FOCAL INC, S-1/A, 1997-12-09

FOCAL INC
S-1/A, 1997-12-09
SURGICAL & MEDICAL INSTRUMENTS & APPARATUS

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 9, 1997

REGISTRATION NO. 333-38379
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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

FOCAL, INC.
(Exact name of Registrant as specified in its charter)
------------------------------

<TABLE>
<S> <C> <C>
DELAWARE 3841 94-3142791
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>

4 MAGUIRE ROAD
LEXINGTON, MA 02173
(781) 280-7800
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
DAVID M. CLAPPER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
FOCAL, INC.
4 MAGUIRE ROAD
LEXINGTON, MA 02173
(781) 280-7800
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------

COPIES TO:

<TABLE>
<S> <C>
MARIO M. ROSATI, ESQ. KENNETH J. NOVACK, ESQ.
CHRISTOPHER D. MITCHELL, ESQ. PETER S. LAWRENCE, ESQ.
WILSON SONSINI GOODRICH & ROSATI MINTZ, LEVIN, COHN, FERRIS, GLOVSKY AND POPEO,
PROFESSIONAL CORPORATION P.C.
650 PAGE MILL ROAD ONE FINANCIAL CENTER
PALO ALTO, CALIFORNIA 94304 BOSTON, MASSACHUSETTS 02111
(650) 493-9300 (617) 542-6000
</TABLE>

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

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
--------------------------

If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to rule 434,
please check the following box. / /
--------------------------

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO OFFERING AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED(1) PRICE PER SHARE(2) PRICE(2) FEE(3)
<S> <C> <C> <C> <C>
Common Stock, $0.01 par value..................... 2,875,000 shares $13.00 $37,375,000 $11,326
</TABLE>

(1) Includes 375,000 shares that the Underwriters have the option to purchase to
cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee in accordance with Rule 457 under the Securities Act of
1933, as amended.
(3) Entire amount previously paid.
--------------------------

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 SUCH SECTION 8(A),
MAY DETERMINE.

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

SUBJECT TO COMPLETION, DATED DECEMBER 9, 1997

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 THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
STATE.
<PAGE>
PROSPECTUS

2,500,000 SHARES

[LOGO]

COMMON STOCK
------------------

All of the shares of Common Stock offered hereby are being sold by Focal,
Inc. ("Focal" or the "Company"). Prior to this offering, there has been no
public market for the Common Stock of the Company. It is currently estimated
that the initial public offering price will be between $11.00 and $13.00 per
share. See "Underwriting" for a discussion of 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, subject to notice of
issuance, under the symbol "FOCL." After this offering, the Company's existing
stockholders, including directors, officers and other affiliates of the Company,
will own approximately 81% of the Company's outstanding Common Stock
(approximately 78% if the Underwriters' over-allotment option is exercised).
------------------------

THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
---------------------

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.

<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
<S> <C> <C> <C>
Per Share................................... $ $ $
Total (3)................................... $ $ $
</TABLE>

(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."

(2) Before deducting estimated expenses of $600,000 payable by the Company.

(3) The Company has granted the Underwriters a 30-day option to purchase up to
375,000 additional shares of Common Stock on the same terms and conditions
as set forth above, solely to cover over-allotments, if any. If such option
is exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
------------------------

The shares of Common Stock offered by this Prospectus are offered by the
Underwriters subject to prior sale, to withdrawal, cancellation or modification
of the offer without notice, to delivery to and acceptance by the Underwriters
and to certain further conditions. It is expected that delivery of certificates
representing the shares of Common Stock will be made at the offices of Lehman
Brothers Inc., New York, New York, on or about , 1997.
------------------------

LEHMAN BROTHERS

PIPER JAFFRAY INC.

PACIFIC GROWTH EQUITIES, INC.

, 1997
<PAGE>
Diagram of the human body showing the internal anatomy. Emanating from
different parts of the anatomy are four balloons containing pictures of various
organs undergoing different stages in the FOCALSEAL sealing process. The first
balloon emanates from the bowel area and depicts FOCALSEAL primer being applied
to a bowel anastomosis over the caption "FOCALSEAL for Gastrointestinal
Surgery." The second balloon emanates from the head area and depicts FOCALSEAL
sealant being applied to a suture line in the dural membrane over the caption
'FOCALSEAL for Neurosurgery." The third balloon emanates from the chest area and
depicts the illumination of the FOCALSEAL sealant covering a bypass graft
anastomosis on the heart to initiate photopolymerization over the caption
"FOCALSEAL for Vascular Surgery." The fourth balloon emanates from the chest
area and depicts a lung sealed with FOCALSEAL during an underwater test over the
caption "FOCALSEAL for Lung Surgery."

Series of five pictures depicting each step in the use of FOCALSEAL-L in the
simulated sealing of a lung during surgery. The first picture shows a lung
sealed only with staples being tested underwater for air leaks. The second
picture shows the lung being brushed with the FOCALSEAL primer. The third
picture in the series depicts the lung being brushed with the FOCALSEAL sealant.
The fourth picture depicts the illumination of the primer and sealant in order
to initiate photopolymerization. The final picture in the series shows the
sealed lung being tested underwater for air leaks.

None of the Company's products have been approved by the United States Food
and Drug Administration ("FDA") or any foreign regulatory authority for
marketing in any country. The process of obtaining such approvals may be
lengthy, and there can be no assurance that such approvals will be obtained. The
Company has not offered any of its products for commercial sale or received any
revenues from commercial sales.

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY, INCLUDING EFFECTING SYNDICATE COVERING TRANSACTIONS, INITIATING
BIDS OR EFFECTING PURCHASES ON THE NASDAQ NATIONAL MARKET FOR THE PURPOSE OF
PREVENTING OR RETARDING A DECLINE IN THE MARKET PRICE OF THE COMMON STOCK, OR
IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."

Focal-Registered Trademark-, FocalSeal-Registered Trademark-,
FocalSeal-L-TM-, FocalSeal-S-TM- and the Focal logo are trademarks of the
Company. Trade names and trademarks of other companies appearing in this
Prospectus are the property of their respective holders.
<PAGE>
PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE FINANCIAL STATEMENTS AND
NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS OTHERWISE NOTED,
THE INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE
UNDERWRITERS' OVER-ALLOTMENT OPTION AND GIVES EFFECT TO (I) THE EXERCISE OF
CERTAIN OUTSTANDING WARRANTS TO PURCHASE 19,496 SHARES OF COMMON STOCK UPON THE
COMPLETION OF THIS OFFERING, (II) THE CONVERSION OF ALL OUTSTANDING SHARES OF
PREFERRED STOCK OF THE COMPANY INTO COMMON STOCK, WHICH WILL OCCUR AUTOMATICALLY
UPON THE COMPLETION OF THIS OFFERING AND (III) A 1 FOR 3.25 REVERSE STOCK SPLIT
OF ALL ISSUED AND OUTSTANDING COMMON STOCK THAT WILL BE EFFECTED PRIOR TO THE
COMPLETION OF THIS OFFERING. SEE "CAPITALIZATION," "DESCRIPTION OF CAPITAL
STOCK" AND "UNDERWRITING."

THE COMPANY

Focal, Inc. ("Focal" or the "Company") develops, manufactures and
commercializes synthetic, absorbable, liquid surgical sealants based on the
Company's proprietary polymer technology. The Company's family of FOCALSEAL
surgical sealant products is currently being developed for use inside the body
with or without sutures and staples to seal leaks resulting from lung, neuro,
cardiovascular and gastrointestinal surgery. FOCALSEAL-L, the Company's first
surgical sealant product, will initially be used to seal air leaks following
lung surgery. The Company has entered into an exclusive marketing and
distribution agreement for its surgical sealant products outside North America
with Ethicon, Inc., a division of Johnson & Johnson ("Ethicon"), a worldwide
leader in surgical wound closure products. The Company anticipates commercial
launch of FOCALSEAL-L for lung surgery indications in Europe through Ethicon in
the first half of 1998.

There are more than 4 million open and minimally invasive lung, neuro,
cardiovascular and gastrointestinal surgical procedures performed annually
worldwide in which air or fluid leaks may arise in an unpredictable and
unexpected manner, and in which the Company's products, if approved, may be
effective in reducing post-surgical leaks. Patients with persistent air or fluid
leaks may require prolonged hospitalization, have more complications and higher
levels of post-operative pain, and a higher risk of mortality. Sutures and
staples, the principal products comprising the over $2.0 billion worldwide wound
closure market, do not have inherent sealing capabilities, and therefore cannot
consistently eliminate air and fluid leakage at the wound site. Focal's liquid
surgical sealants adhere rapidly to underlying tissue, expand and contract with
tissue, withstand air and fluid pressure, and are designed to provide an
effective seal to reduce the incidence of air and fluid leaks following surgery.
FOCALSEAL surgical sealants, which are biocompatible, remain intact through the
critical wound healing period and are then absorbed and eliminated by the body.
The Company believes the use of its FOCALSEAL liquid surgical sealants could
potentially shorten patient recovery times and hospital stays and reduce
post-surgical complications.

Focal is currently developing two principal surgical sealant formulations,
FOCALSEAL-L and FOCALSEAL-S, for a broad range of applications inside the body.
The Company has completed a 60-patient, multicenter, randomized, controlled
clinical trial in Europe involving use of FOCALSEAL-L in sealing air leaks
following lung surgery. In the trial, following surgery with standard sutures
and staples and prior to randomization, it was determined that 79% of all
patients had intraoperative air leaks. FOCALSEAL-L was shown to be 100%
effective in sealing intraoperative air leaks in the 30 patients who were
randomized into the treated group. In the other patients, who were randomized
into the untreated group and received sutures and staples alone, only 27% were
free of intraoperative air leaks. In September 1997, the Company initiated a
pivotal, 180-patient, multicenter clinical trial in the United States under a
conditional investigational device exemption ("IDE") to evaluate FOCALSEAL-L in
sealing intraoperative and postoperative air leaks following lung surgery. The
Company expects to submit a Premarket Approval ("PMA") application to the FDA
for lung surgery indications by the end of 1998.

3
<PAGE>
will initially be used to seal fluid leaks following neurosurgery. The Company
expects to commence a clinical trial in Europe for this indication in mid-1998.
The Company believes, based upon preclinical evaluation of its polymers, that
its FOCALSEAL-L and FOCALSEAL-S formulations, which are designed to have
absorption times that parallel long-term and short-term synthetic, absorbable
polymer sutures, respectively, will also be widely applicable to cardiovascular
surgery, gastrointestinal surgery and other surgical applications.

Focal is also developing other applications for the liquid formulations of
its polymer technology, including local drug delivery systems and tissue
coatings. In local drug delivery applications, the Company believes that its
polymers can deliver high concentrations of drugs at local disease sites,
thereby potentially enhancing efficacy and reducing toxicity associated with
systemic delivery of drugs. The Company is initially pursuing local delivery of
drugs with the objective of reducing the incidence of restenosis following
coronary angioplasty procedures. The Company has entered into a collaboration
with Novartis Pharmaceuticals, Inc. ("Novartis") and Chiron Corporation
("Chiron") under which these companies are funding development of a
polymer-based local drug delivery system for anti-restenosis agents being
developed by them. In connection with the collaboration, Novartis and Chiron
received worldwide marketing and distribution rights for this indication. In
addition, the Company is developing tissue coatings to prevent the formation of
post-surgical adhesions, excessive scar tissue which attaches to surrounding
tissue and can cause serious complications, particularly in abdominal and
gynecological surgeries. The Company intends to enter into other collaborations
with pharmaceutical companies for additional drug delivery and tissue coating
indications.

Focal's family of surgical sealants and its other products under development
are based on the Company's proprietary synthetic, absorbable, liquid formulation
polymer technology. The Company's polymers are comprised of polyethylene glycol
("PEG"), other synthetic components and water. PEG and other synthetic
components comprise approximately 10-20% of the Company's liquid formulations
and are widely used in other medical products approved for use inside the body,
such as IV-administered pharmaceuticals, synthetic absorbable sutures, bone and
dental cements, pain medications and eye drops. Water comprises the other 80-90%
of Focal's formulations. The Company combines PEG and other synthetic compounds
in various proprietary polymer formulations in order to control characteristics
such as viscosity, setting time, strength, absorption, flexibility and
elasticity. This enables the Company to tailor formulations for particular
applications. A key distinguishing characteristic of the Company's polymer
formulations is that they are applied as liquids and then photopolymerized by
light into solid gels inside the body, a process known as photopolymerization.
The solid gel formed after the light has been applied, is highly flexible,
elastic and transparent and strongly adheres to moist or dry tissue.

The Company believes it has built a strong patent portfolio related to its
photopolymerizable polymer technology. The Company has received, licensed or
believes it has the option or right to license 17 issued United States patents
and six foreign patents corresponding to certain of the issued United States
patents, has 12 additional United States patent applications that have been
allowed and has 21 patent applications pending in the United States, as well as
foreign counterparts of certain of these applications.

The Company's objective is to become a leader in the market for surgical
sealants and in other markets where the Company's novel polymer technology could
address large unmet clinical needs. The Company intends to achieve its goals by
(i) marketing its FOCALSEAL surgical sealant products through Ethicon
internationally and by building a direct sales force in North America; (ii)
leveraging its proprietary polymer technology to develop new products; (iii)
commercializing FOCALSEAL surgical sealants to parallel the existing products in
the market for synthetic absorbable sutures; (iv) funding new research and
development initiatives through corporate collaborations; and (v) retaining
proprietary, and outsourcing non-proprietary, manufacturing processes.

Focal was incorporated in Delaware in June 1991. The Company's principal
executive offices are located at 4 Maguire Road, Lexington, Massachusetts 02173.
Its telephone number is (781) 280-7800.

4
<PAGE>
THE OFFERING

<TABLE>
<S> <C>
Common Stock offered......................... 2,500,000 shares

Common Stock to be outstanding after the
offering................................... 12,865,337 shares (1)

Use of proceeds.............................. For research and development, clinical
trials, expansion of manufacturing
capabilities and sales and marketing
activities, capital expenditures, working
capital and general corporate purposes. See
"Use of Proceeds."

Proposed Nasdaq National Market symbol....... FOCL
</TABLE>

SUMMARY FINANCIAL DATA
(In thousands, except per share data)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
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1992 1993 1994 1995 1996 1996 1997
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<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Collaborative research revenue............... $ -- $ -- $ 50 $ 968 $ 3,098 $ 2,349 $12,831
Operating expenses:
Research and development................... 1,793 7,405 11,890 9,665 11,680 8,735 10,929
General and administrative................. 466 1,925 2,034 2,098 2,175 1,518 2,106
-------- -------- --------- --------- -------- -------- -------
Total operating expenses..................... 2,259 9,330 13,924 11,763 13,855 10,253 13,035
-------- -------- --------- --------- -------- -------- -------
Loss from operations......................... (2,259) (9,330) (13,874) (10,795) (10,757) (7,904) (204)
Interest income.............................. 6 357 668 443 691 515 731
Interest expense............................. 13 44 79 107 92 71 81
-------- -------- --------- --------- -------- -------- -------
Net income (loss)............................ $ (2,266) $ (9,017) $ (13,285) $ (10,459) $(10,158) $ (7,460) $ 446
-------- -------- --------- --------- -------- -------- -------
-------- -------- --------- --------- -------- -------- -------
Pro forma net income (loss) per share (2).... $ (1.23) $ (.93) $ .04
-------- -------- -------
-------- -------- -------
Shares used in computing pro forma
net income (loss) per share (2)............ 8,271 8,001 10,551
-------- -------- -------
-------- -------- -------
</TABLE>

<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------
PRO FORMA
ACTUAL AS ADJUSTED (3)
--------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities...................................... $ 13,215 $ 40,538
Working capital....................................................................... 9,254 36,577
Total assets.......................................................................... 16,491 43,814
Capital lease obligations, long-term portion.......................................... 1,207 1,207
Total stockholders' equity............................................................ 10,788 38,111
</TABLE>

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

(1) Excludes (i) 297,921 shares of Common Stock issuable upon the exercise of
stock options outstanding under the Company's 1992 Incentive Stock Plan at
September 30, 1997, and (ii) 179,586 shares issuable upon the exercise of
warrants that will remain outstanding following the completion of this
offering. See "Management--Incentive Stock Plans," "Certain Transactions,"
"Description of Capital Stock" and Note 5 of Notes to Financial Statements.

(2) See Note 1 of Notes to Financial Statements for information concerning
calculation of pro forma net income (loss) per share.

(3) Pro forma as adjusted to reflect the sale of the 2,500,000 shares of Common
Stock offered hereby at an assumed initial public offering price of $12.00
per share and the receipt of the estimated net proceeds therefrom and the
automatic conversion of all outstanding shares of Preferred Stock into
8,117,803 shares of Common Stock and the exercise of warrants to purchase
19,496 shares of Common Stock upon the completion of this offering. See "Use
of Proceeds."
------------------------------

THIS PROSPECTUS CONTAINS, IN ADDITION TO HISTORICAL INFORMATION,
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS COULD DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE THOSE DISCUSSED IN "RISK FACTORS" AS WELL AS THOSE DISCUSSED
ELSEWHERE IN THIS PROSPECTUS.

5
<PAGE>
RISK FACTORS

THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN ADDITION TO THE
OTHER INFORMATION CONTAINED IN THIS PROSPECTUS BEFORE PURCHASING THE COMMON
STOCK OFFERED HEREBY.

HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICIT; UNCERTAINTY OF FUTURE
PROFITABILITY. The Company has incurred net losses in each year since its
inception, including a net loss of approximately $10.2 million during 1996. At
September 30, 1997, the Company had an accumulated deficit of $45 million. The
Company's operating losses have resulted primarily from expenses incurred in
connection with the Company's research and development activities, including
preclinical and clinical trials, development of manufacturing processes and
general and administrative expenses. The Company expects to incur net losses
into 1999 and may incur net losses in subsequent periods, although the amount of
future net losses and time required by the Company to reach profitability are
highly uncertain. The Company is dependent upon corporate partners for funding
of a significant portion of its research and development expenses. If the
Company does not continue to receive funding from its current corporate
partners, or is unable to otherwise obtain third-party funding, operating losses
will increase. Focal does not expect to generate revenues from the sale of
products, if any, until the first half of 1998. The Company's ability to achieve
and sustain profitability will be dependent upon obtaining regulatory approval
for and successfully commercializing its FOCALSEAL surgical sealants, and
developing the manufacturing capacity and sales and marketing capability for its
products. There can be no assurance that Focal will obtain required regulatory
approvals, or successfully develop, manufacture, commercialize and market
products or that the Company will ever record product revenues or achieve
profitability. Profitability, if achieved, may not be sustained. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

UNCERTAINTIES RELATED TO EARLY STAGE OF COMMERCIALIZATION AND
DEVELOPMENT. Except for the FOCALSEAL-L surgical sealant for lung surgery
indications, which the Company expects to begin marketing in Europe in 1998
through Ethicon, all of the Company's products are in early stages of
development or research. To date the Company has not received marketing approval
for its FOCALSEAL-L lung surgical sealant or any other product from the FDA or
any other international regulatory body. The Company's initial product,
FOCALSEAL-L, is not expected to be commercially available in Europe until the
first half of 1998 and in the United States until the end of 1999, at the
earliest. In addition, FOCALSEAL-L and FOCALSEAL-S will require significant
additional research and development efforts before either is suitable for other
indications. The development and commercialization of new bioabsorbable
synthetic polymer products are highly uncertain and subject to a number of
significant risks. Potential products that appear to be promising at early
stages of development may not reach the market for a number of reasons. Such
reasons include the possibilities that the potential products will be found
ineffective or cause harmful side effects during preclinical testing or clinical
trials, fail to receive necessary regulatory approvals, be difficult to
manufacture on a commercial scale, be uneconomical, fail to achieve market
acceptance or be precluded from commercialization by proprietary rights of third
parties. No assurance can be given that any of the Company's development
programs will be successfully completed, that clinical trials will generate
anticipated results or will commence or be completed as planned, that any PMA
application will be accepted or ultimately approved by the FDA, that required
regulatory approvals will be obtained on a timely basis, if at all, or that any
products for which approval is obtained will be commercially successful. If any
of the Company's development programs are not successfully completed, required
regulatory approvals are not obtained, or products for which approvals are
obtained are not commercially successful, the Company's business, financial
condition and results of operations would be materially adversely affected. See
"Business--Products and Product Development Programs."

EARLY STAGE OF CLINICAL TESTING AND LACK OF EXTENSIVE CLINICAL DATA. The
FOCALSEAL-L product for lung surgery is in the early stages of clinical testing
in the United States, and clinical data obtained to date is insufficient to
demonstrate the safety and efficacy of this product under applicable FDA
regulatory guidelines. The Company has completed a 60-patient controlled,
randomized human clinical trial in

6
<PAGE>
Europe involving use of FOCALSEAL-L in lung surgery. Although the Company
believes that the results of this trial are sufficient to obtain marketing
approval in Europe, significant additional clinical data will be required prior
to submission of a PMA application in the United States. The Company has only
recently commenced United States clinical trials of FOCALSEAL-L pursuant to a
conditionally approved IDE issued by the FDA. Based on communications to date,
the FDA may require the Company to pursue certain clinical endpoints that were
not the subject of the European clinical trial. In the event that the Company is
required to pursue these endpoints, it may be more difficult for the Company to
demonstrate the efficacy of FOCALSEAL-L in the United States trial than in the
European trial, which could result in delays or adversely affect the success of
the clinical trial. There can be no assurance that FOCALSEAL-L will receive
marketing approval from the FDA or that any of the Company's other products will
prove to be safe and effective in United States or international clinical trials
under applicable regulatory guidelines. In addition, clinical trials may
identify significant technical or other obstacles to be overcome prior to
obtaining necessary regulatory or international approvals. In particular, during
the Company's European clinical trial of FOCALSEAL-L in lung surgery, a higher
than anticipated incidence of insufficient wound healing at the bronchial stump
was observed in patients in the treated group. The bronchial stump typically
heals through tissue overgrowth from surrounding areas. Based upon its review
and analysis of the clinical data, the Company believes that in those cases in
which FOCALSEAL-L was applied directly to the bronchial stump it may have acted
as a barrier to such tissue overgrowth, thereby slowing natural healing of the
bronchial stump. As a result of this observed clinical event, the labelling for
FOCALSEAL-L in the United States clinical trial indicates that the product may
be applied to all lung tissues other than the bronchial stump. Other unforeseen
circumstances may arise, or adverse events related to the use of the product may
occur, during clinical trials and any such events may require suspension or
termination of clinical trials as well as reporting to the FDA or other
regulatory authorities. If the FOCALSEAL product and the Company's other
products under development do not prove to be safe and effective in clinical
trials or if the Company is otherwise unable to commercialize these products
successfully, the Company's business, financial condition and results of
operations will be materially and adversely affected. See "Business--Products
and Product Development Programs--FOCALSEAL Surgical Sealant Products."

DEPENDENCE UPON FOCALSEAL SURGICAL SEALANTS. The Company expects to
introduce its first commercial product, FOCALSEAL-L for lung surgery
indications, in Europe in the first half of 1998 through its strategic marketing
alliance with Ethicon. The Company anticipates that revenues derived from
European sales of FOCALSEAL-L will account for a substantial majority of the
Company's near term product revenues. Before FOCALSEAL-L can be sold in Europe,
the Company must first obtain a CE mark for marketing in the member countries of
the European Union. Any delays or other difficulties encountered by the Company
in obtaining such CE mark would have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the
Company's future success will depend, in significant part, on its ability to
complete successfully additional clinical trials and to obtain regulatory
approval and market acceptance of FOCALSEAL-L in the United States. Although the
Company recently commenced a 180-patient, pivotal, multicenter trial of
FOCALSEAL-L for lung surgery indications in the United States and anticipates
submitting a PMA application to the FDA based on the results of the trial, there
can be no assurance that the FDA will accept the PMA for filing, that the
Company will be able to demonstrate to the FDA's satisfaction that FOCALSEAL-L
is safe and effective, or, if marketing approval were granted by the FDA, that
the Company will commercialize successfully FOCALSEAL-L in the United States.
Failure by the Company to gain marketing approval from the FDA for FOCALSEAL-L
or to be able to commercialize successfully FOCALSEAL-L in the United States
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "--Uncertainties Related to Early Stage
of Commercialization and Development," "--Early Stage of Clinical Testing and
Lack of Extensive Clinical Data," and "--Uncertainty of Market Acceptance."

UNCERTAINTY OF MARKET ACCEPTANCE. The Company's FOCALSEAL surgical sealants
represent a new method of sealing air and fluid leaks that arise in connection
with surgery, and there can be no assurance that these products will gain
commercial acceptance among physicians, patients and health care payors,

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even if necessary international and United States marketing approvals can be
obtained. The Company believes that recommendations and endorsements by
physicians will be essential for market acceptance of FOCALSEAL, and there can
be no assurance that any such recommendations or endorsements will be obtained.
Physicians will not use the FOCALSEAL surgical sealants unless they determine,
based on clinical data and other factors, that these systems are an effective
means of sealing air and fluid leaks and that the clinical benefits to the
patient and cost savings achieved through use of these systems outweigh their
cost. Such determinations will depend, in part, on the ability of the Company's
FOCALSEAL-L surgical sealant to reduce the time a lung surgery patient must be
connected to a chest tube and the length of hospital stays associated with lung
surgery. Acceptance among physicians may also depend upon the Company's ability
to train thoracic surgeons and other potential users of the Company's products
in the application of liquid surgical sealants, which such physicians typically
have not performed, and the willingness of such users to learn these new
techniques. Failure of the Company's products to achieve significant market
acceptance would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Products and
Product Development Programs--FOCALSEAL Surgical Sealant Products."

DEPENDENCE ON STRATEGIC ALLIANCES. The Company has established strategic
alliances and collaborations with the Ethicon division of Johnson & Johnson in
the field of surgical sealants for all territories outside of North America and
with Novartis and Chiron in the field of local drug delivery for restenosis
prevention worldwide. The Company is dependent upon these corporate partners to
provide certain research and development funding for these programs. Under the
agreement with Ethicon, the Company is dependent upon Ethicon for marketing and
sale of surgical sealants outside North America and for obtaining international
regulatory approvals other than the CE mark, which is the responsibility of the
Company to obtain. Under the agreement with Novartis and Chiron, the Company is
dependent on these companies to collaborate in the development of polymer-based
drug delivery products to be used for local, time-release delivery of
cardiovascular drugs, to conduct preclinical testing and clinical trials and
obtain required regulatory approvals for such drug candidates, and to
manufacture and commercialize any resulting drugs. Failure of these partners to
continue to collaborate with the Company for subsequent development of products,
seek required regulatory approvals or commercialize products would have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company's strategy for development and
commercialization of certain of its future products may depend upon the Company
entering into additional arrangements with research collaborators, corporate
partners and others, and upon the subsequent success of these third parties in
performing their obligations. There can be no assurance that the Company will be
able to enter into additional strategic alliances on terms favorable to the
Company, or at all. The Company's inability to enter into additional strategic
alliances could have an adverse effect on the Company's business, financial
condition and results of operations.

The Company cannot control the amount and timing of resources which its
corporate partners devote to the Company's programs or potential products. If
any of the Company's corporate partners breach their agreements with the Company
or otherwise fail to conduct their collaborative activities in a timely manner,
the clinical development and/or commercialization of products will be delayed,
and the Company will be required to devote additional resources to product
development and commercialization, or terminate certain development programs.
The Company's strategic alliance with Novartis and Chiron is subject to
termination upon 90 days notice. There can be no assurance that Novartis and
Chiron will not elect to terminate their strategic alliance with the Company. In
addition, if the Company's corporate partners effect a merger with a third
party, there can be no assurance that the strategic alliances will not be
terminated or otherwise materially adversely affected. The termination of any
current or future strategic alliances could have a material adverse effect on
the Company's business, financial condition and results of operations.

In addition, Focal's strategic partners may develop, either alone or with
others, products that compete directly with the development and marketing of the
Company's products. Competing products, either

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developed by the corporate partners or to which the corporate partners have
rights, may result in their withdrawal of support with respect to all or a
portion of the Company's technology, marketing and development efforts, which
would have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that disputes
will not arise in the future with respect to the ownership of rights to any
products or technology developed with corporate partners. These and other
possible disagreements between corporate partners and the Company could lead to
delays in or termination of the collaborative research, development or
commercialization of certain products or could require or result in litigation
or arbitration, which would be time-consuming and expensive, and would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Strategic Alliances."

INTENSE COMPETITION; UNCERTAINTY OF TECHNOLOGICAL CHANGE. The Company
competes with many domestic and foreign medical device, pharmaceutical and
biopharmaceutical companies. In the surgical sealant area, the Company will
compete with existing methodologies for sealing air and fluid leaks resulting
from surgery, including some traditional wound closure products such as sutures
and staples, marketed by companies such as Johnson & Johnson, United States
Surgical Corporation, American Home Products Corporation and others. Other
products currently being marketed include fibrin glue, sold in Europe and the
Pacific Rim countries by Immuno AG, Cention, Fujisawa and others, and under
development by Baxter Healthcare Corporation, Bristol-Myers Squibb Company,
Vitex and others. Other competitors in the surgical sealant market include
Closure Medical Corporation, B. Braun GmBH and Cryolife. Competitive products
may also be under development by other large medical device, pharmaceutical and
biopharmaceutical companies. The other areas in which Focal is developing
products, such as post-surgical adhesion prevention and restenosis drug
delivery, are intensely competitive markets and the Company will encounter
competition from major medical device, pharmaceutical and biopharmaceutical
companies in such markets. Many of the Company's current and potential
competitors have substantially greater financial, technological, research and
development, regulatory and clinical, marketing and sales, and personnel
resources than the Company. These competitors may also have greater experience
in developing products, conducting clinical trials, obtaining regulatory
approvals, and manufacturing and marketing such products. Certain of these
competitors may obtain patent protection, approval or clearance by the FDA or
foreign countries or product commercialization earlier than the Company, any of
which could materially adversely affect the Company. Furthermore, if the Company
commences significant commercial sales of its products, it will also be
competing with respect to manufacturing efficiency and marketing capabilities,
areas in which it currently has limited experience. Finally, there can be no
assurance that the Company's marketing partners will not pursue parallel
development of other technologies or products, which may result in a marketing
partner developing additional products that would compete with the Company's
products.

