MICROSURGE INC, S-1/A, 1996-06-18

MICROSURGE INC
S-1/A, 1996-06-18
ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 18, 1996

REGISTRATION NO. 333-4112
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

AMENDMENT NO. 4 TO

FORM S-1

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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

MICROSURGE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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DELAWARE 3841 04-3118465
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)

150 A STREET,
NEEDHAM, MA 02194
(617) 444-2300
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

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

E. JAMES HUTCHENS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
MICROSURGE, INC.
150 A STREET
NEEDHAM, MA 02194 (617) 444-2300
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)

Copies to:

DAVID E. REDLICK, ESQ. ROBERT ROSENMAN, ESQ.
HALE AND DORR CRAVATH, SWAINE & MOORE
60 STATE STREET WORLDWIDE PLAZA
BOSTON, MASSACHUSETTS 02109 825 EIGHTH AVENUE
(617) 526-6000 NEW YORK, NEW YORK 10019-7475
(212) 474-1000

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date hereof.

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, check the following box and
list the Securities Act registration statement number of 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 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 WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO
SECTION 8(A), MAY DETERMINE.

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<PAGE>

MICROSURGE, INC.

CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS
OF INFORMATION REQUIRED BY ITEMS IN PART I OF FORM S-1

<TABLE>
<CAPTION>
REGISTRATION STATEMENT
ITEM AND CAPTION LOCATION IN PROSPECTUS
---------------------- ----------------------
<C> <S> <C>
1. Forepart of Registration Statement
and Outside Front Cover Page of
Prospectus........................ Outside Front Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus............... Inside Front Cover Page; Outside Back
Cover Page
3. Summary Information, Risk Factors
and Ratio of Earnings to Fixed
Charges........................... Prospectus Summary; Risk Factors
4. Use of Proceeds.................... Prospectus Summary; Use of Proceeds
5. Determination of Offering Price.... Underwriting
6. Dilution........................... Dilution
7. Selling Security Holders........... Not Applicable
8. Plan of Distribution............... Outside Front Cover Page; Underwriting
9. Description of Securities to be
Registered........................ Description of Capital Stock
10. Interests of Named Experts and
Counsel........................... Legal Matters; Experts
11. Information With Respect to the
Registrant:
(a) Description of Business........ Business
(b) Description of Property........ Business--Facilities
(c) Legal Proceedings.............. Business--Litigation
(d) Market Price of and Dividends
on the Registrant's Common
Equity and Related Stockholder
Matters........................ Outside Front Cover Page; Dividend
Policy; Principal Stockholders;
Description of Capital Stock; Shares
Eligible for Future Sale
(e) Financial Statements........... Capitalization; Financial Statements
(f) Selected Financial Data........ Selected Financial Data
(g) Supplementary Financial
Information.................... Not Applicable
(h) Management's Discussion and
Analysis of Financial Condition
and Results of Operations...... Management's Discussion and Analysis
of Financial Condition and Results of
Operations
(i) Changes in and Disagreements
with Accountants on Accounting
and Financial Disclosure....... Change in Independent Accountants
(j) Directors, Executive Officers,
Promoters and Control Persons.. Management--Executive Officers and
Directors; Certain Transactions
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
REGISTRATION STATEMENT
ITEM AND CAPTION LOCATION IN PROSPECTUS
---------------------- ----------------------
<C> <S> <C>
(k) Executive Compensation............. Management--Executive Compensation
(l) Security Ownership of Certain
Beneficial Owners and Management... Principal Stockholders; Certain
Transactions
(m) Certain Relationships and Related
Transactions....................... Certain Transactions
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities........................... Not Applicable
</TABLE>
<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,

PROSPECTUS JUNE 18, 1996

3,000,000 SHARES

[MICROSURGE LOGO APPEARS HERE]

COMMON STOCK
($.001 PAR VALUE)

The 3,000,000 shares of common stock, par value $.001 per share (the "Common
Stock"), offered hereby (the "Shares") are being offered by Microsurge, Inc.
("Microsurge" or the "Company"). Prior to this offering, there has been no
public market for the Common Stock. It is currently estimated that the initial
public offering price will be between $11.00 and $13.00 per share. See
"Underwriting" for the factors to be considered in determining the initial
public offering price.

The Common Stock has been approved for quotation on the Nasdaq National Market
under the symbol "MSRG."

SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.

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 TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT COMPANY(1)
<S> <C> <C> <C>
Per Share..................................... $ $ $
Total(2)...................................... $ $ $
</TABLE>
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(1) Before deducting expenses payable by the Company estimated at $800,000.
(2) The Company has granted the Underwriters a 30-day option to purchase up to
450,000 additional shares of Common Stock at the Price to Public, less the
Underwriting Discount, solely to cover over-allotments, if any. If such
option is exercised in full, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $ , $ and $ , respectively.
See "Underwriting."

The shares of Common Stock are offered subject to receipt and acceptance by the
Underwriters, to prior sale, and to the Underwriters' right to reject any order
in whole or in part and to withdraw, cancel or modify the offer without notice.
It is expected that delivery of the shares of Common Stock will be made at the
office of Salomon Brothers Inc, Seven World Trade Center, New York, New York,
or through the facilities of The Depository Trust Company on or about ,
1996.

SALOMON BROTHERS INC
RAYMOND JAMES & ASSOCIATES, INC.
VECTOR SECURITIES INTERNATIONAL, INC.

The date of this Prospectus is , 1996.
<PAGE>

[PICTURE OF DETACHATIP MULTI-USE LAPAROSCOPIC SCISSORS APPEARS HERE]

Microsurge designs, develops, manufactures and markets instrumentation
for use in minimally invasive surgery.

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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
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN
THE OVER-THE-COUNTER MARKET, OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.

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"Microsurge", "Uniforce", "VariFlo" and "Director" are registered trademarks
of the Company. "BipoliGator," "CloSure," "DetachaPort," "DetachaTip,"
"StapleLeader" and "Tip Tracker" are trademarks of the Company with respect to
which the Company has applied for federal trademark registrations.
"PillowPort" and "DetachaClip" are trademarks of the Company. This Prospectus
also includes the names and trademarks of companies other than Microsurge.
<PAGE>

[ON THE LEFT SIDE OF THE PAGE UNDER THE CAPTION "1993", A PICTURE OF DETACHATIP
MULTI-USE LAPAROSCOPIC INSTRUMENTS APPEARS; ON THE RIGHT SIDE OF THE PAGE UNDER
THE CAPTION "1994-1995" A PICTURE OF THE DETACHATIP TRAY SYSTEM APPEARS]

Micosurge's multi-use laparoscopic instrumentation is designed to provide a
lower instrumentation cost per procedure than single-use disposable
instrumentation and greater convenience and more consistent performance than
traditional reusable instrumentation. The Company has introduced 52 lararoscopic
products since it began marketing its products in July 1993 and plans to release
another seven products by the end of 1996.
<PAGE>

[ON THE LEFT SIDE OF THE PAGE UNDER THE CAPTION "1996", A PICTURE OF A
DETACHAPORT MULTI-USE TROCAR APPEARS; ON THE RIGHT SIDE OF THE PAGE UNDER THE
CAPTION "UNDER DEVELOPMENT", A PICTURE OF A PROTOTYPE OF THE DETACHACLIP MULTI-
USE CLIP APPLIER APPEARS ABOVE THE FOLLOWING LEGEND: "THE DETACHACLIP PRODUCT
CANDIDATE HAS NOT RECEIVED MARKETING CLEARANCE FROM THE FDA. THE PROCESS OF
OBTAINING MARKETING CLEARANCE CAN BE LENGTHY AND THERE CAN BE NO ASSURANCE THAT
MARKETING CLEARANCE WILL BE RECEIVED."]

<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and the Financial Statements and Notes thereto appearing elsewhere
in this Prospectus. Investors should carefully consider the information set
forth under the heading "Risk Factors." Except as otherwise specified, all
information in this Prospectus assumes no exercise of the Underwriters' over-
allotment option and reflects (i) a 0.644-for-1 reverse stock split of the
Common Stock of the Company effected on June 17, 1996, (ii) the conversion of
all outstanding shares of the Company's Redeemable Convertible Preferred Stock
into an aggregate of 5,525,860 shares of Common Stock at the closing of this
offering and (iii) the conversion of the outstanding principal amount of and
accrued interest on the Company's Convertible Subordinated Notes due August 28,
1997 (the "1996 Notes") issued in the aggregate principal amount of $2,334,414
into an aggregate of 333,989 shares of Common Stock at the closing of this
offering (assuming an initial public offering price of $12.00 per share and a
closing date of July 1, 1996).

THE COMPANY

Microsurge designs, develops, manufactures and markets surgical
instrumentation for use in minimally invasive surgery. The Company is currently
developing families of surgical instrumentation for use in minimally invasive
abdominal procedures, referred to as laparoscopy, and minimally invasive
thoracic procedures, referred to as thoracoscopy. Microsurge's laparoscopic
instrumentation is based on a novel "multi-use" design concept which seeks to
address the shortcomings of, and provide an alternative to, currently available
single-use disposable and traditional reusable laparoscopic instrumentation.
The Company's thoracoscopic instrumentation is being developed to address a
market need for a family of products specifically designed for thoracoscopic
surgery. The Company began marketing its laparoscopic products in July 1993 and
plans to release its first thoracoscopic products in the second half of 1996.
The Company is also exploring the applicability of its product designs and
technologies to other areas of minimally invasive surgery, such as cardiac and
colorectal surgery.

Minimally invasive surgical procedures are performed through strategically
placed punctures in a patient's body without the major incisions used in
traditional open surgery. Minimally invasive surgical procedures generally
offer a range of clinical and healthcare cost containment benefits in
comparison with traditional open surgery, including reduced patient trauma,
decreased scarring, reduced risk of infection, shortened post-operative
hospitalization and more rapid recovery times. These benefits have resulted in
a growing preference among patients, surgeons and healthcare payors for
minimally invasive procedures over traditional open surgery. From 1990 to 1995,
the number of laparoscopic procedures performed annually in the United States
increased from approximately 84,000 to more than an estimated 2,400,000 and the
number of thoracoscopic procedures performed annually in the United States
increased from fewer than 1,000 to over an estimated 92,000.

Laparoscopy was initially performed using traditional stainless steel
instrumentation designed to be sterilized and reused many times. The principal
benefit of traditional reusable instrumentation is that its reusable nature
reduces the instrumentation cost per procedure. However, this instrumentation
is often difficult to clean and needs to be repaired periodically in order to
continue to be used effectively. In addition, after a number of repairs, the
precision of traditional reusable instrumentation permanently degrades. In
response to these shortcomings, surgical instrumentation manufacturers
introduced single-use disposable laparoscopic instrumentation in 1989. These
manufacturers facilitated the market acceptance of single-use disposable
products by offering surgeons training programs focusing

3
<PAGE>

on the use of this new instrumentation. Although disposable laparoscopic
instrumentation has less precision than traditional reusable instrumentation it
was widely accepted because it did not need to be cleaned or repaired. However,
the managed care cost containment pressures of the 1990s have caused healthcare
providers to reevaluate the use of single-use disposable laparoscopic
instrumentation because of its high cost per surgical procedure.

To address the shortcomings of single-use disposable and traditional reusable
laparoscopic instrumentation, Microsurge is developing a family of "multi-use"
laparoscopic surgical instrumentation. Multi-use laparoscopic instrumentation
is designed to provide a lower instrumentation cost per procedure than single-
use disposable instrumentation and greater convenience and more consistent
performance than traditional reusable instrumentation. The Company's multi-use
laparoscopic instrumentation is designed to be easily cleaned and used multiple
times. Most of this instrumentation is comprised of two components. One
component, generally a handle, is designed to be used many, often hundreds of,
times. The other component, generally a tip configuration, is designed to be
used one or more times. When the performance of any component deteriorates, it
is discarded and replaced by a new component, eliminating the need for repairs.

Microsurge's principal laparoscopic products include its line of DetachaTip
multi-use hand-held scissors, graspers and dissectors and DetachaPort multi-use
trocars. The Company is also developing a DetachaClip multi-use laparoscopic
clip applier for use in ligating vessels and ducts. The Company began marketing
its laparoscopic products in July 1993 and has since introduced 52 products to
the laparoscopic instrumentation market. The Company plans to release seven
additional laparoscopic products by the end of 1996. The Company believes that
its multi-use laparoscopic instrumentation addresses the requirements of
today's managed care environment due to the cost benefits of this
instrumentation and its precision, quality and feel.

In contrast with laparoscopy, thoracoscopy is a relatively new surgical
approach. Surgical instrumentation manufacturers are not yet offering broad
lines of instrumentation specifically designed for use in thoracoscopy. To
address this need, the Company is developing a family of surgical
instrumentation for use in thoracoscopic surgery, including DetachaTip multi-
use scissors, a line of dilators and trocars to gain access to the chest
cavity, a novel plication device and an array of accessories. The Company has
16 thoracoscopic products under development and expects to release eight of
these products in the second half of 1996. The Company believes that the
availability of surgical instrumentation and training programs specifically
designed for thoracoscopic surgery may significantly increase the use of
thoracoscopy.

The Company's objective is to achieve a significant presence in the minimally
invasive surgical instrumentation market by developing and marketing families
of innovative surgical instrumentation. The Company believes that the
development of targeted, cost-effective instrumentation will play an important
role in the growth of minimally-invasive surgical procedures. In pursuit of the
Company's obejective Microsurge has recruited a direct sales force to market
the Company's products in the United States. As the Company expands its product
offerings, it plans to significantly increase its domestic direct sales force.
Through March 31, 1996, the Company had sold its laparoscopic products to over
650 customers in the United States. The Company also markets its products in 18
foreign countries through 14 international distributors and is in the process
of expanding its international distributor network.

The Company was organized as a Delaware corporation in 1991. The Company's
principal office is located at 150 A Street, Needham, MA 02194 and its
telephone number is (617) 444-2300.

4
<PAGE>

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company.... 3,000,000 shares
Common Stock to be outstanding after
the offering.......................... 9,265,323 shares(1)
Use of proceeds........................ To fund sales and marketing activities
and research and product development,
to pay a license fee, to repay bank
debt and for general corporate
purposes.
Proposed Nasdaq National Market sym-
bol................................... MSRG
</TABLE>
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(1) Reflects (i) the conversion of all outstanding shares of Redeemable
Convertible Preferred Stock into an aggregate of 5,525,860 shares of Common
Stock at the closing of this offering and (ii) the conversion of the
outstanding principal amount of and accrued interest on the 1996 Notes into
an aggregate of 333,989 shares of Common Stock at the closing of this
offering (assuming an initial public offering price of $12.00 per share and
a closing date of July 1, 1996). Does not include 892,450 shares reserved
for issuance upon the exercise of outstanding options and warrants
(excluding the warrants to purchase shares of Common Stock issued in
connection with the sale and issuance of the 1996 Notes (the "1996
Warrants") as of March 31, 1996 at a weighted average exercise price of
$1.44 per share, 274,694 shares reserved for issuance upon the exercise of
outstanding options granted in May 1996 at an exercise price equal to the
initial public offering price (the "May 1996 Options") and 105,035 shares
reserved for issuance upon the exercise of the outstanding 1996 Warrants at
an exercise price equal to the public offering price (assuming an initial
public offering price of $12.00 per share). See "Dilution,"
"Capitalization," "Certain Transactions" and "Description of Capital
Stock."

5
<PAGE>

SUMMARY FINANCIAL DATA

<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
YEARS ENDED DECEMBER 31, 31,
------------------------------------------- -----------------------------
1991(1) 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Product sales.......... $ -- $ -- $ 101 $ 1,548 $ 3,797 $ 687 $ 1,173
Cost of goods sold..... -- -- 53 1,042 2,370 428 724
Operating expenses
Research and
development.......... 466 1,313 1,939 2,010 1,913 399 496
Selling, general and
administrative....... 473 1,372 1,759 3,312 5,912 1,187 1,437
------ ------- ------- ------- ------- ------- -------
Total operating
expenses........... 939 2,685 3,698 5,322 7,825 1,586 1,933
------ ------- ------- ------- ------- ------- -------
Interest and other
(income) expense...... (12) (15) (194) (139) (67) (19) 12
------ ------- ------- ------- ------- ------- -------
Net loss............... $ (927) $(2,670) $(3,456) $(4,677) $(6,331) $(1,308) $(1,496)
====== ======= ======= ======= ======= ======= =======
Pro forma net loss per
share(2).............. $ (1.02) $ (0.24)
======= =======
Pro forma weighted
average common and
common equivalent
shares
outstanding(2)........ 6,194 6,213
======= =======
</TABLE>

<TABLE>
<CAPTION>
MARCH 31, 1996
-------------------------------
PRO FORMA
PRO AS
ACTUAL FORMA(3) ADJUSTED(4)
---------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securi-
ties......................................... $ 2,403 $2,403 $35,083
Working capital............................... 2,672 2,672 35,352
Total assets.................................. 5,520 5,520 38,200
Long-term debt, net of current portion........ 2,412 136 136
Redeemable convertible preferred stock........ 25,875 -- --
Total stockholders' equity (deficit).......... (24,262) 3,889 36,569
</TABLE>
- --------
(1) For the period February 27, 1991 (date of inception) to December 31, 1991.
(2) See Note 2 to Financial Statements for information concerning the
computation of pro forma net loss per share and shares used in computing
pro forma net loss per share.
(3) Presented on a pro forma basis to give effect to (a) the conversion of all
outstanding shares of Redeemable Convertible Preferred Stock into an
aggregate of 5,525,860 shares of Common Stock at the closing of this
offering and (b) the conversion of the outstanding principal amount of and
accrued interest on the 1996 Notes into an aggregate of 333,989 shares of
Common Stock at the closing of this offering (assuming an initial public
offering price of $12.00 per share and a closing date of July 1, 1996).
(4) Adjusted to give effect to the sale of the 3,000,000 shares of Common Stock
offered by the Company hereby at an assumed initial public offering price
of $12.00 per share and the application of net proceeds therefrom. See "Use
of Proceeds" and "Capitalization."

6
<PAGE>

RISK FACTORS

An investment in the shares of Common Stock offered hereby involves a high
degree of risk. The following factors, in addition to the other information
contained in this Prospectus, should be carefully considered in evaluating the
Company and its business before purchasing the shares of Common Stock offered
hereby.

LIMITED OPERATING HISTORY; HISTORY OF LOSSES AND POSSIBLE FUTURE LOSSES;
FLUCTUATIONS IN OPERATING RESULTS

The Company has a limited operating history upon which an evaluation of its
prospects can be made. Microsurge was founded in 1991 and has had limited
sales to date. Since 1991, the Company has engaged primarily in researching,
developing, testing, obtaining regulatory clearances and developing
manufacturing capabilities for its products. The Company first began marketing
and selling its products in the second half of 1993. The Company's prospects
should be considered in light of the risks, expenses and difficulties
frequently encountered in establishing a business in the evolving, heavily-
regulated medical instrumentation industry.

The Company has experienced net losses since its inception, including net
losses for the fiscal years ended December 31, 1994 and December 31, 1995 and
the first quarter of 1996 of $4,676,891, $6,330,841 and $1,496,385,
respectively. At March 31, 1996, the Company had an accumulated deficit of
$24,262,790. The Company expects to incur substantial and increasing sales and
marketing, research and product development, manufacturing and other expenses
in the future, particularly as it expands its product offerings for use in
laparoscopic surgery and introduces its thoracoscopic surgery products. There
can be no assurance that the Company will ever generate substantial revenues
or achieve profitability. Results of operations may fluctuate significantly
from quarter to quarter and will depend upon numerous factors, including the
availability of third party reimbursement, the timing of regulatory actions,
progress of product development, the extent to which the Company's products
gain market acceptance, varying pricing promotions and volume discounts to
customers, marketing and manufacturing costs and competition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Collaboration and License Agreements."

RAPID TECHNOLOGICAL CHANGE, OBSOLESCENCE AND COMPETITION

The medical instrumentation market is characterized by intensive development
efforts and rapidly advancing technology. The future success of the Company
will depend, in large part, upon its ability to anticipate and keep pace with
advancing technology and competitive innovations. However, there can be no
assurance that the Company will be successful in identifying, developing and
marketing new products or enhancing its existing products. In addition, there
can be no assurance that new products or alternative medical procedures will
not be developed that will render the Company's current or planned products
obsolete or inferior. Rapid technological development by competitors 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.

Competition in the market for minimally invasive surgical instrumentation is
intense. The Company competes with numerous medical device companies,
including United States Surgical Corporation ("U.S. Surgical") and Ethicon
EndoSurgery, Inc. ("Ethicon EndoSurgery"), a subsidiary of Johnson & Johnson.
U.S. Surgical and Ethicon EndoSurgery offer lines of single-use disposable
instrumentation for laparoscopic surgery and other types of minimally invasive
procedures that have achieved significant market penetration. In addition,
many competitors of the Company offer traditional reusable surgical
instrumentation that is used by surgeons to perform many of the minimally
invasive surgical procedures for which the Company either is offering or is
developing products. Many of the Company's

7
<PAGE>

competitors and potential competitors have substantially greater capital
resources, 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. Moreover, earlier entrants in the market often
obtain and maintain significant market share relative to later entrants such
as the Company. Some of the Company's competitors have long-term or
preferential supply arrangements with hospitals that may act as a barrier to
market entry. Other large healthcare companies may enter the minimally
invasive surgical product market in the future. Competing companies may
succeed in developing products that are more efficacious or less costly than
any that may be developed by Microsurge, and such companies also may be more
successful than Microsurge in producing and marketing such products or their
existing products. Competing companies may also introduce competitive pricing
pressures that may adversely affect the Company's sales levels and margins.
There can be no assurance that the Company will be able to compete
successfully with existing or new competitors. Additionally, the medical
conditions that can be treated by procedures using the Company's medical
instruments also may be treated using a variety of other procedures,
alternative therapies or other medical instruments. See "Business--
Competition."

UNCERTAINTY OF 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. The
Company believes that use and acceptance by influential physicians 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. In addition, broad
use of certain of the Company's products, including its thoracoscopic surgical
products, is expected to require the training of surgeons and other operating
room staff, which may be expensive and result in delays in market acceptance.
Failure to achieve market acceptance would have a material adverse effect on
the Company's business, financial condition and results of operations.

UNCERTAINTY RELATING TO THIRD PARTY REIMBURSEMENT

The Company's ability to successfully market its 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 healthcare providers are moving towards a
managed care system in which such providers contract to provide comprehensive
healthcare for a fixed cost per person, irrespective of the amount of care
actually provided. Such providers, in an effort to control healthcare costs
are increasingly challenging the prices charged for medical products and
services, and in some instances, have pressured medical suppliers to lower
their prices. The Company is unable to predict what changes will be made in
the reimbursement methods utilized by third party healthcare payors.
Furthermore, the Company could be adversely affected by changes in
reimbursement policies of governmental or private healthcare payors,
particularly to the extent any such changes affect reimbursement for
procedures in which the Company's products are used. The Company is currently
developing a product that may be used in lung volume reduction procedures. As
of January 1, 1996, the Health Care Financing Administration of the United
States Department of Health and Human Services ("HCFA") announced that these
procedures will not be covered by Medicare or Medicaid because HCFA has
determined that there is insufficient medical evidence available at this time
on which to base a determination that this procedure is safe and effective. If
coverage and adequate reimbursement levels are not provided by government or
third party payors for uses 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.

8
<PAGE>

Reimbursement and healthcare payment systems in international markets vary
significantly by country, and include both government sponsored healthcare 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."

FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING

The Company's future capital requirements will depend on many factors,
including sales of its existing products, continued progress in, and the
magnitude of, its research and product development programs, time and costs
involved in obtaining regulatory approvals, costs involved in filing,
prosecuting, enforcing and defending patent claims, competing technological
and market developments and the costs and success of commercialization
activities and arrangements.

Based upon its current operating plan, the Company believes that its
existing capital resources and lines of credit, the proceeds of this offering
and interest earned thereon and internally generated funds, will be adequate
to satisfy its capital requirements through the end of 1997. The Company
anticipates that it may be required to raise substantial additional funds,
through means including public or private financings. No assurance can be
given that additional financing will be available, or, if available, that it
will be available on acceptable terms. If additional funds are raised by
issuing equity securities, further dilution to the then existing stockholders
will result. Additionally, the terms of the financing may adversely affect the
holdings or the rights of the then existing stockholders. If adequate funds
are not available on acceptable terms, the Company may be required to
significantly curtail its sales and marketing activities or one or more of its
research or product development programs, or obtain funds through arrangements
with others that may require the Company to relinquish rights to certain of
its technologies, product candidates or products which the Company would
otherwise pursue on its own. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."

GOVERNMENT REGULATION

The Company's products, product development 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 United States, the FDA regulates the commercial introduction of medical
devices as well as the manufacturing, labeling and recordkeeping procedures
for such products. In order for the Company to market its products for
clinical use in the United States, the Company must typically obtain from the
FDA concurrence with a 510(k) pre-market notification or approval of a more
extensive submission known as pre-market approval ("PMA"). However, recent
changes in the FDA regulations regarding medical devices permit the marketing
of certain specified medical devices under an exemption from 510(k) pre-market
notification and PMA requirements. 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,
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
product claims. The FDA could also limit or prevent the manufacture or
distribution of the Company's products and has the power to require the recall
of such products. The Company has made modifications to its cleared devices
which the

9
<PAGE>

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 would not require the Company to submit new 510(k) notices
for any of the changes made to the devices.

All of the products currently marketed by the Company have received
marketing clearance from the FDA pursuant to 510(k) pre-market notifications
filed by the Company or are exempt from 510(k) pre-market notification
requirements. 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 United States. In order for a medical
device to be exempt from 510(k) pre-market notification requirements, the
manufacturer of such medical device must establish much of the same facts as
it would need to establish to obtain marketing clearance pursuant to 510(k)
pre-market notification, but does not need formal FDA concurrence prior to the
marketing of such device. In all other respects, medical devices that are
exempt from pre-market notification requirements are regulated identically to
devices that are subject to such requirements. For future products, there can
be no assurance that the FDA will concur in the Company's 510(k) request for
clearance or with the Company's determination that a product is exempt from
510(k) pre-market notification, or that the FDA will not require the Company
to file PMA applications. The process of obtaining a PMA can be expensive,
uncertain and lengthy, frequently requiring anywhere from two 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 Practices ("GMP"). 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 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 United States. 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 EU countries
unless they display the CE mark. 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.

In addition, the ability of the Company to market its products may be
adversely affected by the extent and difficulty of compliance by end users
with federal and state environmental regulations governing the disposal of the
Company's products. See "Business--Government Regulation."

10
<PAGE>

UNCERTAINTY REGARDING PATENTS AND PROPRIETARY RIGHTS; LICENSE OBLIGATIONS

The Company's success will depend in part on its ability to develop
patentable products, enforce its patents and obtain patent protection for its
products both in the United States and in other countries. However, the patent
positions of medical device companies, including Microsurge, 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 Microsurge 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.

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. In order to rapidly bring new
products to market and to respond to the requirements of the minimally
invasive surgical community, the Company has licensed significant technology
and patents from third parties, including patents and technology relating to
its thoracoscopic surgery product candidates licensed from Dr. David
Sugarbaker and Brigham & Women's Hospital ("BWH") and technology and patents
relating to its DetachaPort multi-use trocar products licensed from Endoscopic
Concepts, Inc. ("ECI"). 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 Company is aware of patents belonging to its competitors and assumes
that these competitors have patent applications pending which are not yet
public. These patents and patent applications may require the Company to alter
its products or processes, pay licensing fees or cease certain activities.
There can be no assurance that the Company will be able successfully to obtain
a license to any technology that it may require or that, if obtainable, such
technology can be licensed at a reasonable cost or on an exclusive basis.
Failure by the Company to obtain a license to any technology that it may
require to commercialize its products could have a material adverse effect on
the Company. See "Business--Collaboration and License Agreements" and "--
Patents, Trade Secrets and Proprietary Rights".

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 United
States 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

11
<PAGE>

maintain patent and trade secret protection, for any reason, could have a
material adverse effect on the Company. See "Business--Collaboration and
License Agreements" and "--Patents, Trade Secrets and Proprietary Rights."

The licenses of patents and patent applications to which the Company is
currently a party and the licenses into which the Company may enter in the
future do and may impose royalty obligations on the Company. Because such
royalty obligations are typically based on net sales of a product and not the
margins earned on product sales, in order to maintain satisfactory margins the
Company may be required to price the product at a competitively
disadvantageous price or to cease manufacturing and selling the product
altogether. In addition, under certain of its license arrangements, the
Company is required to prepay royalties to the licensor, which royalties,
depending on sales levels achieved, may never be earned.

