liable for the reasonable fees and expenses of more than
one separate firm for all such indemnified parties. Such firm shall be
designated in writing by you in the case of parties indemnified pursuant to
Section 8(a) and by the Company in the case of parties indemnified pursuant to
Section 8(b). The indemnifying party shall not be liable for any settlement of
any proceeding effected without its written consent but if settled with such
consent or if there be a final judgment for the plaintiff, the indemnifying
party agrees to indemnify the indemnified party from and against any loss or
liability by reason of such settlement or judgment. In addition, the
indemnifying party will not, without the prior written consent of the
indemnified party, settle or compromise or consent to the entry of any judgment
in any pending or threatened claim, action or proceeding of which
indemnification may be sought hereunder (whether or not any indemnified party is
an actual or potential party to such claim, action or proceeding) unless such
settlement, compromise or consent includes an unconditional release of each
indemnified party from all liability arising out of such claim, action or
proceeding.

(d) If the indemnification provided for in this Section 8 is unavailable
to or insufficient to hold harmless an indemnified party under Section 8(a) or
(b) above in respect of any losses, claims, damages or liabilities (or actions
or proceedings in respect thereof) referred to therein, then each indemnifying
party shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) in such proportion as is appropriate to reflect
the relative benefits received by the Company on the one hand and the
Underwriters on the other from the offering of the Shares. If, however, the
allocation provided by the immediately preceding sentence is not permitted by
applicable law then each indemnifying party shall contribute to such amount paid
or payable by such indemnified party in such proportion as is appropriate to
reflect not only such relative

24
<PAGE>

benefits but also the relative fault of the Company on the one hand and the
Underwriters on the other in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities, (or actions or
proceedings in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one hand
and the Underwriters on the other shall be deemed to be in the same proportion
as the total net proceeds from the offering (before deducting expenses) received
by the Company bear to the total underwriting discounts and commissions received
by the Underwriters, in each case as set forth in the table on the cover page of
the Prospectus. The relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company on the one hand or the Underwriters on the
other and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.

The Company and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this Section 8(d) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 8(d). The amount
paid or payable by an indemnified party as a result of the losses, claims,
damages or liabilities (or actions or proceedings in respect thereof) referred
to above in this Section 8(d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (d), (i) no Underwriter shall be required to
contribute any amount in excess of the underwriting discounts and commissions
applicable to the Shares purchased by such Underwriter and (ii) no person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations in this Section 8(d)
to contribute are several in proportion to their respective underwriting
obligations and not joint.

(e) In any proceeding relating to the Registration Statement, any
Preliminary Prospectus, the Prospectus or any supplement or amendment thereto,
each party against whom contribution may be sought under this Section 8 hereby
consents to the jurisdiction of any court having jurisdiction over any other
contributing party, agrees that process issuing from such court may be served
upon him or it by any other contributing party and consents to the service of
such process and agrees that any other contributing party may join him or it as
an additional defendant in any such proceeding in which such other contributing
party is a party.

(f) Any losses, claims, damages, liabilities or expenses for which an
indemnified

25
<PAGE>

party is entitled to indemnification or contribution under this Section 8 shall
be paid by the indemnifying party to the indemnified party as such losses,
claims, damages, liabilities or expenses are incurred. The indemnity and
contribution agreements contained in this Section 8 and the representations and
warranties of the Company set forth in this Agreement shall remain operative and
in full force and effect, regardless of (i) any investigation made by or on
behalf of any Underwriter or any person controlling any Underwriter, the
Company, its directors or officers or any persons controlling the Company, (ii)
acceptance of any Shares and payment therefor hereunder, and (iii) any
termination of this Agreement. A successor to any Underwriter, or to the
Company, its directors or officers, or any person controlling the Company, shall
be entitled to the benefits of the indemnity, contribution and reimbursement
agreements contained in this Section 8.

9. Default by Underwriters.
-----------------------

If on the Closing Date or the Option Closing Date, as the case may be, any
Underwriter shall fail to purchase and pay for the portion of the Shares which
such Underwriter has agreed to purchase and pay for on such date (otherwise than
by reason of any default on the part of the Company), you, as Representatives of
the Underwriters, shall use your reasonable efforts to procure within 36 hours
thereafter one or more of the other Underwriters, or any others, to purchase
from the Company such amounts as may be agreed upon and upon the terms set forth
herein, the Firm Shares or Option Shares, as the case may be, which the
defaulting Underwriter or Underwriters failed to purchase. If during such 36
hours you, as such Representatives, shall not have procured such other
Underwriters, or any others, to purchase the Firm Shares or Option Shares, as
the case may be, agreed to be purchased by the defaulting Underwriter or
Underwriters, then (a) if the aggregate number of shares with respect to which
such default shall occur does not exceed 10% of the Firm Shares or Option
Shares, as the case may be, covered hereby, the other Underwriters shall be
obligated, severally, in proportion to the respective numbers of Firm Shares or
Option Shares, as the case may be, which they are obligated to purchase
hereunder, to purchase the Firm Shares or Option Shares, as the case may be,
which such defaulting Underwriter or Underwriters failed to purchase, or (b) if
the aggregate number of shares of Firm Shares or Option Shares, as the case may
be, with respect to which such default shall occur exceeds 10% of the Firm
Shares or Option Shares, as the case may be, covered hereby, the Company or you
as the Representatives of the Underwriters will have the right, by written
notice given within the next 36-hour period to the parties to this Agreement, to
terminate this Agreement without liability on the part of the non-defaulting
Underwriters or of the Company except to the extent provided in Section 8
hereof. In the event of a default by any Underwriter or Underwriters, as set
forth in this Section 9, the Closing Date or Option Closing Date, as the case
may be, may be postponed for such period, not exceeding seven days, as you, as
Representatives, may determine in order that the required changes in the
Registration

26
<PAGE>

Statement or in the Prospectus or in any other documents or arrangements may be
effected. The term "Underwriter" includes any person substituted for a
defaulting Underwriter. Any action taken under this Section 9 shall not relieve
any defaulting Underwriter from liability in respect of any default of such
Underwriter under this Agreement.