Other recently developed technologies or procedures are, or may in the
future be, the basis of competitive products. There can be no assurance that the
Company's current competitors or other parties will not succeed in developing
alternative technologies and products that are more effective, easier to use or
more economical than those which have or are being developed by the Company or
that would render the Company's technology and products obsolete and
non-competitive in these fields. In such event, the Company's business,
financial condition and results of operations could be materially adversely
affected. See "Business--Competition and Technological Change."

UNCERTAINTIES RELATED TO PATENTS AND PROPRIETARY TECHNOLOGY. The Company's
success will depend on its ability to obtain patent protection for its products,
preserve its trade secrets, prevent third parties from infringing upon its
proprietary rights, and operate without infringing upon the proprietary rights
of others, both in the United States and internationally. There can be no
assurance that the Company's pending or future patent applications will issue,
or that the claims of the Company's issued patents, or any patents that may
issue in the future, will provide any competitive advantages for the Company's
products or that they will not be successfully challenged, narrowed, invalidated
or circumvented in the future. Moreover,

9
<PAGE>
litigation and interference or opposition proceedings associated with obtaining,
enforcing or defending patents or trade secrets is expensive and can divert the
efforts of technical and management personnel. The Company has filed patent
applications in certain foreign countries corresponding to certain patent
applications that it has filed in the United States and may file additional
patent applications inside and outside the United States. The Company believes
that obtaining foreign patents may be more difficult than obtaining domestic
patents because of differences in patent laws and believes the protection
afforded by foreign patents or any other foreign intellectual property
protection, if obtained, may be more limited than that provided domestically. In
addition, there can be no assurance that competitors will not seek to apply for
and obtain patents that will prevent, limit or interfere with the Company's
ability to make, use, offer for sale, sell and import its products. The Company
is aware that certain medical device, pharmaceutical and other companies,
universities and research institutions have filed patent applications or have
issued patents relating to compositions and methods for wound closure and
adhesion prevention. In addition, the medical device and pharmaceutical
industries have been characterized by litigation regarding patents and other
intellectual property rights, and many companies in the medical device industry
have employed intellectual property litigation to gain a competitive advantage.
There can be no assurance that litigation will not be brought against the
Company by third parties in the future challenging the Company's patent rights
or claiming infringement by the Company of patents held by the third parties.

Because of the substantial length of time and expense associated with
bringing new products through the development and regulatory approval processes
in order to reach the marketplace, the medical products industry places
considerable importance on obtaining patent and trade secret protection for new
technologies, products and processes. Accordingly, the Company intends to seek
patent protection for its proprietary technology, products and processes. There
can be no assurance as to the success or timeliness in obtaining any such
patents, that the breadth of claims obtained, if any, will provide adequate
protection of the Company's proprietary technologies, products and processes, or
that the Company will be able to adequately enforce any such claims to protect
its proprietary technology, products and processes. Because patent applications
in the United States are confidential until the patents issue, and publication
of discoveries in the scientific and patent literature tends to lag behind
actual discoveries by several months, the Company cannot be certain that Company
inventors or licensors were the first to conceive of inventions covered by
pending patent applications or that the Company was the first to file patent
applications for such inventions.

The Company may desire to or may be required to obtain licenses to patents
or proprietary rights of others. No assurance can be given that any licenses
required under any patents or proprietary rights of third parties would be made
available on terms acceptable to the Company, or at all. If the Company does not
obtain such licenses, it could encounter delays in product introductions while
it attempts to design around or otherwise avoid such patents, or it could find
that the development, manufacture or sale of products requiring such licenses is
foreclosed. Litigation may be necessary to defend against or assert claims of
patent infringement or invalidity, to enforce or defend patents issued to the
Company, to protect trade secrets or know-how owned by the Company, or to
determine the scope and validity of the proprietary rights of others. In
addition, interference proceedings in the United States Patent and Trademark
Office, or opposition proceedings in a foreign patent office, may be necessary
to determine the priority of inventions with respect to patent applications of
the Company or its licensors. Litigation, interference or opposition proceedings
could result in substantial costs to and diversion of effort by the Company, and
adverse determinations in any such proceedings could prevent the Company from
manufacturing, marketing or selling its products and could have a material
adverse effect on the Company's business, financial condition and results of
operations.

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<PAGE>
certain, but not all, commercial partners and consultants. There can be no
assurance that relevant inventions will not be developed by a person not bound
by an invention assignment agreement. There can be no assurance that binding
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 discovered by competitors. See "Business--Patents and
Proprietary Rights."

GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVALS. Clinical
testing, manufacture, promotion and sale of the Company's products are subject
to extensive regulation by numerous governmental authorities in the United
States, principally the FDA, and corresponding foreign regulatory agencies. The
Federal Food, Drug, and Cosmetic Act ("FDC Act"), and other federal and state
statutes and regulations govern or influence the testing, manufacture, labeling,
advertising, distribution and promotion of drugs and medical devices.
Noncompliance with applicable requirements can result in fines, injunctions,
civil penalties, recall or seizure of products, total or partial suspension of
production, refusal to authorize the marketing of new products or to allow the
Company to enter into supply contracts, and criminal prosecution.

The Company's FOCALSEAL surgical sealant product will be regulated as a
class III medical device for which FDA approval of a premarket approval ("PMA")
application must be obtained prior to commercial distribution in the United
States. A PMA application must be supported by extensive information, including
preclinical and clinical trial data. The PMA process is expensive, lengthy and
uncertain, and a number of products for which PMA applications have been
submitted by other companies have never been approved for marketing.

If granted, the approval of the PMA application may include significant
limitations on the indicated uses for which a product may be marketed. There can
be no assurance that the Company will be able to obtain necessary PMA
application approvals to market the FOCALSEAL surgical sealant, or any other
products, on a timely basis, if at all. Failure to obtain or delays in receipt
of such approvals, the loss of previously received approvals, or failure to
comply with existing or future regulatory requirements could have a material
adverse effect on the Company's business, financial condition and results of
operations.

Although the Company has received a conditionally approved investigational
device exemption ("IDE") from the FDA permitting the Company to conduct clinical
trials of FOCALSEAL for lung surgery in the United States, and such clinical
study has recently commenced, there can be no assurance that data from such
studies will demonstrate the safety and effectiveness of the FOCALSEAL product
or will adequately support a PMA application for the product. In addition, the
Company will be required to obtain additional IDEs for other applications of
FOCALSEAL and for other products that the Company develops that are regulated by
the FDA as medical devices. There can be no assurance that data, typically the
results of animal and laboratory testing, that may be provided by the Company in
support of future IDE submissions will be deemed adequate for the purposes of
obtaining IDE approval or that the Company will obtain approval to conduct
clinical studies of any such future product. Furthermore, even if IDE approval
is obtained and clinical studies are conducted, there can be no assurance that
data from such studies will demonstrate the safety and effectiveness of any such
product or will adequately support a PMA application for any such product. See
"--Early Stage of Clinical Testing and Lack of Extensive Clinical Data."

The drug delivery products that the Company is developing, including
products under development with collaborative partners for restenosis drug
delivery, are likely to be regulated as drugs requiring FDA approval of an
investigational new drug ("IND") prior to clinical testing and of a new drug
application ("NDA") prior to commercialization in the United States. The new
drug approval process is generally considered more onerous, costly and lengthy
than the PMA process, requiring more extensive preclinical and clinical testing,
and many products for which NDAs have been submitted by other companies have
never been approved for marketing. There can be no assurance that the Company
will be able to obtain necessary or timely IND or NDA approval for any product
for which it is required. Failure to obtain or

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<PAGE>
delays in the receipt of NDA approval, when required, could have a material
adverse effect on the Company's business, financial condition, and results of
operations.

The FDA and other regulatory agency requirements for manufacturing, product
testing and marketing vary depending upon whether the product is a medical
device or drug. Manufacturers of medical devices and drugs are also required to
comply with the applicable FDA good manufacturing practice ("GMP") requirements,
which include requirements relating to product testing and quality assurance as
well as the corresponding maintenance of records and documentation. There is no
assurance that the Company will be able to comply with the applicable GMP
requirements.

The Company is required to provide information to the FDA on death or
serious injuries alleged to have been 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. In addition, the
FDA prohibits a cleared or approved device from being marketed for uncleared or
unapproved uses. If the FDA believes that a company is not in compliance with
law, it can institute proceedings to detain or seize products, issue a recall,
enjoin future violations and assess civil and criminal penalties against the
Company, its officers and its employees. Failure to comply with the regulatory
requirements could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, regulations
regarding the manufacture and sale of the Company's products are subject to
change. The Company cannot predict the effect, if any, that such changes might
have on its business, financial condition or results of operations.

The Company is 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.

International sales of the Company's products are subject to the regulatory
agency product registration requirements of each country. The regulatory review
process varies from country to country. In order to market the FOCALSEAL
surgical sealant and other products being developed by the Company in the member
countries of the European Union, the Company will be required to obtain CE mark
certification. CE mark certification is an international symbol of adherence to
quality assurance standards and compliance with applicable European medical
device directives. The Company will be required to obtain the right to affix the
CE mark to its products in order to sell such products in member countries of
the European Union. In September 1997, the Company completed a CE mark and ISO
9001 standards audit for FOCALSEAL-L, which is one of the principal steps in the
CE mark approval process. The remainder of the CE mark approval process consists
primarily of review by the approving body of additional documentation to be
submitted by the Company in response to observations made during the CE mark
audit. Although the CE mark and ISO 9001 standards audit has been completed,
there can be no assurance that the Company will be successful in completing the
remainder of the CE mark certification process or obtaining CE mark
certification in a timely manner. See "Business--Government Regulation."

NEED FOR ADDITIONAL FUNDING; UNCERTAINTY OF ACCESS TO CAPITAL. Focal will
require substantial additional funding in order to continue its research and
product development programs, including for preclinical testing and clinical
trials of its product candidates, for operating expenses, for the pursuit of
regulatory approvals for its product candidates, and may require additional
funding for establishing manufacturing and marketing capabilities in the future.
The Company believes that its existing capital resources, together with the net
proceeds of this offering, interest income and future payments due under
strategic alliances, will be sufficient to satisfy its current and projected
funding requirements for at least 18 months. However, no assurance can be given
that such net proceeds will be sufficient to conduct its research and
development programs as planned. The Company's future capital requirements will
depend on many factors, including continued scientific progress in its research
and development programs, the magnitude of these programs,

12
<PAGE>
progress with preclinical testing and clinical trials, the time and costs
involved in obtaining regulatory approvals, if any, the costs involved in filing
and prosecuting patent applications and enforcing patent claims, competing
technological and market developments, the establishment of additional strategic
alliances, the cost of manufacturing facilities and of commercialization
activities, and the cost of product in-licensing and any possible acquisitions.
There can be no assurance that the Company's cash, cash equivalents and
marketable securities, including the net proceeds of this offering, and interest
income earned thereon, together with funding that may be received under the
Company's strategic alliances, will be adequate to satisfy its capital and
operating requirements.

Focal intends to seek additional funding through strategic alliances, and
may seek additional funding through public or private sales of the Company's
securities, including equity securities. In addition, the Company has obtained
equipment lease financing and other forms of debt financing and may continue to
pursue opportunities to obtain additional lease or debt financing in the future.
There can be no assurance, however, that additional equity or debt financing
will be available on reasonable terms, if at all. Any additional equity
financings would be dilutive to the Company's stockholders. If adequate funds
are not available, Focal may be required to curtail significantly one or more of
its research and development programs and/or obtain funds through arrangements
with corporate partners or others that may require Focal to relinquish rights to
certain of its technologies or product candidates. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."

LIMITED MANUFACTURING EXPERIENCE. The Company has only limited
manufacturing facilities for clinical and early commercial production of its
products and has limited experience in manufacturing its FOCALSEAL surgical
sealants. There can be no assurance that the Company will be able to attract,
train and retain the required personnel or will be able to increase its
manufacturing capability to manufacture commercial quantities of surgical
sealants in a timely manner, or at all. Manufacturers often encounter
difficulties in scaling up production of their products, including problems
involving production yields, quality control and assurance, component supply and
shortages of qualified personnel. The Company anticipates that it will need to
increase significantly its current manufacturing capacity to meet commercial
needs over the next several years and that it may need to establish off-site
manufacturing capacity to meet these anticipated needs. In addition, the Company
expects that it will need to identity and qualify additional sources for
materials and outsourced manufacturing processes. There can be no assurance that
the Company's manufacturing scale-up efforts will be successful or that
reliable, commercial manufacturing can be established or maintained at
commercially reasonable costs on a timely basis, or at all. The Company would
experience supply interruptions in the event it is unable to establish or
maintain commercial levels of polymer synthesis, as the Company's polymer
formulations are proprietary and are not available from third parties. In
addition, there can be no assurance that the Company will not encounter
unanticipated problems and delays in connection with its contract manufacturers
and suppliers. Delays associated with or difficulties encountered in
establishing commercial manufacturing, or problems encountered with contract
manufacturers and suppliers, would result in disruptions of product supply to
the Company's marketing partners and for use in clinical trials. In such event,
Ethicon could, under its agreement with the Company, commence manufacturing of
surgical sealants for sales in all territories outside North America. Any of the
foregoing would have a material adverse affect on the Company's business,
financial condition and results of operations.

The Company purchases raw materials used in its products from various
suppliers. Certain materials and components are currently purchased by the
Company from single sources. These materials have generally been readily
available in the marketplace and have not been the subject of shortages. There
can, however, be no assurance that the Company or its suppliers or contract
manufacturers will not experience materials shortages in the future. Any such
future shortages of materials or components could have a material adverse effect
on the Company's business, financial condition and results of operations.

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<PAGE>
the Company will be required to attain and maintain compliance with GMP
requirements and ISO 9001 standards. Failure to either attain or maintain
compliance with the applicable regulatory requirements of various regulatory
agencies would have a material adverse effect on the Company's business
financial condition and results of operations. These regulations require that
the Company maintain its documents in a prescribed manner with respect to
manufacturing, testing and control activities. Further, the Company and the
third party manufacturers of its products are required to comply with various
FDA requirements for design, safety, advertising and labeling. The Company has
not yet undergone an FDA GMP inspection and does not anticipate that it will
undergo such an inspection until after submission of its initial PMA application
for FOCALSEAL surgical sealants. See "Business--Manufacturing."

Complex medical devices, such as the Company's products, can experience
performance problems in the field that require review and possible corrective
action by the manufacturer. There can be no assurance that component failures,
manufacturing errors or design defects that could result in an unsafe condition
or injury to the patient will not occur. If any such failures or defects were
deemed serious, the Company could be required to withdraw or recall products,
which could result in significant costs to the Company. However, there can be no
assurance that market withdrawals or product recalls will not occur in the
future. Any future product problems could result in market withdrawals or
recalls of products, which could have a material adverse affect on the Company's
business, financial condition or results of operations.

LACK OF MARKETING AND SALES CAPABILITIES. The Company currently has no
experience in marketing or selling its products under development and does not
have a marketing and sales staff. In order to achieve commercial success for any
product approved by the FDA, Focal must either develop a marketing and sales
force or enter into arrangements with third parties to market and sell its
products. Although Focal has international marketing arrangements in place for
its surgical sealant products, there can be no assurance that Focal will
successfully develop such marketing capabilities or experience for United States
marketing efforts. If the Company develops its own marketing and sales
capabilities, it will compete with other companies that currently have
experienced and well funded marketing and sales operations. To the extent that
the Company enters into co-promotion or other marketing and sales arrangements
with other companies, any revenues to be received by Focal will be dependent on
the efforts of others, and there can be no assurance that such efforts will be
successful. See "Business--Sales and Marketing."

REIMBURSEMENT AND PRODUCT PRICING. Reimbursement and health care payment
systems in international markets vary significantly by country. In connection
with international product introductions, the Company and its strategic
marketing partners may be required to seek international reimbursement
approvals, although there can be no assurance that any such approvals will be
obtained in a timely manner, or at all, and failure to receive such
international reimbursement approvals could have an adverse effect on market
acceptance of the Company's products in the international markets in which such
approvals are sought. In the United States, health care providers, such as
hospitals and physicians, that purchase medical devices such as the Company's
products, generally rely on third-party payors, principally federal Medicare,
state Medicaid and private health insurance plans, to reimburse all or part of
the cost of surgical procedures. The Company anticipates that in a prospective
payment system, such as the DRG system utilized by Medicare, and in many managed
care systems used by private health care payors, there will be no separate,
additional reimbursement for the Company's products. Accordingly, the Company
believes that there will be no product or procedure reimbursement codes for the
Company's products. There can be no assurance that reimbursement for the
Company's products will be available in the United States or in international
markets under either governmental or private reimbursement systems. Furthermore,
the Company could be adversely affected by changes in reimbursement policies of
governmental or private health care payors. Failure by physicians, hospitals and
other users of the Company's products to obtain sufficient reimbursement from
health care payors for procedures in which the Company's products are used or
adverse changes in governmental and private third party payors' policies toward
reimbursement for such procedures would have a material adverse effect on the
Company's business, financial condition and results of operations. The Company's
business may be also materially adversely affected by the continuing

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efforts of government and third-party payors to contain or reduce the costs of
health care through various means. See "Business--Third Party Reimbursement."

UNCERTAINTY OF ABILITY TO ATTRACT AND RETAIN KEY MANAGEMENT, EMPLOYEES AND
CONSULTANTS. The Company is highly dependent on the principal members of its
management and scientific staff. The loss of services of any of these personnel
could impede the achievement of the Company's development objectives.
Furthermore, recruiting and retaining qualified scientific personnel to perform
research and development work in the future will also be critical to the
Company's success. There can be no assurance that the Company will be able to
attract and retain personnel on acceptable terms given the competition among
biotechnology, pharmaceutical and healthcare companies, universities and
non-profit research institutions for experienced scientists. In addition, the
Company relies on members of its Scientific Advisory Board and a significant
number of consultants to assist the Company in formulating its research and
development strategy. All of Focal's consultants and the members of the
Company's Scientific Advisory Board are employed by employers other than the
Company, and may have commitments to, or advisory or consulting agreements with,
other entities that may limit their availability to the Company. See
"Business--Scientific Advisors" and "Management."

POTENTIAL PRODUCT LIABILITY EXPOSURE; LIMITED INSURANCE COVERAGE. The use
of any of the Company's potential products in clinical trials, and the sale of
any approved products, may expose the Company to liability claims resulting from
the use of its products. These claims might be made directly by consumers,
health care providers or by pharmaceutical companies or others selling such
products. Focal has obtained product liability insurance coverage, subject to
certain policy limits, for its clinical trials. The Company intends to expand
its insurance coverage to include the sale of commercial products if marketing
approval is obtained for products in development. However, insurance coverage is
becoming increasingly expensive, and no assurance can be given that the Company
will be able to maintain insurance coverage at a reasonable cost or in
sufficient amounts to protect the Company against losses due to liability. There
can also be no assurance that the Company will be able to obtain commercially
reasonable product liability insurance for any products approved for marketing.
A successful product liability claim or series of claims brought against the
Company could have a material adverse effect on its business, financial
condition and results of operations.

HAZARDOUS MATERIALS; ENVIRONMENTAL MATTERS. The Company's research and
development processes involve the controlled use of hazardous materials. The
Company is subject to federal, state and local laws and regulations governing
the use, manufacture, storage, handling and disposal of such materials and
certain waste products. Although the Company believes that its safety procedures
for handling and disposing of such materials comply with the standards
prescribed by such laws and regulations, the risk of accidental contamination or
injury from these materials cannot be completely eliminated. In the event of
such an accident, the Company could be held liable for any damages that result
and any such liability could exceed the resources of the Company. The Company
believes that it is in compliance in all material respects with applicable
environmental laws and regulations. Accordingly, it does not expect to make
material capital expenditures for environmental control facilities in the
near-term. However, there can be no assurance that it will not be required to
incur significant costs to comply with environmental laws and regulations in the
future, or that the operations, business or assets of the Company will not be
materially adversely affected by the costs of compliance with current or future
environmental laws or regulations.

BROAD MANAGEMENT DISCRETION OVER USE OF PROCEEDS. The Company expects to
use a majority of the net proceeds to fund research and development activities,
clinical trials, expansion of marketing and sales activities, expansion of
manufacturing capabilities and capital expenditures. The Company is not
currently able to estimate precisely the allocation of the proceeds among such
uses, and a significant portion of the net proceeds have not been designated for
specific uses. In addition, the timing and amount of expenditures will vary
depending upon numerous factors. Accordingly, management of the Company will
have broad discretion with respect to the use of these funds and the
determination of the timing of expenditures. See "Use of Proceeds."

15
<PAGE>
NO PRIOR PUBLIC MARKET FOR COMMON STOCK. Prior to this offering, there has
been no public market for the Company's Common Stock, and there can be no
assurance that a regular trading market will develop and continue after this
offering or that the market price of the Common Stock will not decline below the
initial public offering price. The initial public offering price will be
determined through negotiations between the Company and the representatives of
the Underwriters and may not be indicative of the market price of the Common
Stock following this offering. Among the factors considered in such negotiations
are prevailing market conditions, certain financial information of the Company,
market valuations of other companies that the Company and the representatives of
the Underwriters believe to be comparable to the Company, estimates of the
business potential of the Company, the present state of the Company's
development and other factors deemed relevant. See "Underwriting."

VOLATILITY OF COMMON STOCK PRICE. The market prices for securities of
biotechnology and pharmaceutical companies have historically been highly
volatile, and the market has from time to time experienced significant price and
volume fluctuations that are unrelated to the operating performance of
particular companies. Factors such as fluctuations in the Company's operating
results, announcements of technological innovations or new therapeutic products
by the Company or others, clinical trial results, developments concerning
strategic alliance agreements, government regulation, developments in patent or
other proprietary rights, public concern as to the safety of products developed
by the Company or others, future sales of substantial amounts of Common Stock by
existing stockholders, comments by securities analysts and general market
conditions can have an adverse effect on the market price of the Common Stock.
In addition, the realization of any of the risks described in these "Risk
Factors" could have a dramatic and material adverse impact on market price of
the Company's Common Stock.

CONTROL BY EXISTING STOCKHOLDERS. After the completion of this offering,
current stockholders, including certain executive officers and directors of the
Company and their affiliates, will own approximately 81% of the outstanding
Common Stock. As a result, these stockholders will, to the extent they act
together, continue to have the ability to exert significant influence and
control over matters requiring the approval of the Company's stockholders,
including the election of a majority of the Company's Board of Directors. See
"Principal Stockholders."

SHARES ELIGIBLE FOR FUTURE SALE. Sales of Common Stock (including shares
issued upon the exercise of outstanding options) in the public market after this
offering could materially adversely affect the market price of the Common Stock.
Such sales also might make it more difficult for the Company to sell equity
securities or equity-related securities in the future. Based on the number of
shares of Common Stock outstanding at September 30, 1997 and assuming no
exercise of outstanding options or certain warrants after September 30, 1997,
upon the completion of this offering, the Company will have 12,865,337 shares of
Common Stock outstanding, of which the 2,500,000 shares offered hereby will be
freely tradable (unless held by affiliates of the Company) and the remaining
10,365,337 shares will be restricted securities within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"). These shares may be
sold in the public market only if registered, or pursuant to an exemption from
registration, including pursuant to Rules 144, 144(k) or 701 under the
Securities Act. All of the executive officers, directors, all stockholders and
optionholders of the Company are subject to lock-up agreements with the
Representatives or are otherwise subject to agreements with the Company
providing that, pursuant to the terms of such lock-up agreements (each a
"Lock-Up Agreement"), during the 180-day period beginning on the date of this
Prospectus, they will not sell or otherwise dispose of any shares of Common
Stock of the Company. Upon expiration of the Lock-Up Agreements, all of such
10,365,337 shares of Common Stock will become eligible for immediate public
resale, subject in some cases to volume limitations pursuant to Rule 144 at
various times over a period of less than one year following the completion of
this offering, subject in some cases to volume limitations. See "Shares Eligible
for Future Sale" and "Underwriting."

ADVERSE IMPACT OF EXPIRATION OR RELEASE OF SHARES FROM LOCK-UP
AGREEMENTS. The executive officers and directors of the Company and all
stockholders and optionholders of the Company have each agreed that, or are
otherwise subject to an agreement providing that, pursuant to the terms of a
lock-up agreement (the "Lock-Up Agreement"), during the 180-day period beginning
on the date of this Prospectus (the

16
<PAGE>
"Lock-Up Period") they will not, without the prior written consent of Lehman
Brothers Inc., directly or indirectly, offer, sell, contract to sell,
hypothecate or otherwise dispose (or enter into any transaction which is
designed to, or could be expected to, result in the disposition by any person)
of any shares of Common Stock of the Company, or any security convertible into
or exercisable for Common Stock of the Company, or any rights to purchase or
acquire, Common Stock of the Company (other than pursuant to bona fide gifts to
persons who agree in writing to be bound by the provisions of the Lock-up
Agreement). Lehman Brothers Inc. may in its sole discretion and at any time
without notice, release all or any portion of the securities subject to the
Lock-Up Agreement. In addition, upon expiration of the Lock-up Agreement,
substantially all of the shares subject to the Lock-up Agreement will be
eligible for immediate sale, other than shares held by officers, directors and
other affiliates of the Company which will be eligible for sale subject in some
cases to volume limitations. Furthermore, holders of 8,297,389 shares and
certain warrants outstanding immediately following the completion of this
offering will be entitled to registration rights with respect to such shares
upon termination of the Lock-Up Agreement. Sales of shares of Common Stock as a
result of the expiration of the Lock-up Agreement, the exercise of registration
rights or the early release of shares from the Lock-Up Agreement could have a
material adverse affect on the market price of the Company's Common Stock. See
"Shares Eligible for Future Sale," "Underwriting" and "Description of Capital
Stock."

POTENTIAL ADVERSE EFFECT OF ANTI-TAKEOVER PROVISIONS. The Company's
Certificate of Incorporation provides for staggered terms for the members of the
Board of Directors and does not provide for cumulative voting in the election of
directors. In addition, the Board of Directors of the Company may issue shares
of Preferred Stock without stockholder approval on such terms as the Board may
determine. The Company's Bylaws require advance notice of matters of business to
be brought before meetings of stockholders. The Company's Certificate of
Incorporation prohibits stockholders from acting by written consent. The rights
of the holders of Common Stock will be subject to, and may be adversely affected
by, the rights of the holders of any Preferred Stock that may be issued in the
future. Further, the Company is subject to Section 203 of the Delaware General
Corporation Law which, subject to certain exceptions, restricts certain
transactions and business combinations between a corporation and a stockholder
owning 15% of more of the corporation's outstanding voting stock (an "interested
stockholder") for a period of three years from the date the stockholder becomes
an interested stockholder. The staggered board terms, lack of cumulative voting,
Preferred Stock provision and other provisions of the Company's charter and
Delaware corporate law may discourage certain types of transactions involving an
actual or potential change in control of the Company.

In addition, the Company's Board of Directors has approved a Stockholders
Rights Plan under which a dividend of one right (a "Right") to purchase one
one-thousandth share of the Company's Series A Participating Preferred Stock
("Series A Preferred") for each outstanding share of Common Stock ("Common
Shares") of the Company has been declared and will be distributed to
stockholders of record as of the effective date of this offering. The Rights may
have the effect of rendering it more difficult or discouraging an acquisition of
the Company deemed undesirable by the Company's board of directors. The Rights
may cause substantial dilution to a person or group that attempts to acquire the
Company on terms or in a manner not approved by the Company's Board of
Directors, except pursuant to an offer conditioned upon the negation, purchase
or redemption of the Rights, and may therefore discourage or prevent certain
transactions involving an actual or potential change in control of the Company.
See "Description of Capital Stock."

IMMEDIATE AND SUBSTANTIAL DILUTION. Upon purchase of Common Stock,
investors will experience an immediate and substantial dilution of $8.91 per
share in the net tangible book value of the Common Stock they acquire in this
offering. Additional dilution is likely to occur upon the exercise of options,
warrants and conversion rights granted by the Company. See "Dilution" and
"Description of Capital Stock -- Registration Rights of Certain Holders."

ABSENCE OF CASH DIVIDENDS. The Company has never paid any cash dividends
and does not anticipate paying cash dividends in the foreseeable future. See
"Dividend Policy."

17
<PAGE>
USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,500,000 shares of
Common Stock offered hereby at an assumed initial public offering price of
$12.00 per share are estimated to be $27,300,000 ($31,485,000 if the
over-allotment option is exercised in full) after deducting underwriting
discounts and commissions and estimated offering expenses.

The Company expects to use the majority of the net proceeds to fund research
and development activities, clinical trials, expansion of manufacturing
capabilities and sales and marketing activities, and capital expenditures. The
Company anticipates using $2,500,000 of the net proceeds for the expansion of
its manufacturing facility for its surgical sealant products. The balance of the
net proceeds will be used for working capital and general corporate purposes.
Although the Company may use a portion of the net proceeds for the licensing or
acquisition of new products or technologies from others, the Company currently
has no specific commitments in this regard. The amounts actually expended for
each purpose and the timing of such expenditures may vary significantly
depending upon numerous factors, including the timing of regulatory actions
regarding the Company's potential future products, the costs and timing of
expansion of marketing, sales and manufacturing activities, results of clinical
trials and competition. In addition, there can be no assurance that any product
developed or introduced by the Company will be successfully commercialized or
that the Company will not exceed its current spending expectations. Pending the
foregoing uses, the Company intends to invest the net proceeds of this offering
in short-term, interest-bearing, investment grade securities. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."

DIVIDEND POLICY

The Company has never declared or paid any dividends on its capital stock.
The Company does not anticipate declaring or paying any cash dividends in the
foreseeable future.