LIMITED SALES AND MARKETING CAPABILITY; DEPENDENCE ON INTERNATIONAL
DISTRIBUTORS

The Company currently markets its products in the United States through its
own direct sales force and through the efforts of independent sales
organizations. The Company plans to expand its domestic direct sales force and
reduce its reliance on independent sales organizations. Significant additional
expenditures, management resources and time will be required for the Company
to expand its domestic direct sales force. There can be no assurance that the
Company will be able to expand its domestic direct sales force or that its
marketing efforts will be successful in gaining market acceptance of its
products. See "Business--Sales and Marketing."

The Company currently markets its products internationally through
independent distributors. The majority of these distributors are not parties
to written distribution agreements with the Company and thus have no
obligation to continue distributing the Company's products. The Company's
distributors may also distribute competing products under certain
circumstances. The loss of a significant international distributor could have
a material adverse effect on the Company's business if a new distributor,
sales representative or other suitable sales organization cannot be found on a
timely basis in the relevant geographic market. To the extent that it relies
on sales in certain territories through distributors, any revenues the Company
receives in those territories will depend upon the efforts of its
distributors. There can be no assurance that a distributor will market the
Company's products successfully or that the terms of its distribution
arrangements will be favorable to the Company.

LIMITED MANUFACTURING EXPERIENCE; SCALE-UP RISK; DEPENDENCE ON THIRD PARTY
MANUFACTURERS

For the Company to commercialize its products successfully, it must
manufacture or assemble, either by itself or through third parties, the
products it developed in accordance with FDA, GMP and, by 1998, ISO 9001/EN
46001 requirements, in commercial quantities, at high quality levels and at
commercially reasonable costs. The Company has limited experience in
manufacturing and assembling to date. The Company has only recently produced
certain of its products in commercial quantities at commercially reasonable
costs, and there can be no assurance that it will be able to do so
consistently for the Company's existing or future products. In addition, to
the extent the Company cannot manufacture certain of its products and is
unable to obtain contract manufacturing or sterilizing services on
commercially reasonable terms, it may not be able to commercialize its
products as planned. Where third party arrangements are established, the
Company will depend upon such third parties to perform their obligations on a
timely basis.

The Company currently manufactures its DetachaTip multi-use instruments at
its facilities in Needham, Massachusetts. This manufacturing activity consists
principally of the assembly, inspection, testing and packaging of products
from components supplied by third parties. The Company contracts with third
parties for the manufacture of all its other products. To date, the Company
has typically arranged for third party manufacturing services on a purchase
order basis, and there can be no assurance that such third party manufacturers
will continue to provide manufacturing services to the Company. If sales of
the Company's products increase significantly, the Company or third party

12
<PAGE>

manufacturers may encounter difficulties in scaling up production of the
Company's products, including problems involving production yields, quality
control and assurance, component supply and shortages of qualified personnel.
Difficulties in manufacturing scale-up could have a material adverse effect on
the Company's business, financial condition and results of operations.

DEPENDENCE UPON KEY SUPPLIERS

Certain components required for the Company's products currently are
obtained from a single source. Moreover, substitute components may not be
immediately available in quantities needed by the Company. Delays associated
with any future component shortages, particularly as the Company scales up its
manufacturing activities in support of commercial sales, would have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company's inability to obtain alternative suppliers or a
sufficient quantity of single source components on favorable terms could
materially adversely affect the Company's business, financial condition and
results of operations. See "Business--Manufacturing."

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. 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. See "Business--Product
Liability and Insurance."

UNCERTAINTY OF HEALTHCARE 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 healthcare systems in the
United States and abroad. The Company cannot predict what healthcare reform
legislation, if any, will be enacted in the United States or elsewhere.
Significant changes in the healthcare system in the United States 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. The existence of pending healthcare reform proposals
could also have a material adverse effect on the Company's ability to raise
capital. See "Business--Government Regulation."

ATTRACTION AND RETENTION OF AND DEPENDENCE ON KEY MANAGEMENT PERSONNEL AND
CONSULTANTS

The Company is highly dependent on its principal management, marketing and
technical personnel, the loss of whose services could have a material adverse
effect on the Company. Recruiting and retaining such personnel in the future
will be critical to the Company's success. There can be no assurance that the
Company will be able to attract and retain qualified personnel on acceptable
terms given the competition for such qualified personnel.

In addition, the Company depends on third party consultants, collaborators
and contractors in connection with its product development, testing and
manufacturing activities. In particular, the Company is collaborating with Dr.
David Sugarbaker in the development of thoracoscopic procedures and
instrumentation. The discontinuation of the Company's collaborative
relationship with

13
<PAGE>

Dr. Sugarbaker or other consultants, collaborators or contractors, or the
Company's failure to establish future relationships with highly qualified
consultants, collaborators or contractors, could have a material adverse
effect on the Company.

NO PUBLIC MARKET; POSSIBLE VOLATILITY OF SHARE PRICE; DILUTION

Prior to this offering, there has been no public market for the Common Stock
of the Company, and there can be no assurance that an active trading market
will develop or be sustained after this offering. The initial public offering
price will be determined by negotiations among the Company and the
representatives of the Underwriters based upon several factors and may not be
indicative of future market prices. See "Underwriting" for a discussion of the
factors to be considered in determining the initial public offering price. The
market price of the Company's Common Stock could be subject to wide
fluctuations in response to quarterly variations in the Company's operating
results, announcements of technological innovations or new commercial products
by the Company or its competitors, governmental regulation, developments in
patent or other proprietary rights and public concern regarding the safety,
effectiveness or other implications of the products being developed by the
Company. In addition, the stock market has experienced extreme price and
volume fluctuations. This volatility has significantly affected the market
prices of securities of many medical instrument companies for reasons
frequently unrelated to or disproportionate to the operating performance of
the specific companies. These broad market fluctuations may adversely affect
the market price of the Company's Common Stock.

Purchasers of shares of Common Stock in this offering will experience an
immediate and substantial dilution in the net tangible book value of the
Common Stock from the initial public offering price. Additional dilution is
likely to occur upon the exercise of outstanding warrants and stock options.
See "Dilution."

CONTROL BY DIRECTORS, OFFICERS AND PRINCIPAL STOCKHOLDERS

Upon completion of this offering, the Company's directors, executive
officers and principal stockholders, and their affiliates, will beneficially
own approximately 58.2% of the Company's outstanding Common Stock
(approximately 55.6% if the Underwriters exercise their over-allotment option
in full). As a result, these stockholders, if acting together, will have the
ability to influence the outcome of corporate actions requiring stockholder
approval, including actions to control the election of directors and the
approval of certain mergers and other significant corporate transactions,
including a sale of substantially all of the Company's assets, irrespective of
how other stockholders of the Company may vote. This concentration of
ownership may have the effect of delaying or preventing a change in control of
the Company. See "Management" and "Principal Stockholders."

SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE ADVERSE EFFECT ON MARKET PRICE OF
SHARES

Sales of substantial amounts of Common Stock in the public market following
the offering could have a material adverse effect on the market price of the
Common Stock. The 3,000,000 shares of Common Stock offered by the Company (and
any shares sold pursuant to the exercise of the Underwriters' over-allotment
option) will be freely tradeable without restriction. An additional 13,041
shares of Common Stock, which are not subject to lock-up agreements with the
Underwriters or the Company, will be eligible for sale in the public market
upon the date of this Prospectus in reliance on Rule 144(k) under the
Securities Act of 1933. Beginning approximately 90 days after the date of this
Prospectus approximately 126,015 additional shares of Common Stock (including
approximately 55,025 shares covered by options exercisable within the 90-day
period following the date of this Prospectus) will become eligible for
immediate resale in the public market, subject to compliance as to certain of
such shares with applicable provisions of Rules 144 and 701. Beginning 180
days after the date of this Prospectus, 5,623,793 additional shares of Common
Stock (including 383,517 shares of Common Stock issuable upon exercise of
vested stock options) will become eligible for sale upon

14
<PAGE>

expiration of lock-up agreements between certain stockholders and the
Underwriters or the Company subject to compliance with Rule 144. Additionally,
stockholders of the Company owning an aggregate of approximately 6,476,909
shares of Common Stock (assuming an initial public offering price of $12.00
per share), including shares of Common Stock that may be acquired upon the
exercise of outstanding warrants, all of which are subject to the 180-day
lock-up agreements, have the right to demand registration under the Securities
Act of their shares of Common Stock and have the right to have their shares of
Common Stock included in future registered public offerings of securities by
the Company. No precise prediction can be made as to the effect, if any, that
market sales of shares or the availability of shares for sale will have on the
market price of the Common Stock prevailing from time to time. Sales of
significant amounts of the Common Stock of the Company in the public market
could adversely affect the market price of the Company's Common Stock and
could impair the Company's ability to raise capital through an offering of its
equity securities. See "Description of Capital Stock--Common Stock," "Shares
Eligible for Future Sale" and "Underwriting."

ANTITAKEOVER PROVISIONS

The Company's Restated Certificate of Incorporation as in effect upon the
closing of this offering will require that any action required or permitted to
be taken by stockholders of the Company must be effected at a duly called
annual or special meeting of stockholders and may not be effected by any
consent in writing, and will require reasonable advance notice by a
stockholder of a proposal or director nomination which such stockholder
desires to present at any annual or special meeting of stockholders. Special
meetings of stockholders may be called only by the President of the Company or
by the Board of Directors. The Restated Certificate of Incorporation provides
for a classified Board of Directors, and members of the Board of Directors may
be removed only for cause upon the affirmative vote of holders of at least
two-thirds of the shares of capital stock of the Company entitled to vote. In
addition, the Board of Directors will have the authority, without further
action by the stockholders, to fix the rights and preferences of, and issue
shares of, Preferred Stock. These provisions, other provisions of the Restated
Certificate of Incorporation and provisions in certain of the Company's stock
options which provide for acceleration of exercisability upon a change in
control of the Company, may have the effect of deterring hostile takeovers or
delaying or preventing changes in control or management of the Company,
including transactions in which stockholders might otherwise receive a premium
for their shares over then current market prices. In addition, these
provisions may limit the ability of stockholders to approve transactions that
they may deem to be in their best interests. See "Description of Capital
Stock--Preferred Stock" and "--Delaware Law and Certain Charter and By-Law
Provisions."

ABSENCE OF DIVIDENDS

The Company has not paid any dividends on the Common Stock since its
inception and does not anticipate paying any dividends in the future.
Declaration of dividends on the Common Stock will depend upon, among other
things, future earnings, if any, the operating and financial condition of the
Company, its capital requirements and general business conditions. The Company
is currently prohibited from paying dividends under its credit facility with a
commercial bank (the "Bank Credit Facility"). See "Dividend Policy."

15
<PAGE>

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 3,000,000 shares of
Common Stock offered hereby are estimated to be $32,680,000 ($37,702,000 if
the Underwriters' exercise their over-allotment option in full), assuming an
initial public offering price of $12.00 per share and after deducting the
underwriting discount and estimated offering expenses payable by the Company.

The Company estimates that approximately $14,000,000 of the net proceeds of
this offering will be used to fund sales and marketing activities, including
the expansion of the Company's domestic direct sales force and sponsorship of
surgeon and operating room staff training programs for the Company's
thoracoscopic instrumentation; approximately $8,000,000 will be used to fund
increased research and product development activities; $750,000 will be used
to make a payment due under the Company's DetachaPort multi-use trocar license
with ECI; and approximately $150,000 will be used to repay bank debt. The
Company will use the balance of the net proceeds for working capital and
general corporate purposes. Pending application of the proceeds of this
offering as described above, the Company intends to invest the net proceeds of
this offering in short-term, investment-grade, interest-bearing securities.

The amount and timing of expenditures may vary significantly depending upon
numerous factors, including the success of the Company's currently marketed
products, the progress of the Company's research and product development
programs, market acceptance of the Company's current and future products, the
timing and costs involved in obtaining regulatory approvals, the costs
involved in filing, prosecuting, enforcing and defending patent claims,
manufacturing and marketing costs and the status of competitive products.

DIVIDEND POLICY

The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain earnings for use in its
business and therefore does not anticipate paying cash dividends in the
foreseeable future. Payment of future dividends, if any, will be at the
discretion of the Company's Board of Directors after taking into account
various factors, including the Company's financial condition, operating
results, current and anticipated cash needs and plans for expansion. The
Company is currently prohibited from paying dividends under the Bank Credit
Facility. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."

16
<PAGE>

CAPITALIZATION

The following table sets forth as of March 31, 1996 (i) the actual
capitalization of the Company, (ii) the pro forma capitalization of the
Company as described in Note (1) below and (iii) the pro forma capitalization
of the Company as adjusted to reflect the issuance and sale of 3,000,000
shares of Common Stock offered hereby at an assumed initial public offering
price of $12.00 share and the application of the net proceeds therefrom, after
deducting the underwriting discount and estimated offering expenses. This
table should be read in conjunction with the Company's Financial Statements
and the Notes thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA (1) AS ADJUSTED
-------- ------------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Long-term debt, net of current portion.... $ 2,412 $ 136 $ 136
Redeemable convertible preferred stock,
$.001 par value; 12,000,000 shares
authorized; 8,580,587 shares issued and
outstanding; no shares authorized or
outstanding, pro forma and pro forma as
adjusted(1).............................. 25,875 -- --
Stockholders' equity:
Preferred Stock, $.001 par value;
5,000,000 shares authorized and
unissued............................... -- -- --
Common Stock, $.001 par value;
50,000,000 shares authorized; 405,474
shares issued and outstanding;
6,265,323 shares issued and
outstanding, pro forma; 9,265,323
shares issued and outstanding, pro
forma as adjusted(1)(2)................ -- 6 9
Additional paid-in capital................ -- 28,213 60,890
Accumulated deficit....................... (24,262) (24,330) (24,330)
-------- -------- --------
Total stockholders' equity (deficit).. (24,262) 3,889 36,569
-------- -------- --------
Total capitalization...................... $ 4,025 $ 4,025 $ 36,705
======== ======== ========
</TABLE>
- --------
(1) Presented on a pro forma basis to give effect to (a) the conversion of all
outstanding shares of Redeemable Convertible Preferred Stock into an
aggregate of 5,525,860 shares of Common Stock at the closing of this
offering and (b) the conversion of the outstanding principal amount of and
accrued interest on the Company's 1996 Notes into an aggregate of 333,989
shares of Common Stock at the closing of this offering (assuming an
initial public offering price of $12.00 per share and a closing date of
July 1, 1996).
(2) Does not include 892,450 shares of Common Stock reserved for issuance upon
exercise of outstanding options and warrants other than the 1996 Warrants
as of March 31, 1996, 274,694 shares reserved for issuance upon exercise
of the May 1996 Options and 105,035 shares of Common Stock reserved for
issuance upon exercise of the 1996 Warrants (assuming an initial public
offering price of $12.00 per share). See Notes 8 and 11 to Financial
Statements.

17
<PAGE>

DILUTION

The Company's net tangible book value as of March 31, 1996, on a pro forma
basis to reflect (a) the conversion of all outstanding shares of the Company's
Redeemable Convertible Preferred Stock into an aggregate of 5,525,860 shares
of Common Stock at the closing of this offering and (b) the conversion of the
outstanding principal amount of and accrued interest on the Company's 1996
Notes into an aggregate of 333,989 shares of Common Stock at the closing of
this offering (assuming an initial public offering price of $12.00 per share
and a closing date of July 1, 1996), was $3,622,718 or $0.58 per share of
Common Stock. Pro forma net tangible book value per share represents the
amount of the Company's pro forma total tangible assets, reduced by the amount
of the Company's pro forma total liabilities, divided by the pro forma number
of shares of Common Stock outstanding. After giving effect to the Company's
receipt of the estimated net proceeds from the sale by the Company of
3,000,000 shares of Common Stock in this offering at an assumed initial public
offering price of $12.00 per share and after deducting the underwriting
discount and estimated offering expenses, the pro forma net tangible book
value of the Company as of March 31, 1996 would have been $36,302,718 or $3.92
per share. This represents an immediate increase in the net tangible book
value of $3.34 per share to the holders of Common Stock and an immediate
dilution in the pro forma net tangible book value of $8.08 per share to new
investors purchasing Common Stock in this offering. The following table
illustrates such per share dilution to new investors:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................... $12.00
Pro forma net tangible book value per share as of March 31,
1996............................................................ 0.58
Increase per share attributable to new investors................. 3.34
----
Pro forma net tangible book value per share after this offering.... 3.92
------
Dilution per share to new investors................................ $ 8.08
======
</TABLE>

The following table summarizes, on the pro forma basis described above, as
of March 31, 1996, the number of shares of Common Stock purchased from the
Company, the total consideration paid to the Company, and the average price
paid per share by the existing stockholders and by investors purchasing shares
of Common Stock offered hereby (at an assumed initial public offering price of
$12.00 per share):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------- -------------------
AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders....... 6,265,323 67.6% $23,481,784 39.5% $ 3.75
New investors............... 3,000,000 32.4 36,000,000 60.5 12.00
--------- ------ ----------- ------
Total..................... 9,265,323 100.0% $59,481,784 100.0%
========= ====== =========== ======
</TABLE>

The above computation assumes no exercise of outstanding options and
warrants since March 31, 1996. As of March 31, 1996, there were options and
warrants outstanding to purchase an aggregate of 892,450 shares of Common
Stock at a weighted average exercise price of $1.44 per share. The exercise of
such options and warrants would result in further dilution to new investors.
In addition, effective upon the closing of this offering, there will be
2,850,000 shares of Common Stock reserved for future issuance under the
Company's stock plans. See "Capitalization," "Management--Compensation of
Directors," "--Employee Benefit Plans," and "Description of Capital Stock."

18
<PAGE>

SELECTED FINANCIAL DATA

The selected financial data presented below as of December 31, 1994 and
1995, and for each of the three years in the period ended December 31, 1995,
are derived from the Company's Financial Statements, included elsewhere in
this Prospectus, which have been audited by Coopers & Lybrand L.L.P.,
independent accountants. The selected financial data presented below as of
December 31, 1993 are derived from the Company's Financial Statements, not
included in this Prospectus, which have been audited by Coopers & Lybrand
L.L.P., independent accountants. The selected financial data presented below
as of December 31, 1991 and 1992 and March 31, 1996, and for the period ended
December 31, 1991, the year ended December 31, 1992 and for the three months
ended March 31, 1995 and 1996, are derived from the Company's unaudited
Financial Statements. In the opinion of management of the Company, the
unaudited Financial Statements have been prepared on the same basis as the
audited Financial Statements and include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the
financial position and the results of operations for these periods. The
results of operations for the three months ended March 31, 1996 are not
necessarily indicative of the results to be expected for the entire year. This
data should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Financial Statements
and related Notes included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
THREE
MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------------------------- ----------------
1991(1) 1992 1993 1994 1995 1995 1996
------- ------- ------- -------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Product sales.......... $ -- $ -- $ 101 $ 1,548 $ 3,797 $ 687 $ 1,173
Cost of goods sold..... -- -- 53 1,042 2,370 428 724
Operating expenses
Research and
development......... 466 1,313 1,939 2,010 1,913 399 496
Selling, general and
administrative...... 473 1,372 1,759 3,312 5,912 1,187 1,437
------ ------- ------- -------- ------- ------- -------
Total operating
expenses........... 939 2,685 3,698 5,322 7,825 1,586 1,933
------ ------- ------- -------- ------- ------- -------
Interest and other
(income) expense...... (12) (15) (194) (139) (67) (19) 12
------ ------- ------- -------- ------- ------- -------
Net loss............... $ (927) $(2,670) $(3,456) $ (4,677) $(6,331) $(1,308) $(1,496)
====== ======= ======= ======== ======= ======= =======
Pro forma net loss per
share (2)............. $ (1.02) $ (0.24)
======= =======
Pro forma weighted
average common and
common equivalent
shares (2)............ 6,194 6,213
======= =======
<CAPTION>
DECEMBER 31,
-------------------------------------------- MARCH 31,
1991 1992 1993 1994 1995 1996
------- ------- ------- -------- ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents
and marketable
securities............ $ 653 $ 6,965 $ 3,361 $ 4,056 $ 1,806 $ 2,403
Working capital........ 540 6,702 2,977 4,438 1,866 2,672
Total assets........... 848 7,146 4,268 6,398 4,908 5,520
Long-term debt, net of
current portion....... -- -- 239 244 197 2,412
Redeemable convertible
preferred stock....... 1,650 10,712 11,809 19,230 25,301 25,875
Total stockholders' eq-
uity (deficit)........ (927) (3,831) (8,374) (14,033) (22,270) (24,262)
</TABLE>
- -------
(1) For the period February 27, 1991 (date of inception) to December 31, 1991.
(2) See Note 2 to Financial Statements for information concerning the
computation of pro forma net loss per share and shares used in computing
pro forma net loss per share.

19
<PAGE>

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

OVERVIEW

The Company designs, develops, manufactures and markets surgical
instrumentation for use in minimally invasive surgery. Since its inception in
1991, Microsurge has engaged primarily in researching, developing, testing,
obtaining regulatory clearances and developing manufacturing capabilities for
its products. The Company first began marketing and selling its products in
the second half of 1993 and has introduced 52 products for use in laparoscopy
since that time. In the second half of 1996, the Company expects to release
its first thoracoscopic products.

Although the Company has received revenues from the sales of its products
since 1993, the Company has experienced net losses since its inception. The
Company expects to incur substantial and increasing sales and marketing,
research and product development, manufacturing and other expenses in the
future, particularly as it expands its product offerings for use in
laparoscopic surgery and introduces its thoracoscopic surgery products. The
Company expects to incur net losses for so long as such expenses exceed
revenues generated from the sales of its products, which will depend upon
numerous factors, including the availability of third party reimbursement, the
timing of regulatory actions, progress of product development, the extent to
which the Company's products gain market acceptance, varying pricing
promotions and volume discounts to customers, marketing and manufacturing
costs and competition. The Company has incurred cumulative net losses since
inception through March 31, 1996 of approximately $19,557,000 (exclusive of
accretion of dividends with respect to Redeemable Convertible Preferred
Stock). See "Risk Factors."

RESULTS OF OPERATIONS

Three Months Ended March 31, 1995 and 1996.

The Company had product sales of $687,000 in the three months ended March
31, 1995 and $1,173,000 in the three months ended March 31, 1996, consisting
primarily of sales of the Company's DetachaTip multi-use laparoscopic
instruments. The increase in product sales in the three months ended March 31,
1996 resulted primarily from increased unit sales and increased average
selling prices of the Company's DetachaTip multi-use laparoscopic instruments.
Product sales also increased in the three months ended March 31, 1996 as a
result of the introduction of the Company's DetachaPort multi-use trocars and
several other products for laparoscopic surgery. Export sales through
international distributors represented 24% and 22% of product sales in the
three months ended March 31, 1995 and 1996, respectively.

The Company's cost of goods sold was $428,000 in the three months ended
March 31, 1995 and $724,000 in the three months ended March 31, 1996. These
amounts represented 62% of product sales in both periods.

The Company's research and development expenses were $399,000 in the three
months ended March 31, 1995 and $496,000 in the three months ended March 31,
1996 and consisted in both periods of expenses relating to the development of
laparoscopic and thoracoscopic surgical instrumentation. The increase in
research and development expenses in the three months ended March 31, 1996
reflected a higher level of product development activity with respect to these
products.

The Company's selling, general and administrative expenses increased from
$1,187,000 in the three months ended March 31, 1995 to $1,437,000 in the three
months ended March 31, 1996. This increase was attributable primarily to
increased sales and marketing expenses associated with the expansion of the
Company's domestic direct sales force and customer base, as well as sales and
marketing expenses relating to the introduction of several new products in the
three months ended March 31, 1996, including the Company's DetachaPort multi-
use trocars.

The Company had no provision for income taxes for the three-month periods
ended March 31, 1995 or 1996 because it incurred net losses in each of such
periods.

20
<PAGE>

Years Ended December 31, 1993, 1994 and 1995

The Company had product sales of $101,000 in 1993, $1,548,000 in 1994 and
$3,797,000 in 1995, consisting primarily of sales of the Company's DetachaTip
multi-use laparoscopic instruments. The increases in product sales in 1994 and
1995 reflected volume increases resulting primarily from the expansion of the
customer base as the Company developed and expanded its domestic direct sales
force and domestic independent sales organization network and entered into
international distribution arrangements. Product sales also increased as a
result of the increase in the DetachaTip multi-use laparoscopic instrument
product offerings. Export sales through international distributors represented
24%, 33% and 31% of product sales in 1993, 1994 and 1995, respectively.

The Company's cost of goods sold was $53,000 in 1993, $1,042,000 in 1994 and
$2,370,000 in 1995. These amounts represented 52% of product sales in 1993,
67% of product sales in 1994 and 62% of product sales in 1995. The percentage
of product sales decrease in 1995 from 1994 was attributable primarily to the
lower unit manufacturing costs achieved through improved efficiencies and
lower manufacturing overhead cost per unit due to higher production volumes.
The percentage of product sales increase in 1994 from 1993 reflected the
scale-up costs, including increased facilities, equipment and personnel costs,
associated with the Company's first full year of commercial production.

The Company's research and development expenses were $1,939,000 in 1993,
$2,010,000 in 1994 and $1,913,000 in 1995. Research and development expenses
have primarily related to the DetachaTip multi-use line of instruments for
laparoscopic surgery which the Company first introduced in the fourth quarter
of 1993 and expanded in 1994 and 1995. In 1995, the Company's research and
development expenses also included expenses relating to the development of
instrumentation for use in thoracoscopic surgery. The decrease in research and
development expenses in 1995 from 1994 reflected a shift in the allocation of
the Company's resources with respect to its DetachaTip multi-use laparoscopic
instruments from research and product development expenditures to sales and
marketing expenditures as the development of a number of such products was
completed and the products were introduced into the market. The Company
expects research and development expenses to increase significantly in the
future as it develops additional products for use in laparoscopic surgery and
new products for use in thoracoscopic surgery.

The Company's selling, general and administrative expenses increased from
$1,759,000 in 1993, to $3,312,000 in 1994 and $5,912,000 in 1995. The
increases in 1994 and 1995 were attributable primarily to increased sales and
marketing expenses associated with the expansion of the Company's domestic
direct sales force and customer base and the increased sales commissions as a
result of higher sales volumes. The increases in 1994 and 1995 were also
attributable to the development of the Company's administrative
infrastructure. The Company expects that its selling, general and
administrative expenses will continue to increase in connection with the
Company's planned expansion of its sales and marketing network.

Interest income was $196,000 in 1993, $173,000 in 1994 and $131,000 in 1995.
The changes in interest income from year to year reflect fluctuations in
interest rates in each of these years as well as the average funds available
for investment during each year.

The Company had no provision for income taxes for 1993, 1994 and 1995
because it incurred net losses in each of such years. At December 31, 1995,
the Company had net operating loss carryforwards of approximately $16,155,000
as well as approximately $174,000 of federal tax credit carryforwards
available for income tax purposes. These carryforwards generally expire in the
years 2006 through 2010 and are subject to annual limitations as a result of
changes in the Company's ownership and as a result of certain other factors.
There can be no assurance that changes in ownership in future periods, which
may be triggered by events such as this offering, or continuing losses will
not significantly limit the Company's use of net operating loss and tax credit
carryforwards.

21
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

Since inception, the Company has financed operations primarily from the sale
of Redeemable Convertible Preferred Stock and product sales. As of March 31,
1996, the Company had raised approximately $20,597,000 (net of stock issuance
costs) from sales of Redeemable Convertible Preferred Stock, with net proceeds
of $4,149,000 received in 1995 and $5,970,000 received in 1994. There were no
preferred stock offerings in 1993. From inception through March 31, 1996, the
Company has had product sales of $6,619,000. The Company has also financed
operations with borrowings under the Bank Credit Facility. The outstanding
principal of $150,000 and accrued interest under the Bank Credit Facility will
be repaid by the Company from the proceeds of this offering. The Company has
also financed the purchase of certain property and equipment through $928,000
of capital lease obligations. Of the $928,000 of capital lease obligations,
$396,000 remained outstanding at March 31, 1996 and bears interest at rates
ranging from 9% to 10% per annum.