10. Notices.
-------

All communications hereunder shall be in writing and, except as otherwise
provided herein, will be mailed, delivered, telecopied or telegraphed and
confirmed as follows: if to the Underwriters, to Alex. Brown & Sons
Incorporated, 135 East Baltimore Street, Baltimore, Maryland 21202, Attention:
________________; with a copy to Alex. Brown & Sons Incorporated, 135 East
Baltimore Street, Baltimore, Maryland 21202. Attention: General Counsel; if to
the Company , to

Xomed Surgical Products, Inc.
6743 Southpoint Drive North
Jacksonville, Florida 32216

11. Termination.
-----------

This Agreement may be terminated by you by notice to the Company as
follows:

(a) at any time prior to the earlier of (i) the time the Shares are
released by you for sale by notice to the Underwriters, or (ii) 11:30 a.m. on
the first business day following the date of this Agreement;

(b) at any time prior to the Closing Date if any of the following has
occurred: (i) since the respective dates as of which information is given in the
Registration Statement and the Prospectus, any material adverse change or any
development involving a prospective material adverse change in or affecting the
condition, financial or otherwise, of the Company and its Subsidiaries taken as
a whole or the earnings, business, management, properties, assets, rights,
operations, condition (financial or otherwise) or prospects of the Company and
its Subsidiaries taken as a whole, whether or not arising in the ordinary course
of business, (ii) any outbreak or escalation of hostilities or declaration of
war or national emergency or other national or international calamity or crisis
or change in economic or political conditions if the effect of such outbreak,
escalation, declaration, emergency, calamity, crisis or change on the financial
markets of the United States would, in your reasonable judgment, make it
impracticable to market the Shares or to enforce contracts for the sale of the
Shares, or (iii) suspension of trading in securities

27
<PAGE>

generally on the New York Stock Exchange or the American Stock Exchange or
limitation on prices (other than limitations on hours or numbers of days of
trading) for securities on either such Exchange, (iv) the enactment,
publication, decree or other promulgation of any statute, regulation, rule or
order of any court or other governmental authority which in your opinion
materially and adversely affects or may materially and adversely affect the
business or operations of the Company, (v) declaration of a banking moratorium
by United States or New York State authorities, (vi) any downgrading in the
rating of the Company's debt securities by any "nationally recognized
statistical rating organization" (as defined for purposes of Rule 436(g) under
the Exchange Act); (vii) the suspension of trading of the Company's common stock
by the Commission on [The Nasdaq National Market] or (viii) the taking of any
action by any governmental body or agency in respect of its monetary or fiscal
affairs which in your reasonable opinion has a material adverse effect on the
securities markets in the United States; or

12. Successors.
----------

This Agreement has been and is made solely for the benefit of the
Underwriters and the Company and their respective successors, executors,
administrators, heirs and assigns, and the officers, directors and controlling
persons referred to herein, and no other person will have any right or
obligation hereunder. No purchaser of any of the Shares from any Underwriter
shall be deemed a successor or assign merely because of such purchase.

13. Information Provided by Underwriters.
------------------------------------

The Company and the Underwriters acknowledge and agree that the only
information furnished or to be furnished by any Underwriter to the Company for
inclusion in any Prospectus or the Registration Statement consists of the
information set forth in the last paragraph on the front cover page (insofar as
such information relates to the Underwriters), legends required by Item 502(d)
of Regulation S-K under the Act and the information under the caption
"Underwriting" in the Prospectus.

14. Miscellaneous.
-------------

The reimbursement, indemnification and contribution agreements contained in
this Agreement and the representations, warranties and covenants in this
Agreement shall remain in full force and effect regardless of (a) any
termination of this Agreement, (b) any investigation made by or on behalf of
any Underwriter or controlling person thereof, or by or on behalf of the Company
or its directors or officers and (c) delivery of and payment for the Shares
under this Agreement.

28
<PAGE>

This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.

This Agreement shall be governed by, and construed in accordance with, the
laws of the State of Maryland.

If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Company and the several
Underwriters in accordance with its terms.

Very truly yours,

XOMED SURGICAL PRODUCTS, INC.

By____________________________
President

The foregoing Underwriting Agreement
is hereby confirmed and accepted as
of the date first above written.

ALEX. BROWN & SONS INCORPORATED
UBS SECURITIES LLC

As Representatives of the several
Underwriters listed on Schedule I

By: Alex. Brown & Sons Incorporated

By: __________________________
Authorized Officer

29
<PAGE>

SCHEDULE I

Schedule of Underwriters

Number of Firm Shares
Underwriter to be Purchased
----------- ------------------------

Alex. Brown & Sons Incorporated
UBS Securities LLC

__________

Total __________

<PAGE>

EXHIBIT 23.2

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the captions "Experts" and
"Selected Consolidated Financial Data" and to the use of our reports dated
June 19, 1996, except for the 4th paragraph of footnote No. 8 for which the
date is September 3, 1996, May 31, 1996 and May 31, 1996 related to Xomed
Surgical Products, Inc., Xomed, Inc., and TreBay Medical Corporation,
respectively, in Amendment No. 2 to the Registration Statement and related
Prospectus of Xomed Surgical Products, Inc. for the Registration of 2,500,000
shares of its Common Stock.

ERNST & YOUNG LLP

Jacksonville, Florida
September 30, 1996