18
<PAGE>
CAPITALIZATION

The following table sets forth as of September 30, 1997 (i) the actual
capitalization of the Company, and (ii) the capitalization of the Company on a
pro forma as adjusted basis to reflect the sale of the 2,500,000 shares of
Common Stock offered by the Company hereby (at an assumed initial public
offering price of $12.00 per share) and receipt of the proceeds therefrom, after
deducting underwriting discounts and commissions and estimated expenses payable
by the Company, and the conversion of all outstanding shares of Preferred Stock
into 8,117,803 shares of Common Stock, the exercise of warrants to purchase
19,496 shares of Common Stock and the restatement of the Company's Certificate
of Incorporation to provide for authorized capital stock consisting of
50,000,000 shares of Common Stock and 5,000,000 shares of undesignated Preferred
Stock upon completion of this offering. This table should be read in conjunction
with "Selected Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's financial
statements, including the notes thereto, included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
1997
-----------------------
<S> <C> <C>
PRO FORMA
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
Capital lease obligations, long-term portion............................................. $ 1,207 $ 1,207
---------- -----------
Stockholders' equity:
Preferred Stock, par value $.01 per share;
31,681,540 shares authorized; 24,345,247 shares issued and outstanding on an actual
basis; 5,000,000 shares authorized, none issued and outstanding
pro forma as adjusted(1)............................................................. 243 --
Common Stock, par value $.01 per share;
50,000,000 shares authorized; 2,228,038 shares issued and outstanding on an actual
basis, and 12,865,337 shares issued and outstanding pro forma as adjusted(2)(3)...... 22 129
Additional paid-in capital............................................................. 57,987 85,446
Unrealized loss on marketable securities............................................... (11) (11)
Notes receivable from related parties.................................................. (1,688) (1,688)
Deferred compensation.................................................................. (733) (733)
Accumulated deficit.................................................................... (45,032) (45,032)
---------- -----------
Total stockholders' equity........................................................... 10,788 38,111
---------- -----------
Total capitalization................................................................. $ 11,995 $ 39,318
---------- -----------
---------- -----------
</TABLE>

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

(1) For information regarding each series of Preferred Stock that will convert
into Common Stock upon the completion of this offering, including
information regarding the conversion ratio for each such series and the pro
forma effect of such conversion, see Note 5 of Notes to Financial
Statements.

(2) Excludes (i) 297,921 shares of Common Stock issuable upon the exercise of
stock options outstanding under the Company's 1992 Incentive Stock Plan at
September 30, 1997, and (ii) 179,586 shares issuable upon the exercise of
warrants that will remain outstanding following the completion of this
offering. See "Management--Incentive Stock Plans," "Certain Transactions,"
"Description of Capital Stock" and Note 5 of Notes to Financial Statements.

(3) For information regarding outstanding options and warrants, including
information regarding the exercise prices and expiration dates thereof, see
Note 5 of Notes to Financial Statements.

19
<PAGE>
DILUTION

The net tangible book value of the Company, at September 30, 1997, on a pro
forma basis to give effect to the conversion of all outstanding shares of
Preferred Stock into Common Stock and the exercise of warrants to purchase
19,496 shares of Common Stock upon the completion of this offering, was
$12,499,800 or approximately $1.21 per share of Common Stock. "Net tangible book
value" per share represents the amount of the Company's total tangible assets,
reduced by the amount of its total liabilities, divided by the pro forma number
of shares of Common Stock outstanding. After giving effect to the sale of the
2,500,000 shares of Common Stock offered hereby (assuming an initial public
offering price of $12.00 per share), after deducting underwriting discounts and
commissions and estimated offering expenses, the Company's pro forma net
tangible book value at September 30, 1997 would have been $39,799,800, or $3.09
per share. This represents an immediate increase in net tangible book value of
$1.88 per share to existing stockholders and an immediate dilution in net
tangible book value of $8.91 per share to new investors purchasing Common Stock
in the offering. The following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Assumed price to public........................................... $ 12.00
Pro forma net tangible book value per share at September 30,
1997.......................................................... $ 1.21
Increase per share attributable to new investors................ 1.88
---------
Pro forma net tangible book value per share after offering........ 3.09
---------
Dilution to new investors......................................... $ 8.91
---------
---------
</TABLE>

The following table summarizes, on a pro forma basis as of September 30,
1997, 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
existing stockholders and by investors purchasing shares in the offering (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....................... 10,365,337 81% $ 58,480,384 66% $ 5.64
New investors............................... 2,500,000 19% 30,000,000 34% 12.00
------------ --- ------------- ---
Total..................................... 12,865,337 100% $ 88,480,384 100%
------------ --- ------------- ---
------------ --- ------------- ---
</TABLE>

The foregoing computations assume no exercise of stock options or warrants
outstanding at September 30, 1997. At September 30, 1997, there were outstanding
stock options to purchase an aggregate of 297,921 shares of Common Stock at a
weighted average exercise price of $2.16 per share and warrants which are not
required to be exercised upon the completion of this offering to purchase an
aggregate of 179,586 shares of Common Stock at a weighted average exercise price
of $10.40 per share. To the extent these stock options and warrants are
exercised, there will be further dilution to purchasers in this offering. See
"Management--Incentive Stock Plans" and Note 5 of Notes to Financial Statements.

20
<PAGE>
SELECTED FINANCIAL DATA

The selected financial data set forth below for each year in the five year
period ended December 31, 1996 are derived from the financial statements of
Focal, Inc. which have been audited by Ernst & Young LLP, independent auditors.
The financial data for the nine month periods ended September 30, 1997 and 1996
are derived from unaudited financial statements. The unaudited financial
statements include all adjustments, consisting of normal recurring accruals,
which Focal considers necessary for a fair presentation of the financial
position and the results of operations for these periods. Operating results for
the nine months ended September 30, 1997 are not necessarily indicative of the
results that may be expected for the entire year ending December 31, 1997. This
data should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's financial
statements, related notes and other financial information included elsewhere in
this Prospectus.

<TABLE>
<CAPTION>
NINE
MONTHS
ENDED
SEPTEMBER
YEAR ENDED DECEMBER 31, 30,
-------------------------------------------------------- ---------
<S> <C> <C> <C> <C> <C> <C>
1992 1993 1994 1995 1996 1996
--------- --------- ---------- ---------- ---------- ---------

<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Collaborative research revenue......................... $ -- $ -- $ 50 $ 968 $ 3,098 $ 2,349
Operating expenses:
Research and development........................... 1,793 7,405 11,890 9,665 11,680 8,735
General and administrative......................... 466 1,925 2,034 2,098 2,175 1,518
--------- --------- ---------- ---------- ---------- ---------
Total operating expenses............................... 2,259 9,330 13,924 11,763 13,855 10,253
--------- --------- ---------- ---------- ---------- ---------
Loss from operations................................... (2,259) (9,330) (13,874) (10,795) (10,757) (7,904)
Interest income........................................ 6 357 668 443 691 515
Interest expense....................................... 13 44 79 107 92 71
--------- --------- ---------- ---------- ---------- ---------
Net income (loss)...................................... $ (2,266) $ (9,017) $ (13,285) $ (10,459) $ (10,158) $ (7,460)
--------- --------- ---------- ---------- ---------- ---------
--------- --------- ---------- ---------- ---------- ---------
Pro forma net income (loss) per
share (1)............................................ $ (1.23) $ (.93)
---------- ---------
---------- ---------
Shares used in computing pro forma net income (loss)
per share (1)........................................ 8,271 8,001
---------- ---------
---------- ---------
<CAPTION>

SEPTEMBER
30, 1997
---------
DECEMBER 31,
--------------------------------------------------------
1992 1993 1994 1995 1996 ACTUAL
--------- --------- ---------- ---------- ---------- ---------
(IN THOUSANDS)
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C> <C>
Cash, cash equivalents and marketable securities....... $ 6,945 $ 19,027 $ 12,240 $ 6,948 $ 12,208 $ 13,215
Working capital........................................ 6,320 17,776 10,159 4,401 9,003 9,254
Total assets........................................... 7,173 20,936 15,331 9,306 14,089 16,491
Capital lease obligations, long-term portion........... -- 602 934 462 315 1,207
Total stockholders' equity............................. 6,471 18,556 11,626 5,995 10,099 10,788

<S> <C>
1997
-----------

<S> <C>
STATEMENT OF OPERATIONS DATA:
Collaborative research revenue......................... $ 12,831
Operating expenses:
Research and development........................... 10,929
General and administrative......................... 2,106
-----------
Total operating expenses............................... 13,035
-----------
Loss from operations................................... (204)
Interest income........................................ 731
Interest expense....................................... 81
-----------
Net income (loss)...................................... $ 446
-----------
-----------
Pro forma net income (loss) per
share (1)............................................ $ .04
-----------
-----------
Shares used in computing pro forma net income (loss)
per share (1)........................................ 10,551
-----------
-----------

PRO FORMA
AS
ADJUSTED
(2)
-----------

BALANCE SHEET DATA:
<S> <C>
Cash, cash equivalents and marketable securities....... $ 40,538
Working capital........................................ 36,577
Total assets........................................... 43,814
Capital lease obligations, long-term portion........... 1,207
Total stockholders' equity............................. 38,111
</TABLE>

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

(1) See Note 1 of Notes to Financial Statements for information concerning the
calculation of pro forma net income (loss) per share.

(2) Pro forma as adjusted to reflect the sale of the 2,500,000 shares of Common
Stock offered hereby at an assumed initial public offering price of $12.00
per share and the receipt of the estimated net proceeds therefrom and the
automatic conversion of all outstanding shares of Preferred Stock into
8,117,803 shares of Common Stock and the exercise of warrants to purchase
19,496 shares of Common Stock upon the completion of this offering. See "Use
of Proceeds."

21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the Company's
financial statements, including the notes thereto, appearing elsewhere in this
Prospectus.

OVERVIEW

The Company was founded in 1991 and is focused on the development,
manufacture and commercialization of synthetic, absorbable, liquid surgical
sealants based on the Company's proprietary polymer technology. Since inception,
the Company has funded its operations primarily through the private placement of
equity securities. In addition, the Company has entered into strategic alliances
with corporate partners and has recorded revenues totaling $16.9 million through
September 30, 1997 in connection with these alliances.

The Company has incurred net losses in each year since its inception,
including net losses of approximately $10.2 million during 1996. At September
30, 1997, the Company had an accumulated deficit of $45 million. The Company's
profitability during the nine months ended September 30, 1997 resulted primarily
from the receipt of a one-time non-refundable payment of $7.0 million as well as
receipt of quarterly research and development funding under the Company's
strategic alliance with Ethicon, Inc., a division of Johnson and Johnson
("Ethicon"), for FOCALSEAL surgical sealants. The Company's operating losses
have resulted primarily from expenses incurred in connection with the Company's
research and development activities, including preclinical and clinical trials,
development of manufacturing processes and general and administrative expenses.
The Company expects to incur net losses into 1999 and may incur net losses in
subsequent periods although the amount of future net losses and time required by
the Company to reach profitability are highly uncertain. The Company is
dependent upon corporate partners for funding of a significant portion of
research and development expenses. If the Company does not continue to receive
funding from its current corporate partners, or is unable to otherwise obtain
third-party funding, net losses will continue to increase. Focal does not expect
to generate revenues from the sale of products until the first half of 1998. The
Company's ability to achieve and sustain profitability will be dependent upon
obtaining regulatory approval for and successfully commercializing its FOCALSEAL
surgical sealants, and developing the manufacturing capacity and sales and
marketing capability for its products. There can be no assurance that Focal will
obtain required regulatory approvals, or successfully develop, manufacture,
commercialize and market products or that the Company will ever record product
revenues or achieve profitability.

To date, the Company has not recorded any product revenues. The Company
expects to introduce its first commercial product, FOCALSEAL-L for lung surgery
indications, in Europe in the first half of 1998 through its strategic marketing
alliance with Ethicon. The Company anticipates that revenues derived from
European sales of the Company's FOCALSEAL surgical sealants will account for a
substantial majority of the Company's near term product revenues. The Company
must obtain a CE mark before Ethicon can market FOCALSEAL in the member
countries of the European Union. Any delays or other difficulties encountered by
the Company in obtaining such CE mark would have a material adverse effect on
the Company's business, financial condition and results of operations.

RESULTS OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996

Revenues for the nine months ended September 30, 1997 increased to $12.8
million from $2.3 million for the nine months ended September 30, 1996, due to
higher collaborative research and development funding, which comprised all of
the Company's revenues during both periods. The increase in the 1997 period was
due primarily to a strategic alliance entered into with Ethicon in January 1997.
Revenues recorded in connection with this strategic alliance for the nine months
ended September 30, 1997 included a one-time non-refundable payment of $7.0
million, as well as funding of $1.25 million per quarter for research and
development activities.

22
<PAGE>
Research and development expenses increased to $10.9 million for the nine
months ended September 30, 1997 from $8.7 million for the nine months ended
September 30, 1996. This increase resulted from the hiring of additional
research and development personnel in 1997, as well as increased clinical trials
and manufacturing start-up costs.

General and administrative expenses increased to $2.1 million for the nine
months ended September 30, 1997 from $1.5 million for the nine months ended
September 30, 1996. General and administrative expenses during these periods
consisted primarily of personnel costs, which increased due to the hiring of
additional administrative personnel.

Interest income increased to $731,000 for the nine months ended September
30, 1997 from $515,000 for the nine months ended September 30, 1996 as a result
of higher average cash balances.

The Company recorded net income of approximately $446,000 for the nine
months ended September 30, 1997. The Company's profitability was primarily the
result of a one-time payment and quarterly funding of research and development
by Ethicon. The Company does not expect profitability to continue in the near
term and anticipates that it will incur net operating losses into 1999.

YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

Revenues for 1996 increased to $3.1 million from $968,000 in 1995. Revenues
during both years consisted of research and development funding from corporate
partners. The increase was due to a strategic alliance signed in April 1996 with
Novartis Corporation and Chiron Corporation. Revenues recorded in connection
with corporate alliances in 1996 include one-time payments, milestone payments
and funding for research and development activities.

Research and development expenses increased to $11.7 million in 1996 from
$9.7 million in 1995, due to the hiring of research personnel and increased
clinical trial expenses.

General and administrative expenses increased to $2.2 million in 1996 from
2.1 million in 1995 and consisted primarily of personnel costs.

Interest income increased to $691,000 in 1996 from $443,000 in 1995 due to
higher cash balances as a result of a $19.7 million private placement completed
in April 1996.

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

Revenues for 1995 increased to $968,000 from $50,000 for 1994 due to an
increase in collaborative research and development funding. This increase was
due to receipt of funding for a local drug delivery program. Revenues recorded
in connection with this funding arrangement in 1995 included up-front payments
and funding for research and development activities.

Research and development expenses decreased to $9.7 million for 1995 from
$11.9 million for 1994 due to a reduction in personnel in the first quarter of
1995. In addition, the Company incurred significant costs in 1994 in connection
with a clinical trial conducted in Europe. There were no clinical trials
conducted in 1995.

General and administrative expenses were $2.1 million for 1995 and $2.0
million for 1994 and consisted primarily of personnel costs. Increases in
general consulting costs were offset by decreases in certain other
administrative expenses.

Interest income decreased to $443,000 for 1995 from $668,000 for 1994. Cash
balances were higher in 1994 as compared to 1995 due to the completion of a
private placement in 1994.

LIQUIDITY AND CAPITAL RESOURCES

Since its inception, the Company has financed operations primarily from the
sale of preferred stock in private placements. Through September 30, 1997, the
Company has raised approximately $58.5 million from equity financings and has
received $5.3 million in equipment lease financing. In addition, the Company has
received funding from Novartis, Chiron and Ethicon totaling approximately $17.1
million through September 30, 1997.

23
<PAGE>
Cash provided by operations totaled $2.1 million for the nine months ended
September 30, 1997 as compared to the use of $5.9 million for the same period of
1996. The change in cash from operations was due to the achievement of net
income for the nine months ended September 30, 1997 as compared to a net loss of
$7.4 million for the same period of 1996. Cash used in operations is equal to
the net loss incurred for each period, less non-cash charges such as
depreciation and amortization of property and equipment in addition to any
changes in working capital.

Capital expenditures from inception through September 30, 1997 totaled $5.8
million, representing laboratory equipment, office furniture and equipment,
computers and certain leasehold improvements. The majority of these purchases
have been financed through either direct financing leases or sale and leaseback
arrangements. As of September 30, 1997, the Company did not have any material
commitments for future capital expenditures. In the next 12 to 18 months, the
Company anticipates capital expenditures of approximately $2.5 million for
manufacturing facilities and related equipment. The Company has commitments from
lenders, in the form of term loans and lease lines, totaling $2.5 million to
provide for its expected capital needs during 1997 and 1998. As of September 30,
1997, the Company had drawn down $1.4 million under these credit facilities.

The Company believes that its existing capital resources, together with the
net proceeds of this offering, interest income and future payments due under
strategic alliances, will be sufficient to satisfy its current and projected
funding requirements for at least 18 months. Under the Company's surgical
sealant collaboration agreement with Ethicon, the Company will receive fixed
quarterly research and development funding of $750,000 per quarter through 1998.
The Company also receives quarterly research and development funding under its
collaboration agreement with Novartis and Chiron for local drug delivery;
however, such agreement (including the funding obligations of Novartis and
Chiron) is terminable upon 90 days notice. The Company may receive additional
payments under these agreements upon achievement of specified development
milestones; however, as such payments are dependent upon the achievement of such
milestones, there can be no assurance as to the receipt or timing of any such
payments. Under certain agreements with universities and consultants, the
Company is obligated to make payments for sponsored research and consulting
services. The Company's research funding commitments under these agreements
totalled approximately $402,000 at December 31, 1996. Payments under these
agreements are typically made on a quarterly or monthly basis. There can be no
assurance that the net proceeds of this offering and the Company's other capital
resources will be sufficient to enable the Company to conduct its research and
development programs as planned. The Company's future capital requirements will
depend on many factors, including continued scientific progress in its research
and development programs and the magnitude of these programs, progress with
preclinical testing and clinical trials, the time and costs involved in
obtaining regulatory approvals, if any, the costs involved in filing and
prosecuting patent applications and enforcing patent claims, competing
technological and market developments, the establishment of additional strategic
alliances, the cost of manufacturing facilities and of commercialization
activities and arrangements, and the cost of product in-licensing and any
possible acquisitions. There can be no assurance that the Company's cash, cash
equivalents and marketable securities including the net proceeds of this
offering, and interest income earned thereon, together with funding that may be
received under the Company's strategic alliances, will be adequate to satisfy
its capital and operating requirements.

24
<PAGE>
BUSINESS

GENERAL

Focal develops, manufactures and commercializes synthetic, absorbable,
liquid surgical sealants based on the Company's proprietary polymer technology.
The Company's family of FOCALSEAL surgical sealant products is currently being
developed for use inside the body with or without sutures and staples to seal
leaks resulting from lung, neuro, cardiovascular and gastrointestinal surgery.
FOCALSEAL-L, the Company's first surgical sealant product, will initially be
used to seal air leaks following lung surgery. The Company has entered into an
exclusive marketing and distribution agreement for its surgical sealant products
outside North America with Ethicon, a worldwide leader in surgical wound closure
products. The Company anticipates commercial launch of FOCALSEAL-L for lung
surgery indications in Europe through Ethicon in the first half of 1998.

There are more than 4 million open and minimally invasive lung, neuro,
cardiovascular and gastrointestinal surgical procedures performed annually
worldwide in which air or fluid leaks may arise in an unpredictable and
unexpected manner, and in which the Company's products, if approved, may be
effective in reducing post-surgical leaks. Patients with persistent air or fluid
leaks may require prolonged hospitalization, have more complications and have
higher levels of post-operative pain, and a higher risk of mortality. Sutures
and staples, the principal products comprising the over $2.0 billion worldwide
wound closure market, do not have inherent sealing capabilities, and therefore
cannot consistently eliminate air and fluid leakage at the wound site. Focal's
liquid surgical sealants adhere rapidly to underlying tissue, expand and
contract with tissue, withstand air and fluid pressure, and are designed to
provide an effective seal to reduce the incidence of air and fluid leaks
following surgery. FOCALSEAL surgical sealants, which are biocompatible remain
intact through the critical wound healing period and are then absorbed and
eliminated by the body. The Company believes the use of its FOCALSEAL liquid
surgical sealants could potentially shorten patient recovery times and hospital
stays and reduce post-surgical complications.

Focal is currently developing two principal surgical sealant formulations,
FOCALSEAL-L and FOCALSEAL-S, for a broad range of applications inside the body.
The Company has completed a 60-patient, multicenter, randomized, controlled
clinical trial in Europe involving use of FOCALSEAL-L in sealing air leaks
following lung surgery. In the trial, following surgery with standard sutures
and staples and prior to randomization, it was determined that 79% of all
patients had intraoperative air leaks. FOCALSEAL-L was shown to be 100%
effective in sealing intraoperative air leaks in the 30 patients who were
randomized into the treated group. In the other patients, who were randomized
into the untreated group and received sutures and staples alone, only 27% were
free of intraoperative air leaks. In September 1997, the Company initiated a
pivotal, 180-patient, multicenter clinical trial in the United States under a
conditional IDE to evaluate FOCALSEAL-L in sealing intraoperative and
postoperative air leaks following lung surgery. The Company expects to submit a
PMA for lung surgery indications to the FDA by the end of 1998.

FOCALSEAL-S, the Company's second surgical sealant formulation, is absorbed
by the body more quickly than FOCALSEAL-L and is designed for applications in
which shorter sealing duration is desired. FOCALSEAL-S will initially be used to
seal fluid leaks following neurosurgery. The Company expects to commence a
clinical trial in Europe for this indication in mid-1998. The Company believes,
based upon preclinical evaluation of its polymers, that its FOCALSEAL-L and
FOCALSEAL-S formulations, which are designed to have absorption times that
parallel long-term and short-term synthetic absorbable polymer sutures,
respectively, will also be widely applicable to cardiovascular surgery,
gastrointestinal surgery and other surgical applications.

25
<PAGE>
coronary angioplasty procedures. The Company has entered into a collaboration
with Novartis and Chiron under which these companies are funding development of
a polymer-based local drug delivery system for anti-restenosis agents being
developed by them. In connection with the collaboration, Novartis and Chiron
received worldwide marketing and distribution rights for this indication. In
addition, the Company is developing tissue coatings to prevent the formation of
post-surgical adhesions, excessive scar tissue which attaches to surrounding
tissue and can cause serious complications, particularly in abdominal and
gynecological surgeries. The Company intends to enter into other collaborations
with pharmaceutical companies for additional drug delivery and tissue coating
indications.

During the past three years, the Company has been engaged primarily in the
development of the polymer formulations for its FOCALSEAL surgical sealant
products and the delivery devices that are used to deliver these products. In
addition, the Company has devoted resources to its other product development
programs and research and development initiatives. In addition, in 1996 the
Company commenced clinical trials of FOCALSEAL-L in Europe and in 1997, the
Company commenced clinical trials of FOCALSEAL-L in the United States.

SURGICAL SEALANT MARKET OPPORTUNITY

Effective closure of internal wounds following surgical procedures is
critical to the restoration of the function of injured and diseased tissue and
the ultimate success of the surgical procedure. Failure to effectively seal
surgical wounds can result in leakage of air in lung surgeries, cerebral spinal
fluid in neurosurgeries, blood in cardiovascular surgeries, and gastrointestinal
contents in gastrointestinal surgeries. Air and fluid leaks resulting from
surgical procedures can lead to significant post-surgical morbidity resulting in
prolonged hospitalization, higher levels of post-operative pain and
complications and a higher mortality rate.

The current annual worldwide market for wound closure products, consisting
primarily of surgical sutures and staples, is estimated at over $2 billion.
Sutures and staples facilitate healing by joining wound edges and allowing the
body to heal naturally. However, because sutures and staples do not have
inherent sealing capabilities, they cannot consistently eliminate air and fluid
leakage at the wound site. This is particularly the case when sutures and
staples are used to close tissues containing air or fluids under pressure, such
as the lobes of the lung, the dural membrane surrounding the brain and spinal
cord, blood vessels and the gastrointestinal tract. In addition, in minimally
invasive surgical procedures, where the physician must operate through small
access devices, it can be more difficult and time-consuming for the physician to
place sutures and staples as compared to open surgical procedures. The Company
believes that the use of surgical sealants with or without sutures and staples
in minimally invasive procedures could enhance the efficacy of these procedures
through more effective and rapid wound closure.

The limitations of sutures and staples in sealing certain air and fluid
leaks have led to the adaptation of other technologies for wound closure. These
alternatives include the use of liquid fibrin glues and nonliquid collagen patch
products. Fibrin glues, which were originally developed as hemostatic agents,
have limited efficacy in many surgical sealant applications because they do not
adhere strongly to, or move and expand with, underlying tissue, particularly
moist tissue. In spite of these limitations, annual international sales of
fibrin glue sealants are estimated at $250 million. Collagen patches have
similar limitations, in that they are not highly adherent, strong or elastic. In
addition, both collagen patches and fibrin glues are absorbed by enzymatic
reaction. Enzymatic reaction can result in variable absorption time from patient
to patient, depending upon metabolic rates, and can potentially result in
absorption prior to healing of the surgical site. Collagen patches and fibrin
glues are derived from animal by-products, including bovine collagen and bovine
and/or human plasma. These derivatives have resulted in significant safety
concerns, and are reported to be one of the primary reasons fibrin glues have
not received FDA approval for United States commercial sales. Furthermore, the
wound closure industry has undergone a significant shift away from animal
derived materials to synthetic materials due to the more predictable absorption,
superior

26
<PAGE>
performance characteristics and safety of synthetic sutures. Currently, the
Company estimates that over 65% of suture material is synthetic, as compared to
only approximately 25% in 1975.

Due to the limitations of sutures and staples in achieving rapid, leakproof
wound closure and the inadequacy of animal by-product sourced glues and patches,
Focal believes that a significant market opportunity exists for its synthetic,
absorbable, liquid, surgical sealants.

FOCAL'S SYNTHETIC POLYMER TECHNOLOGY

Focal's family of surgical sealants and its other products under development
are based on the Company's proprietary synthetic, absorbable, liquid formulation
polymer technology. The Company's polymers are designed to incorporate several
beneficial characteristics, including adherence to tissue, strength, flexibility
and elasticity, consistent absorption, and safety and biocompatibility, which
are critical to their use as surgical sealants and in other clinical
applications.

The Company's proprietary polymer formulations are comprised of polyethylene
glycol ("PEG"), other synthetic components and water. PEG and other synthetic
components comprise approximately 10-20% of the Company's synthetic liquid
formulation polymers and are widely used in other medical products approved for
use inside the body, such as IV-administered pharmaceuticals, synthetic
absorbable sutures, bone and dental cements, pain medications and eye drops.
Water comprises the other 80-90% of Focal's formulations. The Company combines
PEG and other synthetic components in various proprietary polymer formulations
in order to control characteristics such as viscosity, setting time, strength,
absorption, flexibility and elasticity. This enables the Company to tailor
polymers for particular applications. A key distinguishing characteristic of the
Company's polymer formulations is that they are applied as liquids and are
photopolymerized by light into solid gels inside the body, a process known as
photopolymerization. The solid gel formed after the light has been applied is
highly flexible, elastic and transparent and strongly adheres to moist or dry
tissue. The design and macromer composition of the Company's polymers enable
them to polymerize quickly without generating heat, which is a significant
clinical advantage over other IN VIVO polymerizable materials.

The key technological hurdle which the Company overcame in the development
of its synthetic, liquid surgical sealants was the crucial need to adhere
strongly to moist tissue surfaces. The Company's sealants adhere to tissue as a
result of a proprietary two-step priming and sealing process. To use FOCALSEAL,
the physician first applies a liquid primer which penetrates the uneven surfaces
of spongy, porous tissue. Once the primer is brushed on, the sealant is applied
over the primer and both are exposed to a standard wavelength of visible light.
The primer and sealant contain a photoinitiator which enables them to polymerize
rapidly upon exposure to light, a process known as photopolymerization. The
viscosity and rapid photopolymerization characteristics of the Company's
surgical sealants enable the physician to apply the sealant where desired and
avoid significant run off of the material prior to polymerization. Surgeons can
perform the entire surgical sealant application process quickly and efficiently
after limited training.

The key properties of the Company's synthetic liquid polymers are:

- ADHERENCE TO TISSUE. The Company's FOCALSEAL surgical sealants adhere
strongly to both moist and dry tissue, a requirement for effective
sealants which, to the Company's knowledge, has not been adequately
demonstrated by alternative technologies in clinical applications. The
combination of a viscous liquid formulation polymer incorporating a
photoinitiator enables the Company's polymers to adhere to tissue when
applied as a liquid and to polymerize rapidly when exposed to light.

- STRENGTH, FLEXIBILITY AND ELASTICITY. The composition of the Company's
polymers provides a high degree of strength, flexibility and elasticity,
enabling them to stretch with the tissue to which they are applied. These
qualities are especially significant when the polymers are used in areas
where resistance to air and fluid pressure is critical, including the
lungs, the dural membrane surrounding the brain, the vascular system and
the gastrointestinal tract.

27
<PAGE>
- CUSTOMIZABLE POLYMER CHARACTERISTICS. By modifying the chemical
composition of its polymers, the Company is able to control
characteristics such as viscosity, setting time, strength, absorption,
flexibility and elasticity. The customizable nature of the Company's
polymer technology enables Focal to design and develop products with
characteristics and properties that are tailored for specific clinical
indications.

- HYDROLYTIC ABSORPTION. The Company's synthetic polymers are designed to
be predictably broken down by water, a process known as hydrolysis, and
are absorbed by the body over a specified period of time depending upon
their chemical composition. As a result, the Company's polymers should
have a relatively consistent absorption profile from patient to patient.
Collagen patches and fibrin glues are absorbed by enzymatic reaction,
which can vary significantly from patient to patient depending upon an
individual's metabolism, and can potentially result in these products
being absorbed before the wound site is completely healed.

- SAFETY AND BIOCOMPATIBILITY. Focal's synthetic polymers are comprised of
materials which are commonly found in other medical products approved for
use in humans. The PEG backbone allows the resulting formulations to be
water-soluble and biocompatible, resulting in minimal reaction with the
tissue to which the polymer is applied. In addition, the absence of animal
or human derived by-products eliminates safety concerns related to
transmission of blood borne diseases such as HIV and hepatitis.
Preclinical toxicology testing of FOCALSEAL-L and FOCALSEAL-S, and initial
clinical trials of FOCALSEAL-L in Europe, indicate that these biomaterial
formulations are nontoxic.

- TRANSPARENCY. The Company's polymers are transparent, enabling the
physician to observe the underlying tissue to which the polymers have
adhered to confirm sufficient coverage of the wound site. Other products
used as surgical sealants, including fibrin glues and collagen patches,
are not transparent.