In February and March of 1996, the Company raised an additional $2,334,000
from the issuance of the 1996 Notes. The 1996 Notes mature in 1997 and bear
interest at 9.25% per annum. The 1996 Notes will be converted into shares of
Common Stock upon the closing of this offering. The Company also issued the
1996 Warrants in connection with the 1996 Notes. See "Certain Transactions."

The Company has used its cash resources to fund operating losses of
approximately $19,557,000 (exclusive of accretion of dividends with respect to
Redeemable Convertible Preferred Stock), capital expenditures of $1,671,000,
the purchase of technology rights to a product for $290,000, and increases in
accounts receivable and inventory which resulted from the growth of the
business. As of March 31, 1996, the Company had cash, cash equivalents and
marketable securities of $2,403,000.

The Company expects its capital expenditures to increase in 1996 from the
1995 level of $226,000 as a result of the planned expansion of the Company's
business. As of March 31, 1996, the Company had no material commitments for
capital expenditures.

In April 1996, the Company paid $250,000 and agreed to pay an additional
$750,000 upon the closing of this offering under the Company's DetachaPort
multi-use trocar license with ECI. See "Business--Collaboration and License
Agreements."

The Bank Credit Facility is comprised of a $1,000,000 maximum amount line of
credit, which expires in May 1997 (the "Revolving Line"), and a $500,000
maximum amount equipment line of credit which is available to be used in
conjunction with the acquisition of equipment until October 1996 (the
"Equipment Line"). The Equipment Line converts into a term loan in October
1996, the principal of which is payable in equal installments over three
years. Borrowings under the Revolving Line are limited based on an eligible
accounts receivable formula. As of March 31, 1996, $150,000 was outstanding
under the Revolving Line (which amount will be repaid from the proceeds of
this offering) and an additional $54,000 was available to be borrowed.
Borrowings under the Bank Credit Facility bear interest at the bank's prime
rate plus 2%. Following the closing of this offering, borrowings under the
Bank Credit Facility will bear interest at the bank's prime rate. The Bank
Credit Facility contains a number of covenants, including requirements that
the Company maintain certain levels of financial performance and capital
structure and prohibitions on the payment of dividends and the incurrence of
additional indebtedness. The Bank Credit Facility is collateralized by a first
security interest in substantially all of the Company's assets.

Based on its current operating plan, the Company anticipates that its
existing capital resources and lines of credit, together with the proceeds of
this offering and the interest earned thereon and internally generated funds,
will be adequate to satisfy its cash requirements through the end of 1997.
However, there may be circumstances, particularly lower than anticipated
product sales, that would accelerate the Company's use of proceeds from this
offering. The Company may require substantial additional funds from external
sources when the proceeds of this offering have been expended. Accordingly,
the Company may, from time to time, incur additional indebtedness or issue, in
public or private transactions, equity or debt securities. No assurances can
be made that suitable debt or equity financings will be available to the
Company on acceptable terms.

OTHER MATTERS

In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", which is effective for fiscal year 1996. The Company has
determined that it will elect the disclosure-only alternative. The Company
will be required to disclose the pro forma net income or loss and per share
amounts in the notes to the financial statements using the fair value based
method beginning in fiscal year 1996 with comparable disclosures for fiscal
1995. The Company has not determined the impact of these pro forma
adjustments.

22
<PAGE>

BUSINESS

GENERAL

Microsurge designs, develops, manufactures and markets surgical
instrumentation for use in minimally invasive surgery. The Company is
currently developing families of surgical instrumentation for use in minimally
invasive abdominal procedures, referred to as laparoscopy, and minimally
invasive thoracic procedures, referred to as thoracoscopy. Microsurge's
laparoscopic instrumentation is based on a novel "multi-use" design concept
which seeks to address the shortcomings of, and provide an alternative to,
currently available single-use disposable and traditional reusable
laparoscopic instrumentation. The Company's thoracoscopic instrumentation is
being developed to address a market need for a family of products specifically
designed for thoracoscopic surgery. The Company began marketing its
laparoscopic products in July 1993 and plans to release its first
thoracoscopic products in the second half of 1996. The Company is also
exploring the applicability of its product designs and technologies to other
areas of minimally invasive surgery, such as cardiac and colorectal surgery.

INDUSTRY BACKGROUND

MINIMALLY INVASIVE SURGERY

LAPAROSCOPIC SURGERY

Laparoscopic surgical techniques were initially developed by gynecologists
over 20 years ago. The widespread use of laparoscopy by general surgeons began
in 1989 with the introduction of lightweight, easy to use, disposable
instrumentation. Laparoscopic training programs conducted by the principal
manufacturers of these products facilitated the adoption of laparoscopic
techniques by general surgeons. According to Medical Data International, an
independent research organization ("MDI"), the number of laparoscopic surgical
procedures performed annually in the United States increased from
approximately 84,000 in 1990 to more than an estimated 2,400,000 in 1995. MDI
projects that by 2000 there will be an additional 700,000 laparoscopic
procedures performed each year in the United States.

The laparoscopic surgical instrumentation market currently consists of a
wide range of traditional reusable and single-use disposable products that
have been specially designed for use in laparoscopic procedures. These
procedures include cholecystectomies (gall bladder removal), hernia repairs,
anti-reflux procedures for the correction of heartburn and a wide variety of
gynecological surgeries, including tubal ligations and laparoscopic assisted
vaginal hysterectomies.

23
<PAGE>

Laparoscopic procedures are typically initiated with the insufflation of the
abdomen with carbon dioxide to create a larger operating space. Three or more
rigid tubes ("trocars") are then inserted through the skin and into the
abdomen. Once a trocar enters the abdomen, the sharp, cutting mechanism
("obturator") is removed, leaving a hollow tube ("cannula") through which
instrumentation can be inserted. A laparoscope attached to a camera, which is
used to view the operating site on a video monitor, is usually inserted
through the initial cannula. The other cannulae serve as conduits for
specialized surgical instrumentation used by the surgeon to perform the
surgery. After the procedure is completed, the trocars are withdrawn and the
puncture sites are closed. The following drawing illustrates the use of
laparoscopic instrumentation in a surgical procedure:

[A PICTURE ILLUSTRATING THE USE OF LAPAROSCOPIC INSTRUMENTATION (INCLUDING
TROCARS, INSTRUMENTS, A LAPAROSCOPE AND CAMERA) IN A LAPAROSCOPIC PROCEDURE
VIEWED FROM OUTSIDE THE BODY APPEARS HERE]

24
<PAGE>

THORACOSCOPIC SURGERY

The clinical and healthcare cost containment benefits of minimally invasive
surgery are resulting in the extension of minimally invasive techniques to
additional types of procedures, particularly thoracic surgery (thoracoscopy).
Traditional open thoracic surgery (thoracotomy) requires a six to eight inch
incision and spreading the ribcage or removing ribs. This type of open surgery
results in a high degree of post-surgical pain and a lengthy post-operative
recovery time, including, in many cases, two to four days in the intensive
care unit. In contrast, thoracoscopy is performed through small puncture
openings between the ribs with the aid of a thoracoscope attached to a camera
and video monitor. As a result, thoracoscopy generally results in
substantially less post-surgical pain, shortened post-operative
hospitalization and more rapid recovery times. According to MDI, the number of
thoracoscopic procedures performed annually in the United States increased
from fewer than 1,000 in 1990 to over an estimated 92,000 in 1995. MDI
projects that by 2000 there will be approximately 173,000 thoracoscopic
procedures performed each year in the United States. The following drawing
illustrates a thoracoscopic procedure, as compared with a thoracotomy, and is
not drawn to scale:

[A PICTURE UNDER THE CAPTION "THORACOTOMY" ILLUSTRATING OPEN THORACIC SURGERY
(THORACOTOMY) AND A PICTURE UNDER THE CAPTION "THORACOSCOPY" ILLUSTRATING THE
USE OF THORACOSCOPIC INSTRUMENTATION (INCLUDING TROCARS, INSTRUMENTS, A
THORACOSCOPE AND CAMERA) IN MINIMALLY INVASIVE THORACIC SURGERY (THORACOSCOPY)
VIEWED FROM OUTSIDE THE BODY APPEAR HERE]

Thoracoscopic procedures are frequently employed to diagnose lung
conditions, resect portions of the lung and pleura, remove lung fluid, reduce
the volume of the lung and examine and resect the lymph nodes. In contrast
with laparoscopy, surgical instrumentation manufacturers are not currently
offering broad lines of instrumentation specially designed for use in
thoracoscopy. The Company believes that most of the thoracoscopy
instrumentation currently on the market consists of conventional open or
laparoscopic surgical instrumentation that has been modified or repackaged for
thoracoscopic use. The Company believes that thoracoscopy has developed more
slowly than laparoscopy due to (i) the restricted access to the thoracic
cavity through the ribs, (ii) the criticality of the organs in the thoracic
cavity, particularly the heart and lungs, (iii) the absence of instrumentation
specifically designed to address the requirements of thoracic surgeons and
(iv) the lack of training of surgeons in thoracoscopic surgical techniques.

25
<PAGE>

OTHER MINIMALLY INVASIVE SURGERIES

Surgeons are currently exploring the use of minimally invasive surgical
techniques for many other procedures, such as cardiac and colorectal
surgeries. The Company believes that the benefits of minimally invasive
surgery will, over time, result in an increasing number of traditional open
surgeries being replaced by minimally invasive surgical procedures. Moreover,
the Company believes that the development of targeted, cost-effective
instrumentation will play an important role in the extension of minimally
invasive surgical procedures to other areas.

IMPACT OF MANAGED CARE

Under the fee-for-service policies of the 1970s and 1980s, healthcare
providers did not have a strong incentive to control costs. Beginning in the
mid 1980s, and at an increasing pace in the 1990s, third party payors for
healthcare services began to impose "managed care" cost containment programs.
Under managed care, providers are increasingly at risk if their costs for a
procedure exceed the amount that will be reimbursed. According to MDI, at the
end of 1995, the number of persons in the United States insured by third party
payors using managed care policies was between approximately 23% and 27% of
the 213,000,000 individuals then insured in the United States. As a result of
managed care, the advent of integrated healthcare delivery networks and the
introduction of state and federal government cost reduction initiatives,
healthcare providers are actively seeking ways to reduce the costs of surgical
procedures, both by decreasing patient hospitalization and recovery times and
by reducing the costs of instrumentation and supplies.

LIMITATIONS OF CONVENTIONAL LAPAROSCOPIC SURGICAL INSTRUMENTATION

Traditional Reusable Laparoscopic Instrumentation. Historically, surgical
instrumentation, including laparoscopic instrumentation, has been cleaned,
sterilized and reused many times on a routine basis. Laparoscopy was initially
performed using traditional reusable stainless steel instrumentation. The
principal benefit of traditional reusable laparoscopic instrumentation is that
using the same instrumentation in many procedures reduces the instrumentation
cost per procedure. However, this instrumentation is often difficult to clean,
relatively expensive to acquire and can become worn and damaged after multiple
uses. Repairing surgical instrumentation can be costly and inconvenient.
Moreover, after a number of repairs, the precision of the instrumentation
permanently degrades. Certain manufacturers offer reusable laparoscopic
instrumentation that can be disassembled into three to five parts in an
attempt to make cleaning the instrumentation easier for hospital staff.
However, the Company believes that this "take apart" instrumentation is often
too complex for hospital staff to disassemble and reassemble in an efficient
manner and is frequently damaged or lost during the disassembly and reassembly
process.

Single-Use Disposable Laparoscopic Instrumentation. In response to the
shortcomings of traditional reusable laparoscopic instrumentation, surgical
instrumentation manufacturers introduced single-use disposable laparoscopic
instrumentation in 1989. The manufacturers facilitated the market acceptance
of these products by offering surgeons laparoscopic training programs focusing
on the use of the new single-use disposable instrumentation. Single-use
disposable instrumentation generally has less precision than traditional
reusable instrumentation because it is mass produced and is not fabricated
with reusable-quality components. However, single-use disposable laparoscopic
instrumentation was quickly accepted because of the convenience of not having
to clean or repair the instrumentation. The high instrumentation cost per
procedure of a single-use disposable product was not a significant barrier to
market acceptance because the cost containment pressures of managed care were
only beginning to have an impact at the time that disposable laparoscopic
instrumentation was introduced.

26
<PAGE>

In the cost-conscious healthcare environment of the 1990s, the high cost per
procedure of single-use disposable instrumentation is causing healthcare
providers to reevaluate the use of these products. However, many surgeons are
reluctant to use traditional reusable laparoscopic instrumentation due to
concerns about the cost and inconvenience of repairs and the degradation in
performance that occurs after reusable instrumentation has been repaired many
times.

MICROSURGE'S LAPAROSCOPIC MULTI-USE SOLUTION

To address the shortcomings of disposable and reusable laparoscopic
instrumentation, Microsurge is developing a family of "multi-use" laparoscopic
surgical instrumentation. Multi-use laparoscopic instrumentation is designed
to provide a lower instrumentation cost per procedure than single-use
disposable instrumentation and greater convenience and more consistent
performance than traditional reusable instrumentation. The Company's multi-use
laparoscopic instrumentation is designed to be easily cleaned and used
multiple times. Most of this instrumentation is comprised of two components.
One component, generally a handle, is designed to be used many, often hundreds
of, times. The other component, generally a tip configuration, is designed to
be used one or more times. When the performance of any component deteriorates,
it is discarded and replaced by a new component, eliminating the need for
repairs. The Company believes that its multi-use laparoscopic instrumentation
addresses the requirements of today's managed care environment due to the cost
benefits of this instrumentation and its precision, quality and feel.

The following drawings illustrate two of Microsurge's laparoscopic multi-use
products:

[A PICTURE UNDER THE CAPTION "DETACHATIP MULTI-USE INSTRUMENT" OF THE TWO
COMPONENTS OF A DETACHATIP MULTI-USE INSTRUMENT, THE MULTI-USE SHAFT AND THE
HANDLE AND A PICTURE UNDER THE CAPTION "DETACHAPORT MULTI-USE TROCAR" OF AN
ASSEMBLED DETACHAPORT MULTI-USE TROCAR AND THE THREE COMPONENTS OF A
DETACHAPORT MULTI-USE TROCAR, THE DISPOSABLE SEAL, THE DISPOSABLE OBTURATOR AND
THE CANNULA APPEAR HERE]

27
<PAGE>

ADVANTAGES OF MULTI-USE OVER SINGLE-USE DISPOSABLE LAPAROSCOPIC
INSTRUMENTATION

Cost Effectiveness. Microsurge's multi-use laparoscopic instrumentation is
designed with multi-use components and, for some products, single-use
disposable components. The multi-use components are designed to be cleaned,
sterilized and reused multiple times. As a result, Microsurge believes that
its multi-use laparoscopic instrumentation has a significantly lower cost per
procedure than most single-use disposable laparoscopic instrumentation, which
is designed to be used only once before being discarded in its entirety.

High Quality. Microsurge's multi-use laparoscopic instrumentation is
manufactured to tight tolerances using high quality materials and precision
crafting techniques. As a result, the Company believes that the precision,
quality and feel of its multi-use laparoscopic instrumentation are superior to
those offered by single-use disposable laparoscopic instrumentation.

Reduced Medical Waste. The use of the Company's multi-use laparoscopic
instrumentation results in less medical waste (including attendant packaging
and wrapping) than single-use disposable instrumentation, which must be
discarded after every procedure.

ADVANTAGES OF MULTI-USE OVER TRADITIONAL REUSABLE LAPAROSCOPIC
INSTRUMENTATION

No Need to Repair. The Company's multi-use laparoscopic instrumentation is
designed with components that are intended to be discarded after their
performance deteriorates, avoiding the inconvenience and expense of the
repeated repairs necessary with traditional reusable laparoscopic
instrumentation.

Easier to Clean. In contrast with traditional reusable instrumentation,
Microsurge is engineering its multi-use laparoscopic instrumentation with
features, such as special cleaning channels and a minimum of separate parts,
that make it easy to clean, reassemble and reuse.

Consistent Performance. In order to provide consistent, high quality
performance, the components of the Company's multi-use laparoscopic
instrumentation are designed to be replaced by new, sterile components when
their performance deteriorates. In contrast, surgeons frequently find that
traditional reusable instrumentation permanently degrades after being repaired
a number of times.

Ergonomic Design. Microsurge, in close consultation with surgeons, has
applied ergonomic design principles to its multi-use laparoscopic
instrumentation to improve surgeon comfort and control. The Company believes
that most traditional reusable instrumentation does not afford the same levels
of comfort and control as Microsurge's ergonomically designed laparoscopic
instrumentation.

MICROSURGE'S THORACOSCOPIC MARKET SOLUTION

Microsurge is developing and expects to begin to market in the second half
of 1996 a family of products intended to address the need for surgical
instrumentation specifically tailored to thoracoscopy. The Company is
developing an innovative line of new thoracoscopic products, including
DetachaTip multi-use scissors, a family of dilators and trocars to gain access
to the chest cavity, a novel plication (or folding) device and an array of
accessories. The Company believes that the availability of surgical
instrumentation and training programs specifically designed for thoracoscopic
surgery may significantly increase the use of thoracoscopy.

To enter the thoracoscopic instrumentation market quickly with a family of
innovative products, Microsurge is designing most of its initial products to
be either reusable or single-use disposable, as opposed to multi-use. Reusable
products permit rapid development at a relatively low cost because there are
no molds and only minimal custom tooling is required. Disposable products are
used for cases in which thoracoscopic instrumentation is difficult to clean,
inexpensive to produce or used in

28
<PAGE>

applications in which "first use" precision is required on each occasion. The
Company plans to develop multi-use instrumentation, where appropriate, as
second generation products.

BUSINESS STRATEGY

The Company's objective is to achieve a significant presence in the
minimally invasive surgical instrumentation market by developing and marketing
families of innovative surgical instrumentation. To achieve this objective,
the Company is pursuing the strategies described below. There can be no
assurance that the Company will be successful in achieving this objective.

Establishing Multi-Use Concept. To address the need for more cost-effective,
high-precision surgical instrumentation in the rapidly growing minimally
invasive surgery market, the Company is developing and has begun to market a
family of multi-use instrumentation, initially for laparoscopy. The Company is
focusing much of its marketing and sales efforts on familiarizing surgeons,
operating room staff and other surgical instrumentation purchasing decision
makers with the benefits of Microsurge's laparoscopic multi-use
instrumentation over both single-use disposable and traditional reusable
laparoscopic instrumentation.

Expanding Laparoscopic Product Line. The Company is directing a substantial
portion of its product development efforts at expanding its family of
instrumentation for minimally invasive laparoscopic surgery. The Company
believes that by offering a complete instrumentation line in today's
healthcare environment, its products will become an attractive alternative to
the full lines of single-use disposable and traditional reusable laparoscopic
instrumentation that manufacturers currently offer. Since the second half of
1993, Microsurge has introduced 52 products to the laparoscopic
instrumentation market and plans to release seven additional laparoscopic
products by the end of 1996.

Leveraging Expertise into Thoracoscopy and Other Surgical Areas. The Company
plans to build on the product development and marketing expertise that it has
obtained in the laparoscopic instrumentation field by developing and marketing
innovative instrumentation and procedures in other areas of minimally invasive
surgery, initially thoracoscopy. The Company has 16 thoracoscopic products
under development and expects to release eight of these products by the end of
1996. To accelerate market acceptance, the Company plans to institute training
programs in the use of its new thoracoscopic instrumentation for surgeons and
operating room staff. In addition, the Company is exploring the applicability
of its product designs and technologies to other areas of minimally invasive
surgery, such as cardiac and colorectal surgery.

Rapidly Developing New Products. To meet the demands of the expanding
minimally invasive surgical market, the Company has implemented a streamlined
product development approach that draws upon: (i) an experienced internal
development team, (ii) outside collaborators with specific technical
expertise, and (iii) a network of leading surgeons and operating room staff
from whom the Company seeks advice and feedback. In addition, the Company's
current practice is to develop only products that qualify for FDA clearance
under the 510(k) pre-market notification process, thereby avoiding the delays
and expense associated with the more time-consuming PMA process.

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<PAGE>

Expanding Global Sales Network. In the United States, the Company has
assembled a direct sales force of 15 individuals to market the Company's
products to the wide range of persons involved in the purchasing process,
including surgeons, operating room staff, hospital administrators and
integrated healthcare delivery networks. The Company trains its sales force to
promote both the economic benefits of the multi-use concept and the technical
merits of Microsurge's products. As the Company expands its product offerings,
it plans to significantly increase its domestic direct sales force. The
Company also markets its products in 18 foreign countries through 14
international distributors and is in the process of expanding its
international distributor network.

PRODUCTS AND PRODUCT DEVELOPMENT

The following tables list the principal products currently marketed or under
development by the Company. These tables are qualified in their entirety by
reference to the more detailed descriptions elsewhere in this Prospectus.

LAPAROSCOPIC SURGERY

<TABLE>
<CAPTION>
PRODUCT DESCRIPTION STATUS
------------------------------ -------------------------- -------------------------
<S> <C> <C>
HAND-HELD SURGICAL INSTRUMENTS
DetachaTip Multi-Use Line of 19 instruments, Released beginning in
Instruments including scissors, July 1993
graspers and dissectors
Uniforce Multi-Use Graspers Atraumatic graspers Released September 1995
principally for use in
gynecology
BipoliGator Multi-Use Bipolar Bipolar irrigating Released March 1996
Irrigating Graspers graspers for coagulating
vascular tissue
ACCESS PRODUCTS
DetachaPort Multi-Use Trocars Line of trocars for Released February 1996
gaining access into the
abdominal cavity
Multi-Use Pneumo-Needle Needle for insufflating Released February 1996
the abdominal cavity
LIGATION AND CLOSURE PRODUCTS
DetachaClip Multi-Use Clip Clip applier for ligating Under development
Applier vessels and ducts
CloSure Puncture closure device Released February 1996
for fully closing trocar
sites
</TABLE>

30
<PAGE>

THORACOSCOPIC SURGERY

<TABLE>
<CAPTION>
PRODUCT DESCRIPTION STATUS
---------------------- -------------------------- -------------------------
<S> <C> <C>
HAND-HELD SURGICAL
INSTRUMENTS
DetachaTip Multi-Use Line of curved-shaft 510(k) concurrence
Scissors scissors with in-line received; release
handles anticipated in second
half of 1996
Director Clamps Line of curved-shaft 510(k) concurrence
clamps with in-line received; release
handles anticipated in second
half of 1996
Exhale Plication Clamp Plication clamp for use in Exempt from 510(k) pre-
rolling or folding market notification
portions of the lung requirements
Nodulectomy Clamp Expandable clamp for use Exempt from 510(k) pre-
in isolating and clamping market notification
lung nodules requirements
ACCESS PRODUCTS
Dilators Line of dilating devices 510(k) concurrence
for providing atraumatic, received
clean access to the
thoracic cavity
Locking Pivotal Trocar Locking pivotal trocar for 510(k) concurrence
locking scopes in place received
Pillow Ports Line of cushioned trocars Under development
for gaining access into
the thoracic cavity
ACCESSORIES
StapleLeader Catheter for 510(k) concurrence
atraumatically guiding received; release
surgical staplers anticipated in second
half of 1996
Sclerosing Brush Brush for abrading the Under development
chest wall to enhance
adherence of the lung
</TABLE>

LAPAROSCOPIC SURGERY PRODUCTS

The Company is developing a full line of multi-use surgical instrumentation
for use in laparoscopic surgery, including precision hand-held surgical
instruments, devices to gain access to a surgical site and ligation and
closure products.

Hand-Held Surgical Instruments

DetachaTip Multi-Use Instruments. The Company offers a full line of 19
DetachaTip multi-use hand-held laparoscopic instruments, including scissors,
graspers and dissectors for use in all types of laparoscopic procedures. Each
DetachaTip multi-use laparoscopic instrument is comprised of a handle and a
detachable shaft which may be reused, cleaned and sterilized until the surgeon
determines that its performance has deteriorated. All shafts are shipped in
sterile packages so that they may be used immediately without the need for
sterilization. To improve the efficiency of hospital staff, each shaft is
designed with an innovative cleaning port that facilitates cleaning and
resterilization.

31
<PAGE>

Microsurge has designed the handles of these instruments using ergonomic
principles and offers these instruments in a variety of sizes and
configurations to give the surgeon improved comfort and control. Each
instrument includes an easily accessible rotator knob that allows the user to
orient the shaft during surgery with the same hand that is operating the
instrument, freeing the other hand to perform additional surgical tasks. All
DetachaTip multi-use handles are compatible with all DetachaTip multi-use
shafts, providing flexibility and modularity across the DetachaTip product
line.

The Company offers as an option on several of its shafts a usage indicator
called "Tip Tracker." Tip Tracker is a polymer and dye system that changes
color with sequential steam sterilizations, indicating the approximate number
of times the instrument has been steam sterilized.

Uniforce Multi-Use Graspers. The Company offers one-piece, multi-use
atraumatic graspers for use in sensitive laparoscopic procedures, principally
gynecological, that require a uniform, controlled, atraumatic level of
grasping force. Typical surgical graspers apply force to the grasped tissue
based on the amount of force applied by the surgeon. If too much grasping
force is applied, injury can occur to an organ or other tissue. The Uniforce
graspers contain self-locking mechanisms designed to apply a uniform level of
grasping force to the tissue, irrespective of the force applied by the
surgeon.

BipoliGator Multi-Use Bipolar Irrigating Graspers. The Company offers one-
piece, multi-use irrigating graspers for accessing vascular tissue during
laparoscopic procedures and safely coagulating such tissue through the
application of bipolar energy confined between the tips of the grasper. Unlike
other bipolar graspers, Microsurge's instruments use irrigating fluid to clear
the surgical field of blood and to dissipate heat, which reduces smoke
generation, sticking and thermal damage to tissue.

Access Products

DetachaPort Multi-Use Trocars. The Company offers a line of DetachaPort
multi-use trocars for use in creating channels through which surgical
instruments or laparoscopes may be introduced into the abdominal cavity. These
trocars consist of three components: (i) a hollow titanium tube called a
cannula; (ii) a scalpel blade covered by a dilating tapered safety shield
called an obturator; and (iii) a plastic and silicone seal.

The obturators of most traditional trocars have pyramidal tips that puncture
directly through tissue layers as the surgeon applies force to the trocar. In
contrast, the DetachaPort trocar uses an extremely sharp scalpel blade in
conjunction with a tapered safety shield to cut and dilate through tissue
layers. The Company believes that this innovative obturator design, together
with the dilating tapered safety shield, significantly decreases the force
required to insert the trocar, thereby enhancing the surgeon's control,
reducing the velocity of the blade as it enters the abdomen and decreasing the
risk of accidental injury to organs. In addition, the scalpel blade of the
DetachaPort trocar produces a smaller, cleaner incision than pyramidal trocar
blades, which enhances the stability of the cannula during surgery and is
easier to close following the procedure.

Due to the difficulty of cleaning and the need to maintain a very high level
of performance, the obturator and seal of the DetachaPort multi-use trocar are
designed to be disposed of after use on a single patient. The cannula
component of the DetachaPort multi-use trocar is easy to clean and sterilize
and is intended to be reused many times.

Multi-Use Pneumo-Needle. The Company offers a multi-use needle for
insufflating the abdominal cavity prior to laparoscopic surgery. The Pneumo-
Needle consists of a reusable body and a disposable needle. The needle is
disposable because of the need for consistent sharpness in each procedure and
its inexpensive cost.

32
<PAGE>

Ligation and Closure Products

DetachaClip Multi-Use Clip Applier. The Company is developing a multi-use
clip applier for the placement of titanium surgical clips used to ligate
(close) vessels and ducts in laparoscopic procedures, particularly
laparoscopic cholecystectomies. The Company is designing its clip applier to
consist of a multi-use handle and shaft unit (the applicator), which will be
easy to clean and sterilize, and a disposable, easily replaceable cartridge
that will hold a number of titanium clips. Only the inexpensive clip cartridge
will be discarded after each procedure. In contrast, most currently available
clip appliers are disposable after a single use. The Company is designing this
clip applier to provide the same ergonomic benefits as the Company's other
multi-use laparoscopic instruments, including a comfortable handle unit and an
easy to use rotator knob.

CloSure. The Company offers an innovative laparoscopic puncture closure
device for use in reliably and rapidly securing full closure of trocar sites
with a simple, one-handed suturing technique. Because this relatively
inexpensive needle-like device requires a consistently sharp tip and is
difficult to clean, it is designed to be disposed of after use in a single
procedure.