The Company has also developed proprietary systems to deliver its surgical
sealants and other products to the wound site. Easy to use brush applicators
have been designed by the Company to apply its FOCALSEAL surgical sealants and
primer over tissue surfaces. The Company also employs a light source and light
wand to generate and deliver consistent amounts of light necessary for
photopolymerization of its surgical sealants. The Company has also developed a
proprietary double balloon catheter system for use with its restenosis drug
delivery polymers. This catheter system is designed for use with standard
guidewires used in interventional cardiology procedures.

BUSINESS STRATEGY

- MARKET FOCALSEAL SURGICAL SEALANT PRODUCTS THROUGH ETHICON INTERNATIONALLY
AND ESTABLISH ITS OWN DIRECT SALES FORCE IN NORTH AMERICA. The Company
will market and sell its surgical sealant products internationally through
Ethicon and intends to develop its own direct sales force for North
America concurrent with receipt of appropriate marketing approvals. The
Company's agreement with Ethicon will enable the Company to introduce its
surgical sealant products internationally through

28
<PAGE>
Ethicon's extensive sales, marketing and distribution infrastructure. The
Company believes that international commercialization of its surgical
sealants may contribute to more rapid adoption in the United States
following receipt of FDA approvals.

- DEVELOP NEW PRODUCTS BY LEVERAGING ITS PROPRIETARY POLYMER
TECHNOLOGY. Focal's versatile polymers provide a broad technology
platform for the development of new products. The Company's novel
synthetic polymer technology allows for the modification of formulations
yielding properties well-suited to a variety of indications, including
surgical sealants, post-surgical adhesion prevention and local drug
delivery.

- COMMERCIALIZE FOCALSEAL SURGICAL SEALANTS TO PARALLEL THE EXISTING MARKET
FOR SYNTHETIC ABSORBABLE SUTURES. The Company intends to develop
formulations for FOCALSEAL surgical sealants to parallel the absorption
times of long- and short-term synthetic absorbable polymer sutures. The
Company is developing FOCALSEAL-L, a long-term absorbable sealant
initially for use in lung surgery indications, where long-term absorbable
sutures are typically used, and FOCALSEAL-S, a short-term absorbable
sealant intially for use in neurosurgery indications, where short-term
absorbable sutures are typically used. The Company believes this strategy
may result in accelerated adoption of the Company's sealant products by
practitioners.

- FUND NEW RESEARCH AND DEVELOPMENT INITIATIVES THROUGH CORPORATE
COLLABORATIONS. The Company intends to obtain funding for major research
and development initiatives through strategic relationships with corporate
partners. Through September 30, 1997, the Company's strategic
relationships with Ethicon for surgical sealants and Novartis and Chiron
for restenosis drug delivery have provided the Company with over $17.1
million of research and development funding for these programs. The
Company may, however, commence future research and development initiatives
on its own and may seek strategic partner funding for such initiatives as
programs develop or if a strategic relationship can provide significant
advantages for product development, clinical or regulatory support or
marketing and distribution.

- RETAIN PROPRIETARY, AND OUTSOURCE NON-PROPRIETARY, MANUFACTURING
PROCESSES. The Company intends to manufacture its proprietary polymer
formulations in-house, and use third-party contract manufacturers for most
nonproprietary, high volume processes and the provision of system
components. The Company believes that this strategy will enable the
Company to protect its intellectual property, accelerate manufacturing
scale-up and reduce costs as production volume increases.

- EXPANSION OF OPERATIONS. The Company intends to expand its corporate
operations over the next several years to accommodate anticipated
commercialization of its FOCALSEAL surgical sealant products. The Company
intends to expand its manufacturing capacity, either at the Company's
current facility or at a new location and develop a direct sales force in
the United States. The Company has budgeted capital expenditures of
approximately $2.5 million for expansion of surgical sealant manufacturing
capacity. The Company will also incur expenditures in connection with
development of a United States sales force. Expansion of manufacturing and
sales and marketing efforts will require the Company to recruit, hire and
train additional manufacturing, sales and marketing personnel.

29
<PAGE>
PRODUCTS AND PRODUCT DEVELOPMENT PROGRAMS

The following table summarizes the status of the Company's products and
research and product development programs:
<TABLE>
<CAPTION>
MARKETING RIGHTS
PRODUCT ------------------------------------------
DEVELOPMENT PROGRAM INDICATION STATUS NORTH AMERICA INTERNATIONAL
-------------------- ------------------- ---------------------------------------- ------------------------ ---------------
<S> <C> <C> <C> <C>
Surgical Sealants
--------------------
FOCALSEAL-L Lung surgery Awaiting European marketing approval; Focal Ethicon
Pivotal U.S. clinical trial underway

FOCALSEAL-S Neurosurgery Preclinical (1); European clinical trial Focal Ethicon
expected to be initiated in mid-1998

FOCALSEAL-L or S Cardiovascular Preclinical(1) Focal Ethicon
surgery

FOCALSEAL-L or S Gastrointestinal Preclinical(1) Focal Ethicon
surgery

Local Drug
Delivery -----------
<S> <C> <C> <C> <C>
Restenosis Cardiovascular Preclinical(1) (2) Novartis/ Chiron Novartis/
prevention restenosis Chiron

Tissue Coatings
--------------------
Post-surgical Gynecological, Preclinical(1) Focal (3)
adhesion abdominal and neuro
prevention adhesions
</TABLE>

(1) "Preclinical" refers to formulation development and laboratory
experimentation in animal models, including animal efficacy, safety and
toxicology testing.

(2) The Company is currently involved in preclinical development of a drug
delivery system based on its polymer technology. In addition, the Company's
marketing partners are engaged in preclinical development of anti-restenosis
compounds which may be delivered using the Company's drug delivery system.
The Company's ability to develop a restenosis drug delivery product will be
dependent not only on the Company's development efforts but on the
development efforts of the Company's collaborative partners, the safety and
efficacy of any anti-restenosis compounds they develop and the ability of
the Company's marketing partners to conduct clinical trials of, obtain
regulatory approvals for and successfully commercialize any such products.

(3) The Company and Ethicon are negotiating a possible additional collaboration
for this field and there can be no assurance that the Company will
successfully enter into this collaboration.

FOCALSEAL SURGICAL SEALANT PRODUCTS

Focal is developing its FOCALSEAL-L and FOCALSEAL-S liquid surgical sealants
for use inside the body with or without sutures and staples to seal leaks
resulting from lung, neuro, cardiovascular and gastrointestinal surgery.
FOCALSEAL is expected to be used as an adjunct to sutures and staples in most
indications; however, the Company believes there are numerous occasions where
FOCALSEAL can be used in lieu of sutures and staples. In lung surgery,
FOCALSEAL-L can be used to seal air leaks in areas of the lung where sutures and
staples are ineffective. In neurosurgery, FOCALSEAL-S can potentially reduce the
number of sutures needed to close the dura in cranial procedures and can replace
sutures in spinal surgery where their use can be ill-advised due to the
proximity of the spinal cord. The FOCALSEAL surgical sealant system consists of
a procedure kit containing primer and sealant solutions and disposable
applicators, a light source used for photopolymerization of the polymer, and a
reusable light wand. The Company's surgical sealant products

30
<PAGE>
will be marketed outside North America by Ethicon, a world leader in surgical
wound closure products. The Company has retained North American marketing rights
to all of its FOCALSEAL surgical sealants.

FOCALSEAL-L FOR LUNG SURGERY. The Company is developing FOCALSEAL-L to seal
air leaks resulting from lung surgery. During lung surgery, air leaks can
develop in the lung tissue that has been traumatized during surgery and can
unpredictably occur along staple and suture lines. Approximately 260,000 lung
surgery procedures, primarily for the treatment of lung cancer, are performed
worldwide each year including 130,000 such procedures in the United States.
According to the Company's European clinical trial data, 79% of patients
undergoing lung surgery experience intraoperative air leaks that are not
resolved with sutures or staples. Approximately 15% of lung surgery patients
have air leaks that persist longer than seven days and approximately 5-10% of
patients have air leaks that are severe enough to warrant additional surgical
intervention.

As air leaks from the lung it accumulates in the thoracic cavity, making
breathing difficult as the lung cannot expand and contract normally. As a
result, patients require insertion of chest drainage tubes to vent accumulated
air. These chest tubes prolong pain and limit patient mobility. In addition to
undergoing prolonged hospitalization until the air leaks are resolved, patients
with persistent air leaks must receive more intense nursing observation and care
while in the hospital than patients who do not experience air leaks. This
additional hospitalization and more intensive care, as well as the additional
surgical procedures needed for patients whose air leaks are severely prolonged,
result in substantial additional health care costs. Because it is often not
possible to determine at the conclusion of surgery which air leaks are likely to
be prolonged or sustained, the Company believes that FOCALSEAL-L may be used
prophylactically in major lung surgery procedures.

The Company has completed a 60-patient, multicenter, controlled, randomized
clinical trial in Europe involving use of FOCALSEAL-L in sealing air leaks
following lung surgery. Of the 60 patients in the study, the initial four were
pilot patients and the remaining 56 were randomized into the treated or
nontreated group. In the study, prior to randomization, it was determined that
79% of the patients had air leaks following the use of standard sutures and
staples. FOCALSEAL-L was 100% effective in sealing intraoperative air leaks in
the 30 patients who were randomized into the treated group. By contrast, of the
patients in the untreated group who received sutures and staples alone, only 27%
were free of intraoperative air leaks.

The Company is awaiting CE mark approval for European commercialization and
anticipates receiving such approval in late-1997. In September 1997, the Company
completed a CE mark and ISO 9001 standards site audit, which is one of the
principal steps in the CE mark approval process. Subject to receipt of CE mark
approval, the Company expects to commercially introduce FOCALSEAL-L for lung
surgeries in Europe in the first half of 1998 through its strategic marketing
alliance with Ethicon. See "--Strategic Alliances--Ethicon--a division of
Johnson & Johnson."

The protocol for the European clinical trial called for application of
FOCALSEAL-L to all lung tissues that could potentially leak postoperatively.
This included the end of the bronchial segment, known as the bronchial stump,
leading to the diseased lung lobe that was removed during surgery. In lung
surgeries, the bronchial stump is carefully closed with sutures or staples.
During the trial, a higher than anticipated incidence of insufficient wound
healing at the bronchial stump was observed in patients in the treated group.
The bronchial stump typically heals through tissue overgrowth from surrounding
areas. Based upon its review and analysis of the clinical data, the Company
believes that in those cases in which FOCALSEAL-L was applied directly to the
bronchial stump it may have acted as a barrier to such tissue overgrowth,
thereby slowing natural healing of the bronchial stump. As a result of this
observed clinical event, the protocol for the United States clinical trial of
FOCALSEAL-L prohibits its use on the bronchial stump. The clinical data from the
Company's European trial indicates that this limitation will not result in
reduced efficacy of the product. Intraoperative air leaks rarely occur at the
bronchial stump, and were not observed there during the study. These clinical
observations were provided to the European regulatory body as part

31
<PAGE>
of the CE mark approval process and to the FDA as part of the IDE submission for
the Company's United States clinical trial.

In September 1997, pursuant to a conditionally approved IDE, the Company
initiated a 180-patient, pivotal, multicenter clinical trial in the United
States involving the use of FOCALSEAL-L in sealing intraoperative and
postoperative air leaks following lung surgery. The IDE allows for enrollment of
patients at up to seven sites and the Company plans to initially conduct the
study at four clinical sites. The Company believes that enrollment in this
clinical trial will be completed in the first half of 1998 and that it will
submit a PMA to the FDA for FOCALSEAL-L by the end of 1998. Based on
communications to date, the FDA may require the Company to pursue clinical trial
endpoints that were not the subject of the European clinical trial which could
result in delays or adversely affect the success of the clinical trial. In the
event that the Company is required to pursue these endpoints, it may be more
difficult for the Company to demonstrate the efficacy of FOCALSEAL-L in the
United States trial than in the European trial, which could result in delays in
or adversely affect the success of the clinical trial. Approval of a PMA
application for FOCALSEAL-L will be required prior to commercial sales in the
United States.

FOCALSEAL-S FOR NEUROSURGERY. The Company is developing FOCALSEAL-S to seal
the dura, a membrane that encapsulates the brain and spinal cord and contains
cerebral spinal fluid ("CSF") for cushioning and support. In cranial surgeries,
the neurosurgeon must open the cranium and penetrate the dura. Following
surgery, the neurosurgeon must meticulously suture the dura in an attempt to
achieve leakproof closure, a process that requires the use of up to hundreds of
small sutures. Approximately 185,000 cranial surgeries are performed annually in
the United States, and the Company estimates that 370,000 of such procedures are
performed annually worldwide. Leakage of CSF has been reported to occur in
approximately 15% of these procedures. CSF leakage can result in infections,
including meningitis, caused by the passage of infectious agents through the
dural leak, as well as debilitating headaches resulting from settling of the
brain onto the spinal cord due to the loss of CSF. The Company believes that,
because CSF leaks can occur unpredictably in cranial surgeries, FOCALSEAL-S may
be used prophylactically in cranial surgery procedures.

In 1996, neurosurgeons at two major universities demonstrated the safety and
efficacy of FOCALSEAL-S in sealing CSF leaks in cranial surgeries in a
randomized, controlled large animal study. This work was presented at the 1997
meetings of the American Association of Neurological Surgeons and the Southern
Neurological Society. The Company expects to initiate a human clinical trial of
FOCALSEAL-S in cranial surgery applications in Europe in mid-1998.

In spinal surgeries, the surgeon seeks to avoid penetration of the dura.
According to published literature, inadvertent penetration of the dura occurs in
up to approximately 13% of the approximately 800,000 spinal surgeries that are
performed annually worldwide. Penetration of the dura can result in leakage of
CSF with potential complications similar to those that can arise in cranial
surgeries. When inadvertent penetration of the dura occurs in spinal surgeries,
the surgeon generally does not elect to use sutures to close the dural leak due
to the risk of injuring the spinal cord with the suturing needle.

CARDIOVASCULAR SURGICAL SEALANT. Focal is evaluating use of its FOCALSEAL
surgical sealants for use in sealing anastomoses (the attachment of vessels in
surgical procedures) and arteriotomies (the surgical removal of a portion of an
artery for use in a bypass graft) in cardiovascular surgeries, of which
approximately 1.3 million are performed annually worldwide. These procedures
include both open and minimally invasive coronary artery bypass graft ("CABG")
surgeries and other vascular surgical procedures. In most cardiovascular
surgical procedures, vascular anastomoses are closed with sutures. These
anastomoses use both blood vessel grafts from the patient's own veins or
arteries, which occasionally leak, and synthetic grafts, which regularly leak.
In minimally invasive CABG surgeries, achievement of a leakproof vascular
anastomosis can be particularly difficult and time consuming because the small
access ports through which the surgeon must operate can make placement of
sutures difficult. Failure to achieve a leakproof vascular graft anastomosis can
result in sudden blood leaks that may potentially be life-threatening. These
complications can add significant costs to cardiovascular procedures by
increasing the

32
<PAGE>
level of care required and prolonging hospitalization. The Company's sealants
have been shown to be effective in sealing high pressure vascular leaks in
several preclinical large animal models. The Company and Ethicon are currently
preparing the preclinical development plans for this indication.

GASTROINTESTINAL SURGICAL SEALANT. Focal is evaluating use of its FOCALSEAL
surgical sealants to prevent leakage of gastrointestinal contents following
gastrointestinal surgery. Leakage can occur as a result of incomplete
anastomosis of the portions of the digestive tract being operated upon and may
result in infections, delayed healing or fibrosis. Clinically significant
gastrointestinal tract leakage is most prevalent and unpredictable in esophageal
and large bowel surgeries. Approximately 1.5 million gastrointestinal surgeries
are performed annually worldwide, including approximately 400,000 esophageal and
large bowel surgeries. Postoperative leaks are reported to occur up to 5% of
large bowel surgeries and up to 25% of esophageal surgeries. The Company
believes that, due to the unpredictable nature of leaks in these procedures,
FOCALSEAL surgical sealant may be used prophylactically. The Company's sealants
have been shown to be effective in sealing gastrointestinal leaks in several
preclinical large animal models. The Company and Ethicon are currently preparing
the preclinical development plans for this indication.

LOCAL DRUG DELIVERY FOR CARDIOVASCULAR RESTENOSIS PREVENTION

Focal's polymers have properties that enable them to incorporate and deliver
drugs over a sustained period of time at local disease sites. Focal is currently
developing a drug delivery system that is designed to coat the interior wall of
the coronary artery (with or without a metallic stent) with a synthetic polymer
following angioplasty procedures to provide a depot for sustained local delivery
of drugs. These drugs can potentially reduce the proliferation of tissue that
leads to the renarrowing of the artery, a condition known as restenosis. The
Company has developed a proprietary delivery device, consisting of a double
balloon catheter with a fiber optic cable, for depositing and photopolymerizing
its polymer coating. Focal has entered into a collaboration with Novartis and
Chiron to develop a system for local delivery of their anti-restenosis
compounds.

The Company has demonstrated in large animal studies the ability to coat the
interior wall of the coronary artery with an adherent coating that remains in
place for up to 14 days. The Company has also shown in preclinical animal
studies the ability to locally deliver drugs from this polymer coating over a
period of up to 14 days. Focal's drug delivery product will require substantial
additional preclinical development work and animal studies before human clinical
trials can be commenced. Furthermore, the utility of Focal's drug delivery
product will be dependent upon the efficacy of the anti-restenosis compounds
that will be delivered to the angioplasty site using Focal's product.
Accordingly, this project will require substantial additional development
funding which will be provided primarily by the Company's strategic partners,
and has a very high degree of development risk. In addition, the Company's
agreement with Novartis and Chiron may be terminated by such parties upon 90
days notice with or without cause at any time, including any time prior to
development of a product or commencement of human clinical trials. In the event
of any such termination, the Company anticipates that it would terminate or
significantly scale back this research program.

TISSUE COATING FOR POST-SURGICAL ADHESION PREVENTION

The Company is exploring the development of its synthetic, liquid
formulation polymers as coatings that could be applied to surgical sites with
the objective of preventing the growth of post-surgical adhesions. Post-surgical
adhesions develop as a result of wound healing and scar formation triggered by
surgical trauma to tissue. These adhesions develop as part of the body's normal
healing process when surgical sites are in proximity to other tissues and are
typically most serious in gynecological and abdominal surgeries. There are
approximately 1 million gynecological and 1 million abdominal surgical
procedures performed annually worldwide in which post-surgical adhesion
formation may occur. Depending upon the type of surgical procedure, adhesions
can become symptomatic and cause serious complications, including infertility,
abdominal pain and bowel obstruction, and reduced mobility.

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In connection with the Company's collaborative agreement with Ethicon for
surgical sealants, the Company and Ethicon are negotiating a possible additional
collaboration in this area. There can be no assurance that the Company will
successfully enter into this collaboration.

OTHER RESEARCH AND DEVELOPMENT INITIATIVES

The Company has identified several additional potential applications for its
proprietary synthetic, liquid formulation polymer technology. These include
tissue and membrane reinforcement, periodontal infection control, orthopedic
surgery, other drug delivery applications, vascular grafts and nonvascular
stenting. All of these projects are at an early research stage, and the Company
is not currently devoting a significant amount of resources to any of these
projects. Accordingly, there can be no assurance that the Company will continue
any of these research initiatives, that any of such research initiatives will
result in the identification of product formulations that demonstrate sufficient
promise in animal models to enable them to become candidates to enter human
clinical trials, or that any products for which the Company is able to seek and
obtain regulatory approvals and introduce commercially either in the United
States or internationally will result from these efforts.

RESEARCH AND DEVELOPMENT EXPENDITURES

During the years ended December 31, 1994, 1995 and 1996 and the nine months
ended September 30, 1997, the Company incurred expenses of $11.9, $9.7, $11.7
and $10.9 million, respectively, on research and development activities,
including amounts funded by the Company's strategic partners.

STRATEGIC ALLIANCES

Focal's commercial strategy is to develop its products both independently
and in collaboration with strategic corporate partners, including pharmaceutical
companies and medical device companies. The Company's strategic corporate
relationships are described below.

ETHICON (A DIVISION OF JOHNSON & JOHNSON)

In January 1997, the Company entered into an exclusive Distribution, License
and Supply Agreement with Ethicon, Inc., a division of Johnson & Johnson, for
the research, development and commercialization of the Company's surgical
sealant products (the "Ethicon Agreement"). Ethicon received marketing rights
for all surgical sealant indications in all territories outside North America,
while the Company retained manufacturing rights worldwide and marketing rights
for North America and receives a royalty on all Ethicon sales. The Ethicon
Agreement outlines the basis and timetable for the development, supply,
marketing, packaging and distribution of FOCALSEAL-L and FOCALSEAL-S for use
intraoperatively as surgical sealants for lung surgery and neurosurgery
indications and other indications. The Ethicon Agreement also establishes a
framework for additional funding for the development of cardiovascular,
gastrointestinal and other surgical sealant indications. Ethicon will continue
to receive marketing rights outside North America to new surgical sealants as
they are developed.

The Ethicon Agreement provided the Company a one-time, non-refundable
payment of $7.0 million for research and development. During 1997 and 1998,
Ethicon is also obligated to provide Focal with development funding and, if and
to the extent certain regulatory milestones are achieved, milestone payments.
The initial payment, research and development funding and milestone payments for
the FOCALSEAL-L and FOCALSEAL-S surgical sealants will aggregate $18.0 million
over the term of the agreement. Through September 30, 1997, the Company had
received $12.0 million from Ethicon under the Ethicon Agreement.

Focal is responsible for obtaining the CE mark for its FOCALSEAL-L and
FOCALSEAL-S sealants for lung surgery and neurosurgery indications,
respectively. Ethicon is responsible for obtaining regulatory clearances and
approvals in Japan and countries outside of the European Union. Focal is
responsible for manufacturing products covered by the collaboration. Ethicon
will pay Focal a specified percentage of net

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sales of surgical sealant products manufactured by Focal and shipped to Ethicon.
In addition, in the event Focal is unable to achieve specified supply targets or
is in non-compliance with the manufacturing standards established for the CE
mark and by Ethicon, Ethicon has the right to manufacture surgical sealants for
sale in all territories outside North America. Such manufacturing rights, if
they are exercised by Ethicon, will be royalty-bearing and non-exclusive.

The agreement is terminable upon specified events including material breach
by either party or bankruptcy or insolvency of either party. In addition,
Ethicon may terminate the agreement at any time after January 2000 upon 12
months' prior written notice with or without cause.

In addition, in connection with the Ethicon Agreement, the Company and
Ethicon are negotiating a possible additional collaboration in the post-surgical
adhesions prevention area. There can be no assurance that the Company will
successfully enter into this collaboration.

NOVARTIS PHARMACEUTICALS, INC. AND CHIRON CORPORATION

The Company entered into a strategic alliance with Novartis and Chiron in
April 1996 for the development of non-surgical, vascular restenosis prevention
therapy products. The agreement grants Novartis and Chiron a worldwide license
for the use of the Focal polymer-based drug delivery technology in the
restenosis field. Focal retains manufacturing rights for its drug delivery
products developed under the collaboration, provided it is able to meet the
product supply requirements of Novartis or Chiron. Supply of pharmaceuticals
will be the responsibility of Novartis and Chiron.

Under the terms of the agreement, Novartis and Chiron have agreed to fund
research and development expenses and make certain milestone payments upon
achievement of certain preclinical, clinical, regulatory and commercial
milestones. In addition, Novartis and Chiron have agreed to pay for all expenses
incurred for human clinical testing of the products in development under the
collaboration. Focal will contribute its local drug delivery technology,
including its liquid, synthetic, bioabsorbable polymers and its delivery
catheters. Novartis and Chiron will pay Focal a specified percentage of net
sales of products incorporating Focal's drug delivery technology. Novartis and
Chiron have worldwide exclusive marketing rights for the products under
development. Through September 30, 1997, Focal had received $5.1 million in
research and development funding from Novartis and Chiron.

Either Novartis or Chiron have the right to terminate its respective
participation in the research collaboration with the Company upon 90 days
notice, with or without cause, without affecting the rights of the other
parties. Termination of the agreement will relieve Novartis and Chiron of
obligations to make any additional payments for unaccrued research and
development expenses, milestone payments, clinical trial costs or royalties and
transfer payments for products manufactured by Focal. In the event of
termination of funding by Novartis and Chiron, the Company anticipates that it
would terminate or significantly scale back its restenosis drug delivery
research program.

PATENTS AND PROPRIETARY RIGHTS

The Company believes that patents and other proprietary rights are important
to its business. The Company's policy is to file patent applications to protect
technology, inventions and improvements to its inventions that are considered
important to its business and that provide a competitive advantage. Focal also
relies on trade secrets, general know-how, in-licensing opportunities and
continuing technological innovation.

The Company has received, licensed or believes it has the option or right to
license 17 issued United States patents and six foreign patents corresponding to
certain of the issued United States patents, has 12 additional United States
patent applications that have been allowed and has 21 patent applications
pending in the United States, as well as foreign counterparts of certain of
these applications. The issued United States patents have expiration dates
ranging from 2010 to 2015. These patents and patent applications cover certain
aspects of the Company's photopolymerizable polymer formulations, surgical

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sealant compositions and methods, and designs for delivery devices. These
patents and patent applications are either held directly by Focal, or the
Company has licensed or believes it has rights to license these patents. The
Company has licensed from the University of Texas and Endoluminal Therapeutics,
Inc. (a company controlled by one of the Company's founding scientists)
worldwide rights to certain technologies which are the subject of issued patents
and pending patent applications based upon technologies developed by two of the
Company's founders. These licenses are terminable in the event of failure by the
Company to pay scheduled royalties, failure to commercialize products in the
fields covered by these licenses and under certain other conditions. Because of
the substantial length of time and expense associated with bringing new products
through the development and regulatory approval processes in order to reach the
marketplace, the medical products industry places considerable importance on
obtaining patent and trade secret protection for new technologies, products and
processes. Accordingly, the Company intends to seek patent protection for its
proprietary technology, products and processes.

The Company's success will depend in part on its ability to obtain patent
protection for its products, preserve its trade secrets, prevent third parties
from infringing upon its proprietary rights, and operate without infringing upon
the proprietary rights of others, both in the United States and internationally.
There can be no assurance that the Company's pending or future patent
applications will issue, or that the claims of the Company's issued patents, or
any patents that may issue in the future will provide any competitive advantages
for the Company's products or that they will not be successfully challenged,
narrowed, invalidated or circumvented in the future. Moreover, litigation and
interference or opposition proceedings associated with enforcing or defending
patents or trade secrets is expensive and can divert the efforts of technical
and management personnel. The Company has filed patent applications in certain
foreign countries corresponding to certain patent applications that it filed in
the United States and may file additional patent applications inside and outside
the United States. The Company believes that obtaining foreign patents may be
more difficult than obtaining domestic patents because of differences in patent
laws and believes the protection afforded by foreign patents or any other
foreign intellectual property protection, if obtained, may be more limited than
that provided domestically. In addition, there can be no assurance that
competitors will not seek to apply for and obtain patents that will prevent,
limit or interfere with the Company's ability to make, use, import and sell its
products. The Company is aware that certain medical device, pharmaceutical and
other companies, universities and research institutions have filed patent
applications or have issued patents relating to the compositions and methods for
wound closure and adhesion prevention. In addition, the medical device and
pharmaceutical industry has been characterized by extensive litigation regarding
patents and other intellectual property rights, and many companies in the
medical device industry have employed intellectual property litigation to gain a
competitive advantage. There can be no assurance that litigation will not be
brought against the Company by third parties in the future challenging the
Company's patent rights or claiming infringement by the Company of patents held
by the third parties. Because patent applications in the United States are
confidential until the patents issue, and publication of discoveries in the
scientific and patent literature tends to lag behind actual discoveries by
several months, the Company cannot be certain that Company inventors or
licensors were the first to conceive of inventions covered by pending patent
applications or that Company was the first to file patent applications for such
inventions.

The Company may be required or find it desirable to obtain licenses to
patents or proprietary rights of others. No assurance can be given that any
licenses required under any patents or proprietary rights of third parties would
be made available on terms acceptable to the Company, or at all. If the Company
does not obtain such licenses, it could encounter delays in product
introductions while it attempts to design around such patents, or could find
that the development, manufacture or sale of products requiring such licenses is
foreclosed. Litigation may be necessary to defend against or assert claims of
patent infringement or invalidity, to enforce or defend patents issued to the
Company, to protect trade secrets or know-how owned by the Company, or to
determine the scope and validity of the proprietary rights of others. In
addition, interference proceedings declared by the United States Patent and
Trademark Office, or opposition proceedings in a foreign patent office, may be
necessary to determine the priority of inventions

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with respect to patent applications of the Company or its licensors. Litigation,
interference or opposition proceedings could result in substantial costs to and
diversion of effort by the Company, and adverse determinations in any such
proceedings could have a material adverse effect on the business, financial
condition or results of operations of the Company.

The Company also relies upon unpatented trade secrets and improvements,
unpatented know-how and continuing technological innovation to develop and
maintain its competitive position, which it seeks to protect, in part, by
confidentiality agreements with its commercial partners, collaborators,
employees and consultants. The Company also has invention or patent assignment
agreements with its employees and certain, but not all, commercial partners and
consultants. There can be no assurance that relevant inventions will not be
developed by a person not bound by an invention assignment agreement. There can
be no assurance that binding 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 discovered by competitors.

GOVERNMENT REGULATION

UNITED STATES

The Company's proposed products and its research and development activities
are subject to regulation by numerous governmental authorities, principally, the
FDA and corresponding state and foreign regulatory agencies. The Federal Food,
Drug, and Cosmetic Act (the "FDC Act"), as amended, the regulations promulgated
thereunder, and other federal and state statutes and regulations, govern, among
other things, the preclinical and clinical testing, manufacture, safety,
efficacy, labeling, storage, record keeping, advertising and promotion of
medical devices and drugs, including the products currently under development by
the Company. Product development and approval within this regulatory framework
take a number of years and involves the expenditure of substantial resources.

In the United States, medical devices are classified into three different
classes, class I, II and III, on the basis of controls deemed necessary to
reasonably ensure the safety and effectiveness of the device. Class I devices
are subject to general controls (E.G., labeling, premarket notification and
adherence to FDA's good manufacturing practices ("GMPs")) and class II devices
are subject to general and special controls (E.G.,performance standards,
postmarket surveillance, patient registries, and FDA guidelines). Generally,
class III devices are those which must receive premarket approval by the FDA to
ensure their safety and effectiveness (E.G., life-sustaining, life-supporting
and implantable devices, or new devices which have been found not to be
substantially equivalent to legally marketed devices).

Before a new medical device can be marketed, marketing clearance must be
obtained through a premarket notification under Section 510(k) of the FDC Act or
a premarket approval ("PMA") application under Section 515 of the FDA Act. A
510(k) clearance will typically be granted by the FDA if it can be established
that the device is substantially equivalent to a "predicate device," which is a
legally marketed class I or II device or a preamendment class III device (I.E.
one that has been marketed since a date prior to May 28, 1976) for which the FDA
has not called for PMAs. The FDA has been requiring an increasingly rigorous
demonstration of substantial equivalence and this may include a requirement to
submit human clinical trial data. It generally takes four to twelve months from
the date of a 510(k) submission to obtain clearance, but it may take longer.

The FDA may determine that a medical device is not substantially equivalent
to a predicate device, or that additional information is needed before a
substantial equivalence determination can be made. A "not substantially
equivalent" determination, or a request for additional information, could
prevent or delay the market introduction of new products that fall into this
category. For any devices that are cleared through the 510(k) process,
modifications or enhancements that could significantly affect the safety or
effectiveness, or that constitute a major change in the intended use of the
device, will require new 510(k) submissions.

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A PMA application must be filed if a proposed device is not substantially
equivalent to a legally marketed class I or class II device, or if it is a
preamendment class III device for which the FDA has called for PMAs. A PMA
application must be supported by valid scientific evidence to demonstrate the
safety and effectiveness of the device, typically including the results of
clinical trials, bench tests, and laboratory and animal studies. The PMA must
also contain a complete description of the device and its components, and a
detailed description of the methods, facilities and controls used to manufacture
the device. In addition, the submission must include the proposed labeling,
advertising literature, and any training materials. The PMA process can be
expensive, uncertain and lengthy, and a number of devices for which FDA approval
has been sought by other companies have never been approved for marketing.

Upon receipt of a PMA application, the FDA makes a threshold determination
as to whether the application is sufficiently complete to permit a substantive
review. If the FDA determines that the PMA application is sufficiently complete
to permit a substantive review, the FDA will accept the application for filing.
Once the submission is accepted for filing, the FDA begins an in-depth review of
the PMA. The FDA review of a PMA application generally takes one to three years
from the date the PMA is accepted for filing, but may take significantly longer.
The review time is often significantly extended by the FDA asking for more
information or clarification of information already provided in the submission.
During the review period, an advisory committee, typically a panel of
clinicians, may be convened to review and evaluate the application and provide a
recommendation to the FDA as to whether the device should be approved. The FDA
accords substantial weight to the recommendation but is not bound by it. Toward
the end of the PMA review process, the FDA generally will conduct an inspection
of the manufacturer's facilities to ensure compliance with applicable GMP
requirements, which include elaborate testing, control documentation and other
quality assurance procedures. The Company has not yet undergone an FDA GMP
inspection and does not anticipate that it will undergo such an inspection until
after filing of its initial PMA application for FOCALSEAL surgical sealants.

If FDA evaluations of both the PMA application and the manufacturing
facilities are favorable, the FDA may issue either an approval letter or an
approvable letter, which usually contains a number of conditions that must be
met in order to secure final approval of the PMA. When and if those conditions
have been fulfilled to the satisfaction of the FDA, the agency will issue a PMA
approval letter, authorizing marketing of the device for certain indications. If
the FDA's evaluation of the PMA application or manufacturing facilities is not
favorable, the FDA will deny approval of the PMA application or issue a
"non-approvable" letter. The FDA may determine that additional clinical trials
are necessary, in which case the PMA may be delayed for one or more years while
additional clinical trials are conducted and submitted in an amendment to the
PMA. Modifications to a device that is the subject of an approved PMA, its
labeling or manufacturing process may require approval by the FDA of PMA
supplements or new PMAs. Supplements to a PMA often require the submission of
the same type of information required for an initial PMA, except that the
supplement is generally limited to that information needed to support the
proposed change from the product covered by the original PMA.

If human clinical trials of a device are required, either for a 510(k)
submission or a PMA application, and the device presents a "significant risk,"
the sponsor of the trial (usually the manufacturer or the distributor of the
device) must file an investigational device exemption ("IDE") application prior
to commencing human clinical trials. The IDE application must be supported by
data, typically including the results of animal and laboratory testing. If the
IDE application is approved by the FDA and one or more appropriate Institutional
Review Boards ("IRBs"), human clinical trials may begin at a specific number of
investigational sites with a specific number of patients, as approved by the
FDA. If the device presents a "nonsignificant risk" to the patient, a sponsor
may begin the clinical trial after obtaining approval for the study by one or
more appropriate IRBs without the need for FDA approval. Submission of an IDE
does not give assurance that FDA will approve the IDE and, if it is approved,
there can be no assurance that FDA will determine that the data derived from the
studies support the safety and efficacy of the device or warrant the
continuation of clinical studies. Sponsors of clinical trials are permitted to
sell investigational devices distributed in the course of the study provided
such compensation does not exceed recovery of the

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costs of manufacture, research, development and handling. An IDE supplement must
be submitted to and approved by the FDA before a sponsor or investigator may
make a change to the investigational plan that may affect its scientific
soundness or the rights, safety or welfare of human subjects.

The Company's FOCALSEAL surgical sealant products will be regulated as a
class III medical device and will require PMA approval prior to being marketed
in the United States. Although the Company has received an IDE from the FDA
permitting the Company to conduct clinical trials of FOCALSEAL-L for lung
surgery in the United States, and such clinical study has recently commenced,
there can be no assurance that data from such studies will demonstrate the
safety and effectiveness of the FOCALSEAL-L product or will adequately support a
PMA application for the product. See "Risk Factors--Early Stage of Clinical
Testing and Lack of Extensive Clinical Data." In addition, the Company will be
required to obtain additional IDEs for other applications of FOCALSEAL and for
other products that the Company develops that are regulated by the FDA as
medical devices. There is no assurance that data, typically the results of
animal and laboratory testing, that may be provided by the Company in support of
future IDE applications will be deemed adequate for the purpose of obtaining IDE
approval or that the Company will obtain approval to conduct clinical studies of
any such future product.

If clearance or approval is obtained, any device manufactured or distributed
by the Company will be subject to pervasive and continuing regulation by the
FDA. The Company will be subject to routine inspection by the FDA and will have
to comply with the host of regulatory requirements that usually apply to medical
devices marketed in the United States, including labeling regulations, GMP
requirements, the Medical Device Reporting ("MDR") regulation (which requires a
manufacturer to report to the FDA certain types of adverse events involving its
products), and the FDA's prohibitions against promoting products for unapproved
or "off-label" uses. The Company's failure to comply with applicable regulatory
requirements could result in enforcement action by the FDA, which could have a
material adverse effect on the Company's business, financial condition and
results of operations.

Other products that the Company is developing, including the products for
restenosis drug delivery, are likely to be regulated as drugs requiring FDA
approval of a new drug application ("NDA") prior to commercialization in the
United States. The new drug approval process is generally considered more
onerous, costly and lengthy than the PMA process, often requiring more extensive
preclinical and clinical testing, and many products for which NDAs have been
submitted by other companies have never been approved for marketing.

Before clinical studies of a new drug can begin, an investigational new drug
("IND") application must be submitted to the FDA. FDA regulations provide that
human clinical trials may begin 30 days following submission of an IND
application, unless the FDA advises otherwise or requests additional
information, clarification or additional time to review the application. An IND
application contains extensive preclinical data and information about the drug.
There can be no assurance that the Company will develop sufficient data and
information to submit an IND for its restenosis delivery products or that such
data and information if submitted, would be sufficient for the purposes of
commencing clinical studies of the products. Delays in the receipt of or failure
to obtain FDA authorization to begin or continue clinical trials could have a
material adverse effect on the Company's business, financial condition or
results of operations.

Clinical testing of a new drug involves the administration of the drug to
healthy human volunteers or to patients under the supervision of a qualified
principal investigator, usually a physician, pursuant to an FDA reviewed
clinical study protocol and under the auspices of an IRB at each institution at
which the study will be conducted. Human clinical trials carried out pursuant to
an IND, typically are conducted in three sequential phases, but the phases may
overlap. Phase I trials consist of testing the product in a small number of
patients or normal volunteers, primarily for safety, in one or more dosages, as
well as characterization of a drug's pharmacokinetic and/or pharmacodynamic
profile. In Phase II, in addition to safety, the efficacy of the product is
evaluated in a patient population. Phase III trials typically involve additional
testing for safety and clinical efficacy and an expanded population at
geographically dispersed

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sites. All clinical studies must be conducted in conformance with FDA's
bioresearch monitoring regulations and the FDA may order the temporary or
permanent discontinuance of a clinical trial at any time, for a variety of
reasons. There is no assurance that if the Company is permitted to commence
clinical trials that the data collected from one phase of clinical trials will
support continuing to the next phase clinical trials.

Data from clinical trials must be submitted to the FDA in an NDA to
demonstrate the safety and effectiveness of the drug. The NDA must also include
information pertaining to the preparation of the drug substance, analytical
methods, drug product formulation, details on the manufacture of finished
products and proposed product packaging and labeling. The application review
process generally takes one to three years and may take substantially longer if,
among other things, the FDA has questions or concerns about the safety and/or
efficacy of a product. During the review period, an expert advisory committee
may be convened to review the application and provide recommendations as to
whether the drug should be approved. The FDA accords substantial weight to the
panel's recommendation but is not bound by it. The submission of an NDA does not
assure FDA approval for marketing. The FDA ultimately may decide that the
application does not satisfy its regulatory criteria for approval. If an NDA is
approved, its approval may be conditioned on the results of post-approval
clinical tests to confirm safety and efficacy of the drug (so-called Phase IV
clinical trials). There can be no assurance that data from any clinical trials
will demonstrate the safety and effectiveness of the product being studied or
otherwise support NDA approval. Delays in the receipt of or failure to obtain
NDA approval could have a material adverse effect on the Company's business,
financial condition and results of operations.

In addition, the FDA may impose restrictions on the use of the drug that may
make it difficult and expensive to administer. Product approvals may be
withdrawn if compliance with regulatory requirements are not maintained or if
problems occur after the product reaches the market. After a product is approved
for a given indication in an NDA, subsequent new indications or dosage levels
for the same product are reviewed by FDA via the filing and upon approval of a
NDA supplement. The NDA supplement is more focused than the NDA and often deals
primarily with safety and effectiveness data related to the new indication or
dosage. Finally, FDA requires reporting of certain safety and other information
that becomes known to a manufacturer of an approved drug.

If the FDA believes that a company is not in compliance with law, it can
institute proceedings to detain or seize products, issue a recall, enjoin future
violations and assess civil and criminal penalties against the Company, its
officers and its employees. Failure to comply with the regulatory requirements
could have material adverse effect on the Company's business, financial
condition and results of operations. In addition, regulations regarding the
manufacture and sale of the Company's products are subject to change. The
Company cannot predict the effect, if any, that such changes might have on its
business, financial condition or results of operations.

Among the requirements for product approval is the requirement that the
prospective manufacturer conform to the FDA's GMP regulations for drugs. In
complying with the GMP regulations, manufacturers must continue to expend time,
money and effort in product, record keeping and quality control to assure that
the product meets applicable specifications and other requirements. The FDA
periodically inspects device and drug manufacturing facilities in the U.S. in
order to assure compliance with applicable GMP requirements. Failure of the
Company to comply with the GMP regulations or other FDA regulatory requirements
could have a material adverse effect on the Company's business, financial
condition, or results of operations.

INTERNATIONAL

In order for the Company and its strategic partners to market its products
in Europe and other foreign countries, the Company and/or its partners must
obtain required regulatory approvals and comply with extensive regulations
governing safety, quality and manufacturing processes. These regulations vary
significantly from country to country. The time required to obtain approval to
market the Company's products may be longer or shorter than that required in the
United States. In order to market FOCALSEAL

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surgical sealants and other products being developed by the Company in the
member countries of the European Union, the Company will be required to obtain
CE mark certification. CE mark certification is an international symbol of
adherence to quality assurance standards and compliance with applicable European
medical device directives. In September 1997, the Company completed a CE mark
and ISO 9001 standards audit, which is one of the principal steps in the CE mark
approval process. The remainder of the CE mark approval process consists
primarily of review by the approving body of additional documentation submitted
by the Company in response to observations made during the CE mark audit.
Although the CE mark and ISO 9001 standards audit has been completed, there can
be no assurance that the Company will be successful in completing the remainder
of the CE mark certification process or obtaining CE mark certification in a
timely manner, if at all.

SALES AND MARKETING

The Company intends to market and sell its surgical sealants internationally
through Ethicon and to develop its own direct sales and marketing force for
these products in North America. The Company intends to launch its FOCALSEAL-L
surgical sealant for lung surgery in Europe through Ethicon in the first half of
1998. Johnson & Johnson is one of the leading manufacturers of sutures and
staples worldwide and has a significant sales and marketing presence in Europe,
Latin America and the Pacific Rim. If and when the Company receives marketing
approval in the United States, the Company intends to build a direct sales force
for marketing its surgical sealant products in North America.

The Company's sales and marketing strategy for other products may include
using a combination of the Company's own direct sales force, strategic marketing
partners and distributors. The sales and marketing plans for these products will
be dependent on the Company's success in entering into strategic marketing
relationships, its ability to leverage its own internal sales force to market
additional products beyond the surgical sealant products and its ability to hire
and retain additional specialized sales personnel. There can be no assurance
that the Company will be able to secure any additional strategic marketing
partners or international distributors on terms that are acceptable to the
Company, or at all, or that the Company will be successful in building a direct
sales force in the United States.

MANUFACTURING

The Company has only limited experience in manufacturing its FOCALSEAL
surgical sealants. The Company has recently added manufacturing capacity at its
Lexington, Massachusetts facility in order to meet anticipated supply
requirements for the planned European commercial introduction of its FOCALSEAL-L
surgical sealant and for the United States clinical trial.

The Company performs certain steps in the FOCALSEAL manufacturing process
internally and relies on outside contractors for others. Certain proprietary
processes, including polymer synthesis, are performed by Focal. The Company uses
outside contractors for nonproprietary, high volume processes including
sterilization and fill and finish. The Company also contracts with third parties
for the manufacture of syringes, applicators, light sources and light wands.

There can be no assurance that the Company will be able to attract, train
and retain the required personnel or will be able to increase its manufacturing
capability to manufacture commercial quantities of surgical sealants in a timely
manner, or at all. Manufacturers often encounter difficulties in scaling up
production of their products, including problems involving production yields,
quality control and assurance, component supply and shortages of qualified
personnel. The Company anticipates that it will need to increase significantly
its current manufacturing capacity to meet commercial needs over the next
several years and that it may need to establish off-site manufacturing capacity
to meet these anticipated needs. In addition, the Company expects that it will
need to identify and qualify additional sources for materials and outsourced
manufacturing processes. There can be no assurance that the Company's
manufacturing scale-up efforts will be successful or that reliable, high-volume
manufacturing can be established or maintained at commercially reasonable costs
on a timely basis, or at all. Furthermore, the Company may be required to

41
<PAGE>
establish an off-site manufacturing facility and qualify such facility under
GMP, ISO 9001 and other applicable regulatory and quality standards. The Company
would experience supply interruptions in the event it is unable to establish or
maintain commercial levels of polymer synthesis, as the Company's polymer
formulations are proprietary and are not available from third parties. In
addition, there can be no assurance that the Company will not encounter
unanticipated problems and delays in connection with its contract manufacturers
and suppliers. Delays associated with or difficulties encountered in
establishing commercial manufacturing, the establishment of new manufacturing
facilities, or problems encountered with contract manufacturers and suppliers,
would result in disruptions of product supply to the Company's marketing
partners and for use in clinical trials. In such event, Ethicon could, under its
agreement with the Company, commence manufacturing of surgical sealants for
sales in all territories outside North America. Any of the foregoing would have
a material adverse affect on the Company's business, financial condition and
results of operations.

The Company purchases raw materials used in its products from various
suppliers. Certain materials and components are currently purchased by the
Company from single sources. These materials have generally been readily
available in the marketplace and have not been the subject of shortages. There
can, however, be no assurance that the Company or its suppliers or contract
manufacturers will not experience material shortages in the future. Any such
future shortages of materials or components could have a material adverse effect
on the Company's business, financial condition and results of operations.

The Company is also required to register as a medical device manufacturer
with the FDA and to list its products with the FDA. As such, the Company is
subject to inspections by the FDA for compliance with the FDA's GMP and other
applicable regulations. These regulations require that the Company maintain its
documents in a prescribed manner with respect to manufacturing, testing and
control activities. Further, the Company and the third party manufacturers of
its products are required to comply with various FDA requirements for design,
safety, advertising and labeling. The Company has not yet undergone an FDA GMP
inspection and does not anticipate that it will undergo such an inspection until
after submission of its initial PMA application for FOCALSEAL surgical sealants.

COMPETITION AND TECHNOLOGICAL CHANGE

The Company competes with many domestic and foreign medical device,
pharmaceutical and biopharmaceutical companies. In the surgical sealant area,
the Company will compete with existing methodologies for sealing air and fluid
leaks resulting from surgery, including some traditional wound closure products
such as sutures and staples, marketed by companies such as Johnson & Johnson,
United States Surgical Corporation, American Home Products Corporation and
others. Other products currently being marketed include fibrin glue, sold in
Europe and the Pacific Rim countries by Immuno AG, Cention and Fujisawa and
under development by Baxter Healthcare Corporation, Bristol-Myers Squibb Company
and Vitex. Other competitors in the surgical sealant market include Closure
Medical Corporation, B. Braun GmBH and Cryolife. Competitive products may also
be under development by other large medical device, pharmaceutical and
biopharmaceutical companies. The other areas in which Focal is developing
products, such as post-surgical adhesion prevention and restenosis drug
delivery, are intensely competitive markets and the Company will encounter
competition from major medical device, pharmaceutical and biopharmaceutical
companies in such markets. Many of the Company's current and potential
competitors have substantially greater financial, technological, research and
development, regulatory and clinical, marketing and sales, and personnel
resources than the Company.

These competitors may also have greater experience in developing products,
conducting clinical trials, obtaining regulatory approvals, and manufacturing
and marketing such products. Certain of these competitors may obtain patent
protection, approval or clearance by the FDA or foreign countries or product
commercialization earlier than the Company, any of which could materially
adversely affect the Company. Furthermore, if the Company commences significant
commercial sales of its products, it will also be competing with respect to
manufacturing efficiency and marketing capabilities, areas in which it currently
has limited experience. Finally, there can be no assurance that the Company's
marketing partners will not pursue parallel development of other technologies or
products, which may result in a marketing partner developing additional products
that would compete with the Company's products.

42
<PAGE>
Other recently developed technologies or procedures are, or may in the
future be, the basis of competitive products. There can be no assurance that the
Company's current competitors or other parties will not succeed in developing
alternative technologies and products that are more effective, easier to use or
more economical than those which have or are being developed by the Company or
that would render the Company's technology and products obsolete and
non-competitive in these fields. In such event, the Company's business,
financial condition and results of operations could be materially adversely
affected.

THIRD PARTY REIMBURSEMENT

Reimbursement and health care payment systems in international markets vary
significantly by country. In connection with international product
introductions, the Company and its strategic marketing partners may be required
to seek international reimbursement approvals. If required, there can be no
assurance that any such approvals will be obtained in a timely manner, or at
all, and failure to receive such international reimbursement approvals could
have an adverse effect on market acceptance of the Company's products in the
international markets in which such approvals are sought.

In the United States, health care providers, such as hospitals and
physicians, that purchase medical devices such as the Company's products,
generally rely on third-party payors, principally federal Medicare, state
Medicaid and private health insurance plans, to reimburse all or part of the
cost of surgical procedures. The Company anticipates that in a prospective
payment system, such as the DRG system utilized by Medicare, and in many managed
care systems used by private health care payors, there will be no separate,
additional reimbursement for the Company's products. Accordingly, the Company
believes that there will be no procedure-specific reimbursement codes for the
Company's products. The Company anticipates that hospital administrators and
physicians will justify the additional cost of surgical sealants by the
attendant cost savings and clinical benefits that the Company believes will be
derived from the use of its products.

There can be no assurance that reimbursement for the Company's products will
be available in the United States or in international markets under either
governmental or private reimbursement systems. Furthermore, the Company could be
adversely affected by changes in reimbursement policies of governmental or
private health care payors. Failure by physicians, hospitals and other users of
the Company's products to obtain sufficient reimbursement from health care
payors for procedures in which the Company's products are used or adverse
changes in governmental and private third party payors' policies toward
reimbursement for such procedures would have a material adverse effect on the
Company's business, financial condition and results of operations.

The Company's business may be also materially adversely affected by the
continuing efforts of government and third-party payors to contain or reduce the
costs of health care through various means. For example, in certain foreign
markets, pricing or profitability of certain medical products and prescription
pharmaceuticals is subject to government control. In the United States, an
increasing emphasis on managed care has put, and will continue to put, pressure
on pharmaceutical and medical product pricing. Such initiatives and proposals,
if adopted, could decrease the price that the Company receives for any products
it may develop and sell in the future, and thereby have a material adverse
effect on the Company's business, financial condition and results of operations.
Further, to the extent that such proposals or initiatives have a material
adverse effect on other companies that are corporate partners or prospective
corporate partners for certain of the Company's products, the Company's ability
to commercialize its products may be materially adversely affected.

EMPLOYEES

As of September 30, 1997, the Company employed 91 persons of whom 69 were in
research and development, seven were in clinical, regulatory affairs and quality
assurance, and 15 were in management, finance and administration. None of the
Company's current employees is represented by a labor union or is the subject of
a collective bargaining agreement. The Company believes that relations with its
employees are good.

43
<PAGE>
FACILITIES

Focal currently occupies approximately 54,000 square feet of manufacturing,
laboratory and administrative space in Lexington, Massachusetts under a lease
which expires in September 2004. Focal has an option to extend this lease for
several additional five year periods. The Company believes that this facility is
sufficient to meet the Company's requirements through at least mid-1998. The
Company is currently evaluating the possibility of obtaining additional facility
space in the Lexington, Massachusetts area and believes such space can be
obtained on commercially reasonable terms.

SCIENTIFIC ADVISORS

Focal has recruited several physician specialists and experienced
practitioners in various fields pertaining to its products to serve as
scientific advisors. The four founding scientists of Focal are scientific
advisors to the Company, including Jeffrey Hubbell, Ph.D., Professor, Swiss
Federal Institute of Technology, Zurich, Switzerland; Marvin Slepian, M.D.,
Cardiologist, University of Arizona Medical Center; Robert Langer, Ph.D.,
Professor, Massachusetts Institute of Technology; and Henry Brem, M.D.,
Professor, The Johns Hopkins University.

There is no fixed term of service for the scientific advisors. Current
members may resign or be removed at any time, and additional members may be
appointed. In general, members do not serve on an exclusive basis with the
Company and are not obligated to assign inventions to the Company. Drs. Langer,
Brem, Hubbell and Slepian are scientific founders of the Company and certain
inventions of Drs. Hubbell and Slepian were assigned to the Company under the
Company's license agreements with the University of Texas and Endoluminal
Therapeutics, Inc., a company controlled by Dr. Slepian, respectively. Drs.
Langer and Brem also serve as members of the Company's board of directors.
Scientific advisors have from time to time received option grants to purchase
Common Stock of the Company. Scientific Advisors have also received cash
compensation, with the amount of such compensation dependent on the time
commitment and level of involvement of each advisor. All scientific advisors
receive reimbursement for expenses incurred in traveling to and attending
meetings on behalf of the Company.

The following individuals are scientific advisors to Focal in their
respective areas of specialization identified below.

BIOMATERIALS/POLYMER SCIENCE

<TABLE>
<S> <C>
Jeffrey Hubbell, Ph.D. Swiss Federal Institute of Technology
John Eaton, Ph.D. Baylor University College of Medicine
Joachim Kohn, Ph.D. Rutgers University
Joseph Vacanti, M.D. Boston Children's Hospital
Allan Hoffman, Ph.D. University of Washington
</TABLE>

DRUG DELIVERY AND TISSUE ENGINEERING

<TABLE>
<S> <C>
Elazar Edelman, M.D., Ph.D. Harvard Medical School
Robert Langer, Ph.D. Massachusetts Institute of Technology
Jane Shaw, Ph.D. President of Stable Network; Former President
of Alza Corporation
Jeffrey Isner, M.D. St. Elizabeth's Hospital
</TABLE>

PROCEDURE DEVELOPMENT

<TABLE>
<S> <C>
Joseph LoCicero, M.D. Harvard Medical School
Peter Johnson, M.D. University of Pittsburgh Medical School
Ogan Gurel, M.D. Harvard Medical School
</TABLE>

LEGAL PROCEEDINGS

The Company is not currently a party to any material pending legal
proceedings including any litigation related to patents or intellectual
property.

44
<PAGE>
MANAGEMENT

EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS

The following table sets forth the names, ages and positions of the
executive officers, key employees and directors of the Company as of September
30, 1997:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ---------------------------------------------------------------
<S> <C> <C>
David M. Clapper.......................... 46 President, Chief Executive Officer and Director
Arthur J. Coury, Ph.D..................... 56 Vice President, Materials Research
David J. Enscore, Ph.D.................... 46 Vice President, Development & Drug Delivery
Stephen J. Herman......................... 49 Vice President, Operations
Glenn M. Kazo............................. 36 Vice President, Corporate Development
Mary Lou Mooney........................... 41 Vice President, Clinical and Regulatory Affairs
& Quality
Ronald S. Rudowsky........................ 48 Vice President, Marketing and Procedure Development
W. Bradford Smith......................... 42 Vice President, Finance and Administration and
Chief Financial Officer
Henry Brem, M.D. (1)...................... 45 Director
Janet Effland (2)......................... 49 Director
Robert Langer, Ph.D....................... 48 Director
Mark J. Levin (1)......................... 45 Director
Michael J. Levinthal (1).................. 42 Director
Fred E. Silverstein, M.D. (2)............. 55 Director
Jesse I. Treu, Ph.D. (1)(2)............... 50 Director
</TABLE>

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

(1) Member of the Compensation Committee.

(2) Member of the Audit Committee.

DAVID M. CLAPPER has been President, Chief Executive Officer and a Director
since joining Focal in July 1993. Before joining Focal, Mr. Clapper was employed
at Johnson & Johnson from 1977 until 1993. He served as Vice President and a
Board member at the Critikon, Inc. division of Johnson & Johnson from July 1992
to July 1993. From 1977 to June 1992, Mr. Clapper held a variety of positions,
including Vice President of Sales & Marketing and a Board Member of Ethicon
Endo-Surgery, and Vice President of Product Management and a Board Member at
Ethicon Inc.. Mr. Clapper holds a B.S. in Marketing from Bowling Green State
University.

ARTHUR J. COURY, PH.D. has been Vice President, Materials Research of the
Company since July 1993. From 1976 to June 1993, Dr. Coury held various
positions with Medtronic, Inc., serving most recently as Director, Polymer
Technology and Corporate Research Fellow. He has over 20 years of biomaterials
research and development experience and has been issued 30 patents. Dr. Coury
holds a Ph.D. in Organic Chemistry and an M.B.A. from the University of
Minnesota.

DAVID J. ENSCORE, PH.D. has been Vice President, Development and Drug
Delivery of the Company since September 1995. From 1979 until joining the
Company, Dr. Enscore held several positions with ALZA Corporation, a
biopharmaceutical company, most recently as Executive Director, Transdermal
Product Development. Dr. Enscore has been issued 15 patents. He holds a Ph.D. in
Chemical Engineering from North Carolina State University.

STEPHEN J. HERMAN has been Vice President, Operations of the Company since
August 1992. From March 1990 to May 1992, Mr. Herman served as President and
Chief Executive Officer of Cardiopulmonary Corporation, a medical equipment
development company. From 1982 to 1990, he held various positions with C. R.
Bard, Inc., a medical device company, most recently as President of its critical
care

45
<PAGE>
division. Mr. Herman previously held product development management positions
with Cobe Laboratories. Mr. Herman holds an M.B.A. from the University of
Colorado and a B.S. in Mechanical Engineering from the University of Missouri.

GLENN M. KAZO has been Vice President, Corporate Development of the Company
since November 1995. During 1995, prior to joining the Company, Mr. Kazo was
Managing Partner of Kazo Associates, a consulting business focusing on health
care strategy and development. From 1981 to 1994, he held various positions with
Enzon, Inc., a biopharmaceutical and drug delivery company, most recently as
Corporate Vice President, Strategic Planning and Public Affairs. Mr. Kazo holds
an M.S. in Biochemistry from Rutgers University.

MARY LOU MOONEY, Vice President, Clinical Affairs, Regulatory Affairs and
Quality, joined the Company in June 1993 as Director, Regulatory Affairs. In
January 1997, Ms. Mooney was promoted to her current position. From March 1991
to June 1993, she held various positions with C.R. Bard Inc., a medical device
company, most recently as Director, Regulatory Affairs and Quality Assurance for
its ventures division. Ms. Mooney has also held regulatory positions with
Cardiac Pacemakers, Inc., Biometric Research Institute, Inc. and Cordis
Corporation. Ms. Mooney holds an M.S. in Biomedical Science from Drexel
University.

RONALD S. RUDOWSKY, Vice President, Marketing and Procedure Development,
joined the Company in January 1994 as Director, Procedure Development. In
January 1997, Mr. Rudowsky was promoted to his current position. From June 1991
to December 1993, he was the Director of Marketing of Ethicon Endo-Surgery, a
medical device company and a division of Johnson & Johnson. Previously, he spent
14 yers in various sales and marketing positions at Ethicon, Inc. Mr. Rudowsky
holds a B.B.A. in Marketing from Marshall University.