THORACOSCOPIC SURGERY PRODUCTS

The Company is developing a family of surgical instrumentation for use in
thoracoscopic surgery, including precision, hand-held surgical instruments,
devices to gain access to a surgical site and surgical accessories.

Hand-Held Surgical Instruments

DetachaTip Multi-Use Scissors. The Company is developing a line of multi-
use scissors for use in thoracoscopic surgery modeled after the Company's
DetachaTip laparoscopic scissors. However, these thoracoscopic scissors are
being designed with in-line handles to provide thoracic surgeons with the feel
and control of traditional open thoracic surgery instruments to which they are
accustomed. These scissors are also being designed with detachable curved
shafts, which the Company believes will improve the surgeon's access and
maneuverability within the confined thoracic cavity. The Company has received
FDA concurrence for its 510(k) pre-market notification covering these products
and expects to release them in the second half of 1996.

Director Clamps. The Company is developing a line of reusable clamps for
use in thoracoscopic surgery. These clamps will be made from stainless steel
and will also use in-line handles and curved shafts that are designed to be
easily cleaned and sterilized. The Company has received FDA concurrence for
its 510(k) pre-market notification covering this product and expects to
release it in the second half of 1996.

Exhale Plication Clamp. The Company is developing a hand-held, disposable
thoracoscopic clamp for use in rolling or folding portions of the lung, which
may then be stapled to form a fold or plication. This device includes two
atraumatic grasping prongs that move in an arc to encompass lung tissue and a
third, extendable prong used as a pivot for folding the lung and as a guide
for applying staples. Due to the precise alignment of the prongs and the
anticipated difficulty in cleaning, the Company is designing this product to
be disposed of after use in a single procedure.

The Company believes that this plication clamp may be useful in a range of
open and thoracoscopic procedures, including the repair of air leaks in the
lung and lung volume reduction surgery for the treatment of emphysema. The
most significant problem in lung volume reduction surgery as currently
performed is air leakage through the resected edge of the lung, which results
in extended hospital stays and increased healthcare costs. The Company
believes that plication may permit lung volume reduction comparable to
resection, but with less incidence of air leakage. See "Risk Factors--Third
Party Reimbursement." The Company has been notified by the FDA that this
product is exempt from 510(k) pre-market notification.

33
<PAGE>

Nodulectomy Clamp. The Company is developing an expandable thoracoscopic
clamp for use in surrounding and isolating lung nodules (tumors) to facilitate
their safe removal. The Company plans to manufacture this clamp with high-
quality stainless steel components to provide the structural strength needed
to withstand the high level of force applied to this type of product. Due to
the expense of these materials, the Company is designing this product to be
reusable and easily cleaned and sterilized. The Company has been notified by
the FDA that this product is exempt from 510(k) pre-market notification.

Access Products
Dilators. The Company is developing a dilating system to facilitate
minimally invasive access to the thoracic cavity. The Company expects this
system to consist of a set of dilators of increasing diameter that will be
successively inserted through an opening in the chest wall in order to
gradually expand the opening. This system is being designed to provide a clean
pathway for trocar and instrument passage between the ribs while minimizing
bleeding and nerve damage. The Company expects these dilators to be relatively
inexpensive to manufacture and is designing them to be disposed of after use
in a single procedure. The Company has received FDA concurrence for its 510(k)
pre-market notification covering this product.

Locking Pivotal Trocar ("LPT"). The Company is developing a cannula to
lock thoracoscopes in desired positions during thoracoscopic surgery. This
product is being designed to use retractable, locking flukes to anchor the
cannula to the patient's ribs, which will serve as natural stabilizers. The
LPT will not be used for piercing purposes. The Company believes that the LPT
will permit stabilization of the camera used in thoracoscopic surgery, freeing
the operating room staff to perform other tasks. Due to the strength and
reliability requirements for this application and the difficulty of cleaning
such a complex mechanism, this product will be designed to be disposed of
after use in a single procedure. The Company has received FDA concurrence for
its 510(k) pre-market notification covering this product.

Pillow Ports. The Company is developing a line of cushioned thoracic ports
for use in providing clear pathways for the insertion of instruments and
scopes through the chest wall. Unlike many currently available thoracic ports,
which are made from rigid materials, such as steel and hard plastics,
Microsurge's Pillow Ports are being designed with flexible, atraumatic
materials that are expected to reduce damage to chest tissue and nerves. The
Company is designing these ports to be held in place with flexible retaining
mechanisms. Due to the difficulty of cleaning and sterilizing the non-rigid
materials to be used in these products, they are being designed to be disposed
of after use in a single procedure.

Accessories

StapleLeader. The Company is developing a flexible plastic catheter for
use in atraumatically guiding surgical staplers safely onto delicate vessels.
The Company expects the StapleLeader to be inexpensive to manufacture and,
therefore, disposed of after use in a single procedure. The Company has
received FDA concurrence for its 510(k) pre-market notification covering this
product and expects to release it in the second half of 1996.

Sclerosing Brush. The Company is developing a plastic brush designed to
mechanically abrade the chest wall to enhance adherence of the lung to the
chest wall following thoracoscopic surgery. This product is expected to be
relatively inexpensive to manufacture and, because of the difficulty inherent
in cleaning and sterilizing the materials from which it will be manufactured,
is being designed to be disposed of after use in a single procedure.

34
<PAGE>

RESEARCH AND DEVELOPMENT

The Company's research and development efforts are focused on identifying
and analyzing the needs of surgeons in minimally invasive surgical procedures
and rapidly developing products that address these needs. The Company believes
that the rapid development and introduction of new products and product
improvements are essential for it to remain competitive in the minimally
invasive surgical instrumentation market. The Company is continuously seeking
to develop new products and to enhance the quality of its existing products
through innovations in efficacy, ease of use, reliability and ergonomics. The
Company is currently focusing its research and development activities on the
laparoscopic and thoracoscopic instrumentation markets. However, the Company
is also exploring the applicability of its product designs and technologies to
other areas of minimally invasive surgery, such as cardiac and colorectal
surgery. The Company's research and development expenses in 1993, 1994 and
1995 were approximately $1,939,000, $2,010,000 and $1,913,000, respectively.

The Company has assembled a team of engineers and consultants with a variety
of complementary skills and experience to undertake the development of new
instrumentation and the improvement of existing products. The Company's
engineers are expert in the use of sophisticated computer-aided design systems
and rapid prototype fabrication techniques. The Company maintains a network of
leading surgeons and operating room staff personnel from whom the Company
regularly seeks advice and feedback regarding its products and product
candidates.

To supplement the Company's internal research and development capabilities,
the Company has contracted with third parties for the development of new
products or worked collaboratively with third parties on such projects. The
Company plans to continue to work with third parties in these ways,
particularly in situations in which the third party has particular expertise
that the Company's personnel do not have or when working with a third party
will enable the Company to bring a product or product improvement to market
more rapidly. In many cases, the Company enters into license or supply
arrangements with these third parties with respect to any products resulting
from the development contract or collaboration.

In the field of thoracoscopy, in particular, the Company is collaborating on
a comprehensive basis with Dr. David Sugarbaker, Chief of Thoracic Surgery at
BWH and an Associate Professor of the Harvard Medical School, in the
development of minimally invasive surgical instrumentation. This collaboration
has enabled the Company to be involved in the early stages of the development
of innovative new thoracoscopic procedures and to combine its product design,
development, manufacturing and marketing expertise with Dr. Sugarbaker's
research and surgical expertise. See "Business--Collaboration and License
Agreements."

SALES AND MARKETING

In the United States, the Company has assembled a direct sales force to
market the Company's products to the wide range of persons involved in the
surgical instrumentation purchasing process, including surgeons, operating
room staff, hospital administrators and integrated healthcare delivery
networks. The Company's domestic sales force focuses its efforts on developing
business relationships with many of the largest national and regional
proprietary hospital chains and integrated health delivery networks. Through
March 31, 1996, the Company had sold its products to over 650 different
hospitals, heathcare centers and other customers in the United States.

The Company trains its domestic sales force to promote the economic benefits
of the multi-use concept and the technical merits of Microsurge's products. As
of March 31, 1996, this sales force consisted of 15 individuals, most of whom
had prior sales experience with manufacturers of minimally invasive surgical
instrumentation. As the Company expands its product offerings, it plans to
significantly increase its domestic sales force.

35
<PAGE>

To date, the Company has supplemented its domestic sales force through
arrangements with a small number of independent sales organizations in
discrete geographic regions that provide experienced medical sales
representatives with backgrounds in minimally invasive surgery. Because the
Company believes that its United States marketing and sales initiatives can be
more efficiently and effectively implemented through a direct sales force that
promotes only the Company's products, the Company plans to reduce its reliance
on independent sales representatives.

In the international market, to avoid the cost of recruiting and employing
its own sales force, the Company markets its products in 18 foreign countries
in Europe and the Pacific Rim through 14 distributors with technical expertise
who are carefully trained by the Company. International sales comprised 31% of
the Company's total product sales in 1995. The Company is in the process of
expanding its network of international distributors.

A key element of the Company's laparoscopic product marketing strategy is to
increase the awareness of surgeons, operating room staff personnel and other
persons involved in decision making regarding the purchase of laparoscopic
instrumentation of the benefits of the Company's multi-use laparoscopic
instrumentation. To achieve this goal, the Company seeks to establish
relationships with, and solicit the opinions of, surgeons and nurses who are
leaders in their fields. In addition, the Company actively participates in
trade shows and advertises in selected medical and trade journals. In the
thoracoscopic market, the Company intends to complement traditional methods of
promoting its products by offering specialized training programs designed to
familiarize surgeons and operating room personnel with its new thoracoscopic
instrumentation.

MANUFACTURING AND SUPPLIERS

The Company manufactures its DetachaTip multi-use instruments at its
Needham, Massachusetts facility and expects to take over the manufacture of
DetachaPort trocars in mid-1996. These manufacturing activities consist
principally of the assembly, inspection, testing and packaging of final
products from components supplied by third parties to the Company's
specifications. At various assembly stages in the Company's manufacturing
process, each production lot undergoes thorough testing by trained personnel
to ensure compliance with the Company's stringent specifications. The
Company's quality assurance group independently verifies that product
fabrication and inspection processes meet the Company's specifications and
applicable regulatory requirements.

The final assembly and packaging operations are conducted in an
environmentally controlled production room at the Company's facilities. The
Company's manufacturing facilities are subject to periodic inspection by
regulatory authorities and GMP compliance inspections conducted by the FDA.
The Company believes that its facilities are in substantial compliance with
GMP. See "Business--Government Regulation".

Currently, all of the Company's products other than its DetachaTip multi-use
instruments are manufactured by third party manufacturers pursuant to the
Company's specifications. These third party manufacturers typically use the
Company's designs and molds to manufacture the products. The Company's plan is
to expand the products that it manufactures itself over time in order to limit
its dependence on third party manufacturers and to increase its margins.

COMPETITION

Competition in the market for minimally invasive surgical instrumentation is
intense and is expected to increase. 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

36
<PAGE>

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 competes with a number of medical products companies,
particularly U.S. Surgical and Ethicon Endosurgery. U.S. Surgical and Ethicon
Endosurgery offer lines of single-use disposable instrumentation for
laparoscopic surgery and other types of minimally invasive procedures that
have achieved significant market penetration. Many competitors also offer
traditional reusable surgical instrumentation. 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. Moreover, earlier entrants in the market often
obtain and maintain significant market share relative to later entrants, such
as the Company. Some of the Company's competitors have long-term or
preferential supply arrangements with hospitals. Such arrangements may act as
a barrier to market entry.

Other large healthcare companies may enter the minimally invasive surgical
instrumentation market 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 Microsurge and such companies also may be more
successful than Microsurge 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.

The Company believes that its ability to compete successfully will depend on
its ability to develop proprietary products that fulfill unmet market needs or
anticipate marketplace demands, attract and retain highly qualified technical
personnel, obtain patent or other proprietary protection for its products and
technologies, obtain required regulatory approvals and manufacture and
assemble and successfully market products either alone or through other
parties.

GOVERNMENT REGULATION

The Company's products, product development activities and manufacturing
processes are subject to extensive and rigorous regulation by the FDA and
comparable agencies in foreign countries. In the United States, the FDA
regulates the introduction of medical devices as well as manufacturing,
labeling 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 for clinical use in
the United States, the Company must typically obtain from the FDA concurrence
with a 510(k) pre-market notification or approval of a more extensive
submission known as PMA. However, recent changes in the FDA regulations
regarding medical devices permit the marketing of certain specified medical
devices under an exemption from 510(k) pre-market notification and PMA
requirements. 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 or may market a new medical device
without FDA clearance if such device is exempt from 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 United States. 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

37
<PAGE>

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. In order for a
medical device to be exempt from 510(k) pre-market notification requirements,
the manufacturer of such medical device must establish much of the same facts
as it would need to establish to obtain marketing clearance pursuant to 510(k)
pre-market notification, but does not need formal FDA concurrence prior to the
marketing of such device. In all other respects, medical devices that are
exempt from pre-market notification requirements are regulated identically to
devices that are subject to such requirements. 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 United States. 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 two years
and often substantially longer.

All of the Company's currently-marketed products have received FDA marketing
clearance pursuant to 510(k) pre-market notifications filed by the Company or
are exempt from 510(k) pre-market notification requirements. Although the
Company anticipates that, at least in the near term, its products will either
be evaluated under the 510(k) pre-market notification process or be exempt
from 510(k) pre-market notification, there can be no assurance that the
Company's current or future products will 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
product claims. The Company has made modifications 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.

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 the FDA's GMP regulations.
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.

38
<PAGE>

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 United States 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 European Union ("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. After June 1998, medical devices may not be sold in EU
countries unless they display the CE mark. The Company or its distributors
plan to seek CE Mark certification for the Company's products. In addition,
international sales of medical devices manufactured in the United States but
not approved by the FDA for distribution in the United States are subject to
FDA export requirements. Under these requirements, the Company must obtain
documentation from the medical device regulatory authority of the applicable
country stating that the sale of the device is not in violation of that
country's medical device laws. This documentation is then submitted to the FDA
with a request for a permit to export to that country.

THIRD PARTY REIMBURSEMENT

In the United States, healthcare 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 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 laparoscopic 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 for thoracoscopic surgery and the procedures in which such
products will be used will be eligible for third party reimbursement, although
Medicare and Medicaid are not currently covering lung volume reduction
procedures because HCFA has determined that there is little medical evidence
available to base a determination that this procedure is safe and effective.
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
healthcare 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.

39
<PAGE>

During the past several years, the major third party payors have
substantially revised their reimbursement methodologies in an attempt to
contain their healthcare 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 healthcare provider. If the
treatment costs less, the provider keeps the overage; 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
healthcare 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 healthcare payment
systems in international markets vary significantly by country and include
both government sponsored healthcare 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.

COLLABORATION AND LICENSE AGREEMENTS

The Company is a party to certain collaboration, license and other
arrangements under which it has obtained rights to manufacture and/or market
certain of its products or product candidates. Set forth below is a summary of
those arrangements that the Company believes to be material to its business.

The Company is a party to a license agreement with Endoscopic Concepts, Inc.
("ECI"), under which the Company holds the exclusive, worldwide license under
certain ECI patents and patent applications to manufacture, use and sell
DetachaPort multi-use trocars. The agreement has a 10-year term, expiring in
April 2006. ECI and Microsurge have agreed, during the term of the license
agreement, not to develop or license products that compete with the licensed
products, with limited exceptions. Pursuant to this agreement, the Company is
required to pay ECI certain up-front license payments and certain monthly
advances during the first three years of the agreement and running royalties
based on net sales of DetachaPort trocars and other licensed products.

The Company is a party to license agreements with Dr. David Sugarbaker and
BWH under which the Company holds the exclusive, worldwide license under the
patents, patent applications and other technology underlying most of the
Company's thoracoscopic surgery products under development. These agreements
also grant the Company a right of first negotiation to evaluate and obtain an
exclusive license to additional products conceived and developed by Dr.
Sugarbaker. The patent licenses are co-extensive with the duration of the
licensed patents. Pursuant to the license agreements, the Company is required
to pay Dr. Sugarbaker and BWH royalties based on the Company's net sales of
licensed products. In connection with these licenses, the Company granted Dr.
Sugarbaker and BWH options to purchase shares of the Company's Common Stock,
which options vest depending on the level of the Company's net sales of
licensed products. In addition, Dr. Sugarbaker is providing consulting
services to the Company pursuant to a three-year consulting agreement expiring
in August 1997, under which the Company has agreed to pay Dr. Sugarbaker
consulting fees.

40
<PAGE>

The Company is a party to an agreement with Design Standards Corporation
("DSC"), pursuant to which DSC and Microsurge have agreed to collaborate in
the development and prototyping of the DetachaClip multi-use clip applier.
Microsurge will own any intellectual property resulting from the
collaboration. This agreement has a five-year term, expiring in April 2001.
During the term of the agreement, DSC has agreed to manufacture all of the
Company's DetachaClip clip applier requirements, subject to the Company's
right to manufacture the clip applier in-house or through certain third
parties after the third anniversary of the finalization of the device. The
Company will pay DSC a royalty on clip appliers that are not manufactured by
DSC. The Company will pay DSC a fixed per-unit price for all clip appliers
that are manufactured for it by DSC. During the term of the agreement, DSC has
agreed not to develop, manufacture or sell products that are competitive with
the Company's DetachaClip clip applier, other than certain products currently
manufactured by DSC.

The licenses and other third party product arrangements to which the Company
is a party impose various commercialization, sublicensing, royalty and other
payment, insurance and other obligations on the Company. Failure of the
Company to comply with these requirements could result in termination of the
applicable agreement, which could have a material adverse effect on the
Company's business.

PATENTS, TRADE SECRETS AND PROPRIETARY RIGHTS

Proprietary protection for the Company's products and know-how is important
to Microsurge's business. Thus, the Company plans to prosecute and enforce its
patents and proprietary technology. The Company's policy is 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.

Microsurge holds six issued United States patents covering its products, and
has filed five additional United States patent applications and corresponding
patent applications in certain major industrial countries. The Company's
patents and patent applications cover various features of its products,
including aspects of its DetachaTip handle and shaft mechanisms, its
BiopoliGator grasper, and its Uniforce atraumatic multi-use grasper.
Microsurge has also licensed rights under patents and patent applications
owned by third parties, including ECI, Dr. Sugarbaker and BWH. See "Business--
Collaboration and License Agreements."

The patent positions of medical device companies, including Microsurge, are
generally uncertain and involve complex legal and factual questions.
Consequently, even though Microsurge currently is prosecuting its patent
applications with the United States 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 United States 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 Microsurge is not aware, Microsurge 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.

Competitors of the Company and other third parties hold issued patents, and
the Company assumes that those competitors have pending patent applications,
relating to aspects of the Company's technology, and the Company is uncertain
whether these patents and patent applications will require the Company to
alter its products or processes, pay licensing fees or cease certain
activities. A claim by the holder of a patent or another third party that the
Company's current products or products under development allegedly infringe
their patent rights could have a material adverse effect on the Company.

41
<PAGE>

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 alternate 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.

Microsurge'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 Microsurge 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.
Although the Company has not experienced any material product liability claims
to date, 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 coverage for product liability claims. The
coverage limit under the Company's existing policies is $6,000,000. The
Company evaluates its insurance requirements on an ongoing basis. There can be
no assurance that product liability claims will not exceed such insurance
coverage limits or that such insurance will be available on commercially
reasonable terms or at all.

EMPLOYEES

As of March 31, 1996, the Company employed 52 individuals full-time, of
which 17 were engaged in operations and manufacturing, seven were engaged in
research and development and engineering, 21 were engaged in sales and
marketing and seven were engaged in finance, administration and management.
The Company's employees are not covered by any collective bargaining
agreement, and the Company considers relations with its employees to be good.

FACILITIES

The Company leases facilities in Needham, Massachusetts covering
approximately 32,000 square feet pursuant to a lease expiring in 1999. The
Company's facilities contain its executive and administrative offices,
research laboratories and manufacturing facility. The Company believes that
its facilities are adequate for its present needs.

42
<PAGE>

LITIGATION

On January 14, 1995 American Cyanamid Company ("ACC") filed a trademark
cancellation proceeding in the United States Patent and Trademark Office
against the registration by the Company of the trademark DetachaTip. ACC
alleges that its prior use of the trademark "D-TACH" on surgical and dental
needles, and its registration of that trademark, should cause the cancellation
of the Company's DetachaTip mark. The division of ACC which had an interest in
this cancellation proceeding has since been sold to American Home Products,
Inc. The discovery and testimony phases of this proceeding have recently been
completed.

43
<PAGE>

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The executive officers and directors of the Company and their ages as of
March 31, 1996 are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Executive Officers
E. James Hutchens................ 47 Director, President and Chief Executive
Officer
William Barrett.................. 48 Vice President of Sales
Kathleen A. Barry................ 42 Vice President of Finance and
Administration, Chief Financial Officer,
Treasurer and Secretary
John T. Kilcoyne................. 36 Director of Marketing
Richard L. Lariviere............. 39 Vice President of Quality Assurance and
Regulatory Affairs
Andy H. Levine................... 39 Vice President of Research and
Development
Carmine R. Sammarco.............. 43 Director of Manufacturing
Other Members of the Board of Di-
rectors
Brian H. Dovey(1)................ 54 Director
Robert F. Higgins(1)............. 49 Director
Joseph F. Lovett(2).............. 47 Director
Daniel J. Mitchell(2)............ 39 Director
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.

Each officer serves at the discretion of the Board of Directors. There are
no family relationships among any executive officers or directors of the
Company. A brief biography of each executive officer and director follows:

Mr. Hutchens has served as President and Chief Executive Officer and as a
director of the Company since he founded Microsurge in February 1991. In 1996,
Mr. Hutchens was elected to the Board of Directors of the Faulkner Hospital.
Prior to founding the Company, Mr. Hutchens served as Vice President, Sales
and Marketing at Smith & Nephew Dyonics, Inc., a manufacturer and marketer of
arthroscopic devices (currently Smith & Nephew Endoscopy, Inc. ("Smith &
Nephew")), from 1989 to 1991, and as Vice President, Marketing and Sales for
the Microvasive Division of Boston Scientific Corporation, a manufacturer and
marketer of devices for minimally invasive procedures.

Mr. Barrett was appointed Vice President of Sales of the Company in April
1996 after serving as Director of Sales of the Company since joining
Microsurge in November 1991. Prior to joining the Company, Mr. Barrett served
as Sales Manager at Smith & Nephew from 1990 to 1991, as Director of Marketing
at Harbor Medical Devices, Inc., a medical device company, from 1987 to 1990,
and in a variety of sales and marketing positions at Codman & Shurtleff, a
division of Johnson & Johnson, from 1978 to 1987.

Ms. Barry has served as Vice President of Finance and Administration of the
Company and Chief Financial Officer of the Company since joining Microsurge in
July 1995. Prior to joining the Company, Ms. Barry served as Vice President,
Finance and Administration, Treasurer and Chief Financial Officer of Lifeline
Systems Inc. ("Lifeline"), a healthcare products and services company, from
1987 to 1995 and in various other financial management positions at Lifeline
from 1983 to 1987.

44
<PAGE>

Mr. Kilcoyne has served as Director of Marketing of the Company since
joining Microsurge in August 1993. Prior to joining the Company, Mr. Kilcoyne
served as Regional Sales Manager for Advanced Cardiovascular Systems, a
subsidiary of Eli Lilly & Company, from 1989 to 1993, and in a variety of
positions, including Marketing Manager and Product Manager, for the
Microvasive Division of Boston Scientific Corporation from 1986 to 1989.

Mr. Lariviere was appointed Vice President of Quality Assurance and
Regulatory Affairs in April 1996 after serving as Director of Quality
Assurance and Regulatory Affairs of the Company since joining Microsurge in
March 1993. Prior to joining the Company, Mr. Lariviere served as Vice
President, Quality Assurance, Regulatory and Clinical Affairs at Calcitek,
Inc., a manufacturer of dental implants, from 1987 to 1994, and in a variety
of quality and regulatory management positions at two subsidiaries of Johnson
& Johnson from 1981 to 1987.

Mr. Levine was appointed Vice President of Research and Development in April
1996 after serving as Director of Research and Development of the Company
since joining Microsurge in August 1992. Prior to joining the Company, Mr.
Levine served as Engineering Manager at Bard Reproductive Systems, a division
of C.R. Bard, Inc., from 1988 to 1992, and as Program Manager, Medical
Research and Development at Thermedics, Inc., a medical device company from
1983 to 1988.

Mr. Sammarco has served as Director of Manufacturing of the Company since
joining Microsurge in January 1994. Prior to joining the Company, Mr. Sammarco
served as Manufacturing and Engineering Manager at Johnson & Johnson
Orthopaedics, Inc., a subsidiary of Johnson & Johnson, from 1989 to 1994 and
prior to that as Device Engineering Manager for the Microvasive Division of
Boston Scientific Corporation from 1987 to 1989.

Mr. Dovey has served as a director of the Company since 1992. Since 1988,
Mr. Dovey has served as a general partner of Domain Associates, a venture
capital management firm. Mr. Dovey serves as a director of Athena
Neurosciences Inc., Creative BioMolecules Inc., NABI, Connective Therapeutics,
ReSound Corporation and Vivus, Inc.

Mr. Higgins has served as a director of the Company since 1992. Since 1988,
Mr. Higgins has served as the managing general partner of Highland Capital
Partners, a venture capital firm. Mr. Higgins is a director of Renal Treatment
Centers, Inc.

Mr. Lovett has served as a director of the Company since 1991. Since 1988,
Mr. Lovett has served as a General Partner of Medical Science Ventures, L.P.,
the general partner of Medical Science Partners, L.P. ("MSP"), a venture
capital firm. From 1985 to 1988, Mr. Lovett served as Senior Vice President of
Damon Biotech, a biotechnology company.

Mr. Mitchell has served as a director of the Company since 1992. Since 1985,
Mr. Mitchell has served as a general partner of Capital Health Management, a
venture capital firm. Mr. Mitchell serves on the Board of Directors of
CareCentric Solutions, Inc.

Following this offering, the Board of Directors will be divided into three
classes, each of whose members will serve for a staggered three-year term. The
Board will consist of two Class I Directors (Messrs. Higgins and Mitchell),
two Class II Directors (Messrs. Dovey and Lovett) and one Class III Director
(Mr. Hutchens). At each annual meeting of stockholders, a class of directors
will be elected for a three-year term to succeed the directors of the same
class whose terms are then expiring. The initial terms of the Class I
Directors, Class II Directors and Class III Director will expire upon the
election and qualification of successor directors at the annual meeting of
stockholders held during the calendar years 1997, 1998 and 1999, respectively.

Each of the directors has been nominated and elected to the Board of
Directors pursuant to a voting agreement among certain of the Company's
stockholders. This agreement will terminate upon the consummation of this
offering.

45
<PAGE>

COMMITTEES OF THE BOARD OF DIRECTORS

The Board of Directors has a Compensation Committee, which makes
recommendations concerning salaries and incentive compensation for employees
of and consultants to the Company, establishes and approves salaries and
incentive compensation for certain senior officers and employees and
administers and grants stock options pursuant to the Company's stock option
plans, and an Audit Committee, which reviews the results and scope of the
audit and other services provided by the Company's independent public
accountants.

COMPENSATION OF DIRECTORS

All directors of the Company are reimbursed for their expenses incurred in
connection with their attendance at Board and committee meetings.

In April 1996, the Company adopted the 1996 Director Stock Option Plan (the
"Director Plan"). Under the terms of the Director Plan, options to purchase
15,000 shares of Common Stock will be granted to non-employee directors upon
the date on which the initial public offering price is determined (the
"Pricing Date") at the initial public offering price. Thereafter, options to
purchase 15,000 shares of Common Stock will be granted to each new director
upon his or her initial election to the Board of Directors. Annual options to
purchase 5,000 shares of Common Stock will be granted to each non-employee
director on May 1 of each year commencing in 1997. All options will vest on
the first anniversary of the date of grant. However, the exercisability of
these options will be accelerated upon the occurrence of a change in control
of the Company (as defined in the Director Plan). A total of 350,000 shares of
Common Stock may be issued upon the exercise of stock options granted under
the Director Plan. With the exception of the options granted on the Pricing
Date, the exercise price of all options granted under the Director Plan will
equal the closing price of the Common Stock on the date of grant.