W. BRADFORD SMITH, Vice President, Finance and Administration and Chief
Financial Officer, joined the Company as Director of Finance in May 1993. In
March 1994, Mr. Smith was appointed to his current position. From June 1990 to
May 1993, he served as Director of Finance for CytoTherapeutics, Inc., a
biotechnology company. Prior to that, he was Director of Finance at ImmuCell
Corporation, a biotechnology company, a Financial Analyst for a division of
Lockheed Corporation and a Senior Accountant with Coopers & Lybrand. Mr. Smith
holds an M.B.A. from the University of New Hampshire and a B.S. from Tufts
University.

HENRY BREM, M.D. is Director of the Brain Tumor Research Center and
Professor of Neurosurgery, Ophthalmology and Oncology at The Johns Hopkins
University. Dr. Brem has served as a member of the Company's Board of Directors
since June 1991. Dr. Brem is a Scientific Founder of the Company. Dr. Brem holds
an M.D. from Harvard University.

JANET EFFLAND joined the Company's Board of Directors in April 1996. Since
August 1988, Ms. Effland has been Vice President of Patricof & Co. Ventures,
Inc., a venture capital firm. She also serves on the Board of Directors of Cytyc
Corporation and Urologix, Inc., both of which are publicly traded. Ms. Effland
holds a J.D. from Arizona State University.

ROBERT LANGER, PH.D. joined the Company's Board of Directors in January
1996. Dr. Langer has been the Kenneth J. Germeshausen Professor of Chemical and
Biomedical Engineering at the Massachusetts Institute of Technology since 1992.
He is also a member of the National Academy of Sciences, National Academy of
Engineering and the Institute of Medicine. He also serves on the Board of
Directors of Alkermes, Inc., a publicly traded company. Dr. Langer holds a Sc.D.
from the Massachusetts Institute of Technology in Chemical Engineering.

MARK J. LEVIN, President and Chief Executive Officer and a Director of
Millennium Pharmaceuticals, Inc., has served as a Director since the Company's
inception in June 1991. Mr. Levin was the founding Chief Executive Officer of
Focal, Inc., as well as Cell Genesys, Inc., CytoTherapeutics, Inc., Tularik,
Inc. and Millennium Pharmaceuticals, Inc. Mr. Levin was previously a General
Partner with Mayfield Fund, a

46
<PAGE>
venture capital firm. Mr. Levin is a member of the Board of Directors of
CytoTherapeutics, Inc. Mr. Levin holds a B.S. and M.S. in Chemical Engineering
from Washington University.

MICHAEL J. LEVINTHAL joined the Company's Board of Directors in December
1992. Since 1984, Mr. Levinthal has been a General Partner of Mayfield Fund, a
venture capital firm. He also serves on the Board of Directors of Heartstream,
Inc. and InControl, Inc., both of which are publicly traded. Mr. Levinthal holds
an M.B.A. and an M.S. in Engineering from Stanford University.

FRED E. SILVERSTEIN, M.D. joined the Company's Board of Directors in July
1996. Since 1994, Dr. Silverstein has been a member of Frazier Management LLC, a
merchant banking group. From 1986 to 1994, he was a Professor of Medicine at the
University of Washington where he also held the positions of Director,
Gastrointestinal Endoscopy Service (1975-1991) and Director, Endoscopy Training
Program (1991-1994). Dr. Silverstein also serves on the Board of Directors of
Aradigm Corporation and Vision Sciences, Inc. Dr. Silverstein holds an M.D. from
Columbia University College of Physicians and Surgeons.

JESSE I. TREU, PH.D. was a member of the Company's Board of Directors from
March 1993 until April 1995 and from March 1996 to the present. Since 1986, he
has been a General Partner of Domain Associates, a venture capital management
firm. Dr. Treu also serves on the Board of Directors of GelTex Pharmaceuticals,
Inc., RiboGene, Inc. and Trimeris, Inc. He received his B.S. from Rensselaer
Polytechnic Institute, and holds an M.A. and Ph.D. in Physics from Princeton
University.

BOARD COMPOSITION

The Company currently has authorized eight directors. In accordance with the
terms of the Company's Restated Certificate of Incorporation, effective upon the
closing of this offering, the terms of office of the Board of Directors will be
divided into three classes: Class I, whose term will expire at the annual
meeting of stockholders to be held in 1998; Class II, whose term will expire at
the annual meeting of stockholders to be held in 1999; and Class III, whose term
will expire at the annual meeting of stockholders to be held in 2000. The Class
I directors are Mr. Clapper and Dr. Silverstein, the Class II directors are Dr.
Brem, Ms. Effland and Dr. Treu and the Class III directors are Mr. Levin, Dr.
Langer and Mr. Levinthal. At each annual meeting of stockholders after the
initial classification, the successors to directors whose term will then expire
will be elected to serve from the time of election and qualification until the
third annual meeting following election. In addition, the Company's Bylaws
provide that the authorized number of directors may be changed only by
resolution of the Board of Directors. Any additional directorships resulting
from an increase in the number of directors will be distributed among the three
classes so that, as nearly as possible, each class will consist of one-third of
the directors. This classification of the Board of Directors may have the effect
of delaying or preventing changes in control or management of the Company.

Each officer is elected by and serves at the discretion of the Board of
Directors. Each of the Company's officers and directors, other than nonemployee
directors, devotes substantially full time to the affairs of the Company. The
Company's nonemployee directors devote such time to the affairs of the Company
as is necessary to discharge their duties. There are no family relationships
among any of the directors, officers or key employees of the Company.

BOARD COMMITTEES AND COMPENSATION COMMITTEE INTERLOCKS

The Audit Committee of the Board of Directors (consisting of Ms. Effland,
Dr. Treu and Dr. Silverstein) reviews the internal accounting procedures of the
Company and consults with and reviews the services provided by the Company's
independent accountants. The Compensation Committee of the Board of Directors
(consisting of Mr. Levinthal, Dr. Treu, Dr. Brem and Mr. Levin) reviews and
recommends to the Board the compensation and benefits of all executive officers
of the Company and establishes and reviews general policies relating to
compensation and benefits of employees of the Company.

47
<PAGE>
Since January 1, 1994, venture capital firms affiliated with directors Treu
and Levinthal have purchased securities of the Company and director Brem
received a loan from the Company in connection with a stock option exercise
program. Dr. Brem also has a consulting agreement with the Company. See "Certain
Transactions."

DIRECTOR COMPENSATION

Directors do not currently receive any cash compensation from the Company
for their service as members of the Board of Directors, although they are
reimbursed for certain expenses in connection with attendance at Board and
Committee meetings. The Company does not provide additional compensation for
committee participation or special assignments of the Board of Directors. From
time to time, certain directors of the Company have received grants of options
to purchase shares of the Company's Common Stock pursuant to the 1992 Incentive
Stock Plan. Beginning on the date of this offering, nonemployee directors of the
Company will be eligible to receive nondiscretionary, automatic grants of
options to purchase shares of the Company's Common Stock pursuant to the 1997
Director Option Plan. See "-- Incentive Stock Plans" and "Certain Transactions."

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE. The following table sets forth certain
information for the year ended December 31, 1996 regarding the compensation of
the Company's Chief Executive Officer and certain other executive officers of
the Company whose salary and bonus for such fiscal year were in excess of
$100,000 (the "Named Executive Officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
1996 ANNUAL SECURITIES
COMPENSATION UNDERLYING ALL OTHER
-------------------
OPTIONS/SARS COMPENSATION
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) (#)(1) ($)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
David M. Clapper............................................ 230,000 -- 299,293 --
President and Chief Executive Officer
Stephen J. Herman........................................... 184,800 -- 49,402
Vice President, Operations
David J. Enscore, Ph.D...................................... 152,075 -- 60,965 9,904(2)
Vice President, Development and Drug Delivery
Arthur J. Coury, Ph.D....................................... 171,045 66,636
Vice President, Materials Research
Glenn M. Kazo............................................... 160,000 -- 81,537 18,456(2)
Vice President, Corporate Development
</TABLE>

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

(1) Options were granted under the Company's 1992 Incentive Stock Option Plan
and vest over four years as follows: (i) 1/4 of the total after one year and
1/48 of the total at the end of each month thereafter for new hires; and
(ii) 1/48 of the total at the end of each month for subsequent grants. In
each case, vesting is subject to the optionees continued relationship with
the Company.

(2) Consists of reimbursement for relocation expenses.

48
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR. The following table sets forth each
grant of stock options made during the fiscal year ended December 31, 1996 to
each of the Named Executive Officers:

OPTION GRANTS IN YEAR ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
----------------------------------------------------- ANNUAL RATES OF
NUMBER OF PERCENT OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED EXERCISE FOR OPTION TERM(4)
OPTIONS DURING FISCAL PRICE EXPIRATION ------------------
NAME GRANTED (#)(1) 1996(%)(2) ($/SH)(3) DATE 5%($) 10%($)
- -------------------------------------------- -------------- ------------- --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
David M. Clapper............................ 166,986 13.1% $ 1.20 2/28/06 $126,024 $319,361
132,307 10.4 1.20 8/30/06 99,852 253,037
Stephen J. Herman........................... 5,095 * 1.20 1/05/06 3,845 9,744
28,923 2.3 1.20 3/19/06 21,828 55,315
15,384 1.2 1.20 8/30/06 11,610 29,422
David J. Enscore, Ph.D...................... 1,273 * 1.20 1/05/06 960 2,435
28,923 2.3 1.20 3/19/06 21,828 55,315
30,769 2.4 1.20 8/30/06 23,221 58,846
Arthur J. Coury, Ph.D....................... 5,097 * 1.20 1/05/06 3,847 9,748
23,077 1.8 1.20 8/30/06 17,416 44,135
38,462 3.0 1.20 3/19/06 29,027 73,559
Glenn M. Kazo............................... 27,692 2.2 1.20 1/05/06 20,899 52,961
23,076 1.8 1.20 3/19/06 17,415 44,133
30,769 2.4 1.20 8/30/06 23,221 58,846
</TABLE>

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

* Less than one percent (1.0%).

(2) Based on an aggregate of 1,275,691 options granted by the Company in the
year ended December 31, 1996 to employees of and consultants to the Company,
including the Named Executive Officers.

(3) The exercise price per share of each option was equal to the fair market
value of the Common Stock on the date of grant as determined by the Board of
Directors.

(4) The potential realizable value is calculated based on the term of the option
at its time of grant (ten years). It is calculated assuming that the fair
market value of the Company's Common Stock on the date of grant appreciates
at the indicated annual rate compounded annually for the entire term of the
option and that the option is exercised and sold on the last day of its term
for the appreciated stock price. These numbers are calculated based on the
requirements promulgated by the Securities and Exchange Commission and do
not reflect the Company's estimate of future stock price growth.

49
<PAGE>
OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES. There were no stock option exercises by any of the Named Executive
Officers during the year ended December 31, 1996. The following table sets forth
for each of the Named Executive Officers the number and value of securities
underlying unexercised options held at December 31, 1996:

AGGREGATE OPTION EXERCISES IN YEAR ENDED DECEMBER 31, 1996 AND
OPTION VALUES AT DECEMBER 31, 1996

<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1996 (#)(1) DECEMBER 31, 1996 ($)(2)
------------------------ ------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
David M. Clapper.......................................... 83,333 16,667 940,413 188,087
47,556 266,367 513,486 2,876,108
Stephen J. Herman......................................... 15,075 43,885 162,772 473,848
David J. Enscore, Ph.D.................................... 17,607 71,051 190,112 767,173
Arthur J. Coury, Ph.D..................................... 32,852 5,610 370,735 63,309
14,287 57,424 154,264 620,057
Glenn M. Kazo............................................. 14,870 66,668 160,559 719,848
</TABLE>

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

(1) For each of the Named Executive Officers, the aggregate number of shares
underlying the options reflect options that were granted by the Company at
various times during the period from April 1993 to August 1996. Options were
granted under the Company's 1992 Incentive Stock Option Plan and generally
vest over four years as follows: (i) 1/4 of the total after one year and
1/48 of the total at the end of each month thereafter for new hires; and
(ii) 1/48 of the total at the end of each month for subsequent grants. In
each case, vesting is subject to the optionees continued relationship with
the Company. On January 20, 1997, each of the options was exercised as to
all of the shares underlying the options, vested and unvested. Once
exercised, the unvested shares became subject to the Company's right to
repurchase the shares at the original purchase price. The Company's
repurchase right lapses over time at such times and in such amounts as the
shares would have vested and become exercisable under the option
agreement(s) pursuant to which the options were granted.

(2) Based on a value of $12.00 per share, the assumed initial public offering
price, minus the per share exercise price, multiplied by the number of
shares underlying the option.

INCENTIVE STOCK PLANS

1992 INCENTIVE STOCK PLAN. The Company's 1992 Incentive Stock Plan (the
"1992 Plan") provides for the grant of incentive stock options to employees
(including employee directors) and nonstatutory stock options and stock purchase
rights to employees, employee and nonemployee directors and consultants. A total
of 2,600,000 shares of Common Stock have been reserved for issuance pursuant to
the 1992 Plan. As of September 30, 1997, 1,590,031 shares had been issued upon
the exercise of stock options granted under the 1992 Plan and 297,921 shares
were subject to outstanding options. The 1992 Plan is administered by the Board
of Directors and the Compensation Committee thereof. Options and stock purchase
rights granted under the 1992 Plan will vest as determined by the Board, and may
accelerate and become fully vested in the event of an acquisition of the Company
if so determined. The exercise price of options and stock purchase rights
granted under the 1992 Plan will be as determined by the Board, although the
exercise price of incentive stock options must be at least equal to the fair
market value of the Company's Common Stock on the date of grant. The Board of
Directors may amend or modify the 1992 Plan at any time. The 1992 Plan will
terminate in October 2002, unless terminated earlier by the Board of Directors.

50
<PAGE>
1997 DIRECTOR OPTION PLAN. The Company has adopted a 1997 Director Option
Plan (the "Director Plan"), and has reserved a total of 150,000 shares of Common
Stock for issuance thereunder. On the date of each year's annual stockholders'
meeting, commencing with the 1998 annual meeting of stockholders, each
nonemployee director will automatically be granted a nonstatutory option to
purchase 5,000 shares of Common Stock, providing that he or she shall have
served on the Board of Directors for at least the preceding six months. The
exercise price of each of these options will be equal to the fair market value
of the Common Stock on the date of grant. Each option granted under the Director
Plan will vest on a cumulative monthly basis over a four-year period. In the
event of a change in control of the Company, including a merger of the Company
with or into another corporation, or the sale of all or substantially all of the
assets of the Company, then all shares subject to options granted under the
Director Plan will become fully vested and exercisable unless such options are
assumed by the successor or acquiring company. In the event that a nonemployee
director is involuntarily terminated following such an option assumption, such
option becomes fully vested and exercisable. The Director Plan will terminate in
September 2007, unless terminated earlier in accordance with the provisions of
the Director Plan.

1997 EMPLOYEE STOCK PURCHASE PLAN. The Company has adopted a 1997 Employee
Stock Purchase Plan (the "Purchase Plan"), and has reserved a total of 200,000
shares of Common Stock for issuance thereunder. No shares have been issued under
the Purchase Plan to date. The Purchase Plan, which is intended to qualify under
Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"), will
be administered by the Board of Directors of the Company or by a committee
appointed by the Board of Directors. Under the Purchase Plan, the Company will
withhold a specified percentage (not to exceed 15%) of each salary payment to
participating employees over certain offering periods. Any employee who is
currently employed for at least 20 hours per week and for at least five
consecutive months in a calendar year, either by the Company or by a
majority-owned subsidiary of the Company, will be eligible to participate in the
Purchase Plan. Unless the Board of Directors or its committee determines
otherwise, each offering period will run for 24 months and will be divided into
four consecutive purchase periods of approximately six months. The first
offering period and the first purchase period will commence on the date of this
Prospectus. New 24 month offering periods will commence every six months
thereafter. In the event of a change in control of the Company, including a
merger of the Company with or into another corporation, or the sale of all or
substantially all of the assets of the Company, the offering and purchase
periods then in progress will be shortened unless the rights to purchase stock
are assumed by the successor or acquiring company. The price at which Common
Stock will be purchased under the Purchase Plan is equal to 85% of the fair
market value of the Common Stock on the first day of the applicable offering
period or the last day of the applicable purchase period, whichever is lower.
Employees may end their participation in the offering at any time during the
offering period, and participation ends automatically on termination of
employment with the Company. The maximum number of shares that a participant may
purchase on the last day of any offering period is determined by dividing the
payroll deductions accumulated during the purchase period by the purchase price.
However, no person may purchase shares under the Purchase Plan to the extent
such person would own 5% or more of the total combined value or voting power of
all classes of the capital stock of the Company or of any of its subsidiaries,
or to the extent that such person's rights to purchase stock under all employee
stock purchase plans would accrue at a rate that exceeds $25,000 worth of stock
for any calendar year. The Board of Directors may amend the Purchase Plan at any
time. The Purchase Plan will terminate in September 2007, unless terminated
earlier in accordance with the provisions of the Purchase Plan.

SECTION 401(K) PLAN

The Company has adopted a Retirement Savings and Investment Plan (the
"401(k) Plan") covering the Company's employees who are located in the United
States and have been employed by the Company for three months or more. Pursuant
to the 401(k) Plan, employees may elect to reduce their current compensation by
up to the statutorily prescribed annual limit ($9,500 in 1997) and to have the
amount of such reduction contributed to the 401(k) Plan. The 401(k) Plan
permits, but does not require, additional

51
<PAGE>
matching contributions by the Company on behalf of all participants in the
401(k) Plan. The Company is not currrently making any contributions to the
401(k) Plan. The 401(k) Plan is intended to qualify under Section 401(k) of the
Code, so that contributions to the 401(k) Plan by employees or by the Company,
and the investment earnings thereon, are not taxable to employees until
withdrawn from the 401(k) Plan, and that contributions by the Company, if any,
will be deductible by the Company when made.

EMPLOYMENT AGREEMENTS

There are no employment agreements between the Company and any of its
executive officers, except that Mr. Clapper is entitled to severance
compensation of 12 months salary and continuation of healthcare benefits in the
event of termination of employment by the Company without cause and Messrs.
Herman, Kazo and Enscore are entitled to receive severance pay of six months
salary in the event of termination by the Company without cause. In addition,
officers of the Company have received loans in connection with stock option
exercises and relocations. See "Certain Transactions."

LIMITATIONS ON DIRECTORS' LIABILITY AND INDEMNIFICATION

The Company's Certificate of Incorporation limits the liability of directors
to the maximum extent permitted by Delaware law. Delaware law provides that
directors of a corporation will not be personally liable for monetary damages
for breach of their fiduciary duties as directors, except liability for (i) any
breach of their duty of loyalty to the corporation or its stockholders, (ii)
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) unlawful payments of dividends or unlawful stock
repurchases or redemptions, or (iv) any transaction from which the director
derived an improper personal benefit. Such limitation of liability does not
apply to liabilities arising under the federal securities laws and does not
affect the availability of equitable remedies such as injunctive relief or
rescission.

The Company's Bylaws provide that the Company shall indemnify its directors
and executive officers and may indemnify its other officers and employees and
other agents to the fullest extent permitted by law. The Company believes that
indemnification under its Bylaws covers at least negligence and gross negligence
on the part of indemnified parties. The Company's Bylaws also permit it to
secure insurance on behalf of any officer, director, employee or other agent for
any liability arising out of his or her actions in such capacity, regardless of
whether the Bylaws would permit indemnification.

The Company has entered into agreements to indemnify its directors and
executive officers, in addition to indemnification provided for in the Company's
Bylaws. These agreements, among other things, indemnify the Company's directors
and executive officers for certain expenses (including attorneys' fees),
judgments, fines and settlement amounts incurred by any such person in any
action or proceeding, including any action by or in the right of the Company
arising out of such person's services as a director or executive officer of the
Company, any subsidiary of the Company or any other company or enterprise to
which the person provides services at the request of the Company. The Company
believes that these provisions and agreements are necessary to attract and
retain qualified persons as directors and executive officers.

52
<PAGE>
CERTAIN TRANSACTIONS

In August 1994, the Company issued shares of Series D Preferred Stock in a
financing transaction to certain entities affiliated with directors of the
Company and certain 5% stockholders of the Company at an as-converted purchase
price of $9.71 per share. The number of shares of Common Stock issuable upon
conversion of such shares of Series D Preferred Stock issued to each such entity
is set forth below.

<TABLE>
<CAPTION>
NO. OF
NAME OF INVESTOR SHARES
- ---------------------------------------------------------------------------------------------------- ------------
<S> <C>
ENTITIES AFFILIATED WITH DIRECTORS
Entities Affiliated with Frazier & Company L.P. (Fred E. Silverstein, M.D.)......................... 22,662
Entities Affiliated with Mayfield Fund (Michael J. Levinthal)....................................... 80,347
Domain Partners II, L.P. (Jesse I. Treu, Ph.D.)..................................................... 30,903
Biotechnology Investments Limited (Jesse I. Treu, Ph.D.)............................................ 18,542

5% STOCKHOLDERS
General Electric Pension Trust...................................................................... 206,021
</TABLE>

In connection with the August 1994 financing, the Company issued warrants
exercisable for 87,043 shares of Common Stock at an as converted purchase price
of $13.83 to Frazier & Company L.P. These warrants were issued in consideration
of placement agency services provided by Frazier Investment Securities. Fred
Silverstein, M.D., a director of the Company, is a member of Frazier Management,
L.L.C., an affiliate of Frazier Investment Securities.

In April 1996, the Company issued shares of Series E Preferred Stock in a
financing transaction to certain entities affiliated with directors of the
Company and certain 5% stockholders of the Company at an as-converted purchase
price of $5.66 per share. The number of shares of Common Stock issuable upon
conversion of such shares of Series D Preferred Stock issued to each such entity
is set forth below.

<TABLE>
<CAPTION>
NO. OF
NAME OF INVESTOR SHARES
- ---------------------------------------------------------------------------------------------------- ------------
<S> <C>
ENTITIES AFFILIATED WITH DIRECTORS
Entities Affiliated with Patricof & Co. Ventures (Janet Effland).................................... 1,591,509
Entities Affiliated with Frazier & Company L.P. (Fred E. Silverstein, M.D.)......................... 66,870
Entities Affiliated with Mayfield Fund (Michael J. Levinthal)....................................... 238,571
Domain Partners II, L.P. (Jesse I. Treu, Ph.D.)..................................................... 96,522
Biotechnology Investments Limited (Jesse I. Treu, Ph.D.)............................................ 57,986

5% STOCKHOLDERS
General Electric Pension Trust...................................................................... 128,444
</TABLE>

In January 1997, the Company implemented a program under which directors,
executive officers and certain other key employees were permitted to exercise
their outstanding options as to both vested and unvested shares, with unvested
shares being subject to a right of repurchase at cost in favor of the Company in
the event of termination of employment prior to vesting of all then-unvested
shares. Under this program, the participants paid the exercise price for their
outstanding options pursuant to full recourse

53
<PAGE>
promissory notes. The notes bear interest at 6.0% per annum and are due and
payable on December 31, 2000. The principal amounts of each note payable by a
director or executive officer are set forth below:

<TABLE>
<CAPTION>
DIRECTOR OR EXECUTIVE OFFICER NOTE AMOUNT
<S> <C>
David M. Clapper...................................... $ 448,993
Arthur J. Coury, Ph.D................................. $ 113,733
David J. Enscore, Ph.D................................ $ 106,612
Stephen J. Herman..................................... $ 70,897
Glenn M. Kazo......................................... $ 98,050
Mary Lou Mooney....................................... $ 54,218
Ronald S. Rudowsky.................................... $ 92,223
W. Bradford Smith..................................... $ 102,341
Henry Brem, M.D....................................... $ 51,800
Robert Langer, Ph.D................................... $ 88,800
Mark J. Levin......................................... $ 33,000
</TABLE>

The Company has from time to time made loans to executive officers and key
employees in connection with their employment with the Company to assist them
with respect to relocation expenses. From August 1993 through February 1997, the
Company lent Dr. Coury an aggregate of $120,000. These loans bear interest at
interest rates ranging from 5.0% to 7.0% per annum and are due and payable in
full on December 31, 1999. However, the outstanding principal of these loans and
accrued, unpaid interest thereon will be forgiven on December 31, 1999 if the
value of Dr. Coury's stock and stock options has not attained a certain
threshold on such date. In March, 1995, the Company lent Mr. Rudowsky $20,000.
This loan bears interest at 6.0% per annum and is due and payable in full on
July 1, 1998. However, the outstanding principal of this loan and accrued,
unpaid interest thereon will be forgiven on July 1, 1998 if the value of Mr.
Rudowsky's stock and stock options has not attained a certain threshold by such
date.

The Company has a consulting agreement with Dr. Brem under which it pays Dr.
Brem $30,000 per annum for scientific advisory and consulting services provided
by Dr. Brem. Dr. Brem is a founder and director of the Company and has, from
time to time, been granted options to purchase Common Stock of the Company. See
"Principal Stockholders."

The Company has a consulting agreement with Dr. Langer under which it pays
Dr. Langer $60,000 per annum for scientific advisory and consulting services
provided by Dr. Langer. Dr. Langer is a founder and director of the Company and
has, from time to time, been granted options to purchase Common Stock of the
Company. See "Principal Stockholders."

All future transactions, including any loans from the Company to its
officers, directors, principal stockholders or affiliates, will be approved by a
majority of the Board of Directors, including a majority of the independent and
disinterested members of the Board of Directors or, if required by law, a
majority of disinterested stockholders, and will be on terms no less favorable
to the Company than could be obtained from unaffiliated third parties.

54
<PAGE>
PRINCIPAL STOCKHOLDERS

The following table sets forth information known to the Company regarding
the beneficial ownership of its Common Stock as of September 30, 1997, and as
adjusted to reflect the sale of Common Stock offered by the Company hereby and
conversion of all outstanding shares of Preferred Stock into shares of Common
Stock, for (i) each person known by 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 OF SHARES
BENEFICIALLY OWNED
(1)
SHARES --------------------
BENEFICIALLY PRIOR TO AFTER
BENEFICIAL OWNER OWNED OFFERING OFFERING
- ------------------------------------------------------------------------------- ----------- --------- ---------
<S> <C> <C> <C>
Entities affiliated with Patricof & Co. Ventures(3)............................ 1,591,509 15.4% 12.4%
(Janet Effland)
2100 Geng Road, Suite 150
Palo Alto, CA 94303
Entities affiliated with Mayfield Fund(2)...................................... 1,530,325 14.8 11.9
(Michael J. Levinthal)
2800 Sand Hill Rd, Suite 250
Menlo Park, CA 94025
Domain Partners II, L.P........................................................ 585,851 5.7 4.6
(Jesse I. Treu, Ph.D.)
c/o Domain Associates
One Palmer Square, Suite 515
Princeton, NJ 05815
General Electric Pension Trust................................................. 849,519 8.2 6.6
3000 Summer Street
Stanford, CT 06904
Entities affiliated with Frazier & Company(4).................................. 523,856 5.1 4.1
(Fred E. Silverstein, M.D.)
601 Union Street, Suite 2110
Seattle, WA 98101
David M. Clapper(5)............................................................ 413,923 4.0 3.2
David Enscore, Ph.D.(5)........................................................ 88,658 * *
Stephen J. Herman(5)........................................................... 120,496 1.2 *
Glenn M. Kazo(5)............................................................... 81,538 * *
Arthur J. Coury, Ph.D.(5)...................................................... 110,173 1.1 *
Henry Brem, M.D.(5)............................................................ 129,230 1.2 1.0
Janet Effland(6)............................................................... 1,591,509 15.4 12.4
Robert Langer, Ph.D.(5)........................................................ 222,523 2.1 1.7
Mark J. Levin(5)............................................................... 46,153 * *
Michael Levinthal(7)........................................................... 1,530,325 14.8 11.9
Fred E. Silverstein, M.D.(8)................................................... 523,856 5.1 4.1
Jesse I. Treu, Ph.D.(9)........................................................ 943,096 9.1 7.3
All directors and executive officers as a group (15 persons)(10)............... 6,018,334 58.1 46.8
</TABLE>

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

* Represents beneficial ownership of less than one percent of the Common
Stock.

55
<PAGE>
(1) Beneficial ownership is determined in accordance with the rules of
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Except as indicated by
footnote, and subject to community property laws where applicable, the
persons named in the table above have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them.
The number of shares of Common Stock outstanding used in calculating the
percentage for each listed person includes the shares of Common Stock
underlying options or warrants held by such person that are exercisable
within 60 days of the date of this Prospectus, but excludes shares of Common
Stock underlying options or warrants held by any other person. Percentage of
beneficial ownership is based on 10,365,337 shares of Common Stock
outstanding as of September 30, 1997 (after giving effect to the conversion
of Preferred Stock into Common Stock and the exercise of certain warrants
upon the completion of this offering) and 12,865,337 shares of Common Stock
outstanding after completion of this offering.

(2) Consists of 904,711 shares beneficially owned by Mayfield VI, 382,567 shares
beneficially owned by Mayfield VII, 130,435 shares beneficially owned by
Mayfield Medical Partners, 48,675 shares beneficially owned by Mayfield
Medical Partners (1992), 43,129 shares beneficially owned by Mayfield
Associates and 20,808 shares beneficially owned by Mayfield Associates Fund
II, (the "Mayfield Funds").

(3) Consists of 1,072,833 shares beneficially owned by APA Excelsior IV, L.P.,
309,460 shares beneficially owned by The P/A Fund, 189,323 shares
beneficially owned by APA Excelsior IV/Offshore, L.P. and 19,893 shares
beneficially owned by Patricof Private Investment Club, L.P. (the "Patricof
Funds").

(4) Consists of 398,563 shares beneficially owned by Frazier Healthcare
Investments, L.P., 38,079 shares beneficially owned by Frazier Portfolio
Fund L.P., 171 shares owned by Frazier Management, L.L.C. (the "Frazier
Funds") and an aggregate of 87,043 shares issuable upon the exercise of
warrants held by Frazier & Company L.P.

(5) Includes shares issued pursuant to an early stock option exercise program.
The unvested portion of such shares are subject to a repurchase option in
favor of the company at cost in the event of the termination of such
individual's employment or consultant relationship with the company prior to
vesting. See "Certain Transactions."

(6) Consists of shares beneficially owned by the Patricof Funds. Ms. Effland
disclaims beneficial ownership of the shares beneficially owned by the
Patricof Funds except to the extent of her proportional partnership interest
therein.