46
<PAGE>

EXECUTIVE COMPENSATION

The following table summarizes the compensation paid to or earned by the
following individuals for services rendered to the Company in all capacities
during the year ended December 31, 1995: (i) the Chief Executive Officer (the
"CEO") of the Company as of December 31, 1995 and (ii) each of the most highly
compensated executive officers (other than the CEO) as of December 31, 1995
whose salary and bonus earned during fiscal 1995 exceeded $100,000 (the CEO
and such other executive officers are hereinafter referred to as the "Named
Executive Officers"):

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------- ------------
SECURITIES ALL OTHER
UNDERLYING COMPEN-
NAME AND PRINCIPAL POSITION(1) SALARY BONUS OPTIONS SATION
- ------------------------------ ---------- --------- ------------ ----------
<S> <C> <C> <C> <C>
E. James Hutchens .......... $ 165,000 $ -- -- $18,916(2)
President and Chief
Executive Officer
Kathleen A. Barry .......... 47,654(3) -- 64,400 214(2)
Vice President of Finance
and Administration and
Chief Financial Officer
John T. Kilcoyne ........... 100,077 12,500 9,660 8,731(2)(4)
Director of Marketing
William Barrett ............ 82,500 20,000 16,100 679(2)
Vice President of Sales
</TABLE>
- --------
(1) In accordance with the rules of the Securities and Exchange Commission,
this table and the stock option grant table and the stock option value
table which follow present information concerning the Named Executive
Officers for fiscal 1995.
(2) Includes amounts paid by the Company in respect of life insurance premiums
on life insurance policies, the beneficiaries of which are members of the
executive officer's immediate family.
(3) Ms. Barry, who joined the Company in July 1995, currently receives an
annual salary of $118,000 per year.
(4) Includes $8,400 paid to Mr. Kilcoyne for relocation expenses.

47
<PAGE>

Option Grants

The following table sets forth certain information concerning grants of
stock options made during fiscal 1995 to each of the Named Executive Officers:
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT
ASSUMED ANNUAL
RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTIONS TERM(2)
------------------------------------------- --------------------
PERCENT
OF TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED EXERCISE
UNDERLYING TO EMPLOYEES PRICE
OPTIONS IN FISCAL PER EXPIRATION
NAME GRANTED YEAR SHARE DATE(1) 5% 10%
---- ---------- ------------ -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
E. James Hutchens....... -- -- -- -- -- --
Kathleen A. Barry....... 64,400 37.9% $0.54 7/31/05 $ 22,011 $ 55,781
John T. Kilcoyne........ 9,660 5.7 0.54 9/21/05 3,302 8,367
William Barrett......... 16,100 9.5 0.54 9/21/05 5,503 13,945
</TABLE>

OPTION GRANTS IN LAST FISCAL YEAR

- --------
(1) These options were granted to Ms. Barry on July 31, 1995 and to Messrs.
Kilcoyne and Barrett on September 21, 1995. The expiration date of each
option is the tenth anniversary of the date on which it was originally
granted. These options are intended to qualify as incentive stock options
and are exercisable in four equal annual installments commencing on the
first anniversary of the date of grant. These options will become
immediately exercisable in full following a change in control of the
Company.
(2) The amounts shown on this table represent hypothetical gains that could be
achieved for the respective options if exercised at the end of the option
term. These gains are based on assumed rates of stock appreciation of 5%
and 10%, compounded annually from the date the respective options were
granted to their expiration date. The gains shown are net of the option
exercise price, but do not include deductions for taxes or other expenses
associated with the exercise. Actual gains, if any, on stock option
exercises will depend on the future performance of the Common Stock, the
option holder's continued employment through the option period, and the
date on which the options are exercised.

The following table sets forth certain information concerning the number and
value of unexercised options held by each of the Named Executive Officers on
December 31, 1995. No Named Executive Officer exercised any options during the
year ended December 31, 1995.

FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR-END AT FISCAL YEAR-END(1)
----------------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE(2) EXERCISABLE UNEXERCISABLE(2)
---- --------------- ----------------- ----------- ----------------
<S> <C> <C> <C> <C>
E. James Hutchens....... 155,818 81,993 $12,098 $6,366
Kathleen A. Barry....... -- 64,400 -- --
John T. Kilcoyne........ 16,100 41,860 688 812
William Barrett......... 27,370 53,130 1,500 1,000
</TABLE>
- --------
(1) The value of the unexercised, in-the-money options on December 31, 1995 is
based on the difference between the fair market value of the shares as of
such date ($0.54) and the per share option exercise price, multiplied by
the number of shares of Common Stock underlying the options.
(2) These options will become immediately exercisable in full following a
change in control of the Company.

48
<PAGE>

In May 1996, the Company granted the May 1996 Options to purchase an
aggregate of 274,694 shares of Common Stock, effective upon the Pricing Date,
at the initial public offering price, of which options to purchase 50,000,
20,000, 20,000 and 20,000 shares of Common Stock were granted to Mr. Hutchens,
Ms. Barry, Mr. Kilcoyne and Mr. Barrett, respectively. The options granted to
the Named Executive Officers are intended to qualify, at least in part, as
incentive stock options, are exercisable in four equal annual installments
commencing on the first anniversary of the Pricing Date and will become
immediately exercisable in full following a change in control of the Company.

Employment Agreement and Change in Control Arrangements

The Company is a party to an employment agreement with Mr. Hutchens for the
period commencing March 11, 1991 and ending March 11, 1997. Under this
agreement, Mr. Hutchens is currently entitled to receive an annual base salary
of $165,000, as it may be adjusted. In the event Mr. Hutchens' employment is
terminated by the Company without cause, he will continue to receive his
annual base salary during the one-year period commencing on the date of
termination, provided that such severance payments will be reduced by the
amount of any payments or compensation earned by Mr. Hutchens as a result of
employment or consulting performed for a third party during such period.

The Company's stock option agreements with the Named Executive Officers
provide for the automatic acceleration of vesting of all unvested options held
by them as of the date of a change in control of the Company.

EMPLOYEE BENEFIT PLANS

1996 Stock Option Plan

The Company's 1996 Stock Option Plan (the "1996 Option Plan") was adopted by
the Company in April 1996. The 1996 Option Plan provides for the grant of
stock options to employees, officers and directors of, and consultants or
advisors to, the Company and its subsidiaries. Under the 1996 Option Plan, the
Company may grant options that are intended to qualify as incentive stock
options within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code") ("incentive stock options"), or options not
intended to qualify as incentive stock options ("non-statutory options").
Incentive stock options may be granted only to employees of the Company. A
total of 2,000,000 shares of Common Stock may be issued upon the exercise of
options granted under the 1996 Option Plan. The maximum number of shares with
respect to which options may be granted to any employee under the 1996 Option
Plan shall not exceed 500,000 shares of Common Stock during any calendar year.

The 1996 Option Plan is administered by the Compensation Committee of the
Board of Directors. Subject to the provisions of the 1996 Option Plan, the
Compensation Committee has the authority to select the employees to whom
options are granted and determine the terms of each option, including (i) the
number of shares of Common Stock subject to the option, (ii) when the option
becomes exercisable, (iii) the option exercise price, which, in the case of
incentive stock options, must be at least 100% (110% in the case of incentive
stock options granted to a stockholder owning in excess of 10% of the
Company's Common Stock) of the fair market value of the Common Stock as of the
date of grant, and (iv) the duration of the option (which, in the case of
incentive stock options, may not exceed ten years).

Payment of the option exercise price may be made in cash, shares of Common
Stock, a combination of cash or stock or by any other method (including
delivery of a promissory note payable on terms specified by the Compensation
Committee) approved by the Compensation Committee consistent with Section 422
of the Code and Rule 16b-3 ("Rule 16b-3") under the Securities Exchange Act of
1934, as amended (the "Exchange Act"). Options are not assignable or
transferable except by

49
<PAGE>

will or the laws of descent and distribution and, in the case of non-statutory
options, pursuant to a qualified domestic relations order (as defined in the
Code).

As of March 31, 1996, the Company had approximately 52 full-time employees,
all of whom were eligible to participate in the 1996 Option Plan. The number
of individuals receiving stock options varies from year to year depending on
various factors, such as the number of promotions and the Company's hiring
needs during the year, and thus the Company cannot now determine award
recipients.

The Compensation Committee may, in its sole discretion, include additional
provisions in any option or award granted or made under the 1996 Option Plan,
including without limitation restrictions on transfer, repurchase rights,
commitments to pay cash bonuses, to make, arrange for or guaranty loans or to
transfer other property to optionees upon exercise of options, or such other
provisions as shall be determined by the Compensation Committee, so long as
not inconsistent with the 1996 Option Plan or with applicable law. The
Compensation Committee may also, in its sole discretion, accelerate or extend
the date or dates on which all or any particular option or options granted
under the 1996 Option Plan may be exercised.

1996 Employee Stock Purchase Plan

The Company's 1996 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Company in April 1996 and becomes effective upon the closing of
this offering. The Purchase Plan authorizes the issuance of up to a total of
500,000 shares of Common Stock to participating employees.

All employees of the Company, including directors of the Company who are
employees and all employees of any participating subsidiaries, whose customary
employment is more than 20 hours per week and for more than five months in any
calendar year are eligible to participate in the Purchase Plan. Employees who
would immediately after the grant own 5% or more of the total combined voting
power or value of the stock of the Company or any subsidiary are not eligible
to participate. As of March 31, 1996, all of the Company's full-time employees
would have been eligible to participate in the Purchase Plan.

On the first day of a designated payroll deduction period (the "Offering
Period"), the Company will grant to each eligible employee who has elected to
participate in the Purchase Plan an option to purchase shares of Common Stock
as follows: the employee may authorize an amount (a whole percentage from 1%
to 10% of such employee's regular pay) to be deducted by the Company from such
pay during the Offering Period. On the last day of the Offering Period, the
employee is deemed to have exercised the option, at the option exercise price,
to the extent of accumulated payroll deductions. Under the terms of the
Purchase Plan, the option price is an amount equal to 85% (or such higher
percentage as is determined by the Board of Directors) of the fair market
value per share of the Common Stock on either the first day or the last day of
the Offering Period, whichever is lower. In no event may an employee purchase
in any one Offering Period a number of shares which is more than 15% of the
employee's annualized base pay divided by 85% (or such higher percentage as is
determined by the Board of Directors) of the market value of a share of Common
Stock on the commencement date of the Offering Period. The Compensation
Committee may, in its discretion, choose an Offering Period of 12 months or
less for each of the Offerings and choose a different Offering Period for each
Offering.

If an employee is not a participant on the last day of the Offering Period,
such employee is not entitled to exercise any option, and the amount of such
employee's accumulated payroll deductions will be refunded. An employee's
rights under the Purchase Plan terminate upon voluntary withdrawal from the
Purchase Plan at any time, or when such employee ceases employment for any
reason, except that upon termination of employment because of death, the
employee's beneficiary has certain

50
<PAGE>

rights to elect to exercise the option to purchase the shares which the
accumulated payroll deductions in the participant's account would purchase at
the date of death.

1992 Stock Option Plan

The Company has amended the Company's 1992 Stock Option Plan (the "1992
Plan") to provide that no additional stock options would be granted under such
1992 Plan following the closing of this offering. As of March 31, 1996,
options to purchase a total of 686,345 shares of Common Stock remained
outstanding under the 1992 Plan and options to purchase a total of 32,022
shares of Common Stock had been exercised. In May 1996, the Company granted
the May 1996 Options to purchase an aggregate of 274,694 shares of Common
Stock under the 1992 Plan, effective upon the Pricing Date.

The 1992 Plan is administered by the Compensation Committee of the Board of
Directors pursuant to authority delegated to it by the Board of Directors. The
Compensation Committee, based on recommendations of management, selects the
optionees and determines (i) the number of shares of Common Stock covered by
the option, (ii) when the option becomes exercisable, (iii) the option
exercise price, which, in the case of incentive stock options, must be at
least 100% of the fair market value of the Common Stock as of the date of
grant and (iv) the duration of the option (which may not exceed ten years).
Options granted to officers and directors are to be made in compliance with
Rule 16b-3 promulgated under the Exchange Act. Payment of the option exercise
price may be made in cash, shares of Common Stock, or a combination of both.
Options generally are nontransferable other than by will or the laws of
descent and distribution and generally are exercisable during the lifetime of
the optionee only while the optionee is in the employ of, or engaged as a
consultant to, Microsurge or within one to three months after termination of
employment or consultancy. In the event that termination is due to death or
disability, options generally are exercisable for a one-year period
thereafter.

401(k) Savings and Retirement Plan

In 1993, the Company adopted a 401(k) Savings and Retirement Plan (the
"401(k) Plan"), a tax-qualified plan covering all of its employees who are at
least 21 years of age. Each employee may elect to reduce his or her current
compensation by up to 15%, subject to the statutory limit (a maximum of $9,500
in 1996) and have the amount of the reduction contributed to the 401(k) Plan.
The 401(k) Plan provides that the Company may, as determined from time to time
by the Board of Directors, provide a matching cash contribution. In addition,
the Company may contribute an additional amount to the 401(k) Plan, as
determined by the Board of Directors, which will be allocated based on the
proportion of the employee's compensation for the plan year to the aggregate
compensation for the plan year for all eligible employees.

All employee and Company contributions to the 401(k) Plan are fully vested
at all times. Upon termination of employment, a participant may elect a lump
sum distribution or, if his or her total amount in the 401(k) Plan is greater
than $3,500, may elect to receive benefits as retirement income.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The current members of the Company's Compensation Committee are Messrs.
Higgins and Dovey.

51
<PAGE>

CERTAIN TRANSACTIONS

Since January 1, 1993, the Company has engaged in the following transactions
with the following directors, officers and stockholders who beneficially own
more than 5% of the outstanding Common Stock of the Company ("5%
Stockholders"), and affiliates of such directors, officers and 5% Stockholders
(collectively, the "Affiliates").

On January 20, 1994 and on February 24, 1994, MSP exercised warrants to
purchase an aggregate of 51,198 shares of Common Stock for an aggregate
purchase price of $258,375. These warrants were issued to MSP on June 1, 1992
in connection with the sale and issuance of certain notes of the Company. On
December 16, 1993, the expiration date of these warrants was extended by the
Company from January 1, 1994 to March 1, 1994. On August 1, 1994, the Company
issued and sold 9,309 shares of Common Stock to MSP for an aggregate purchase
price of approximately $15.00.

In addition to the above transactions, the Company has engaged in the
following transactions in which certain Affiliates of the Company
participated.

On June 29, 1994, the Company issued and sold 2,181,818 shares of its Series
D Redeemable Convertible Preferred Stock for a purchase price of $2.75 per
share. On September 18, 1995 and September 28, 1995, the Company issued and
sold 1,511,935 shares of Series E Redeemable Convertible Preferred Stock for a
purchase price of $2.75 per share.

On February 28, 1996, the Company entered into a Credit Agreement (the
"Credit Agreement") with certain of its stockholders pursuant to which such
stockholders agreed to advance the Company an aggregate of $3,268,180 upon the
request of the Company. On February 28, 1996 and March 29, 1996, in connection
with an initial advance of $2,334,414 under the Credit Agreement, the Company
issued and sold to such stockholders a series of convertible subordinated
notes (the "1996 Notes") due August 28, 1997 in the aggregate principal amount
of $2,334,414. The 1996 Notes bear interest at a rate of 9.25% per annum and
provide that the outstanding principal amount of the 1996 Notes, together with
the accrued interest thereon, may be converted, at the option of the holder,
into shares of capital stock of the Company upon the consummation of a sale of
shares of capital stock which results in aggregate gross proceeds to the
Company of not less than $10,000,000 (an "Investor Sale"). The 1996 Notes are
convertible into the type of shares of capital stock issued and sold in the
Investor Sale at a conversion price equal to 60% of the price at which shares
of capital stock were sold in the Investor Sale (the "Investor Sale Price").
The holders of the 1996 Notes have agreed to convert the principal amount of
and the accrued interest on the 1996 Notes upon the closing of this offering
(which will constitute an Investor Sale) into shares of Common Stock at a
conversion price equal to 60% of the initial public offering price.

In connection with the execution of the Credit Agreement and the issuance
and sale of the 1996 Notes, the Company also issued to each holder of 1996
Notes two warrants to purchase shares of Common Stock, exercisable at any time
after an Investor Sale and prior to February 28, 1999, at an exercise price
equal to the Investor Sale Price. The first 1996 Warrant is exercisable to
purchase the number of shares of Common Stock determined by dividing 10% of
the commitment made by such holder under the Credit Agreement by the Investor
Sale Price, and the second 1996 Warrant is exercisable to purchase the number
of shares of Common Stock determined by dividing 40% of the aggregate original
principal amount of the 1996 Notes held by such holder by the Investor Sale
Price. Following this offering, the 1996 Warrants will become exercisable for
the purchase of an aggregate of 105,035 shares of Common Stock (assuming an
initial public offering price of $12.00).

52
<PAGE>

The purchasers of the shares of Series D Redeemable Convertible Preferred
Stock, the shares of Series E Redeemable Convertible Preferred Stock, the 1996
Notes and the 1996 Warrants included, among others, the following Affiliates
of the Company:

<TABLE>
<CAPTION>
ORIGINAL
PRINCIPAL
SHARES OF SHARES OF AMOUNT OF 1996 TOTAL
NAME SERIES D SERIES E 1996 NOTES WARRANTS(1) CONSIDERATION(2)
---- --------- --------- ---------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Allstate Insurance Com-
pany................... 195,512 148,469 $259,250 11,655 $1,205,198
Allstate Life Insurance
Company................ 97,756 74,234 129,500 5,826 602,473
American Healthcare Fund
II, L.P. .............. 109,328 113,784 172,250 7,750 785,808
BancBoston Ventures,
Inc.................... 97,181 85,140 148,500 6,682 649,883
Domain Partners II,
L.P. .................. 161,968 141,899 247,750 11,148 1,083,384
Old Court Limited....... 80,984 70,950 123,750 5,568 541,569
Edison Venture Fund II,
L.P. .................. 76,412 66,945 -- -- 394,232
Edison Venture Fund II-
PA, L.P. .............. 14,695 12,874 -- -- 75,815
Highland Capital
Partners Limited
Partnership............ 219,951 167,027 291,500 13,116 1,355,690
Medical Science Partners
II, L.P. .............. 283,603 128,266 438,000 19,710 1,570,640
Medical Science II Co-
Investment L.P. ....... -- 51,606 -- -- 141,917
Menlo Entrepreneurs Fund
VI, L.P. .............. 10,748 5,374 4,500 202 48,836
Menlo Ventures VI,
L.P. .................. 716,525 358,263 307,250 13,825 3,262,917
</TABLE>
- --------
(1) Assumes an initial public offering price of $12.00.
(2) Reflects the aggregate purchase price paid by Affiliates for shares of
Series D Redeemable Convertible Preferred Stock, Series E Redeemable
Convertible Preferred Stock and for the 1996 Notes and 1996 Warrants.

Certain persons and entities, including the purchasers of the Company's
securities listed above, are entitled to certain rights with respect to the
registration under the Securities Act of certain shares of the Company's
Common Stock, including shares of Common Stock that may be acquired pursuant
to the conversion of Redeemable Convertible Preferred Stock or the 1996 Notes
or the exercise of certain options or warrants (including the 1996 Warrants),
under the terms of agreements among the Company and such persons and entities.
For a description of such rights, see "Shares Eligible for Future Sale."

For a description of the employment arrangement between the Company and its
Chief Executive Officer, see "Management--Executive Compensation." For a
description of stock options granted to certain directors of the Company, see
"Management--Compensation of Directors." For a description of the relationship
between certain directors of the Company and certain of the Affiliates, see
"Management--Executive Officers and Directors."

The Company believes that the securities issued in the transactions
described above were sold at their then fair market value and that the terms
of the transactions described above were no less favorable than the Company
could have obtained from unaffiliated third parties.

53
<PAGE>

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company as of March 31, 1996 (assuming
the conversion of all outstanding shares of Redeemable Convertible Preferred
Stock into an aggregate of 5,525,860 shares of Common Stock and the conversion
of the outstanding principal amount of and accrued interest on the 1996 Notes
into an aggregate of 333,989 shares of Common Stock (assuming an initial
public offering price of $12.00 per share and a closing date of July 1,
1996)), by (i) each person or entity known to the Company to own beneficially
more than 5% of the Company's Common Stock, (ii) each of the Company's
directors, (iii) each of the Named Executive Officers, and (iv) all directors
and executive officers as a group.
<TABLE>
<CAPTION>
PERCENTAGE
BENEFICIALLY OWNED
------------------------------
NAME AND ADDRESS OF NUMBER OF SHARES
BENEFICIAL OWNER(1) BENEFICIALLY OWNED(2) BEFORE OFFERING AFTER OFFERING
------------------- --------------------- --------------- --------------
<S> <C> <C> <C>
5% Stockholders
Allstate Insurance Com-
pany Entities........... 948,946(3) 15.1% 10.2%
3075 Sanders Rd., Suite
G4B
Northbrook, IL 60062-
7127
American Healthcare Fund
II, L.P................. 420,675(4) 6.7 4.5
c/o Capital Health
Venture Partners
20 N. Wacker Drive,
Suite 2200
Chicago, IL 60606
BancBoston Ventures,
Inc..................... 362,762(5) 5.8 3.9
100 Federal St.
Boston, MA 02110
Domain Partners II,
L.P..................... 604,649(6) 9.6 6.5
One Palmer Square, Suite
515
Princeton, NJ 08542
Edison Venture Funds..... 313,871(7) 5.0 3.4
997 Lenox Drive, No. 3
Lawrenceville, NJ 08648
Highland Capital Partners
Limited Partnership..... 711,699(8) 11.3 7.7
Two International Place
Boston, MA 02110
Medical Science Partners
Group................... 1,069,922(9) 17.1 11.5
20 William Street, Suite
250
Wellesley, MA 02181
Menlo Ventures Group..... 760,915(10) 12.1 8.2
3000 Sand Hill Road
Menlo Park, CA 94025
Directors
E. James Hutchens........ 313,531(11) 4.9 3.3
Brian H. Dovey........... 604,649(12) 9.6 6.5
Robert F. Higgins........ 711,699(13) 11.3 7.7
Joseph F. Lovett......... 1,069,922(14) 17.1 11.5
Daniel J. Mitchell....... 420,675(15) 6.7 4.5
</TABLE>

54
<PAGE>

<TABLE>
<CAPTION>
PERCENTAGE
BENEFICIALLY OWNED
------------------------------
NAME AND ADDRESS OF NUMBER OF SHARES
BENEFICIAL OWNER(1) BENEFICIALLY OWNED(2) BEFORE OFFERING AFTER OFFERING
------------------- --------------------- --------------- --------------
<S> <C> <C> <C>
Other Named Executive Of-
ficers
Kathleen A. Barry........ -- * *
John T. Kilcoyne......... 16,905(11) * *
William Barrett.......... 33,005(11) * *
All Directors and
executive officers as a
group (11 persons)...... 3,222,711(16) 48.8% 33.6%
</TABLE>

- --------
* Represents less than 1% of the outstanding Common Stock.
(1) The address for each director and officer of the Company is c/o
Microsurge, Inc., 150 A Street, Needham, Massachusetts 02194.
(2) Each stockholder has sole voting and investment power with respect to the
shares listed, except as otherwise noted. Shares of Common Stock which an
individual or group has a right to acquire within the 60-day period
following March 31, 1996 pursuant to the exercise of options or warrants
are deemed to be outstanding for the purposes of computing the percentage
ownership of such individual or group, but are not deemed to be
outstanding for the purpose of computing the percentage ownership of any
other person shown in the table. The number of shares of Common Stock
issuable upon exercise of the 1996 Warrants assumes an initial public
offering price of $12.00 per share.
(3) Includes 632,648 shares held by Allstate Insurance Company (including
11,665 shares issuable upon the exercise of the 1996 Warrants) and
316,298 shares held by Allstate Life Insurance Company (including 5,826
shares issuable upon the exercise of the 1996 Warrants). These entities
are affiliates that are under common control.
(4) Includes 7,750 shares issuable upon the exercise of the 1996 Warrants.
(5) Includes 6,682 shares issuable upon the exercise of the 1996 Warrants.
(6) Includes 11,148 shares issuable upon the exercise of the 1996 Warrants.
(7) Includes 263,248 shares held by Edison Venture Fund II, L.P. and 50,623
shares held by Edison Venture Fund II-PA, L.P. Edison Partners II, L.P.
exercises sole investment and voting power over both of these entities.
(8) Includes 13,116 shares issuable upon the exercise of the 1996 Warrants.
(9) Includes 634,760 shares held by MSP, 401,928 shares held by Medical
Science Partners II, L.P. (including 19,710 shares issuable upon the
exercise of the 1996 Warrants) and 33,234 shares held by Medical Science
II Co-Investment, L.P., all of which are affiliates that are under common
control.
(10) Includes 749,692 shares held by Menlo Ventures VI, L.P. (including 13,825
shares issuable upon the exercise of the 1996 Warrants) and 11,223 shares
held by Menlo Entrepreneurs Fund VI, L.P. (including 202 shares issuable
upon the exercise of the 1996 Warrants). MV Management VI, L.P. is the
general partner of Menlo Ventures VI, L.P. and Menlo Entrepreneurs Fund
VI, L.P., and as such exercises voting and investment power over the
shares held by each of them.

(11) Includes the following shares which may be acquired by the stockholder
upon the exercise of options within 60 days of March 31, 1996: Mr.
Hutchens: 179,133, Mr. Barrett: 33,005, Mr. Kilcoyne: 16,905.
(12) Includes 604,649 shares held by Domain Partners II, L.P. (including
11,148 shares issuable upon the exercise of the 1996 Warrants). Mr. Dovey
is a general partner of One Palmer Square Associates II, L.P., the
general partner of Domain Partners II, L.P. Mr. Dovey has indirect
beneficial ownership of these shares. Excludes 302,300 shares owned by
Biotechnology Investments Limited (including 5,568 shares issuable upon
the exercise of the 1996 Warrants), a Channel Islands investor for which
Domain Associates, a partnership of which Mr. Dovey is a general partner,
is the United States venture capital advisor. Domain Associates has
neither voting nor investment power over these shares. Mr. Dovey and
Domain Associates disclaim beneficial ownership of these shares.

55
<PAGE>

(13) Includes 711,699 shares held by Highland Capital Partners Limited
Partnership, (including 13,116 shares issuable upon the exercise of the
1996 Warrants). Mr. Higgins is a general partner of Highland Management
Partners Limited Partnership, the general partner of Highland Capital
Partners, L.P., which has sole voting and investment power over these
shares. Mr. Higgins disclaims beneficial ownership of these shares.
(14) Includes 1,069,922 shares held by MSP and its affiliates (including
19,710 shares issuable upon the exercise of 1996 Warrants), as to which
Mr. Lovett disclaims beneficial ownership. Mr. Lovett is a general
partner of Medical Science Ventures II, L.P., the general partner of
Medical Science Partners II, L.P., a general partner of Medical Science
Ventures, L.P., the general partner of MSP, and the general partner of
Medical Science II Co-Investment Ventures, L.P., the general partner of
Medical Science II Co-Investment, L.P. See Note (9) above. Mr. Lovett
disclaims beneficial ownership of these shares.
(15) Includes 420,675 shares held by American Healthcare Fund II, L.P.
(including 7,750 shares issuable upon the exercise of 1996 Warrants). Mr.
Mitchell is a general partner of Capital Health Venture Partners, the
general partner of American Healthcare Fund II, L.P., and, as such,
exercises voting and investment power over these shares. Mr. Mitchell
disclaims beneficial ownership of these shares.
(16) Includes 51,724 shares issuable upon the exercise of 1996 Warrants and
281,368 shares issuable upon the exercise of options within the 60-day
period following March 31, 1996.

56
<PAGE>

DESCRIPTION OF CAPITAL STOCK

Assuming conversion of all of the Company's Convertible Preferred Stock and
the 1996 Notes, as of March 31, 1996, there were 6,265,323 shares of Common
Stock outstanding, held of record by 53 stockholders.

COMMON STOCK

Prior to the effectiveness of the Registration Statement of which this
Prospectus is a part, the Company's Restated Certificate of Incorporation will
authorize the issuance of up to 50,000,000 shares of Common Stock, $.001 par
value per share. Holders of Common Stock are entitled to one vote for each
share held on all matters submitted to a vote of stockholders and do not have
cumulative voting rights. Accordingly, holders of a majority of the shares of
Common Stock entitled to vote in any election of directors may elect all of
the directors standing for election. Holders of Common Stock are entitled to
receive ratably such dividends, if any, as may be declared by the Board of
Directors out of funds legally available therefor, subject to any preferential
dividend rights of outstanding Preferred Stock. Upon the liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to receive ratably the net assets of the Company available after the
payment of all debts and other liabilities and subject to the prior rights of
any outstanding Preferred Stock. Holders of Common Stock have no preemptive,
subscription, redemption or conversion rights. 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 nonassessable. 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.

WARRANTS AND CERTAIN STOCK OPTIONS

As of March 31, 1996, a total of 892,450 shares of Common Stock were
issuable upon exercise of outstanding warrants (other than the 1996 Warrants)
and options (consisting of options to purchase 686,345 shares of Common Stock
pursuant to the Company's 1992 Stock Option Plan (other than the May 1996
Options) and options to purchase 133,275 shares of Common Stock granted
outside the Company's 1992 Stock Option Plan) at exercise prices ranging from
$0.47 to $5.05 per share. In addition, a total of 105,035 shares of Common
Stock were issuable upon exercise of the 1996 Warrants (assuming an initial
public offering price of $12.00 per share) and a total of 274,694 shares of
Common Stock were issuable upon exercise of the May 1996 Options. All of such
warrants and options, unless exercised after March 31, 1996, will remain
outstanding after the closing of this offering.

PREFERRED STOCK

Upon the closing of this offering, the Company's Restated Certificate of
Incorporation will authorize the issuance of up to 5,000,000 shares of
Preferred Stock, $.001 par value per share. Under the terms of the Restated
Certificate of Incorporation, the Board of Directors is authorized, subject to
any limitations prescribed by law, without stockholder approval, to issue such
shares of Preferred Stock in one or more series. Each such series of Preferred
Stock shall have such rights, preferences, privileges and restrictions,
including voting rights, dividend rights, conversion rights, redemption
privileges and liquidation preferences, as shall be determined by the Board of
Directors.

The purpose of authorizing the Board of Directors to issue Preferred Stock
and determine its rights and preferences is to eliminate delays associated
with a stockholder vote on specific issuances. The issuance of Preferred
Stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
from acquiring, a majority of the outstanding voting stock of the Company. The
Company has no present plans to issue any shares of Preferred Stock.

DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS

The Company is subject to the provisions of Section 203 of the General
Corporation Law of Delaware. Section 203 prohibits a publicly-held Delaware
corporation from engaging in a "business

57
<PAGE>

combination" with an "interested stockholder" for a period of three years
after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed
manner. A "business combination" includes mergers, asset sales and other
transactions resulting in a financial benefit to the interested stockholder.
Subject to certain exceptions, an "interested stockholder" is (i) a person
who, together with affiliates and associates, owns 15% or more of the
corporation's voting stock or (ii) is an affiliate or associate of the Company
and was the owner, together with affiliates and associates of 15% or more of
the outstanding voting stock of the Company at any time within the 3-year
period prior to the date for determining whether such person is "interested".

The Restated Certificate of Incorporation provides for the division of the
Board of Directors into three classes as nearly equal in size as possible with
staggered three-year terms. See "Management." In addition, the Restated
Certificate of Incorporation provides that directors may be removed only for
cause by the affirmative vote of the holders of two-thirds of the shares of
capital stock of the corporation entitled to vote. Under the Restated
Certificate of Incorporation, any vacancy on the Board of Directors, however
occurring, including a vacancy resulting from an enlargement of the Board, may
only be filled by vote of a majority of the directors then in office. The
classification of the Board of Directors and the limitations on the removal of
directors and filling of vacancies could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
acquiring, control of the Company.

The Restated Certification of Incorporation also provides that after the
closing of this offering, any action required or permitted to be taken by the
stockholders of the Company at an annual meeting or special meeting of
stockholders may only be taken if it is properly brought before such meeting
and may not be taken by written action in lieu of a meeting. The Restated
Certificate of Incorporation further provides that special meetings of the
stockholders may only be called by the President of the Company or by the
Board of Directors. Under the Company's By-Laws, as amended (the "By-Laws"),
in order for any matter to be considered "properly brought" before a meeting,
a stockholder must comply with certain requirements regarding advance notice
to the Company. The foregoing provisions could have the effect of delaying
until the next stockholders meeting stockholder actions which are favored by
the holders of a majority of the outstanding voting securities of the Company.
These provisions may also discourage another person or entity from making a
tender offer for the Company's Common Stock, because such person or entity,
even if it acquired a majority of the outstanding voting securities of the
Company, would be able to take action as a stockholder (such as electing new
directors or approving a merger) only at a duly called stockholders meeting,
and not by written consent.

The General Corporation Law of Delaware provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's Restated Certificate of Incorporation or By-
Laws, unless a corporation's Restated Certificate of Incorporation or By-Laws,
as the case may be, requires a greater percentage. The Restated Certificate of
Incorporation and the By-Laws require the affirmative vote of the holders of
at least 75% of the shares of capital stock of the Company issued and
outstanding and entitled to vote to amend or repeal any of the provisions
described in the prior two paragraphs.

The Restated Certificate of Incorporation contains certain provisions
permitted under the General Corporation Law of Delaware relating to the
liability of directors. The provisions eliminate a director's liability for
monetary damages for a breach of fiduciary duty, except in certain
circumstances involving wrongful acts, such as the breach of a director's duty
of loyalty or acts or omissions which involve intentional misconduct or a
knowing violation of law. Further, the Restated Certificate of Incorporation
contains provisions to indemnify the Company's directors and officers to the
fullest extent permitted by the General Corporation Law of Delaware. The
Company believes that these provisions will assist the Company in attracting
and retaining qualified individuals to serve as directors.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is Boston Equiserve
Limited Partnership.

58
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, based upon the number of shares
outstanding at March 31, 1996 there will be 9,265,323 shares of Common Stock
of the Company outstanding. There were also 997,485 shares covered by vested
options and warrants (including the 1996 Warrants and assuming an initial
public offering price of $12.00 per share) outstanding at March 31, 1996,
which are not considered to be outstanding shares. Of the outstanding shares
and without taking into account the agreements described in the following
paragraph, 4,047,969 shares, including the 3,000,000 shares of Common Stock
sold in this offering, will be immediately eligible for resale in the public
market without restriction under the Securities Act, except that any shares
purchased in this offering by "affiliates" of the Company ("Affiliates"), as
that term is defined in Rule 144 under the Securities Act ("Rule 144"), may
generally only be resold in compliance with applicable provisions of Rule 144.
Beginning approximately 90 days after the date of this Prospectus and without
taking into account the agreements described in the following paragraph,
approximately 4,331,363 additional shares of Common Stock (including
approximately 421,666 shares covered by options exercisable within the 90-day
period following the date of this Prospectus) will become eligible for
immediate resale in the public market, subject to compliance as to certain of
such shares with applicable provisions of Rules 144 and 701.

The Company, the executive officers and directors of the Company, and
certain securityholders, who in the aggregate hold approximately 6,652,969
shares of Common Stock (including 471,676 shares of Common Stock that may be
acquired pursuant to the exercise of vested options or warrants held by them
at March 31, 1996) have agreed pursuant to certain agreements that they will
not, without the prior written consent of the Representatives and, in certain
cases, the Company, offer, sell or otherwise dispose of the shares of Common
Stock beneficially owned by them for a period of 180 days from the date of the
Underwriting Agreement. The shares subject to the lock-up agreements include
approximately 1,034,928 of the shares of Common Stock that would otherwise
have become immediately eligible for resale in the public market upon
completion of this offering and approximately 4,205,348 of the shares of
Common Stock (including approximately 366,641 shares of Common Stock covered
by options exercisable within the 90-day period following the date of the
Underwriting Agreement) that would otherwise have become eligible for resale
in the public market beginning approximately 90 days after the date of the
Underwriting Agreement, subject to compliance as to certain of such shares
with the applicable provisions of Rules 144 and 701.

In general, under Rule 144 as currently in effect, beginning approximately
90 days after the effective date of the Registration Statement of which this
Prospectus is a part, a stockholder, including an Affiliate, who has
beneficially owned his or her restricted securities (as that term is defined
in Rule 144) for at least two years from the later of the date such securities
were acquired from the Company or (if applicable) the date they were acquired
from an Affiliate is entitled to sell, within any three-month period, a number
of such shares that does not exceed the greater of 1% of the then outstanding
shares of Common Stock (approximately 92,653 immediately after this offering)
or the average weekly trading volume in the Common Stock during the four
calendar weeks preceding the date on which notice of such sale was filed under
Rule 144, provided certain requirements concerning availability of public
information, manner of sale and notice of sale are satisfied. In addition,
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 or (if
applicable) the date they were acquired from an Affiliate of the Company, a
stockholder who is not an Affiliate of the Company at the time of sale and has
not been an Affiliate of the Company for at least three months prior to the
sale is entitled to sell the shares immediately without compliance with the
foregoing requirements under Rule 144. The Securities and Exchange Commission
has proposed an amendment to Rule 144 which would reduce the holding period
required for shares subject to Rule 144 to become eligible for sale in the
public market from two years to one year, and from three years to two years in
the case of Rule 144(k).

Securities issued in reliance on Rule 701 (such as shares of Common Stock
that may be acquired pursuant to the exercise of certain options granted under
the 1992 Option Plan) are also restricted

59
<PAGE>

securities and, beginning 90 days after the effective date of the Registration
Statement of which this Prospectus is a part, may be sold by stockholders
other than an Affiliate of the Company subject only to the manner of sale
provisions of Rule 144 and by an Affiliate under Rule 144 without compliance
with its two-year holding period requirement.

At the completion of this offering, certain persons and entities (the
"Rightholders"), will be entitled to certain rights with respect to the
registration under the Securities Act of a total of approximately 6,691,807
shares of Common Stock (the "Registrable Shares"), including 105,035 shares of
Common Stock that may be acquired pursuant to the exercise of outstanding
warrants (assuming an initial public offering price of $12.00 per share),
under the terms of an agreement among the Company and the Rightholders (the
"Registration Agreement"). The Registration Agreement generally provides that
in the event the Company proposes to register any of its securities under the
Securities Act at any time, with certain exceptions, the Rightholders shall be
entitled to include Registrable Shares in such registration, subject to the
right of the managing underwriter of any underwritten offering to exclude from
such registration for marketing reasons some or all of such Registrable
Shares. Certain Rightholders have the additional right under the Registration
Agreement to require the Company to prepare and file registration statements
under the Securities Act with respect to a total of approximately 6,476,909
Registrable Shares, including shares of Common Stock that may be acquired upon
the exercise of outstanding warrants (assuming an initial public offering
price of $12.00 per share), if such Rightholders holding specified percentages
of such Registrable Shares so request, and the Company is required to use its
best efforts to effect such registration, subject to certain conditions and
limitations. Under the Registration Agreement, the Company is not required to
file a registration statement within six months of the effective date of the
Registration Statement of which this Prospectus is a part. The Company is
generally required to bear the expense of all such registrations.

Prior to this offering, there has been no public market for the Common
Stock. No precise prediction can be made as to the effect, if any, that market
sales of shares or the availability of shares for sale will have on the market
price of the Common Stock prevailing from time to time. The Company is unable
to estimate the number of shares that may be sold in the public market
pursuant to Rule 144, since this will depend on the market price of the Common
Stock, the personal circumstances of the sellers and other factors.
Nevertheless, sales of significant amounts of the Common Stock of the Company
in the public market could adversely affect the market price of the Company's
Common Stock and could impair the Company's ability to raise capital through
an offering of its equity securities.

60
<PAGE>

UNDERWRITING

Subject to the terms and conditions set forth in the Underwriting Agreement
among the Company and the Underwriters (the "Underwriting Agreement"), the
Company has agreed to sell to each of the underwriters named below (the
"Underwriters") for whom Salomon Brothers Inc, Raymond James & Associates,
Inc. and Vector Securities International, Inc. are acting as representatives
(the "Representatives"), and each such Underwriter has severally agreed to
purchase from the Company, the aggregate number of shares of Common Stock set
forth opposite its name below:

<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ ---------
<S> <C>
Salomon Brothers Inc .............................................
Raymond James & Associates, Inc. .................................
Vector Securities International, Inc. ............................
---
Total...........................................................
===
</TABLE>

In the Underwriting Agreement, the several Underwriters have agreed, subject
to the terms and conditions set forth therein, to purchase all the shares of
Common Stock offered hereby (other than those subject to the over-allotment
option described below) if any such shares are purchased. In the event of a
default by any Underwriter, the Underwriting Agreement provides that, in
certain circumstances, the purchase commitments of the non-defaulting
Underwriters may be increased or the Underwriting Agreement may be terminated.

The Company has been advised by the Representatives that the several
Underwriters propose initially 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 offering 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 public offering, the public offering price and such
concessions may be changed.

The Company has granted to the Underwriters an option to purchase up to
450,000 additional shares of Common Stock from the Company at the initial
public offering price less the underwriting discount, solely to cover over-
allotments. The option may be exercised at any time up to 30 days after the
date of this Prospectus. To the extent that the Underwriters exercise such
option, each of the Underwriters will have a firm commitment, subject to
certain conditions, to purchase a number of option shares proportionate to
such Underwriter's initial commitment.

The Company and the directors, executive officers and major shareholders of
the Company (the "Directors, Officers and Major Shareholders") have agreed,
pursuant to "lock-up" agreements, not to offer, sell or contract to sell, or
otherwise dispose of, directly or indirectly, or announce the offering of any
shares of Common Stock beneficially owned by them or any securities
convertible into, or exchangeable or exercisable for, shares of Common Stock
for a period of 180 days following the date

61
<PAGE>

of execution of the Underwriting Agreement without the prior written consent
of the Representatives, except for (a) in the case of the Company, (i) the
Common Stock offered hereby, (ii) issuances of Common Stock and grants of
options pursuant to any stock option plan, stock ownership plan, stock
purchase plan and dividend reinvestment plan of the Company described herein,
(iii) issuances of Common Stock upon the conversion of securities or the
exercise of options or warrants outstanding on the date the Underwriting
Agreement is executed or granted pursuant to a certain agreement previously
entered into by the Company, (iv) issuances and sales of Common Stock or other
securities convertible into or exchangeable for Common Stock or warrants or
other rights to purchase Common Stock in connection with the execution and
delivery of any research and development, licensing, distribution or other
similar arrangement and (v) pursuant to an acquisition by the Company; and (b)
in the case of the Directors, Officers and Major Shareholders, shares of
Common Stock disposed of or acquired (i) as bona fide gifts, (ii) pursuant to
the laws of testamentary or intestate descent, (iii) pursuant to a final and
nonappealable order of a court or other body of competent jurisdiction, (iv)
as payment of the exercise of options under any stock option plan of the
Company and (v) shares acquired on the open market.

The Underwriting Agreement provides that the Company will indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act, or contribute to payments the Underwriters may be required
to make in respect thereof.

The foregoing is a summary of the principal terms of the Underwriting
Agreement and does not purport to be complete. Reference is made to the copy
of the Underwriting Agreement which is on file as an exhibit to the
Registration Statement of which this Prospectus is a part.

The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.

Certain of the Representatives have provided from time to time, and may
provide in the future, investment banking or commercial banking services to
the Company for which they have received or expect to receive customary fees
and commissions. In 1994, the Company paid Vector Securities International,
Inc. ("Vector") $25,000 for financial advisory services provided to the
Company. In 1995, the Company engaged Vector to serve as a financial advisor
in identifying potential acquisitions. In 1996, this engagement was terminated
by the Company. However, the Company has agreed to pay Vector certain
compensation if within two years after the date of termination the Company
consummates an acquisition with any entity identified to the Company by Vector
or as to which Vector rendered any service on behalf of the Company during the
engagement.

Prior to this offering there has been no public trading market for the
Company's securities. Accordingly, the public offering price of the shares of
Common Stock will be determined by negotiations among the Company and the
Representatives. Among the factors to be considered in determining the initial
public offering price are prevailing economic conditions, the sales, earnings
and certain other financial and operating information of the Company in recent
periods, the present state of the Company's business operations, the future
prospects of the Company and its industry in general, financial and operating
information of companies engaged in activities similar to those of the
Company, an assessment of the Company's management and the market prices of
securities for comparable companies, the general condition of the securities
market at the time of the offering and other relevant factors. There can be no
assurance that the prices at which the Common Stock will sell in the public
market after the offering will not be lower than the price at which the Common
Stock was sold by the Underwriters.

Following this offering, the Representatives intend to serve as market
makers for the Company's Common Stock.

62
<PAGE>

LEGAL MATTERS

The validity of the shares of Common Stock offered by the Company hereby
will be passed upon for the Company by Hale and Dorr, Boston, Massachusetts.
Certain legal matters have been passed upon for the Underwriters by Cravath,
Swaine & Moore, New York, New York.

EXPERTS

The balance sheets as of December 31, 1994 and 1995 and the statements of
operations, stockholders' equity (deficit) and cash flows for each of the
three years in the period ended December 31, 1995, included in this
Prospectus, have been included herein in reliance on the report of Coopers &
Lybrand L.L.P., independent accountants, given on the authority of that firm
as experts in accounting and auditing.

The statements in this Prospectus set forth under the captions "Risk
Factors--Uncertainty Regarding Patents and Proprietary Rights; License
Obligations" and "Business--Patents, Trade Secrets and Proprietary Rights"
(other than the statements set forth in the second, fifth and sixth paragraphs
of "Risk Factors--Uncertainty Regarding Patents and Proprietary Rights;
License Obligations" and the last sentence of the second paragraph and the
sixth paragraph of "Business--Patents, Trade Secrets and Proprietary Rights")
have been reviewed and approved by Hamilton, Brook, Smith & Reynolds, P.C.,
patent counsel for the Company, as experts on such matters, and are included
herein in reliance upon such review and approval.

CHANGE IN INDEPENDENT ACCOUNTANTS

In late 1995, the Company engaged Coopers & Lybrand L.L.P., as its
independent accountants, in replacement of its former independent accountants.
The decision was made by the Company's Board of Directors, upon the
recommendation of management, and was not due to any disagreement with the
former accountants. This decision was subsequently ratified by the Company's
stockholders. During the fiscal years ended December 31, 1993 and 1994 and the
subsequent interim period immediately preceding the date of this change, the
Company had no disagreements with the former accountants on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure, which disagreement if not resolved to the satisfaction of
the former accountants would have caused them to make reference thereto in
their report on the Company's financial statements; and the reports of the
former accountants on the Company's financial statements for 1993 and 1994 did
not contain any adverse opinion, disclaimer of opinion or qualification or
modification as to uncertainty, audit scope or accounting principles.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement (which term
shall include all amendments, exhibits and schedules thereto) on Form S-1
under the Securities Act with respect to the shares of Common Stock offered
hereby. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission, to which Registration Statement
reference is hereby made. Statements made in this Prospectus as to the
contents of any contract, agreement or other document referred to are not
necessarily complete. With respect to each such contract, agreement or other
document filed as an exhibit to the Registration Statement, reference is made
to the exhibit for a more complete description of the matter involved, and
each such statement shall be deemed qualified in its entirety by such
reference. The Registration Statement and the exhibits thereto may be
inspected and copied at prescribed rates at the public reference facilities

63
<PAGE>

maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the regional offices of the Commission
located at Seven World Trade Center, 13th Floor, New York, New York 10048 and
500 West Madison Street, Suite 1400, Chicago, Illinois 60661.

The Company intends to furnish to its stockholders annual reports containing
financial statements audited by an independent public accounting firm and
quarterly reports containing unaudited financial statements for the first
three quarters of each fiscal year.

64
<PAGE>

MICROSURGE, INC.

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants......................................... F-2
Balance Sheets as of December 31, 1994, 1995 and March 31, 1996
(unaudited).............................................................. F-3
Statements of Operations for the years ended December 31, 1993, 1994 and
1995 and for the three months ended March 31, 1995 and 1996 (unaudited).. F-4
Statements of Stockholders' Equity (Deficit) for the years ended December
31, 1993, 1994 and 1995 and for the three months ended March 31, 1996
(unaudited).............................................................. F-5
Statements of Cash Flows for the years ended December 31, 1993, 1994 and
1995 and for the three months ended March 31, 1995 and 1996 (unaudited).. F-6
Notes to Financial Statements............................................. F-7
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of Microsurge, Inc.:

We have audited the accompanying balance sheets of Microsurge, Inc. as of
December 31, 1994 and 1995 and the related statements of operations,
stockholders' equity (deficit) 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 financial statements referred to above present fairly,
in all material respects, the financial position of Microsurge, Inc. as of
December 31, 1994 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.

Boston, Massachusetts Coopers & Lybrand L.L.P.

April 19, 1996, except as to the information
in Note 14, for which the date is June 17, 1996

F-2
<PAGE>

MICROSURGE, INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
PRO FORMA
MARCH 31, MARCH 31,
1994 1995 1996 1996
------------ ------------ ------------ ------------
ASSETS (UNAUDITED)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents.......... $ 525,898 $ 264,889 $ 2,159,769 $ 2,159,769
Marketable
securities........... 3,530,368 1,540,700 243,407 243,407
Accounts receivable,
net of allowance for
doubtful accounts of
$28,000 in 1994,
$80,000 in 1995 and
$100,000 at March 31,
1996................. 554,693 711,691 736,932 736,932
Inventories........... 779,525 984,755 997,283 997,283
Other current assets.. 3,873 44,358 30,292 30,292
------------ ------------ ------------ ------------
Total current
assets........... 5,394,357 3,546,393 4,167,683 4,167,683
Property and equipment,
net.................... 863,496 936,940 951,645 951,645
Restricted cash......... 96,000 96,000 96,000 96,000
Purchased technology.... -- 290,000 265,833 265,833
Other assets............ 43,818 38,835 38,835 38,835
------------ ------------ ------------ ------------
Total assets...... $ 6,397,671 $ 4,908,168 $ 5,519,996 $ 5,519,996
============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and
accrued expenses..... $ 696,890 $ 1,238,974 $ 1,085,729 $ 1,085,729
Note payable.......... -- 150,000 150,000 150,000
Current portion of
capital lease
obligation........... 259,760 291,145 260,086 260,086
------------ ------------ ------------ ------------
Total current
liabilities...... 956,650 1,680,119 1,495,815 1,495,815
Capital lease
obligation............. 243,837 197,090 135,630 135,630
Convertible subordinated
notes, net of
discount............... -- -- 2,275,903 --
Commitments (Notes 8 and
9)
Redeemable convertible
preferred stock, $.001
par value; 12,000,000
shares authorized;
7,068,652 shares issued
and outstanding at
December 31, 1994 and
8,580,587 shares issued
and outstanding at
December 31, 1995 and
March 31, 1996;
(liquidation preference
of $25,365,874 and
$25,888,402 at December
31, 1995 and March 31,
1996, respectively). No
shares issued and
outstanding
(pro forma)............ 19,230,207 25,300,934 25,875,033 --
Stockholders' equity
(deficit):
Common stock, $.001
par value; 9,016,000
shares authorized;
372,647, 405,330,
405,474 and 6,257,655
shares issued and
outstanding at
December 31, 1994,
1995, March 31, 1996
and on a pro forma
basis, respectively.. 372 405 405 6,257
Additional paid-in
capital.............. -- -- -- 28,145,084
Accumulated deficit... (14,033,395) (22,270,380) (24,262,790) (24,262,790)
------------ ------------ ------------ ------------
Total
stockholders'
equity
(deficit)........ (14,033,023) (22,269,975) (24,262,385) 3,888,551
------------ ------------ ------------ ------------
Total liabilities
and stockholders'
equity
(deficit)........ $ 6,397,671 $ 4,908,168 $ 5,519,996 $ 5,519,996
============ ============ ============ ============
</TABLE>

The accompanying notes are an integral part of the financial statements.

F-3
<PAGE>

MICROSURGE, INC.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------- ------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Product sales........... $ 101,300 $ 1,547,545 $ 3,796,645 $ 686,880 $ 1,172,519
Cost of goods sold...... 53,180 1,041,498 2,369,825 428,009 723,936
----------- ----------- ----------- ----------- -----------
48,120 506,047 1,426,820 258,871 448,583
----------- ----------- ----------- ----------- -----------
Operating expenses:
Research and
development.......... 1,939,448 2,010,427 1,913,006 399,453 496,222
Selling, general and
administrative....... 1,758,479 3,311,777 5,911,955 1,186,920 1,436,922
----------- ----------- ----------- ----------- -----------
Total operating
expenses........... 3,697,927 5,322,204 7,824,961 1,586,373 1,933,144
----------- ----------- ----------- ----------- -----------
Other (income) expense:
Interest income....... (196,305) (172,660) (131,212) (47,888) (20,153)
Interest expense...... 2,789 33,394 63,912 28,189 31,977
----------- ----------- ----------- ----------- -----------
Net loss............ $(3,456,291) $(4,676,891) $(6,330,841) $(1,307,803) $(1,496,385)
=========== =========== =========== =========== ===========
Net loss per common and
common equivalent
share--historical basis
(Note 2)
Pro forma net loss per
common and common
equivalent share....... $ (1.02) $ (0.24)
=========== ===========
Pro forma weighted
average common and
common equivalent
shares outstanding..... 6,193,974 6,213,121
=========== ===========
</TABLE>

The accompanying notes are an integral part of the financial statements.

F-4
<PAGE>

MICROSURGE, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
COMMON STOCK
---------------- ADDITIONAL TOTAL
NUMBER OF PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY (DEFICIT)
--------- ------ ---------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Balance, December 31,
1992................... 217,796 $218 $ -- $ (3,831,074) $ (3,830,856)
Issuance of common stock
under license
agreement.............. 5,796 6 2,694 -- 2,700
Issuance of common stock
upon exercise of stock
options................ 16,905 17 7,858 -- 7,875
Accretion of redeemable
convertible
preferred stock........ -- -- (10,552) (1,086,869) (1,097,421)
Net loss................ -- -- -- (3,456,291) (3,456,291)
------- ---- --------- ------------ ------------
Balance, December 31,
1993................... 240,497 241 -- (8,374,234) (8,373,993)
Issuance of common stock
under license
agreements............. 23,184 23 12,577 -- 12,600
Issuance of common stock
upon exercise of stock
options and warrants... 108,966 108 456,043 -- 456,151
Accretion of redeemable
convertible
preferred stock........ -- -- (468,620) (982,270) (1,450,890)
Net loss................ -- -- -- (4,676,891) (4,676,891)
------- ---- --------- ------------ ------------
Balance, December 31,
1994................... 372,647 372 -- (14,033,395) (14,033,023)
Issuance of common stock
upon exercise of stock
options................ 32,683 33 15,192 -- 15,225
Accretion of redeemable
convertible
preferred stock........ -- -- (15,192) (1,906,144) (1,921,336)
Net loss................ -- -- -- (6,330,841) (6,330,841)
------- ---- --------- ------------ ------------
Balance, December 31,
1995................... 405,330 405 -- (22,270,380) (22,269,975)
Issuance of common stock
upon exercise of stock
options................ 144 -- 74 -- 74
Issuance of warrants.... -- -- 78,000 -- 78,000
Accretion of redeemable
convertible preferred
stock.................. -- -- (78,074) (496,025) (574,099)
Net loss................ -- -- -- (1,496,385) (1,496,385)
------- ---- --------- ------------ ------------
Balance, March 31, 1996
(unaudited)............ 405,474 $405 $ -- $(24,262,790) $(24,262,385)
======= ==== ========= ============ ============
</TABLE>

The accompanying notes are an integral part of the financial statements.