(7) Consists of shares beneficially owned by the Mayfield Funds. Mr. Levinthal
disclaims beneficial ownership of the shares beneficially owned by the
Mayfield Funds except to the extent of his proportional partnership interest
therein.

(8) Consists of shares beneficially owned by the Frazier Funds and an aggregate
of 87,043 shares issuable upon the exercise of warrants held by Frazier &
Company L.P. Dr. Silverstein disclaims beneficial ownership of the shares
beneficially owned by the Frazier Funds except to the extent of his
proportional partnership interest therein.

(9) Consists of 585,851 shares beneficially owned by Domain Partners II, L.P.
Dr. Treu is a general partner of One Palmer Square Associates II, L.P., the
general partner of Domain Partners II, L.P. and has indirect beneficial
ownership of these shares. Also includes 357,245 shares owned by
Biotechnology Investments Limited ("BIL"). Pursuant to a contractual
agreement, Domain Associates, of which Dr. Treu is a general partner, is the
U.S. venture capital advisor to BIL. Domain Associates has no voting or
investment power over BIL's shares and Dr. Treu disclaims beneficial
ownership of BIL's shares.

(10) See footnotes 2 through 9.

56
<PAGE>
DESCRIPTION OF CAPITAL STOCK

GENERAL

The Company's Restated Certificate of Incorporation, which will become
effective upon the closing of this offering, authorizes the issuance of up to
50,000,000 shares of Common Stock, $0.01 par value per share and authorizes the
issuance of 5,000,000 shares of Preferred Stock, $0.01 par value per share, the
rights and preferences of which may be established from time to time by the
Company's Board of Directors. As of September 30, 1997, 2,228,038 shares of
Common Stock (excluding 19,496 shares of Common Stock issuable upon exercise of
a warrant upon the closing of this offering) were issued and outstanding and
held by 74 stockholders, shares of Preferred Stock convertible into 8,117,803
shares of Common Stock upon the completion of this offering were issued and
outstanding and held by 45 stockholders and warrants to purchase 179,586 shares
of Common Stock were issued and outstanding and held by six holders.

COMMON STOCK

Each holder of Common Stock is entitled to one vote for each share held on
all matters to be voted upon by the stockholders and there are no cumulative
voting rights. Subject to preferences that may be applicable to any outstanding
Preferred Stock, holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefor. See "Dividends Policy." In the event of a liquidation,
dissolution or winding up of the Company, holders of Common Stock would be
entitled to share in the Company's assets remaining after the payment of
liabilities and the satisfaction of any liquidation preference granted the
holders of any outstanding shares of Preferred Stock. Holders of Common Stock
have no preemptive or conversion rights or other subscription rights. There are
no redemption or sinking fund provisions applicable to the Common Stock. All
outstanding shares of Common Stock are, and the shares of Common Stock offered
by the Company in this offering, when issued and paid for, will be, fully paid
and nonassessable. The rights, preferences and privileges of the 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 in the future.

PREFERRED STOCK

Upon the closing of this offering, the Board of Directors will be
authorized, subject to any limitations prescribed by law, without stockholder
approval, from time to time to issue up to an aggregate of 5,000,000 shares of
Preferred Stock, $0.01 par value per share, in one or more series, each of such
series to have such rights and preferences, including voting rights, dividend
rights, conversion rights, redemption privileges and liquidation preferences, as
shall be determined by the Board of Directors. The rights of the holders of
Common Stock will be subject to, and may be adversely affected by, the rights of
holders of any Preferred Stock that may be issued in the future. 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 attempting to acquire, a majority of the outstanding voting
stock of the Company. The Company has no present plans to issue any shares of
Preferred Stock.

WARRANTS

Upon the completion of this offering, the Company will have outstanding
warrants to purchase 179,586 shares of Common Stock at a weighted average
exercise price of $10.40 per share. These warrants have net exercise provisions
under which the holder may, in lieu of payment of the exercise price in cash,
surrender the warrant and receive a net amount of shares, based on the fair
market value of the Company's Common Stock at the time of exercise of the
warrant, after deducting the aggregate exercise price. These warrants expire on
dates ranging from September 1998 to February 2006.

57
<PAGE>
CERTAIN CHARTER AND BYLAWS PROVISIONS AND DELAWARE ANTI-TAKEOVER STATUE

Certain provisions of the Company's Restated Certificate of Incorporation
and Bylaws may have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from attempting to acquire, control of
the Company. Such provisions could limit the price that certain investors might
be willing to pay in the future for shares of the Company's Common Stock.
Certain of these provisions allow the Company to issue Preferred Stock without
any vote or further action by the stockholders, eliminate the right of
stockholders to act by written consent without a meeting and eliminate
cumulative voting in the election of directors. These provisions may make it
more difficult for stockholders to take certain corporate actions and could have
the effect of delaying or preventing a change in control of the Company. In
addition, the Company is subject to Section 203 of the Delaware General
Corporation Law which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder, unless: (i) prior to such date, the Board of Directors of the
corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder; (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder; the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned by persons who are directors and also officers
and by employee stock plans in which employee participants do not have the right
to determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer; of (iii) on or subsequent to such date,
the business combination is approved by the Board of Directors and authorized at
an annual or special meeting of stockholders, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock which is
not owned by the interested stockholder.

The Company's Certificate of Incorporation provides that, upon the closing
of this offering, the Board of Directors will be divided into three classes of
directors with each class serving a staggered three-year term. The
classification system of electing directors may tend to discourage a third party
from making a tender offer or otherwise attempting to obtain control of the
Company and may maintain the incumbency of the board of Directors, as the
classification of the board of directors generally increases the difficulty of
replacing a majority of the directors. The Company's Certificate of
Incorporation eliminates the right of stockholders to act by written consent
without a meeting and the Company's Bylaws eliminate the right of stockholders
to call special meetings of stockholders. The Certificate of Incorporation and
Bylaws do not provide for cumulative voting in the election of directors. The
authorization of undesignated Preferred Stock makes it possible for the board of
directors to issue Preferred Stock with voting or other rights or preferences
that could impede the success of any attempt to change control of the Company.
These and other provisions may have the effect of deferring hostile takeovers or
delaying changes in control or management of the Company. The amendment of any
of these provisions would require approval by holders of at least 66 2/3% of the
outstanding Common Stock.

SHAREHOLDER RIGHTS PLAN

Pursuant to a Preferred Shares Rights Agreement (the "Rights Agreement"),
between the Company and Norwest Bank Minnesota, N.A., as Rights Agent (the
"Rights Agent"), the Company's Board of Directors declared a dividend of one
right (a "Right") to purchase one one-thousandth share of the Company's Series A
Participating Preferred Stock ("Series A Preferred") for each outstanding share
of Common Stock ("Common Shares") of the Company. The dividend is payable on the
effective date of this Offering (the "Record Date") to stockholders of record as
of the close of business on that date. Each Right entitles the registered holder
to purchase from the Company one one-thousandth of a share of Series A Preferred
at an exercise price of $150.00 (the "Purchase Price"), subject to adjustment.
The following summary of the principal terms of the Rights Agreement is a
general description only and is subject to the detailed terms and conditions of
the Rights Agreement.

58
<PAGE>
The Rights will not be exercisable until the Distribution Date (defined
below). Until the Distribution Date, certificates for the Rights ("Rights
Certificates") will not be sent to stockholders; instead, the Rights will attach
to and trade only together with the Common Shares. Accordingly, Common Share
certificates outstanding on the Record Date will evidence the Rights related
thereto, and Common Share certificates issued after the Record Date will contain
a notation incorporating the Rights Agreement by reference. Until the
Distribution Date (or the earlier redemption or expiration of the Rights), the
surrender or transfer of any certificates for Common Shares outstanding as of
the Record Date, even without the notation or a copy of the Summary of Rights
being attached thereto, will also constitute the transfer of the Rights
associated with the Common Shares represented by such certificate. The Rights
will separate from the Common Shares, Rights Certificates will be issued and the
Rights will become exercisable upon the earlier of: (i) 10 days (or such later
date as may be determined by a majority of the Board of Directors, excluding
directors affiliated with the Acquiring Person, as defined below (the
"Continuing Directors")) following a public announcement that a person or group
of affiliated or associated persons (an "Acquiring Person") has acquired, or
obtained the right to acquire, beneficial ownership of 15% or more of the
outstanding Common Shares; or (ii) 10 business days (or such later date as may
be determined by a majority of the Continuing Directors) following the
commencement of, or announcement of an intention to make, a tender offer or
exchange offer the consummation of which would result in the beneficial
ownership by a person or group of 15% or more of the outstanding Common Shares.
The earlier of such dates is referred to as the "Distribution Date." As soon as
practicable following the Distribution Date, separate Rights Certificates will
be mailed to holders of record of the Common Shares as of the close of business
on the Distribution Date and such separate Rights Certificates alone will
evidence the Rights from and after the Distribution Date. All Common Shares
issued prior to the Distribution Date will be issued with Rights. Common Shares
issued after the Distribution Date may be issued with Rights if such shares are
issued (i) upon the conversion of outstanding convertible debentures or any
other convertible securities issued after adoption of the Rights Agreement or
(ii) pursuant to the exercise of stock options or under employee benefit plans
or arrangements unless such issuance would result in (or create a risk that)
such options, plans or arrangements would not qualify for otherwise available
special tax treatment. Except as otherwise determined by the Board of Directors,
no other Common Shares issued after the Distribution Date will be issued with
Rights. The Rights will expire on the earliest of (i) January 28, 2007 (the
"Final Expiration Date"), (ii) redemption or exchange of the Rights as described
below, or (iii) consummation of an acquisition of the Company satisfying certain
conditions by a person who acquired shares pursuant to a Permitted Offer as
described below.

Following the Distribution Date, and until one of the further events
described below, holders of the Rights will be entitled to receive, upon
exercise and the payment of $150.00 per Right, one one-thousandth of a share of
the Series A Preferred. In the event that the Company does not have sufficient
Series A
Preferred available for all Rights to be exercised, or the Board decides that
such action is necessary and not contrary to the interests of Rights holders,
the Company may instead substitute cash, assets or other securities for the
Series A Preferred for which the Rights would have been exercisable under this
provision or as described below. Unless the Rights are earlier redeemed, in the
event that an Acquiring Person becomes the beneficial owner of 15% or more of
the Company's Common Shares then outstanding (other than pursuant to a Permitted
Offer), then each holder of a Right which has not theretofore been exercised
(other than Rights beneficially owned by the Acquiring Person, which will
thereafter be void) will thereafter have the right to receive, upon exercise,
Common Shares having a value equal to two times the Purchase Price. Rights are
not exercisable following the occurrence of an event as described above until
such time as the Rights are no longer redeemable by the Company as set forth
below. Unless the Rights are earlier redeemed, in the event that, after the
Shares Acquisition Date (as defined below), (i) the Company is acquired in a
merger or other business combination transaction, or (ii) the Company
consummates a merger or other business combination transaction in which the
Company is the continuing or surviving corporation, or (iii) 50% or more of the
Company's assets or earning power are sold, each holder of a Right which has not
theretofore been exercised (other than Rights beneficially owned by the

59
<PAGE>
Acquiring Person, which will thereafter be void) will thereafter have the right
to receive, upon exercise, shares of common stock of (i) the corporation
acquiring the Company or (ii) the Company or (iii) the purchaser of 50% or more
of the Company's assets or earning power, respectively, such shares in each case
having a value equal to two times the Purchase Price (unless the transaction
satisfies certain conditions and is consummated with a person who acquired
shares pursuant to a Permitted Offer, in which case the Rights will expire). A
Permitted Offer means a tender offer for all outstanding Common Shares that has
been determined by a majority of the Continuing Directors to be fair and
otherwise in the best interests of the Company and its stockholders. Where the
Board of Directors has determined that a tender offer constitutes a Permitted
Offer, the Rights will not become exercisable to purchase Common Shares or
shares of the acquiring company (as the case may be) at the discounted price
described above.

At any time after the acquisition by an Acquiring Person of 15% or more of
the Company's outstanding Common Shares and prior to the acquisition by such
Acquiring Person of 50% or more of the Company's outstanding Common Shares, the
Board of Directors of the Company may exchange the Rights (other than Rights
owned by the Acquiring Person), in whole or in part, at an exchange ratio of one
Common Share per Right. At any time on or prior to the close of business on the
earlier of (i) the 10th day following the acquisition by an Acquiring Person of
15% or more of the Company's outstanding Common Shares (the "Shares Acquisition
Date") or such later date as may be determined by a majority of the Continuing
Directors and publicly announced by the Company, or (ii) the Final Expiration
Date of the Rights, the Company may redeem the Rights in whole, but not in part,
at a price of $.001 per Right.

The Purchase Price payable, the number of Rights, and the number of Series A
Preferred or Common Shares or other securities or property issuable upon
exercise of the Rights are subject to adjustment from time to time in connection
with the dilutive issuances by the Company as set forth in the Rights Agreement.
With certain exceptions, no adjustment in the Purchase Price will be required
until cumulative adjustments require an adjustment of at least 1% in such
Purchase Price.

No fractional portion less than integral multiples of one Common Share will
be issued upon exercise of a Right and in lieu thereof, an adjustment in cash
will be made based on the market price of the Common Shares on the last trading
date prior to the date of exercise.

Until a Right is exercised, the holder thereof, as such, will have no rights
as a stockholder of the Company (other than any rights resulting from such
holder's ownership of Common Shares), including, without limitation, the right
to vote or to receive dividends.

The provisions of the Rights Agreement may be supplemented or amended by the
Board of Directors in any manner prior to the close of business on the date of
the acquisition by an Acquiring Person of 15% or more of the Company's
outstanding Common Shares without the approval of Rights holders. After the
Distribution Date, the provisions of the Rights Agreement may be amended by the
Board in order to cure any ambiguity, defect or inconsistency, to make changes
which do not adversely affect the interests of holders of Rights (excluding the
interests of any Acquiring Person), or to shorten or lengthen any time period
under the Rights Agreement; provided, however, that no amendment to adjust the
time period governing redemption shall be made at such time as the Rights are
not redeemable.

Series A Preferred purchasable upon exercise of the Rights will not be
redeemable. Each share of Series A Preferred will be entitled to an aggregate
dividend of 1,000 times the dividend declared per Common Share. In the event of
liquidation, the holders of the Series A Preferred will be entitled to a minimum
preferential liquidation payment equal to $150,000 per share. Each share of
Series A Preferred will have 1,000 votes, voting together with the Common
Shares. In the event of any merger, consolidation or other transaction in which
the Common Shares are changed or exchanged, each share of Series A Preferred
will be entitled to receive 1,000 times the amount received per Common Share.
These rights are protected by customary anti-dilution provisions.

60
<PAGE>
Because of the nature of the dividend, liquidation and voting rights of the
shares of Series A Preferred, the value of the one one-thousandth interest in a
share of Series A Preferred purchasable upon exercise of each Right should
approximate the value of one Common Share.

The Rights approved by the Board are designed to protect and maximize the
value of the outstanding equity interests in the Company in the event of an
unsolicited attempt by an acquiror to take over the Company in a manner or on
terms not approved by the Board of Directors. Takeover attempts frequently
include coercive tactics to deprive the Company's Board of Directors and its
stockholders of any real opportunity to determine the destiny of the Company or
to evaluate and protect the long-term value of the Company. The Rights are not
intended to prevent a takeover of the Company. The Rights may be redeemed by the
Company at $.001 per Right within ten days (or such later date as may be
determined by a majority of the Continuing Directors) after the accumulation of
15% or more of the Company's shares by a single acquiror or group. Accordingly,
the Rights should not interfere with any merger or business combination approved
by the Board of Directors. Issuance of the Rights does not in any way weaken the
financial strength of the Company or interfere with its business plans. The
issuance of the Rights themselves has no dilutive effect, will not affect
reported earnings per share, should not be taxable to the Company or to its
stockholders, and will not change the way in which the Company's shares are
presently traded. The Company's Board of Directors believes that the Rights
represent a sound and reasonable means of addressing the complex issues of
corporate policy created by the current takeover environment. However, the
Rights may have the effect of rendering more difficult or discouraging an
acquisition of the Company deemed undesirable by the Board of Directors. The
Rights may cause substantial dilution to a person or group that attempts to
acquire the Company on terms or in a manner not approved by the Company's Board
of Directors, except pursuant to an offer conditioned upon the negation,
purchase or redemption of the Rights.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Company's Common Stock is Norwest
Bank Minnesota, N.A. Its telephone number is 800-468-9716.

61
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no market for the Common Stock of the
Company. Future sales of substantial amounts of Common Stock in the public
market could adversely affect market prices prevailing from time to time. Sales
of substantial amounts of Common Stock of the Company in the public market after
the restrictions lapse could adversely affect the prevailing market price and
the ability of the Company to raise equity capital in the future.

Upon the completion of this offering, the Company will have 12,865,337
shares of Common Stock outstanding, assuming no exercise of options after
September 30, 1997. Of these shares, the 2,500,000 shares sold in this offering
will be freely tradable without restriction under the Securities Act, unless
held by "affiliates" of the Company, as that term is defined in Rule 144 under
the Securities Act. The remaining 10,365,337 shares of Common Stock held by
existing stockholders were issued and sold by the Company in reliance on
exemptions from the registration requirements of the Securities Act. These
shares may be sold in the public market only if registered, or pursuant to an
exemption from registration, including Rule 144, 144(k) or 701 under the
Securities Act. All of the directors and executive officers and substantially
all of the stockholders and optionholders of the Company have each agreed not to
offer, sell, contract to sell, hypothecate or otherwise dispose (or enter into
any transaction which is designed to, or could be expected to, result in the
disposition by any person) of, directly or indirectly, any shares of Common
Stock (including, without limitation, shares which may be deemed to be
beneficially owned in accordance with the Rules and Regulations of the
Securities and Exchange Commission under the Securities Act of 1933, as
amended), or any security convertible into or exercisable for Common Stock of
the Company, or any rights to purchase or acquire, Common Stock of the Company
(other than pursuant to bona fide gifts to persons who agree in writing to be
bound by the provisions of the agreement) for a period of 180 days from the date
of this Prospectus without the prior written consent of Lehman Brothers Inc. In
addition, all of the stockholders and optionholders are subject to separate
180-day lockup agreements with the Company (all such agreements are collectively
referred to as the "Lock-Up Agreements"). The Company is subject to a similar
180-day agreement with the Representatives, except that the Company may issue
shares upon the exercise of stock options granted prior to the date of this
Prospectus, and may grant additional options or stock purchase rights under its
employee compensation plans, provided that, without the prior written consent of
the Representatives, the shares issuable upon exercise of such options or stock
purchase rights may not be resold during such 180-day period. However, Lehman
Brothers Inc. may in its sole discretion and at any time without notice, release
all or any portion of the securities subject to the Lock-Up Agreements.

Upon expiration of the Lock-Up Agreements, approximately 10,365,337 shares
of Common Stock as well as an additional approximately 176,087 shares issuable
upon exercise of vested options will become eligible for immediate public
resale, subject in some cases to vesting provisions applicable to certain
outstanding shares of Common Stock and volume limitations applicable to
securities held by persons who may be deemed to be affiliates of the Company
pursuant to Rule 144. In addition, 8,297,389 of the shares outstanding
immediately following the completion of this offering will be entitled to
registration rights with respect to such shares upon the release of the Lock-Up
Agreements. The number of shares sold in the public market could increase if
such rights are exercised.

As of September 30, 1997, 297,921 shares were subject to outstanding
options. All of these shares are subject to the Lock-Up Agreements described
above. Approximately 90 days after the date of this Prospectus, the Company
intends to file a Registration Statement on Form S-8 covering shares issuable
under the Company's 1992 Incentive Stock Plan (including shares subject to then
outstanding options under such plans), 1997 Director Option Plan and 1997
Employee Stock Purchase Plan, thus permitting the resale of such shares in the
public market without restriction under the Securities Act after expiration of
the applicable Lock-Up Agreements.

62
<PAGE>
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least one
year (including the holding period of any prior owner, except an affiliate) is
entitled to sell in "broker's transactions" or to market makers, within any
three-month period commencing 90 days after the date of this Prospectus, a
number of shares that does not exceed the greater of (i) one percent of the
number of shares of Common Stock then outstanding (approximately 129,000 shares
immediately after this offering) or (ii) the average weekly trading volume of
the Common Stock during the four calendar weeks preceding the required filing of
a Form 144 with respect to such sale. Sales under Rule 144 are generally subject
to certain manner of sale provisions and notice requirements and to the
availability of current public information about the Company. Under Rule 144(k),
a person who is not deemed to have been an affiliate of the Company at any time
during the 90 days preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years, is entitled to sell such shares
without having to comply with the manner of sale, public information, volume
limitation or notice provisions of Rule 144. Under Rule 701 under the Securities
Act, persons who purchase shares upon exercise of options granted prior to the
effective date of this offering are entitled to sell such shares 90 days after
the effective date of this offering in reliance on Rule 144, without having to
comply with the holding period requirements of Rule 144 and, in the case of
non-affiliates, without having to comply with the public information, volume
limitation or notice provisions of Rule 144.

REGISTRATION RIGHTS OF CERTAIN HOLDERS

The holders of 8,297,389 shares of Common Stock (the "Registrable
Securities") or their transferees are entitled to certain rights with respect to
the registration of such shares under the Securities Act. These rights are
provided under the terms of an agreement between the Company and the holders of
Registrable Securities. The holders of at least 40% of the Registrable
Securities may require, on two occasions, that the Company use its best efforts
to register the Registrable Securities for public resale, provided, among other
limitations, that the proposed aggregate selling price to the public is at least
$5.0 million. If the Company registers any of its Common Stock either for its
own account or for the account of other security holders, the holders of
Registrable Securities are entitled to include their shares of Common Stock in
the registration, subject to the ability of the underwriters to limit the number
of shares included in the offering (but to not less than 20% of the offering,
except in the case of this Offering). The holders of the Registrable Securities
may also require the Company, on four occasions, but not more than once during
any 12-month period, to register all or a portion of their Registrable
Securities on Form S-3 when use of such form becomes available to the Company,
provided, among other limitations, that the proposed aggregate selling price
(net of any underwriters' discounts or commissions) is at least $1.0 million.
All registration expenses must be borne by the Company and all selling expenses
relating to Registrable Securities must be borne by the holders of the
securities being registered. The holders of Registrable Securities have waived
their right to have shares of Common Stock registered under the Securities Act
as part of this Offering and for a period of 180 days following this Offering.

63
<PAGE>
UNDERWRITING

Under the terms and subject to the conditions contained in the Underwriting
Agreement, the form of which is filed as an exhibit to the Registration
Statement of which this Prospectus forms a part, the Underwriters named below,
for whom Lehman Brothers Inc., Piper Jaffray Inc. and Pacific Growth Equities,
Inc. are acting as representatives (the "Representatives"), have severally
agreed to purchase from the Company, and the Company has agreed to sell to each
Underwriter, the aggregate number of shares set forth opposite the name of each
such Underwriter below:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ----------------------------------------------------------------------------------------------------- ----------
<S> <C>
Lehman Brothers Inc..................................................................................
Piper Jaffray Inc....................................................................................
Pacific Growth Equities, Inc.........................................................................

----------
Total............................................................................................ 2,500,000
----------
----------
</TABLE>

The Company has been advised by the Representatives that the Underwriters
propose to offer the shares to the public at the initial public offering price
set forth on the cover page hereof, and to certain dealers at such initial
public 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 Underwriters or to certain other brokers or
dealers. After the initial offering to the public, the offering price and other
selling terms may be changed by the Representatives.

The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares offered hereby are
subject to approval of certain legal matters by counsel and to certain other
conditions, including the condition that no stop order suspending the
effectiveness of the Registration Statement is in effect and no proceedings for
such purpose are pending or threatened by the Securities and Exchange Commission
and that there has been no material adverse change or any development involving
a prospective material adverse change in the condition of the Company from that
set forth in the Registration Statement otherwise than as set forth or
contemplated in this Prospectus, and that certain certificates, opinions and
letters have been received from the Company and its counsel and independent
auditors. The Underwriters are obligated to take and pay for all of the above
shares of Common Stock if any such shares are taken.

The Company and the Underwriters have agreed in the Underwriting Agreement
to indemnify each other against certain liabilities, including liabilities under
the Securities Act.

The Company has granted to the Underwriters an option to purchase up to an
additional 375,000 shares of Common Stock, exercisable solely to cover
over-allotments, at the initial public offering price, less the underwriting
discounts and commissions shown on the cover page of this Prospectus. Such
option may be exercised at any time until 30 days after the date of the
Underwriting Agreement. To the extent that such option is exercised, each
Underwriter will be committed, subject to certain conditions, to purchase a
number of the additional shares of Common Stock that is proportionate to such
Underwriter's initial commitment as indicated in the preceding table.

64
<PAGE>
All of the directors and executive officers and substantially all of the
stockholders and optionholders of the Company have each agreed not to offer,
sell, contract to sell, hypothecate or otherwise dispose (or enter into any
transaction which is designed to, or could be expected to, result in the
disposition by any person) of, directly or indirectly, any shares of Common
Stock (including, without limitation, shares which may be deemed to be
beneficially owned in accordance with the Rules and Regulations of the
Securities and Exchange Commission under the Securities Act of 1933, as
amended), or any security convertible into or exercisable for Common Stock, or
any rights to purchase or acquire, Common Stock of the Company (other than
pursuant to bona fide gifts to persons who agree in writing to be bound by the
provisions of the agreement) for a period of 180 days from the date of this
Prospectus without the prior written consent of Lehman Brothers Inc. In
addition, all of the stockholders and optionholders are subject to separate
180-day lock-up agreements with the Company. Except for the Common Stock to be
sold in the offering, the Company has agreed, with certain limited exceptions
relating to the grant of options and issuance of Common Stock pursuant to the
Company's stock option plans and stock purchase plans, not to offer for sale,
sell or otherwise dispose of (or enter into any transaction or device which is
designed to, or could be expected to, result in the disposition by any person at
any time in the future of), directly or indirectly, any shares of Common Stock
or other capital stock or any securities convertible into or exchangeable or
exercisable for, or any rights to acquire, Common Stock or other capital stock,
prior to the expiration of 180 days from the date of this Prospectus without the
prior written consent of Lehman Brothers Inc. on behalf of the Representatives.

The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to accounts over which they exercise discretionary
authority.

Until the distribution of the shares is completed, the rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase shares of Common Stock. As an exception to these
rules, the Representatives are permitted to engage in certain transactions that
stabilize the price of the Common Stock. Such transactions may consist of bids
or purchases for the purpose of pegging, fixing or maintaining the price of the
Common Stock. In addition, if the Representatives over-allot (sell more shares
of Common Stock than are set forth on the cover page of this Prospectus), and
thereby create a short position in the Common Stock in connection with this
offering, the Representatives may reduce that short position by purchasing
Common Stock in the open market. The Representatives may also elect to reduce
any short position by exercising all or part of the over-allotment option
described herein.

The Representatives may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
shares of the Common Stock in the open market to reduce the Underwriters' short
position or to stabilize the price of the Common Stock, they may reclaim the
amount of the selling concession from the Underwriters and selling group members
who sold those shares as part of this offering. In general, purchases of shares
of Common Stock for the purpose of stabilization or to reduce a syndicate short
position could cause the price of the Common Stock to be higher than it might
otherwise be in the absence of such purchases. The imposition of a penalty bid
might have an effect on the price of a security to the extent that it were to
discourage resales of the security by purchasers in the offering. Neither the
Company nor any of the Underwriters makes any representation or prediction as to
the direction or magnitude of any effect that the transactions described above
may have on the price of the Common Stock. In addition, neither the Company nor
any of the Underwriters makes any representation that the Representatives will
engage in such transactions or that such transactions, once commenced, will not
be discontinued without notice.

Prior to this offering, there has been no public market for the shares of
Common Stock. The initial public offering price will be determined through
negotiations among the Company and the Representatives. Among the factors to be
considered in determining the initial public offering price of the Common Stock,
in addition to prevailing market conditions, will be the Company's historical
performance, capital structure, estimates of the business potential and earnings
prospects of the Company, an assessment of the Company's management,
consideration of the above factors in relation to market valuation of companies
in related businesses and other factors deemed relevant.

65
<PAGE>
LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California. Certain legal matters will be passed upon for the Underwriters
by Mintz, Levin, Cohn, Ferris, Glovksy and Popeo, P.C., Boston, Massachusetts.
Mario M. Rosati and Christopher D. Mitchell, Secretary and Assistant Secretary
of the Company, respectively, are members of Wilson Sonsini Goodrich & Rosati,
Professional Corporation.

EXPERTS

Certain legal matters with respect to information contained in this
Prospectus under the captions "Risk Factors--Uncertainties Related to Patents
and Proprietary Technology" and "Business--Patents and Proprietary Rights" will
be passed upon for the Company by Arnall, Golden & Gregory LLP, Atlanta,
Georgia, patent counsel to the Company.

The financial statements of Focal, Inc. at December 31, 1995 and 1996, and
for each of the three years in the period ended December 31, 1996, appearing in
this Prospectus and Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") Washington, D.C. 20549, a Registration Statement on Form S-1,
including amendments thereto, the Registration Statement under the Securities
Act, with respect to the Securities offered hereby. This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules filed therewith. For further information with respect to
the Company and the Common Stock offered hereby, reference is made to such
Registration Statement and to the exhibits and schedules filed therewith.
Statements contained in this Prospectus regarding the contents of any contract,
agreement or other document referred to are not necessarily complete and, in
each instance, reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. The Registration Statement,
including the exhibits and schedules thereto, may be inspected without charge at
the principal office of the Commission, at Judiciary Plaza, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549 and at its regional offices in New York
(Seven World Trade Center, New York, New York, 10007) and in Chicago (Citicorp
Center, Suite 1400, 500 West Madison Street, Chicago, Illinois 60611), and
copies of all or any part thereof may be obtained from such office upon the
payment of prescribed fees. Such information is also available electronically by
means of the Commission's web site on the Internet at http://www.sec.gov. The
Company intends to distribute to its stockholders annual reports containing
financial statements audited by its independent auditors and will make available
copies of quarterly reports for the first three quarters of each fiscal year
containing unaudited financial statements.