F-5
<PAGE>

MICROSURGE, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------------------- ------------------------
1993 1994 1995 1995 1996
----------- ----------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss.................. $(3,456,291) $(4,676,891) $(6,330,841) $(1,307,803) $(1,496,385)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Depreciation and
amortization........... 82,620 272,388 366,934 97,324 127,044
Provision for doubtful
accounts............... -- 28,000 80,000 20,000 20,000
Loss on disposal of
property and
equipment.............. -- -- 35,261 -- --
Issuance of common stock
under
license agreements..... 2,700 12,600 -- -- --
Changes in operating
assets and liabilities:
Accounts receivable... (55,725) (526,968) (236,998) 48,277 (45,241)
Inventories........... (142,840) (636,685) (205,230) (240,986) (12,528)
Other current assets.. (8,751) 7,032 (40,485) (20,648) 14,066
Accounts payable and
accrued
expenses............. 187,041 244,715 542,084 1,443 (153,245)
Accrued interest on
convertible
subordinated notes... -- -- -- -- 15,156
----------- ----------- ------------ ----------- -----------
Net cash used in
operating
activities........... (3,391,246) (5,275,809) (5,789,275) (1,402,393) (1,531,133)
----------- ----------- ------------ ----------- -----------
Cash flows from investing
activities:
Purchase of marketable
securities............... (4,107,982) (5,477,482) (2,082,639) (590,794) --
Proceeds from sale or
maturity of
marketable securities.... 997,129 5,057,967 4,072,307 3,525,216 1,297,293
Purchase of property and
equipment................ (132,421) (230,211) (226,341) (92,125) (113,249)
Purchase of technology.... -- -- (290,000) -- --
Decrease (increase) in
other assets............. (23,521) (13,883) 83 (6,972) --
----------- ----------- ------------ ----------- -----------
Net cash provided by
(used in)
investing activities.. (3,266,795) (663,609) 1,473,410 2,835,325 1,184,044
----------- ----------- ------------ ----------- -----------
Cash flows from financing
activities:
Payments on capital lease
obligations.............. (16,285) (163,544) (259,760) (63,490) (92,519)
Proceeds from exercise of
stock options and sale of
common stock............. 7,875 1,151 15,225 4,875 74
Proceeds from exercise of
warrants................. -- 455,000 -- -- --
Proceeds from note
payable.................. -- -- 150,000 -- --
Additions to restricted
cash..................... (48,000) (48,000) -- -- --
Proceeds from convertible
subordinated notes and
related warrants......... -- -- -- -- 2,334,414
Proceeds from redeemable
convertible preferred
stock, net............... -- 5,970,350 4,149,391 -- --
----------- ----------- ------------ ----------- -----------
Net cash provided by
(used in)
financing activities.. (56,410) 6,214,957 4,054,856 (58,615) 2,241,969
----------- ----------- ------------ ----------- -----------
Net increase (decrease) in
cash and cash equivalents.. (6,714,451) 275,539 (261,009) 1,374,317 1,894,880
Cash and cash equivalents,
beginning of period........ 6,964,810 250,359 525,898 525,898 264,889
----------- ----------- ------------ ----------- -----------
Cash and cash equivalents,
end of period.............. $ 250,359 $ 525,898 $ 264,889 $ 1,900,215 $ 2,159,769
=========== =========== ============ =========== ===========
</TABLE>

The accompanying notes are an integral part of the financial statements.

F-6
<PAGE>

MICROSURGE, INC.

NOTES TO FINANCIAL STATEMENTS

1. NATURE OF BUSINESS

Microsurge, Inc. (the "Company") was incorporated in Delaware on February
27, 1991. The Company designs, develops, manufactures and markets surgical
instrumentation for use in minimally invasive surgery.

The Company has a limited operating history and has had limited sales to
date. Since inception in 1991, the Company has engaged primarily in
researching, developing, testing, obtaining regulatory clearances and
developing manufacturing capabilities for its products. The Company first
began marketing and selling products in the second half of 1993. The Company
is subject to a number of risks similar to other companies in the industry,
including rapid technological change, uncertainty of market acceptance of
products, competition from substitute products and larger companies,
customers' reliance on third party reimbursement, the need to obtain
additional financing, compliance with government regulations, protection of
proprietary technology, dependence on international distributors, third party
manufacturers and key suppliers, product liability, and dependence on key
individuals. In addition a significant portion of the Company's sales relate
to one product line.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Unaudited Interim Financial Statements

In the opinion of the Company's management, the March 31, 1995 and 1996
unaudited interim financial statements include all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation. The
results of operations for the three months ended March 31, 1996 are not
necessarily indicative of the results to be expected for the full year or for
any future period.

Cash and Cash Equivalents

Cash and cash equivalents are stated at cost, which approximates market. The
Company considers highly liquid investments purchased with an original
maturity of 90 days or less to be cash equivalents. At December 31, 1995 and
March 31, 1996 approximately 60% and 72%, respectively, of cash and cash
equivalents were held in a money market account that was readily convertible
to cash.

Marketable Securities

The Company has classified its marketable securities as "available for
sale". Marketable securities are reported at fair value, which was not
materially different from cost plus accrued interest. All marketable
securities held by the Company mature in less than a year. The effect of
realized gains and losses on the financial statements for the years 1993, 1994
and 1995 and for the three months ended March 31, 1995 and 1996 were
immaterial.

Marketable securities consist of the following:

<TABLE>
<CAPTION>
MARCH 31,
1994 1995 1996
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Corporate debt securities.................. $2,552,645 $1,540,700 $243,407
Commercial paper........................... 977,723 -- --
---------- ---------- --------
$3,530,368 $1,540,700 $243,407
========== ========== ========
</TABLE>

Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market
(net realizable value).

F-7
<PAGE>

MICROSURGE, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Property and Equipment

Property and equipment are recorded at cost. Costs of major additions and
betterments are capitalized; maintenance and repairs which do not improve or
extend the life of the respective assets are charged to operations.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, typically for three to five years, or, in the case
of leasehold improvements over the lesser of the useful life or the lease
term. Equipment under capital lease is amortized over the life of the lease.

Upon retirement or sale, the cost of the assets disposed of and related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is included in the determination of net income or loss.

Purchased Technology

Purchased technology is amortized on a straight line basis over three years,
the estimated useful life.

The Company evaluates the possible impairment in the value of intangible
assets by assessing the carrying value of the asset against the anticipated
future cash flows from related operating activities. Factors considered in
performing this assessment include current operating results, trends and
prospects, and, in addition, demand, competition, and other economic factors.

Revenue Recognition

The Company recognizes revenue upon the later of shipment of the product or,
if applicable, acceptance by the customer.

Research and Development Expenses

Research and development costs are expensed as incurred.

Income Taxes

The Company accounts for income taxes under the liability method. Under this
method, deferred tax liabilities and assets are recognized for the expected
future tax consequences of temporary differences between the carrying amounts
and the tax basis of assets and liabilities. A valuation allowance is required
to offset any net deferred tax assets if, based upon the available evidence,
it is more likely than not that some or all of the deferred tax assets will
not be realized.

Industry Segments

The Company's operations are located solely within the United States and
relate to one industry segment. Operations consist of designing, manufacturing
and marketing medical instruments for use in minimally invasive surgery.

Export sales in 1993, 1994 and 1995 were $24,000, $505,000 and $1,160,000
respectively. For the three months ended March 31, 1995 and 1996, export sales
were $163,000 and $261,000, respectively.

Concentration of Credit Risk

The Company sells its products principally through a direct sales force
domestically and through distributors outside of the United States to
hospitals and other healthcare institutions. The Company performs ongoing
credit evaluations of its customers and generally does not require collateral.
The Company provides reserves for customer receivable balances which are
considered potentially uncollectible. The provision charged to the statement
of operations was $0, $28,000, $80,000, $20,000

F-8
<PAGE>

MICROSURGE, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
and $20,000 in 1993, 1994, and 1995 and for the three months ended March 31,
1995 and 1996, respectively. Write-offs against the allowances were $28,000 in
1995. There were no write-offs against the allowance in 1993, 1994 or in the
three months ended March 31, 1995 and 1996. One customer accounted for
approximately 13% and 10% of 1993 and 1994 product sales respectively. For the
three months ended March 31, 1995 one customer accounted for 13% of product
sales. No customer accounted for more than 10% of product sales in 1995 or in
the three months ended March 31, 1996.

Use of Estimates

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

Pro Forma Presentation (unaudited)

All outstanding shares of redeemable convertible preferred stock and the
outstanding principal (including accrued interest through March 31, 1996) on
the convertible subordinated notes will convert into common stock upon the
consummation of a registered public offering of the Company's common stock.
The unaudited pro forma balance sheet as of March 31, 1996 has been prepared
assuming the conversion of all the outstanding shares of the redeemable
convertible preferred stock into 5,525,860 shares of common stock (see Note
10) and the conversion of the outstanding principal and accrued interest on
the convertible subordinated notes, as of March 31, 1996, into 326,321 shares
of common stock (assuming an initial public offering price of $12.00 per
share) (See Note 8).

Net Loss Per Share

Net loss per common share is computed based upon the weighted average number
of common shares and common equivalent shares outstanding. Common equivalent
shares are included in the per share calculations where the effect of their
inclusion would be dilutive. In accordance with the Securities and Exchange
Commission Staff Accounting Bulletin No. 83 ("SAB No. 83"), all common and
common equivalent shares issued during the twelve month period prior to the
initial filing date in April 1996 of the Registration Statement relating to
the Company's initial public offering have been included in the calculation as
if they were outstanding for all periods presented. The common equivalent
shares were determined using the treasury stock method at an assumed initial
public offering price of $12.00 per share.

F-9
<PAGE>

MICROSURGE, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Net loss per common share on a historical basis is as follows:

Net loss per common share on a pro forma basis is computed in the same
manner as net loss per common share on a historical basis except all
outstanding shares of preferred stock are included in the computation as if
they had been converted into shares of common stock even if anti-dilutive.

Fully diluted net loss per common share is the same as primary net loss per
common share.

New Accounting Pronouncement

In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), which is effective for fiscal year 1996. The
Company has determined that it will elect the disclosure-only alternative. The
Company will be required to disclose the pro forma net income or loss and per
share amounts in the notes to the financial statements using the fair value
based method beginning in fiscal 1996 with comparable disclosures for fiscal
1995. The Company has not determined the impact of these pro forma
adjustments.

3. INVENTORIES

Inventories consist of the following:

<TABLE>
<CAPTION>
MARCH 31,
1994 1995 1996
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Purchased parts and subassemblies.............. $288,203 $388,384 $377,246
Work in process................................ 71,397 63,558 75,692
Finished goods................................. 419,925 532,813 544,345
-------- -------- --------
$779,525 $984,755 $997,283
======== ======== ========
</TABLE>

F-10
<PAGE>

MICROSURGE, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

4. PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

<TABLE>
<CAPTION>
MARCH 31,
1994 1995 1996
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Machinery and equipment.................. $ 408,808 $ 570,131 $ 683,380
Leasehold improvements................... 55,799 73,226 73,226
Furnitures and fixtures.................. 14,672 14,672 14,672
Equipment under capital leases........... 753,443 900,151 900,151
---------- ---------- ----------
1,232,722 1,558,180 1,671,429
Less accumulated depreciation and
amortization............................ 369,226 621,240 719,784
---------- ---------- ----------
$ 863,496 $ 936,940 $ 951,645
========== ========== ==========
</TABLE>

Accumulated depreciation and amortization amounted to $180,562, $444,226 and
$514,664 on equipment under capital leases at December 31, 1994 and 1995 and
March 31, 1996, respectively.

5. PURCHASED TECHNOLOGY

In August 1995, the Company entered into an agreement to purchase the
technology used in one of the Company's current products. The Company licensed
back to the seller a non-exclusive, non-transferable, right to manufacture the
products covered by the patent solely for the Company.

In connection with the agreement, the Company agreed to pay $290,000 for the
acquired technology, purchase a minimum of $100,000 in products by the end of
February 1996, and pay royalties on related product sales for five years. The
$290,000 cost of technology has been capitalized. Accumulated amortization
amounted to $24,167 as of March 31, 1996. Amortization commenced in 1996 when
sales began.

6. INCOME TAXES

No provision for income taxes was recorded in 1993, 1994, 1995 and the
three-month period ended March 31, 1996 as the Company incurred net losses.

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 deferred income taxes were as follows:

<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Gross deferred tax assets:
Net operating losses............................... $3,887,000 $6,463,000
Research and development credits................... 140,000 174,000
Start-up costs..................................... 777,000 555,000
Other.............................................. 5,000 184,000
---------- ----------
Total............................................ 4,809,000 7,376,000
Gross deferred tax liabilities:
Depreciation....................................... 0 (19,000)
Other.............................................. (2,000) (5,000)
---------- ----------
Total............................................ (2,000) (24,000)
Valuation allowance................................ (4,807,000) (7,352,000)
---------- ----------
Net deferred tax asset/(liability)................. $ -- $ --
========== ==========
</TABLE>

F-11
<PAGE>

MICROSURGE, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

A valuation allowance is established if it is more likely than not that all
or a portion of the deferred tax asset will not be realized. Accordingly, a
valuation allowance has been established for the full amount of the deferred
tax asset due to the uncertainty of realization.

At December 31, 1995, the Company had approximately $16,155,000 of net
operating loss carryforwards and $174,000 of federal tax credit carryforwards
available for income tax purposes. These net operating loss and credit
carryforwards will expire in the years 2006 through 2010. During 1992, in
conjunction with the Series C redeemable convertible preferred stock offering
a change in ownership, as defined in the Internal Revenue Code, occurred. As a
result of this change in ownership, the use of approximately $1,638,000 of the
net operating loss carryforward is limited to approximately $187,000 per year
beginning in 1992. The issuance of stock subsequent to the 1992 change in
ownership has not constituted an additional change in ownership. However,
ownership changes in future periods, which may be triggered by events such as
the initial public offering for which these financial statements are prepared,
may further limit the Company's ability to utilize net operating loss and tax
credit carryforwards.

7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities consist of the following:

<TABLE>
<CAPTION>
MARCH 31,
1994 1995 1996
-------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Trade accounts payable....................... $441,005 $ 834,686 $ 759,287
Payroll and payroll related items............ 118,088 190,840 88,041
Deferred rent................................ 51,387 87,711 94,951
Other........................................ 86,410 125,737 143,450
-------- ---------- ----------
$696,890 $1,238,974 $1,085,729
======== ========== ==========
</TABLE>

8. DEBT

Capital Lease Obligation

Pursuant to a capital lease agreement entered into during 1993 and as
amended in 1994, the Company maintains $96,000 in restricted cash at December
31, 1995 and 1994 to collateralize a $96,000 standby letter of credit.
Additionally, the Company issued to the lessor in 1993 and 1994 certain
warrants for the purchase of preferred stock (see Note 11).

Future minimum lease payments under these capital lease obligations as of
December 31, 1995 are as follows:

<TABLE>
<CAPTION>
YEAR AMOUNT
----- --------
<S> <C>
1996............................................................... $322,242
1997............................................................... 159,561
1998............................................................... 51,490
--------
Total minimum lease payments....................................... 533,293
Less--amount representing interest................................. 45,058
--------
Capital lease obligation........................................... 488,235
Less--current portion.............................................. 291,145
--------
$197,090
========
</TABLE>

F-12
<PAGE>

MICROSURGE, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Line of Credit

The Company entered into a line of credit agreement with a bank in 1994,
which was amended in 1995, to allow for borrowings not to exceed the lesser of
$1,000,000 or a specified percentage of eligible accounts receivable.
Borrowings under the line of credit are collateralized by substantially all
assets of the Company and bear interest at the bank's prime rate (8.5% at
December 31, 1995) plus 2%. At December 31, 1995 and March 31, 1996 there was
$150,000 outstanding under the line of credit. No amounts were outstanding at
December 31, 1994. The line of credit agreement provides for the Company to
maintain certain covenants, including defined levels of tangible net worth and
debt to equity, limitations on losses and minimum working capital ratios. In
addition, the agreement prohibits the payment of cash dividends and
repurchases of stock by the Company and the incurrence of additional
indebtedness. In April 1996, the line of credit agreement was amended (see
Note 14) and will now expire in May 1997.

Convertible Subordinated Notes

On February 28, 1996 the Company entered into a credit agreement with a
group of lenders ("Purchasers") who agreed to purchase a series of convertible
subordinated notes ("the Notes") up to $3,268,180 upon the request of the
Company. The Company received an initial advance of $2,334,414 in February and
March 1996. The Notes bear interest at 9.25%, and mature on August 28, 1997.
The Company may prepay amounts outstanding on the Notes without penalty at any
time after the Investor Sale (as defined below) and prior to maturity date.

Upon the closing, or series of closings, in which the Company sells capital
stock of the Company for gross proceeds of $10,000,000 or more (the "Investor
Sale"), the Notes will be convertible, at the option of the Purchasers, into
the same type and class of stock issued in connection with the Investor Sale.
Any outstanding principal amount of the Notes plus accrued interest may
convert at a conversion price equal to 60% of the price per share paid by the
purchasers of capital stock in connection with the Investor Sale (the
"Investor Sale Price").

Warrants for the purchase of common stock in the Company will be issued
under two circumstances in accordance with the credit agreement. All warrants
issued pursuant to the credit agreement will be exercisable at any time after
the Investor Sale and prior to February 28, 1999 for a purchase price equal to
the Investor Sale Price.

The first set of warrants were issued to the Purchasers upon the execution
of the credit agreement. Each Purchaser received a warrant, subject to the
terms above, for the purchase of a number of shares of common stock determined
by dividing (i) the maximum principal amount of the Notes that could be
purchased by such purchaser under the credit agreement, by (ii) the Investor
Sale Price, and then multiplying such number by 10%.

The second set of warrants are issuable to the Purchasers upon each advance.
At such time each Purchaser will receive a warrant, subject to the terms
above, for the purchase of a number of shares of common stock determined by
dividing (i) the principal amount of the Note purchased on such date by such
Purchaser, by (ii) the Investor Sale Price, and then multiplying such number
by 40%. The Company issued warrants in connection with the initial advance in
February and March 1996.

These warrants are valued at $78,000 and the Notes are carried net of
original issue debt discount of $78,000 resulting in an effective annual
interest rate of 11.5%. Amortization of the discount, which is recorded as
interest expense, totaled $4,333 for the three month period ended March 31,
1996.

F-13
<PAGE>

MICROSURGE, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. COMMITMENTS

Operating Leases

The Company leases its facility and certain equipment under operating
leases. Rent expense for the leased facility and equipment was approximately
$75,000, $155,000 and $308,000 during the years ended December 31, 1993, 1994
and 1995, respectively, and $78,000 and $67,000 for the three month periods
ended March 31, 1995 and 1996, respectively. As of December 31, 1995, the
minimum future rental payments under these lease agreements are as follows:

<TABLE>
<CAPTION>
YEAR AMOUNT
----- ----------
<S> <C>
1996.............................................................. $ 229,897
1997.............................................................. 258,402
1998.............................................................. 309,677
1999.............................................................. 239,510
----------
$1,037,486
==========
</TABLE>

License Agreements

The Company has entered into agreements with certain organizations and
individuals under which the Company has been granted exclusive license and
distribution rights for the products, technologies and procedures being
developed by the organizations and individuals. Under the agreements, the
Company is obligated to make royalty payments based on eventual net product
sales of licensed products. No sales or royalty amounts have been recorded to
date.

In connection with one agreement, the Company issued 11,592 shares of its
common stock over a three year period commencing in 1992. The Company recorded
expense for the fair value of the stock on the dates of grant.

In connection with another agreement, the Company issued 20,286 shares of
its common stock in 1994 and recorded a related charge to expense for the fair
value of the stock on the date of grant. The Company also issued nonqualified
options to purchase 117,852 shares of its common stock for $5.05 per share
which vest upon attainment of certain performance criteria (see Note 11). The
fair value of the options will be recorded as expense as the performance
criteria are attained.

F-14
<PAGE>

MICROSURGE, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
10. REDEEMABLE CONVERTIBLE PREFERRED STOCK

The Company has authorized the issuance of up to 12,000,000 shares of
redeemable convertible preferred stock, $.001 par value (collectively, the
Preferred Stock). The Preferred Stock consisted of the following:

<TABLE>
<CAPTION>
MARCH 31,
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Series A--
Authorized--750,000 shares
Issued and outstanding--750,000 shares
at December 31, 1994 and 1995 and
March 31, 1996 (liquidation
preference of $1,050,000 at December
31, 1995 and $1,068,750 at March 31,
1996)................................ $ 975,000 $ 1,050,000 $ 1,068,750
Series B--
Authorized--300,000 shares
Issued and outstanding--300,000 shares
at December 31, 1994 and 1995 and
March 31, 1996 (liquidation
preference of $1,260,000 at December
31, 1995 and $1,282,500 at March 31,
1996)................................ 1,170,000 1,260,000 1,282,500
Series C--
Authorized--3,920,659 shares
Issued and outstanding--3,836,834
shares at December 31, 1994 and 1995
and March 31, 1996 (liquidation
preference of $11,890,082 at December
31, 1995 and $12,117,415 at March 31,
1996)................................ 10,761,388 11,693,809 11,926,913
Series D--
Authorized--2,213,613 shares
Issued and outstanding--2,181,818
shares at December 31, 1994 and 1995
and March 31, 1996 (liquidation
preference of $6,904,025 at December
31, 1995 and $7,054,025 at March 31,
1996)................................ 6,323,819 7,022,706 7,197,424
Series E--
Authorized--1,511,935 shares
Issued and outstanding--1,511,935
shares at December 31, 1995 and March
31, 1996 (liquidation preference of
$4,261,767 at December 31, 1995 and
$4,365,712 at March 31, 1996)........ -- 4,274,419 4,399,446
----------- ----------- -----------
$19,230,207 $25,300,934 $25,875,033
=========== =========== ===========
</TABLE>

In connection with the issuance of Series C and Series D redeemable
convertible preferred stock the Company also issued warrants to purchase
preferred stock (see Note 11).

The rights and preferences of the Preferred Stock are described below.

Conversion

Preferred Stock is convertible, at the option of the holder, into shares of
common stock, at a rate of 0.644 shares for each share of preferred stock
subject to adjustment based on certain defined events.

All outstanding shares of the Preferred Stock shall automatically convert
into shares of the Company's common stock upon the closing of a public
offering of the Company's common stock if certain criteria are met.

F-15
<PAGE>

MICROSURGE, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Voting

The Preferred Stock has voting rights equal to the number of shares of
common stock into which the Preferred Stock is convertible.

Dividends

Holders of the Preferred Stock are entitled to receive dividends if and when
declared by the Company's Board of Directors. The preferred stockholders'
rights to dividends are preferential to those of common stockholders. In
addition to the declared dividends rights, the Series C, Series D and Series E
preferred stockholders are entitled to cumulative dividends in preference to
all other classes of stock. These cumulative dividends accrue at an annual
rate of $0.237, $0.275 and $0.275 per share, respectively, subject to change,
as defined, commencing on the date of issuance. At December 31, 1995,
cumulative dividends of $2,796,786, $904,026 and $103,946 had accrued on the
Series C, Series D and Series E redeemable convertible preferred stock,
respectively. Following conversion, unpaid accrued dividends on the redeemable
convertible preferred stock will not be payable.

Liquidation

Upon liquidation or dissolution of the Company, the holders of the Preferred
Stock shall each be entitled to receive a preference in liquidation. The
holders of the Series E and Series D redeemable convertible preferred stock
are entitled to a preference, collectively prior to all other stockholders, of
$2.75 per share plus any accrued dividends ($103,946 and $904,026 at December
31, 1995, respectively). The holders of the Series C redeemable convertible
preferred stock are entitled to a preference of $2.37 per share plus any
accrued dividends ($2,796,786 at December 31, 1995). The holders of the Series
A and Series B redeemable convertible preferred stock are entitled to a
preference of $1.00 and $3.00 per share, plus an additional $0.10 and $0.30
per share upon each anniversary of the issuance date, respectively, plus any
accrued dividends. After distribution of any preferential payments to the
preferred stockholders, the Series C, Series D and Series E preferred
stockholders and the common stockholders shall share equally in the remaining
assets based on a pro rata basis. If, after distribution to the Series E and
Series D preferred stockholders there are insufficient funds to pay the Series
A, Series B and Series C preferred stockholders their full preferential
amount, the three classes will share ratably the remaining assets in
proportion to what would have been due to them in full.

Redemption

The holders of the Preferred Stock have a redemption right that requires the
Company to repurchase outstanding shares of the Preferred Stock. The Series C,
Series D and Series E preferred stockholders may require the Company to
repurchase up to 25% of the shares outstanding, per year, for each of four
consecutive years beginning on June 29, 1999. The redemption value of the
Series E and Series D redeemable convertible preferred stock is 110% of $2.75
($3.025) per share plus accrued dividends and the redemption value of the
Series C senior redeemable convertible preferred stock is $2.37 per share plus
accrued dividends. The Series A and Series B preferred stockholders may
require the Company to repurchase up to 25% of the shares outstanding, per
year, for each of four consecutive years beginning on June 29 of the year that
is the later of the first year in which no shares of Series C, Series D and
Series E redeemable convertible stock are outstanding or 1999. The redemption
value per share for the Series A and Series B redeemable convertible preferred
stock is $1.00 and $3.00 per share, plus $0.10 and $0.30 per share for every
year outstanding since issuance, respectively, plus accrued dividends. To the
extent that the repurchase right on any of the Preferred Stock is not
exercised in one year, the cumulative right may be exercised in future years,
through the end of the four- year redemption period.

F-16
<PAGE>

MICROSURGE, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
11. STOCKHOLDERS' EQUITY

Common Stock

The Company has authorized 9,016,000 shares of common stock, $.001 par
value. The Company has reserved 6,632,404 shares of common stock for issuance
upon the conversion of Preferred Stock and exercise of warrants and options at
December 31, 1995.

Stock Option Plan

In 1994, the Company's Board of Directors and stockholders approved an
amendment to its 1992 Stock Option Plan (the "Plan"). The Plan allows the
Board of Directors to grant either incentive stock options or nonstatutory
stock options to employees, directors and consultants. The Company has
authorized the granting of options to purchase 913,010 shares of common stock
under the Plan, as amended. As of December 31, 1995, 182,603 options are
available for future grants under the Plan. Options issued under the Plan to
employees are generally incentive stock options that vest in equal annual
increments over a four-year period beginning on the effective date of issuance
and expire no later than 10 years from the date of grant, and are granted at
not less than fair value of the common stock at the date of grant. Options
have been issued outside of the Plan to certain directors and consultants.
These options vest according to varying terms (see Note 9). No options were
granted outside of the plan in 1993, 1995 or the three months ended March 31,
1996.

Stock option activity for 1993, 1994 and 1995 and for the three months ended
March 31, 1996 is as follows:

<TABLE>
<CAPTION>
INCENTIVE NONSTATUTORY
STOCK OPTIONS STOCK OPTIONS
-------------------- --------------------
NUMBER PRICE NUMBER PRICE
------- ----------- ------- -----------
<S> <C> <C> <C> <C>
Outstanding, December 31, 1992... 236,845 $ 0.47 36,706 $ 0.47
Granted........................ 99,498 0.47 -- --
Exercised...................... (14,490) 0.47 (2,415) 0.47
Canceled....................... (9,660) 0.47 -- --
------- ----------- ------- -----------
Outstanding, December 31, 1993... 312,193 0.47 34,291 0.47
Granted........................ 265,006 0.47- 0.54 137,429 0.47- 5.05
Exercised...................... -- -- (2,415) 0.47
Canceled....................... (16,100) 0.47 -- --
------- ----------- ------- -----------
Outstanding, December 31, 1994... 561,099 0.47- 0.54 169,305 0.47- 5.05
Granted........................ 169,744 0.54 1,288 4.27
Exercised...................... (10,948) 0.47 (21,735) 0.47
Canceled....................... (32,328) 0.47- 0.54 (4,635) 0.47
------- ----------- ------- -----------
Outstanding, December 31, 1995... 687,567 0.47- 0.54 144,223 0.47- 5.05
Granted........................ -- -- -- --
Exercised...................... (144) 0.47- 0.54 -- --
Canceled....................... (12,026) 0.47- 0.54 -- --
------- ----------- ------- -----------
Outstanding, March 31, 1996
(unaudited)..................... 675,397 $0.47-$0.54 144,223 $0.47-$5.05
======= =======
Exercisable, December 31, 1995... 250,728 19,851
======= =======
</TABLE>

F-17
<PAGE>

MICROSURGE, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Common Stock Warrants

During 1994, the Company received $455,026 from the sale of common stock and
the exercise of warrants for 106,551 shares of common stock. During 1994, the
Company also entered into a consulting agreement in which the Company
committed to issue a maximum of 19,320 shares of common stock to a consultant
upon achievement of certain performance criteria. As of December 31, 1995 and
March 31, 1996 no shares had been granted and the Company has reserved 19,320
shares of common stock for issuance upon the consultant's achievement of
performance criteria. This agreement expires in July 1996.

Preferred Stock Warrants

In connection with the Series C redeemable convertible preferred stock
offering in 1992, the Company issued a warrant to purchase 52,320 shares of
Series C redeemable convertible preferred stock. The warrant is exercisable at
$2.37 per share and expires August 3, 1997. The Company has reserved 52,320
shares of Series C redeemable convertible preferred stock for issuance upon
exercise of this warrant.

In connection with the Series D redeemable convertible preferred stock
offering in 1994, the Company issued a warrant to purchase 17,250 shares of
Series D senior redeemable convertible preferred stock. The warrant is
exercisable at $2.75 per share and expires June 29, 1999. The Company has
reserved 17,250 shares of Series D redeemable convertible preferred stock for
issuance upon exercise of this warrant.

In connection with equipment lease financing transactions (see Note 8), the
Company issued warrants for the purchase of 28,977 shares of Series C
redeemable convertible preferred stock at an exercise price of $2.37 per
share, and 14,545 shares of Series D redeemable convertible preferred stock at
an exercise price of $2.75 per share. The warrant to purchase Series C
redeemable convertible preferred stock, and the warrant to purchase Series D
redeemable convertible preferred stock, expire on June 17, 2000 and September
12, 2001, respectively, or on the second anniversary of the closing of an
initial public offering of the Company's common stock, whichever is earlier.
The Company has reserved 28,977 shares of Series C redeemable convertible
preferred stock and 14,545 shares of Series D redeemable convertible preferred
stock for issuance upon exercise of the warrants.

Upon the closing of an initial public offering of the Company's common
stock, all preferred stock warrants convert into common stock warrants at the
applicable conversion rate for preferred stock then in effect (see Note 10).

12. EMPLOYEE BENEFIT PLAN

On January 1, 1993, the Company adopted an employee benefit plan under
Section 401(k) of the Internal Revenue Code. The plan allows all employees to
make contributions up to a specified percentage of their compensation. Under
the plan, the Company may, but is not obligated to, match a portion of the
employees' contribution up to a defined maximum. The Company did not make a
matching contribution in 1993, 1994, 1995 or for the three months ended March
31, 1996.

13. SUPPLEMENTAL CASH FLOW INFORMATION

The Company incurred capital lease obligations to obtain certain equipment
in amounts of $397,055, $286,371 and $244,398 in 1993, 1994 and 1995,
respectively. No capital leases were entered into during the three months
ended March 31, 1995 and 1996, respectively.

Cash paid for interest was $2,789, $33,394 and $63,912 in 1993, 1994 and
1995, respectively, and $28,189 and $12,489 for the three months ended March
31, 1995 and 1996, respectively.

F-18
<PAGE>

MICROSURGE, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

14. SUBSEQUENT EVENTS

In April 1996, subsequent to the balance sheet date, the Company announced a
0.644 for 1 reverse stock split of the Company's common stock to be effected
on June 17, 1996 prior to the effectiveness of the Company's registration
statement on Form S-1. All share, per share, pro forma and pro forma per share
data in these financial statements have been retroactively restated to give
effect to the stock split.

In April 1996, the Board of Directors of the Company approved the following
resolutions, subject to shareholder approval, where required: (i) adoption of
the 1996 stock option plan pursuant to which options for the purchase of
2,000,000 shares of common stock may be granted to employees, directors and
consultants of the Company; (ii) amendment of its 1992 stock option plan (see
Note 11) to provide that no additional options would be granted under such
plan; (iii) adoption of its 1996 director stock option plan to authorize for
issuance up to a total of 350,000 shares of common stock; (iv) adoption of the
1996 employee stock purchase plan which becomes effective upon the closing of
an initial public offering of the Company's common stock, and authorized the
issuance of up to a total of 500,000 shares of common stock to participating
employees, (v) authorization of the issuance of up to 50,000,000 shares of
common stock and (vi) authorization of the issuance of up to 5,000,000 shares
of preferred stock, effective upon the closing of an initial public offering
of the Company's common stock.

In April 1996, the Company's line of credit agreement (see Note 8) was
amended to change certain terms and covenants. The line expires in May 1997
and provides that the interest rate be reduced to the bank's prime rate upon
successful completion of an initial public offering of the Company's common
stock. Under the line of credit agreement, the Company can borrow up to an
additional $500,000 for the purchase of equipment at the bank's prime rate
plus 2% until October 1996.

In April 1996, the Company entered into a license agreement with a company
to license exclusive worldwide rights to certain technology for a 10 year
term, expiring in April 2006. In connection with the agreement, the Company
agreed to pay $1,000,000 in upfront license payments, as well as royalties
based on future net sales, subject to minimum royalties which are creditable
against actual royalties.

F-19
<PAGE>

Traditional open thoracic surgery (thoracotomy) requires a six to eight
inch incision and spreading the ribcage or removing ribs. In contrast,
minimally invasive thoracic surgery (thoracoscopy) is performed through
small puncture openings between the ribs with the aid of a thoracoscope
attached to a camera and video monitor. Microsurge is developing a
family of surgical instrumentation for use in thoracoscopy and expects
to release eight thoracoscopic products by the end of 1996. Microsurge
believes that the availability of surgical instrumentation and training
programs specifically designed for thoracoscopic surgery may
significantly increase the use of thoracoscopy.

<PAGE>

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. NEITHER THE DELIV-
ERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUM-
STANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE FACTS SET
FORTH IN THIS PROSPECTUS OR THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH AN OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR
TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Use of Proceeds.......................................................... 16
Dividend Policy.......................................................... 16
Capitalization........................................................... 17
Dilution................................................................. 18
Selected Financial Data.................................................. 19
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 20
Business................................................................. 23
Management............................................................... 44
Certain Transactions..................................................... 52
Principal Stockholders................................................... 54
Description of Capital Stock............................................. 57
Shares Eligible for Future Sale.......................................... 59
Underwriting............................................................. 61
Legal Matters............................................................ 63
Experts.................................................................. 63
Change in Independent Accountants........................................ 63
Additional Information................................................... 63
Index to Financial Statements............................................ F-1
</TABLE>

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

UNTIL , 1996 (25 DAYS AFTER COMMENCEMENT OF THIS OFFERING), ALL DEALERS EF-
FECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIRE-
MENT 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.

3,000,000 SHARES

(MICROSURGE LOGO)

COMMON STOCK
($.001 PAR VALUE)

SALOMON BROTHERS INC

RAYMOND JAMES & ASSOCIATES, INC.

VECTOR SECURITIES INTERNATIONAL, INC.

PROSPECTUS

DATED , 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, other than the
underwriting discounts. All amounts shown are estimates except for the
Securities and Exchange Commission ("SEC") registration fee and the National
Association of Securities Dealers, Inc. ("NASD") filing fee.

<TABLE>
<S> <C>
SEC Registration Fee............................................... $ 18,559
NASD Filing Fee.................................................... 5,882
Nasdaq Listing Fee................................................. 40,000
Blue Sky Fees and Expenses......................................... 4,125
Transfer Agent and Registrar Fees.................................. 3,500
Accounting Fees and Expenses....................................... 200,000
Legal Fees and Expenses............................................ 250,000
Printing, Engraving and Mailing Expenses........................... 150,000
Miscellaneous...................................................... 127,934
--------
Total............................................................ $800,000
========
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Article EIGHTH of the Registrant's Restated Certificate of Incorporation
provides that no director of the Registrant shall be personally liable for any
monetary damages for any breach of fiduciary duty as a director, except to the
extent that the Delaware General Corporation law prohibits the elimination or
limitation of liability of directors for breach of fiduciary duty.

Article NINTH of the Registrant's Restated Certificate of Incorporation
provides that a director or officer of the Registrant (a) shall be indemnified
by the Registrant against all expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement incurred in connection with any
litigation or other legal proceeding (other than an action by or in the right
of the Registrant) brought against him by virtue of his position as a director
or officer of the Registrant 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
Registrant, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful and (b) shall be
indemnified by the Registrant against all expenses (including attorneys' fees)
and amounts paid in settlement incurred in connection with any action by or in
the right of the Registrant brought against him by virtue of his position as a
director or officer of the Registrant 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 Registrant, except that no indemnification shall be made with respect
to any matter as to which such person shall have been adjudged to be liable to
the Registrant, unless a court determines that, despite such adjudication but
in view of all of the circumstances, he is entitled to indemnification of such
expenses. Notwithstanding the foregoing, to the extent that a director or
officer has been successful, on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice, he is required to be
indemnified by the Registrant against all expenses (including attorneys' fees)
incurred in connection therewith. Expenses shall be advanced to a Director or
officer at his request, provided that he undertakes to repay the amount
advanced if it is ultimately determined that he is not entitled to
indemnification for such expenses.

Indemnification is required to be made unless the Registrant determines that
the applicable standard of conduct required for indemnification has not been
met. In the event of a determination by the Registrant that the director or
officer did not meet the applicable standard of conduct required for

II-1
<PAGE>

indemnification, or if the Registrant fails to make an indemnification payment
within 60 days after such payment is claimed by such person, such person is
permitted to petition the court to make an independent determination as to
whether such person is entitled to indemnification. As a condition precedent
to the right of indemnification, the director or officer must give the
Registrant notice of the action for which indemnity is sought and the
Registrant has the right to participate in such action or assume the defense
thereof.

Article NINTH of the Registrant's Restated Certificate of Incorporation
further provides that the indemnification provided therein is not exclusive,
and provides that in the event that the Delaware General Corporation Law is
amended to expand the indemnification permitted to directors or officers the
Registrant must indemnify those persons to the full extent permitted by such
law as so amended.

Article NINTH also permits the Company to purchase and maintain insurance,
at the Company's expense, to protect any director against any expense,
liability or loss incurred by such director in such capacity or arising out of
his status as such.

Section 145 of the Delaware General Corporation Law, as amended, provides
that a corporation has the power to indemnify a director, officer, employee or
agent of the corporation and certain other persons serving at the request of
the corporation in related capacities against amounts paid and expenses
incurred in connection with an action or proceeding to which he is or is
threatened to be made a party by reason of such position, if such person shall
have 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, in any criminal
proceeding, if such person had no reasonable cause to believe his conduct was
unlawful; provided that, in the case of actions brought by or in the right of
the corporation, no indemnification shall be made with respect to any matter
as to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the adjudicating court
determines that such indemnification is proper under the circumstances.

Under Section 8 of the Underwriting Agreement, the Underwriters are
obligated, under certain circumstances, to indemnify directors and officers of
the Registrant against certain liabilities, including liabilities under the
Securities Act. Reference is made to the form of Underwriting Agreement filed
as Exhibit 1.1 hereto.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

(a) Issuances of Capital Stock, Notes and Warrants

Since March 31, 1993, the Registrant has sold the following securities that
were not registered under the Securities Act:

1. On April 3, 1993, April 4, 1994 and April 1, 1995, the Company issued
and sold an aggregate of 7,245 shares of Common Stock for an aggregate
purchase price of $3,375 to a consultant to the Company upon the exercise
of stock options (outside of the Company's 1992 Stock Option Plan) by such
individual pursuant to Rule 701 promulgated under the Securities Act ("Rule
701").

2. On June 17, 1993, the Registrant issued a seven-year warrant to
purchase 28,977 shares of Series C Senior Convertible Preferred Stock at an
exercise price of $2.37 per share to an equipment leasing company in
connection with an equipment lease with such entity pursuant to Section
4(2) of the Securities Act ("Section 4(2)").

3. On January 19, 1994, January 20, 1994, February 23, 1994 and February
24, 1994, the Registrant issued and sold an aggregate of 90,159 shares of
Common Stock for an aggregate purchase price of $455,000 to four financial
investors upon the exercise of warrants by such financial investors
pursuant to Section 4(2).

4. On February 1, 1994, the Registrant issued 2,898 shares of Common
Stock to a company pursuant to the terms of a license agreement between the
Registrant and such company pursuant to Section 4(2).

II-2
<PAGE>

5. On June 29, 1994, the Registrant issued and sold an aggregate of
2,181,818 shares of Series D Senior Convertible Preferred Stock to two
individuals and 15 entities for an aggregate purchase price of $6,000,000
pursuant to Regulation D promulgated under the Securities Act ("Regulation
D") and Section 4(2).

6. On June 29, 1994, the Registrant issued a five-year warrant to
purchase 17,250 shares of Series D Senior Convertible Preferred stock at an
exercise price of $2.75 per share to a placement agent in connection with
services provided by such placement agent to the Registrant pursuant to
Section 4(2).

7. On July 1, 1994, the Registrant issued stock options (outside of its
1992 Stock Option Plan) to purchase an aggregate of 9,917 shares of Common
Stock for an aggregate exercise price of $50,050 to a consultant in
connection with the provision of services to the Registrant by such
consultant pursuant to Rule 701.

8. On August 1, 1994, the Registrant issued and sold an aggregate of
16,392 shares of Common Stock for an aggregate purchase price of
approximately $26 to four financial investors pursuant to Section 4(2).

9. On August 3, 1994, the Registrant issued an aggregate of 20,286 shares
of Common Stock to two companies in connection with the execution of two
license agreements with such companies pursuant to Section 4(2).

10. On August 4, 1994, the Registrant issued stock options (outside of
its 1992 Stock Option Plan) to purchase an aggregate of 117,852 shares of
Common Stock for an aggregate exercise price of $595,000 to two companies
in connection with the execution of two license agreements with such
companies pursuant to Section 4(2).

11. On September 12, 1994, the Registrant issued a seven-year warrant to
purchase 14,545 shares of Series D Convertible Preferred Stock at an
exercise price of $2.75 per share to an equipment leasing company in
connection with an equipment lease with such company pursuant to Section
4(2).

12. On September 18, 1995, the Registrant issued and sold an aggregate of
1,511,935 shares of Series E Convertible Preferred Stock to three
individuals and 16 entities for an aggregate purchase price of $4,157,821
pursuant to Regulation D and Section 4(2).

13. On February 28, 1996 and March 29, 1996, the Registrant issued and
sold a series of convertible subordinated notes in the aggregate original
principal amount of $2,334,414 and accompanying three-year warrants to
purchase shares of Common Stock to one individual and 14 entities pursuant
to Regulation S promulgated under the Securities Act ("Regulation S"),
Regulation D and Section 4(2). The principal amount of these Notes together
with all accrued interest thereon will be converted into shares of Common
Stock upon the closing of the offering.

(b) Grants and Exercises of Stock Options

The Registrant's 1992 Stock Option Plan was adopted by the stockholders of
the Company in November, 1992. As of March 31, 1996, options to purchase
32,022 shares of Common Stock had been exercised for an aggregate
consideration of $15,000 and options to purchase 686,345 shares of Common
Stock were outstanding under such plan. In May 1996, the Company granted
options to purchase 274,694 shares of Common Stock under such plan.

The Registrant's 1996 Stock Option Plan, 1996 Director Option Plan and 1996
Employee Stock Purchase Plan were adopted by the Company in April 1996. These
plans will become effective upon the closing of this offering and, as of March
31, 1996, no shares have been issued under these plans.

As described above, the shares of capital stock and securities issued in the
above transactions were offered and sold in reliance upon the exemption from
registration under Section 4(2) of the Securities Act or Regulation D,
Regulation S or Rule 701 promulgated under the Securities Act, relative to
sales by an issuer not involving any public offering or made outside of the
United States or other exemption from registration.

II-3
<PAGE>

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1* Restated Certificate of Incorporation, as amended, of the
Registrant, including form of Certificate of Amendment to be filed
prior to the effectiveness of this Registration Statement.
3.2* Form of Amended and Restated Certificate of Incorporation of the
Registrant to be filed upon the closing of the public offering.
3.3* Amended and Restated By-Laws of the Registrant.
4.1* Specimen Certificate for shares of Common Stock, $.001 par value, of
the Registrant.
5.1 Opinion of Hale and Dorr with respect to the validity of the
securities being offered.
10.1* 1992 Stock Option Plan.
10.2* 1996 Stock Option Plan.
10.3* 1996 Director Stock Option Plan.
10.4* Registration Agreement, dated June 29, 1994, among the Registrant
and the Investors listed therein, as amended.
10.5* Employment Agreement, dated March 4, 1991, between the Registrant
and E. James Hutchens, as amended.
10.6* Lease, dated July 19, 1991, between the Registrant and Trustees of
New England Industrial Center Trust, as amended.
10.7+* Patent License Agreement, dated August 3, 1994, among the
Registrant, Sugar Surgical Technologies, Inc., Dr. David J.
Sugarbaker and Brigham & Women's Hospital, as amended.
10.8+* License Agreement, dated August 3, 1994, among the Registrant, Sugar
Surgical Technologies, Inc. and Dr. David Sugarbaker, as amended.
10.9* Consulting Agreement, dated August 3, 1994, between the Registrant
and Dr. David Sugarbaker, as amended.
10.10+* Non-Statutory Stock Option Agreement dated August 3, 1994, between
the Registrant and Sugar Surgical Technologies, Inc., as amended.
10.11+* License Agreement, dated April 9, 1996, between the Registrant and
Endoscopic Concepts, Inc.
10.12+* Design, Development and Manufacturing Agreement, dated March 13,
1996 between the Registrant and Design Standards Corporation.
10.13* Loan Agreement, dated October 13, 1994, between the Registrant and
Silicon Valley Bank, as amended.
10.14* Form of 1996 Common Stock Purchase Warrant of the Registrant.
10.15* Amendment dated May 23, 1996 to 1992 Stock Option Plan.
10.16+ Amendment dated May 24, 1996 to August 3, 1994 Patent License
Agreement among the Registrant, Sugar Surgical Technologies, Inc.,
Dr. David J. Sugarbaker and Brigham & Women's Hospital, as amended.
11* Statement regarding computation of per share earnings.
16* Letter regarding change in certifying accountant.
23.1 Consent of Hale and Dorr (included in Exhibit 5.1).
23.2 Consent of Coopers & Lybrand L.L.P. (included on page II-6).
23.3* Consent of Hamilton, Brook, Smith & Reynolds, P.C. (included on page
II-7).
24* Powers of Attorney.
27* Financial data schedule.
</TABLE>
- --------
*Previously filed.
+ Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.

II-4
<PAGE>

(b) Financial Statement Schedules

All other schedules have been omitted because they are not required or
because the required information is given in the Financial Statements or Notes
thereto.

ITEM 17. UNDERTAKINGS

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions contained in the Restated Certificate of
Incorporation and Amended and Restated By-Laws of the Registrant and the laws
of the State of Delaware, 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.

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.

The undersigned Registrant hereby undertakes that:

(1) 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 this
Registration Statement as of the time it was declared effective.

(2) 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>

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the inclusion in Amendment No. 4 to the registration statement
on Form S-1 (File No. 333-4112) of our report dated April 19, 1996, except as
to the information in Note 14, for which the date is June 17, 1996, on our
audits of the financial statements of Microsurge, Inc. We also consent to the
references to our firm under the captions "Experts" and "Selected Financial
Data."

Boston, Massachusetts Coopers & Lybrand L.L.P.

June 17, 1996

II-6
<PAGE>

(LETTERHEAD)

May 29, 1996

Microsurge, Inc.
150 A Street
Needham, MA

Re:Microsurge, Inc.
Registration Statement on Form S-1

Dear Sirs:

We hereby consent to the reference to our firm under the caption "Experts" in
Microsurge, Inc.'s Registration Statement on Form S-1.

Very truly yours,

Hamilton, Brook, Smith & Reynolds,
P.C.

II-7
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 4 to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the Town of Needham,
Commonwealth of Massachusetts, on this 17th day of June, 1996.

Microsurge, Inc.

/s/ Kathleen A. Barry
By: _________________________________
KATHLEEN A. BARRY CHIEF FINANCIAL
OFFICER AND TREASURER

Pursuant to the requirements of the Securities Act, this Amendment No. 4 to
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.

SIGNATURE TITLE DATE

E. James Hutchens* President, Chief
- ------------------------------------- Executive Officer June 17, 1996
E. JAMES HUTCHENS and Director
(Principal Executive
Officer)

/s/ Kathleen A. Barry Chief Financial
- ------------------------------------- Officer June 17, 1996
KATHLEEN A. BARRY and Treasurer
(Principal Financial
and Accounting
Officer)

Joseph F. Lovett* Director
- ------------------------------------- June 17, 1996
JOSEPH F. LOVETT

Brian H. Dovey* Director
- ------------------------------------- June 17, 1996
BRIAN H. DOVEY

Robert F. Higgins* Director
- ------------------------------------- June 17, 1996
ROBERT F. HIGGINS

Daniel J. Mitchell* Director
- ------------------------------------- June 17, 1996
DANIEL J. MITCHELL

/s/ Kathleen A. Barry
*By: ________________________________
KATHLEEN A. BARRY
ATTORNEY-IN-FACT

II-8
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
1.1* Form of Underwriting Agreement.................................
3.1* Restated Certificate of Incorporation, as amended, of the
Registrant, including form of Certificate of Amendment to be
filed prior to the effectiveness of this Registration
Statement......................................................
3.2* Form of Amended and Restated Certificate of Incorporation of
the Registrant to be filed upon the closing of the public
offering.......................................................
3.3* Amended and Restated By-Laws of the Registrant.................
4.1* Specimen Certificate for shares of Common Stock, $.001 par
value, of the Registrant.......................................
5.1 Opinion of Hale and Dorr with respect to the validity of the
securities being offered.......................................
10.1* 1992 Stock Option Plan.........................................
10.2* 1996 Stock Option Plan.........................................
10.3* 1996 Director Stock Option Plan................................
10.4* Registration Agreement, dated June 29, 1994, among the
Registrant and the Investors listed therein, as amended........
10.5* Employment Agreement, dated March 4, 1991, between the
Registrant and E. James Hutchens, as amended...................
10.6* Lease, dated July 19, 1991, between the Registrant and Trustees
of New England Industrial Center Trust, as amended.............
10.7+* Patent License Agreement, dated August 3, 1994, among the
Registrant, Sugar Surgical Technologies, Inc., Dr. David J.
Sugarbaker and Brigham & Women's Hospital, as amended..........
10.8+* License Agreement, dated August 3, 1994, among the Registrant,
Sugar Surgical Technologies, Inc., and Dr. David Sugarbaker, as
amended........................................................
10.9* Consulting Agreement, dated August 3, 1994, between the
Registrant and Dr. David Sugarbaker, as amended................
10.10+* Non-Statutory Stock Option Agreement dated August 3, 1994,
between the Registrant and Sugar Surgical Technologies, Inc.,
as amended.....................................................
10.11+* License Agreement, dated April 9, 1996, between the Registrant
and Endoscopic Concepts, Inc. .................................
10.12+* Design, Development and Manufacturing Agreement, dated March
13, 1996 between the Registrant and Design Standards
Corporation....................................................
10.13* Loan Agreement, dated October 13, 1994, between the Registrant
and Silicon Valley Bank, as amended............................
10.14* Form of 1996 Common Stock Purchase Warrant of the Registrant...
10.15* Amendment dated May 23, 1996 to 1992 Stock Option Plan.........
10.16+ Amendment dated May 24, 1996 to August 3, 1994 Patent License
Agreement among the Registrant, Sugar Surgical Technologies,
Inc., Dr. David J. Sugarbaker and Brigham & Women's Hospital,
as amended.....................................................
11* Statement regarding computation of per share earnings..........
16* Letter regarding change in certifying accountant...............
23.1 Consent of Hale and Dorr (included in Exhibit 5.1).............
23.2 Consent of Coopers & Lybrand L.L.P. (included on page II-6)....
23.3* Consent of Hamilton, Brook, Smith & Reynolds, P.C. (included on
page II-7).....................................................
24* Powers of Attorney.............................................
27* Financial data schedule .......................................
</TABLE>
- --------
*Previously filed.
+ Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.

<PAGE>

[LETTERHEAD OF HALE AND DORR APPEARS HERE]

Exhibit 5.1

June 18, 1996

Microsurge, Inc.
150 A Street
Needham, MA 02194

Ladies and Gentlemen:

This opinion is furnished to you in connection with a Registration
Statement on Form S-1 (the "Registration Statement"), filed with the Securities
and Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended, for the registration of 3,450,000 shares of Common Stock, $.001 par
value per share (the "Shares"), of Microsurge, Inc., a Delaware corporation (the
"Company"), including the Shares which may be sold upon the exercise of an
overallotment option. The Shares are to be sold by the Company pursuant to an
Underwriting Agreement to be entered into by and among the Company, Salomon
Brothers Inc, Raymond James & Associates, Inc., and Vector Securities
International, Inc., as representatives of the several underwriters named in
such Underwriting Agreement (the "Underwriting Agreement").

We have acted as counsel for the Company in connection with the issue and
sale by the Company of the Shares. We have examined signed copies of the
Registration Statement and all exhibits thereto, all as filed with the
Commission. We have also examined and relied upon the original or copies of
minutes of meetings of the stockholders and Board of Directors of the Company,
stock record books of the Company, a copy of the By-Laws of the Company, as
amended, and a copy of the Second Restated Certificate of Incorporation of the
Company, as amended.

In our examination of the foregoing documents, we have assumed the
genuineness of all signatures and authenticity of all documents submitted to us
as originals, the conformity to original documents of all documents submitted to
us as certified or photostatic copies, and the authenticity of the originals of
such latter documents.

<PAGE>

Microsurge, Inc.
June 18, 1996
Page 2

We assume that the appropriate action will be taken, prior to the offer and
sale of the Shares, to register and qualify the Shares for sale under all
applicable state securities or "blue sky" laws.

Based upon the foregoing, we are of the opinion that (i) the Shares have
been duly authorized, and (ii) when the Shares to be sold by the Company are
issued and sold pursuant to the Underwriting Agreement, such Shares will be
legally issued, fully paid and nonassessable.

We hereby consent to the filing of this opinion as part of the Registration
Statement and to the use of our name therein and in the related Prospectus under
the caption "Legal Matters."

Very truly yours,

/s/ HALE AND DORR

HALE AND DORR

<PAGE>

Exhibit 10.16

CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE EXCHANGE COMMISSION.
ASTERISKS DENOTE SUCH OMISSIONS.

MICROSURGE

May 24, 1996

Mr. Brian Hicks
Technology Transfer Associate
Ventures Department
Brigham Medical Center, Inc.
75 Francis Street
Boston, MA 02115

Re: Amendment to August 3, 1994 Patent License Agreement
between Microsurge, Inc. and Brigham & Women's Hospital

Dear Mr. Hicks:

We refer to a Patent License Agreement dated August 3, 1994
between Brigham & Women's Hospital ("BWH") and Microsurge, Inc.
(the "Agreement").

Capitalized terms not otherwise defined herein shall have the
meanings ascribed to them in the Agreement.

Section 4.1 of the Agreement provides that Microsurge will
pay BWH royalties of *% on net sales of BWH Licensed Products.
Section 2.1 of the Agreement gives Microsurge the right to grant
sublicenses, but the Agreement does not discuss how BWH will be
compensated for sales of BWH Licensed Products by Microsurge's
sublicensees.

Microsurge proposed to amend Section 4.1 of the Agreement so
that the current provision becomes Section 4.1(a) and the
following language is added as Section 4.1(b):

(b) Royalties on BWH Licensed Products sold by
Microsurge to its sublicensees shall be determined in
accordance with Section 4.1(a) above. In addition,
Microsurge shall pay BWH ************************* of
Microsurge's sublicense income from the BWH Patent
Rights, including without limitation upfront sublicense
fees and royalties paid by sublicensees (but excluding

<PAGE>

CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE EXCHANGE COMMISSION.
ASTERISKS DENOTE SUCH OMISSIONS.

Mr. Brian Hicks
May 24, 1996
Page 2

revenue from sales of BWH Licensed Products by
Microsurge to its sublicensees). Microsurge shall pay
such amounts to BWH within sixty (60) days after the end
of each calendar quarter, based on sublicense income
received by Microsurge during the calendar quarter just
completed. Such amount shall otherwise be paid to BWH
in accordance with Section 4.4 below. The **% royalty
under Section 4.1(a) above shall not be due on such
sublicensee's Net Sales of BWH Licensed Products.

All other provisions of the Agreement remain in full force
and effect.

If you agree with the proposed amendment stated above, please
sign where indicated below and return a copy of the amendment to
me.

MICROSURGE, INC.

/s/ E. James Hutchens
By:____________________________
Name: E. James Hutchens
Title: Chief Executive Officer

AGREED AND ACCEPTED:

BRIGHAM & WOMEN'S HOSPITAL

/s/ William Terry
By:_____________________________
Name: William Terry
Title: S.R. V.P.

SUGAR SURGICAL TECHNOLOGIES, INC.

/s/ David J. Sugarbaker
By:_____________________________
Name:
Title:

/s/ David J. Sugarbaker
________________________________
DR. DAVID SUGARBAKER