66
<PAGE>
FOCAL, INC.
INDEX TO FINANCIAL STATEMENTS
CONTENTS

<TABLE>
<S> <C>
Report of Independent Auditors....................................................... F-2
Balance Sheets....................................................................... F-3
Statements of Operations............................................................. F-4
Statements of Stockholders' Equity................................................... F-5
Statements of Cash Flows............................................................. F-6
Notes to Financial Statements........................................................ F-7
</TABLE>

F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS

The Board of Directors
and Stockholders
Focal, Inc.

We have audited the accompanying balance sheets of Focal, Inc. as of
December 31, 1995 and 1996, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1996. 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 Focal, Inc. at December 31,
1995 and 1996, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.

/s/ ERNST & YOUNG LLP

Boston, Massachusetts
February 7, 1997, except as
to the first paragraph of
Note 10, as to which the
date is December 8, 1997.

F-2
<PAGE>
FOCAL, INC.
BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------
1995 1996
-------------- ------------- SEPTEMBER 30
1997
--------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 5,000,306 $ 5,465,471 $ 5,160,698
Marketable securities........................................... 1,947,600 6,742,718 8,054,492
Accrued interest receivable..................................... 48,429 158,435 193,959
Prepaid expenses and other assets............................... 253,735 311,881 340,232
-------------- ------------- --------------
Total current assets.............................................. 7,250,070 12,678,505 13,749,381

Notes receivable from related parties............................. 166,546 265,150 377,786

Property and equipment............................................ 2,967,069 3,732,451 5,789,937
Accumulated depreciation and amortization......................... (1,655,241) (2,598,662) (3,438,419)
-------------- ------------- --------------
Net property and equipment........................................ 1,311,828 1,133,789 2,351,518

Other assets...................................................... 577,715 12,049 12,528
-------------- ------------- --------------
Total assets...................................................... $ 9,306,159 $ 14,089,493 $ 16,491,213
-------------- ------------- --------------
-------------- ------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................ $ 614,498 $ 501,604 $ 445,901
Accrued liabilities............................................. 1,549,021 1,864,990 1,929,087
Deferred revenue................................................ -- 655,333 1,373,500
Current portion of capital lease obligations.................... 685,525 653,932 746,991
-------------- ------------- --------------
Total current liabilities......................................... 2,849,044 3,675,859 4,495,479

Capital lease obligations......................................... 461,958 314,607 1,207,386
Commitments and contingent liabilities
Stockholders' equity:
Convertible preferred stock, issuable in series; $.01 par value;
21,150,000 and 31,681,540 shares authorized; 14,561,046,
24,345,247 and 24,345,247 (unaudited) shares issued and
outstanding at December 31, 1995 and 1996, and September 30,
1997, respectively; aggregate liquidation preference of
$56,304,650 at December 31, 1996................................ 145,610 243,452 243,452
Common stock, $.01 par value; 30,000,000 and 50,000,000 shares
authorized at December 31, 1995 and 1996, respectively; 664,504,
723,344, and 2,228,038 (unaudited) shares issued and outstanding
at December 31, 1995 and 1996, and September 30, 1997,
respectively.................................................... 6,645 7,233 22,280
Additional paid-in capital........................................ 41,215,682 56,303,958 57,987,019
Accumulated deficit............................................... (35,320,380) (45,478,469) (45,032,638)
Notes receivable from related parties............................. -- -- (1,688,057)
Deferred compensation............................................. -- (934,104) (732,610)
Unrealized loss on marketable securities.......................... (52,400) (43,043) (11,098)
-------------- ------------- --------------
Total stockholders' equity........................................ 5,995,157 10,099,027 10,788,348
-------------- ------------- --------------
Total liabilities and stockholders' equity........................ $ 9,306,159 $ 14,089,493 $ 16,491,213
-------------- ------------- --------------
-------------- ------------- --------------
</TABLE>

See accompanying notes.

F-3
<PAGE>
FOCAL, INC.
STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31 SEPTEMBER 30
---------------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
-------------- -------------- -------------- ------------- -------------
(UNAUDITED)
Collaborative research revenue.... $ 50,000 $ 968,543 $ 3,098,289 $ 2,349,328 $ 12,831,123
Operating expenses:
Research and development........ 11,890,001 9,665,091 11,679,942 8,735,308 10,929,321
General and administrative...... 2,033,819 2,098,138 2,174,911 1,517,502 2,105,944
-------------- -------------- -------------- ------------- -------------
Total operating expenses.......... 13,923,820 11,763,229 13,854,853 10,252,810 13,035,265
-------------- -------------- -------------- ------------- -------------
Loss from operations.............. (13,873,820) (10,794,686) (10,756,564) (7,903,482) (204,142)
Other income (expense):
Interest income................. 667,970 442,505 690,745 515,458 730,893
Interest expense................ (79,014) (106,895) (92,270) (71,614) (80,920)
-------------- -------------- -------------- ------------- -------------
588,956 335,610 598,475 443,844 649,973
-------------- -------------- -------------- ------------- -------------
Net income (loss)................. $ (13,284,864) $ (10,459,076) $ (10,158,089) $ (7,459,638) $ 445,831
-------------- -------------- -------------- ------------- -------------
-------------- -------------- -------------- ------------- -------------
Pro forma net income (loss) per
share (unaudited)............... $ (1.23) $ (.93) $ .04
-------------- ------------- -------------
-------------- ------------- -------------
Shares used in computing pro forma
net income (loss) per share
(unaudited)..................... 8,271,430 8,001,252 10,550,795
-------------- ------------- -------------
-------------- ------------- -------------
</TABLE>

See accompanying notes.

F-4
<PAGE>
FOCAL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
NOTES
CONVERTIBLE RECEIVABLE
PREFERRED STOCK COMMON STOCK ADDITIONAL FROM
-------------------- ---------------------- PAID-IN ACCUMULATED RELATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT PARTIES
--------- --------- --------- ----------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1994................ 11,292,255 $ 112,923 646,559 $ 6,466 $30,012,576 ($11,576,440) $ --
Issuance of Series D convertible preferred
stock at $3.70 per share (net of issuance
costs of $16,132)........................ 1,730,840 17,308 -- -- 6,370,668 -- --
Exercise of stock options.................. -- -- 1,103 11 1,722 -- --
Repurchase of common stock for cash at $.01
per share................................ -- -- (8,333) (83) (188) -- --
Unrealized loss on marketable securities... -- -- -- -- -- -- --
Net loss................................... -- -- -- -- -- (13,284,864) --
--------- --------- --------- ----------- ---------- ------------ --------------
Balances at December 31, 1994.............. 13,023,095 130,231 639,329 6,394 36,384,778 (24,861,304) --
Issuance of Series E convertible preferred
stock at $3.15 per share (net of issuance
costs of $30,406)........................ 1,537,951 15,379 -- -- 4,798,761 -- --
Exercise of stock options.................. -- -- 25,175 251 32,143 -- --
Unrealized loss on marketable securities... -- -- -- -- -- -- --
Net loss................................... -- -- -- -- -- (10,459,076) --
--------- --------- --------- ----------- ---------- ------------ --------------
Balances at December 31, 1995.............. 14,561,046 145,610 664,504 6,645 41,215,682 (35,320,380) --
Issuance of Series E convertible preferred
stock at $1.74 per share (net of
placement fees and issuance costs of
$798,659)................................ 9,784,201 97,842 -- -- 13,959,510 -- --
Exercise of stock options.................. -- -- 58,840 588 54,129 -- --
Unrealized gain on marketable securities... -- -- -- -- -- -- --
Deferred compensation...................... -- -- -- -- 1,074,637 -- --
Amortization of deferred compensation...... -- -- -- -- -- -- --
Net loss................................... -- -- -- -- -- (10,158,089) --
--------- --------- --------- ----------- ---------- ------------ --------------
Balances at December 31, 1996.............. 24,345,247 243,452 723,344 7,233 56,303,958 (45,478,469) --
Exercise of stock options (unaudited)...... -- -- 9,919 99 9,952 -- --
Exercise of stock options for notes
receivable (unaudited)................... -- -- 1,494,775 14,948 1,673,109 -- (1,688,057)
Unrealized gain on marketable securities
(unaudited).............................. -- -- -- -- -- -- --
Amortization of deferred compensation
(unaudited).............................. -- -- -- -- -- -- --
Net income (unaudited)..................... -- -- -- -- -- 445,831 --
--------- --------- --------- ----------- ---------- ------------ --------------
Balances at September 30, 1997
(unaudited).............................. 24,345,247 $ 243,452 2,228,038 $ 22,280 $57,987,019 ($45,032,638) $(1,688,057)
--------- --------- --------- ----------- ---------- ------------ --------------
--------- --------- --------- ----------- ---------- ------------ --------------

<CAPTION>
UNREALIZED
GAIN (LOSS)
ON TOTAL
DEFERRED MARKETABLE STOCKHOLDERS'
COMPENSATION SECURITIES EQUITY
------------- ----------- ------------
<S> <C> <C> <C>
Balances at January 1, 1994................ $ -- $ -- $18,555,525
Issuance of Series D convertible preferred
stock at $3.70 per share (net of issuance
costs of $16,132)........................ -- -- 6,387,976
Exercise of stock options.................. -- -- 1,733
Repurchase of common stock for cash at $.01
per share................................ -- -- (271)
Unrealized loss on marketable securities... -- (34,346) (34,346)
Net loss................................... -- -- (13,284,864)
------------- ----------- ------------
Balances at December 31, 1994.............. -- (34,346) 11,625,753
Issuance of Series E convertible preferred
stock at $3.15 per share (net of issuance
costs of $30,406)........................ -- -- 4,814,140
Exercise of stock options.................. -- -- 32,394
Unrealized loss on marketable securities... -- (18,054) (18,054)
Net loss................................... -- -- (10,459,076)
------------- ----------- ------------
Balances at December 31, 1995.............. -- (52,400) 5,995,157
Issuance of Series E convertible preferred
stock at $1.74 per share (net of
placement fees and issuance costs of
$798,659)................................ -- -- 14,057,352
Exercise of stock options.................. -- -- 54,717
Unrealized gain on marketable securities... -- 9,357 9,357
Deferred compensation...................... (1,074,637) -- --
Amortization of deferred compensation...... 140,533 -- 140,533
Net loss................................... -- -- (10,158,089)
------------- ----------- ------------
Balances at December 31, 1996.............. (934,104) (43,043) 10,099,027
Exercise of stock options (unaudited)...... -- -- 10,051
Exercise of stock options for notes
receivable (unaudited)................... -- -- --
Unrealized gain on marketable securities
(unaudited).............................. -- 31,945 31,945
Amortization of deferred compensation
(unaudited).............................. 201,494 -- 201,494
Net income (unaudited)..................... -- -- 445,831
------------- ----------- ------------
Balances at September 30, 1997
(unaudited).............................. $ (732,610) $ (11,098) $10,788,348
------------- ----------- ------------
------------- ----------- ------------
</TABLE>

See accompanying notes.

F-5
<PAGE>
FOCAL, INC.
STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
------------------------------------- ----------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)...................................... $(13,284,864) $(10,459,076) $(10,158,089) $(7,459,638) $ 445,831
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization........................ 542,026 872,842 969,868 732,233 839,757
Amortization of deferred compensation................ -- -- 140,533 77,285 201,494
Interest earned on notes receivable.................. (6,663) (8,096) (10,604) (7,236) (82,636)
Loss on sale of equipment, furniture and fixtures.... -- -- 3,647 3,647 --
Increase (decrease) in cash arising from changes of
operating assets and liabilities:
Accrued interest receivable........................ 48,071 135,384 (110,006) (149,176) (35,524)
Prepaid expenses and other assets.................. (182,983) 99,729 (58,146) (123,025) (28,351)
Accounts payable................................... (280,350) 73,343 (112,894) 28,148 (55,703)
Accrued liabilities................................ 875,191 48,199 315,969 331,231 64,097
Deferred revenue................................... -- -- 655,333 670,000 718,167
----------- ----------- ----------- ---------- ----------
Net cash provided by (used in) operating activities.... (12,289,572) (9,237,675) (8,364,389) (5,896,531) 2,067,132
INVESTING ACTIVITIES
Purchase of marketable securities...................... (11,985,343) -- (12,760,761) (8,991,906) (9,549,829)
Sale of marketable securities.......................... 13,813,105 5,929,346 7,975,000 1,800,000 8,270,000
Issuance of notes receivable........................... (20,000) (50,000) (88,000) (88,000) (30,000)
Repayment of notes receivable.......................... -- 45,000 -- -- --
Purchase of property and equipment..................... (296,405) (280,426) (388,683) (342,282) (1,677,847)
Proceeds from sale of property and equipment........... -- -- 2,150 2,150 --
Other assets........................................... (535,431) (42,284) 565,666 37,322 (479)
----------- ----------- ----------- ---------- ----------
Net cash provided by (used in) investing activities.... 975,926 5,601,636 (4,694,628) (7,582,716) (2,988,155)
FINANCING ACTIVITIES
Proceeds from the issuance of convertible preferred
stock, net of issuance costs......................... 6,387,976 4,464,140 14,057,352 14,057,352 --
Proceeds from lease financing.......................... 528,266 312,426 372,356 372,356 1,407,310
Principal payments on capital lease obligations........ (528,666) (867,595) (960,243) (722,217) (801,111)
Proceeds from issuance of common stock, net of
repurchases.......................................... 1,462 32,394 54,717 17,997 10,051
Proceeds from notes payable and advances............... -- 350,000 -- -- --
----------- ----------- ----------- ---------- ----------
Net cash provided by financing activities.............. 6,389,038 4,291,365 13,524,182 13,725,488 616,250
----------- ----------- ----------- ---------- ----------
Net increase (decrease) in cash and cash equivalents... (4,924,608) 655,326 465,165 246,241 (304,773)
Cash and cash equivalents at beginning of the period... 9,269,588 4,344,980 5,000,306 5,000,306 5,465,471
----------- ----------- ----------- ---------- ----------
Cash and cash equivalents at end of the period......... $ 4,344,980 $ 5,000,306 $ 5,465,471 $5,246,547 $5,160,698
----------- ----------- ----------- ---------- ----------
----------- ----------- ----------- ---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Property acquired under capital lease
obligations...................................... $ 730,996 $ 39,165 $ 408,943 $ 282,372 $ 379,639
----------- ----------- ----------- ---------- ----------
----------- ----------- ----------- ---------- ----------
Interest paid...................................... $ 79,014 $ 106,895 $ 92,270 $ 71,614 $ 80,920
----------- ----------- ----------- ---------- ----------
----------- ----------- ----------- ---------- ----------
</TABLE>

See accompanying notes.

F-6
<PAGE>
FOCAL, INC.

NOTES TO FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND BUSINESS

Focal, Inc. (the Company) develops, manufactures and commercializes
synthetic, absorbable, liquid surgical sealants based on the Company's
proprietary polymer technology. The Company's family of FOCALSEAL surgical
sealant products is currently being developed for use inside the body with or
without sutures and staples to seal leaks resulting from lung surgery,
neurosurgery, cardiovascular surgery and gastrointestinal surgery.

During 1996 and early 1997, the Company entered into two collaborative
research agreements, which have provided significant revenues, and began
clinical trials in one of its product development programs. As a result, the
Company has concluded that it is no longer in its development stage.

REVERSE STOCK SPLIT

All common share and per common share amounts included in the accompanying
financial statements and notes thereto have been retroactively restated to give
effect to a 1 for 3.25 reverse stock split, effected in the form of a reverse
stock dividend. See Note 10.

INTERIM FINANCIAL STATEMENTS

The financial information at September 30, 1997, and for the nine months
ended September 30, 1996 and 1997, is unaudited but includes all adjustments
(consisting only of normal recurring adjustments) which the Company considers
necessary for a fair presentation of the financial position at such date and of
the operating results and cash flows for these periods. Results of the 1997
period are not necessarily indicative of results that may be expected for the
entire year.

USE OF ESTIMATES

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

CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES

Cash and cash equivalents include funds held in investments with original
maturities of three months or less. Marketable securities consist of investments
in agencies of the U.S. government, investment grade corporate notes and other
investments with original maturities of greater than three months.

The Company determines the appropriate classification of cash equivalents
and marketable securities at the time of purchase and reevaluates such
designation as of each balance sheet date. The Company has classified such
holdings as available-for-sale securities, which are carried at fair value, with
unrealized gains and losses reported as a separate component of stockholders'
equity.

CONCENTRATION OF CREDIT RISK

The Company invests its cash equivalents and marketable securities with
institutions that have strong credit ratings. The Company has developed
guidelines relative to investment risk and liquidity.

F-7
<PAGE>
FOCAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost and are depreciated using the
straight-line method over estimated useful lives of 3-5 years. Property and
equipment under capital leases are amortized using the straight-line method over
the lease term, typically 3-4 years.

COLLABORATIVE RESEARCH REVENUE

Revenues from collaborative research agreements are recognized as earned
upon the incurrence of reimbursable expenses or the achievement of certain
milestones. Payments received in advance of research performed are designated as
deferred revenue.

RESEARCH AND DEVELOPMENT COSTS AND PATENT COSTS

All research and development costs, including the cost of acquiring patents
and licensing fees paid in connection with university technology licensing
agreements, are expensed as incurred.

STOCK BASED COMPENSATION

The Company accounts for its stock based compensation arrangements under the
provisions of APB Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES,"
rather than the alternative fair value accounting method provided for under FAS
No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION." Under APB 25, when the
exercise price of options granted to employees and non-employee directors under
these plans equals the market price of the underlying stock on the date of
grant, no compensation expense is recorded.

INCOME TAXES

The liability method is used to account for income taxes. Deferred tax
assets and liabilities are determined based on differences between the financial
reporting and income tax basis of assets and liabilities as well as net
operating loss carryforwards and are measured using the enacted tax rates and
laws that will be in effect when the differences reverse. Deferred tax assets
may be reduced by a valuation allowance to reflect the uncertainty associated
with their ultimate realization.

UNAUDITED PRO FORMA NET INCOME (LOSS) PER SHARE

The unaudited pro forma net income (loss) per share is computed using the
weighted average number of outstanding common shares and common share
equivalents, assuming conversion of all convertible preferred shares and certain
warrants into common shares (at date of original issuance), which will
automatically occur upon completion of the initial public offering, as
contemplated herein, and the exercise of stock options and warrants (using the
treasury stock method and the assumed initial public offering price per share as
contemplated herein). Common share equivalents are excluded from the calculation
when their effect is anti-dilutive; however, pursuant to the requirements of the
Securities and Exchange Commission, common shares and common share equivalents
issued by the Company during the twelve-month period prior to the proposed
offering have been included in the calculation as if they were outstanding for
all periods presented whether or not they are anti-dilutive. Historical earnings
per share have not been presented since such amounts are not deemed meaningful
due to the significant change in the Company's capital structure that will occur
in connection with this offering.

F-8
<PAGE>
FOCAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In 1996, the Company adopted Statement No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The adoption of this Statement had
no impact on the financial position or results of operations of the Company as
no indicators of impairment currently exist.

In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, EARNINGS PER SHARE (FAS 128), which will be adopted on December 31,
1997. FAS 128 requires companies to change the method currently used to compute
earnings per share and to restate all prior periods for comparability. Although
the Statement has not yet been applied, the adoption of FAS 128 is not expected
to have a material impact on the Company's earnings per share.

In June 1997, the FASB issued Statement No. 130, REPORTING COMPREHENSIVE
INCOME and Statement No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION. Statement No. 130 establishes standards for the reporting
and display of comprehensive income and its components. Statement No. 131
establishes standards for the way that public companies report information about
operating segments in financial statements. This Statement supersedes Statement
No. 14, FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS ENTERPRISE, but retains
the requirements to report information about major customers. Statements 130 and
131 are effective for the Company in fiscal 1998. The Company does not believe
that the adoption of these Statements will have a material effect on the
Company's financial statements.

2. MARKETABLE SECURITIES

Available-for-sale securities consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------------------------------
<S> <C> <C> <C> <C>
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------ ----------- ----------- ------------
U.S. government securities due within one year............... $ 2,000,000 $ 13,700 $ (66,100) $ 1,947,600
------------ ----------- ----------- ------------
Total debt securities included in marketable securities...... $ 2,000,000 $ 13,700 $ (66,100) $ 1,947,600
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------

DECEMBER 31, 1996
----------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
U.S. government securities due within one year............... $ 2,000,000 $ 9,100 $ (50,900) $ 1,958,200
Corporate notes due within one year.......................... 4,785,760 -- (1,242) 4,784,518
------------ ----------- ----------- ------------
Total debt securities included in marketable securities...... $ 6,785,760 $ 9,100 $ (52,142) $ 6,742,718
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>

Amortized cost basis was used in computing the cost of marketable securities
sold.

F-9
<PAGE>
FOCAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

3. PROPERTY AND EQUIPMENT

Property and equipment consist of the following at December 31:

<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Laboratory equipment.................................................................. $ 2,035,970 $ 2,688,806
Office equipment, computers and software.............................................. 526,424 635,013
Furniture and fixtures................................................................ 404,675 408,632
------------ ------------
$ 2,967,069 $ 3,732,451
------------ ------------
------------ ------------
</TABLE>

Depreciation and amortization expense was $542,026, $872,842 and $969,868
for the years ended December 31, 1994, 1995 and 1996, respectively.

4. ACCRUED LIABILITIES

Accrued liabilities consist of the following at December 31:

<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Accrued university research funding and outside scientific services................... $ 727,948 $ 840,142
Accrued payroll-related expenses...................................................... 190,315 283,747
Accrued professional fees............................................................. 130,902 183,488
Accrued other......................................................................... 499,856 557,613
------------ ------------
$ 1,549,021 $ 1,864,990
------------ ------------
------------ ------------
</TABLE>

5. STOCKHOLDERS' EQUITY

PREFERRED STOCK

The following table summarizes share information with respect to all series
of convertible preferred stock outstanding as of December 31, 1996:

<TABLE>
<CAPTION>
CONVERSION
PREFERRED SHARES FACTOR NUMBER OF
-------------------------- INTO COMMON SHARES
ISSUED AND COMMON AFTER
AUTHORIZED OUTSTANDING SHARES CONVERSION
------------ ------------ ---------- ---------------
<S> <C> <C> <C> <C>
Series A................................................ 1,000,000 1,000,000 .3077 307,700
Series B................................................ 666,667 666,667 .3077 205,133
Series C................................................ 4,261,467 4,220,183 .3321 1,401,522
Series D................................................ 7,553,406 7,136,245 .3811 2,719,622
Series E................................................ 18,200,000 11,322,152 .3077 3,483,826
------------ ------------ ---------------
31,681,540 24,345,247 8,117,803
------------ ------------ ---------------
------------ ------------ ---------------
</TABLE>

The holders of the Series A, B, C, D and E convertible preferred stock (the
"preferred stock") are entitled to receive noncumulative dividends, when and if
declared by the Board of Directors, at a rate of $.04, $.06, $0.174, $0.296 and
$0.139 per share, per annum, respectively. Additional dividends, if declared,
will be distributed first to the holders of common stock in an amount equal to
the sum of the dividends

F-10
<PAGE>
FOCAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

5. STOCKHOLDERS' EQUITY (CONTINUED)
paid to the holders of the preferred stock, and then to the holders of preferred
stock and common stock on an equal basis. No dividends have ever been declared
or paid by the Company.

The preferred stock will be automatically converted into 8,117,803 shares of
common stock upon the consummation of an underwritten public offering of the
Company's common stock at a price per share of at least $5 and with aggregate
net proceeds of at least $20,000,000 or the consent of at least 70% of the
holders of the outstanding shares of preferred stock, which consent was obtained
for the purposes of the offering contemplated herein. The holders of preferred
stock are entitled to one vote for each share of common stock into which the
preferred stock is convertible. In addition to the voting rights of the common
stockholders, the holders of preferred shares have the right, voting as a
separate class, to elect a majority of members of the Board of Directors.

The Series A, B, C, D and E convertible preferred stocks have liquidation
preferences of $.50, $.75, $2.18, $3.70 and $1.74 per share, respectively, plus
all dividends declared and unpaid. After payment of these liquidation
preferences, the holders of common and preferred stock shall be entitled to
receive all remaining assets of the corporation.

In 1996, the Company received gross proceeds totaling $14.9 million from the
sale of Series E Preferred Stock at $1.74 per share, bringing the total gross
proceeds from Series E Preferred Stock financing to $19.7 million. Investors who
purchased shares of Series E Preferred Stock in December 1995 at a price of
$3.15 per share, received a full antidilutive adjustment to $1.74 per share.

WARRANTS

The Company grants warrants to secure lease financing, to raise capital, to
obtain letters of credit and as a form of compensation to various consultants.
At December 31, 1996, the Company has the following preferred stock warrants
outstanding:

<TABLE>
<CAPTION>
WARRANT SHARES EXERCISE PRICE EXPIRATION DATE
- ---------- ------------------------------------------ -------------- ------------------------------------------
<S> <C> <C> <C>
Series C 41,284 (convertible into 13,710 shares of $ 2.18 At closing of an initial public offering
common stock) or at the time of a merger or
consolidation which results in a per share
value of $9.75 or more.
Series D 417,161 (convertible into 158,980 shares $ 3.70-$4.255 Various times through February 2004
of common stock)
Series E 22,414 (convertible into 6,896 shares of $ 1.74 February 2006
common stock)
</TABLE>

During 1996, the Company granted warrants for the purchase of 19,496 shares
of common stock in connection with the sale of Series E convertible preferred
stock. The warrants have an exercise price of $1.20 per share and expire upon
the earlier of an initial public offering of the Company's common stock or April
2000.

STOCK OPTIONS

The 1992 Incentive Stock Plan ("the 1992 Plan") authorizes the grant of
incentive stock options and nonqualified stock options to employees and
nonqualified stock options to consultants. Including the

F-11
<PAGE>
FOCAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

5. STOCKHOLDERS' EQUITY (CONTINUED)
additional 603,692 shares reserved on October 16, 1997 (See Note 10), a total of
2,600,000 shares have been reserved for issuance under the 1992 Plan.

The exercise price of incentive stock options granted under the 1992 Plan
may not be less than 100% of the fair market value of the common stock as of the
grant date, as determined by the Board of Directors. The exercise price of
nonqualified stock options may not be less than 85% of the fair market value of
the common stock as of the grant date. Options issued under the 1992 Plan
generally have a four year vesting period, unless otherwise determined by the
Board of Directors. The term of stock options granted under the 1992 Plan may
not exceed ten years. Subject to the approval of the Board of Directors, the
Plan allows option holders the right to immediately exercise outstanding options
(both vested and unvested), with the subsequent share issuances being subject to
a repurchase option by the Company under certain conditions according to the
original vesting schedule and exercise price.

For certain options granted, the Company recognizes as compensation expense
the excess of the deemed value for accounting purposes of the common stock
issuable upon exercise of such options over the aggregate exercise price of such
options. In connection with these grants, $1,075,000 of deferred compensation
has been recorded. This compensation expense is being amortized over the vesting
period of each option.

In 1995, the Board approved the cancellation of 157,129 options with
exercise prices ranging from $2.44--$3.25 per common share and the issuance of
157,129 new options at $1.20 per common share.

In January 1997, the Board of Directors approved a program under which
directors, executive officers and certain other key employees were permitted to
exercise options to purchase 1,494,775 common shares in exchange for four-year
notes with an interest rate of 6% per annum as permitted by the 1992 Plan. The
notes are full recourse and principal and accrued interest are payable upon the
maturity of the note. Under certain conditions, the shares are subject to a
repurchase option by the Company according to the original vesting schedule. At
September 30, 1997, 787,192 shares issued under the 1992 Plan are subject to the
Company's repurchase option and $1,688,057 of notes receivable are outstanding
and included in the stockholders' equity section of the accompanying financial
statements.

F-12
<PAGE>
FOCAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

5. STOCKHOLDERS' EQUITY (CONTINUED)
The following table presents the activity of the 1992 Plan for the years
ended December 31, 1994, 1995 and 1996 and the nine-month period ended September
30, 1997:
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NINE-MONTH
PERIOD
ENDED
SEPTEMBER
1994 1995 1996 30, 1997
---------------------------- -------------------------- -------------------------- ---------

<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
----------- --------------- --------- --------------- --------- ---------------
OPTIONS
---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>

Outstanding at
beginning of
period.............. 391,826 $ .78 544,787 $ 1.37 557,894 $ .94 1,712,650
Granted............... 155,692 2.83 239,692 1.63 1,275,691 1.20 106,969
Exercised............. (1,103) 1.56 (25,176) 1.30 (58,840) .85 (1,504,694)
Canceled.............. (1,628) 2.44 (201,409) 2.63 (62,095) 1.17 (17,004)
----------- ----- --------- ----- --------- ----- ---------
Outstanding at end of
period.............. 544,787 $ 1.37 557,894 $ .94 1,712,650 $ 1.14 297,921
----------- ----- --------- ----- --------- ----- ---------
----------- ----- --------- ----- --------- ----- ---------
Options exercisable at
end of period....... 179,708 $ 1.07 272,979 $ .88 537,121 $ 1.01 130,582
----------- ----- --------- ----- --------- ----- ---------
----------- ----- --------- ----- --------- ----- ---------
Weighted average fair
value per share of
options granted
during the period... $ .62 $ .46
----- -----
----- -----

<CAPTION>
<S> <C>
WEIGHTED
AVERAGE
EXERCISE PRICE
---------------
<S> <C>
Outstanding at
beginning of
period.............. $ 1.13
Granted............... 4.13
Exercised............. 1.13
Canceled.............. 2.06
-----
Outstanding at end of
period.............. $ 2.16
-----
-----
Options exercisable at
end of period....... $ 1.28
-----
-----
Weighted average fair
value per share of
options granted
during the period...
</TABLE>

The following table presents weighted average price and life information
about significant option groups outstanding at December 31, 1996:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------- OPTIONS EXERCISABLE
WEIGHTED ------------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YRS.) PRICE EXERCISABLE PRICE
- --------------- ----------- --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ .72 248,677 6.5 $ .72 219,701 $ .72
1.20 1,463,973 9.4 1.20 317,420 1.20
----------- -----------
1,712,650 537,121
----------- -----------
----------- -----------
</TABLE>

FAS 123 DISCLOSURES

The Company has adopted the disclosure provisions only of Statement of
Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION
("FAS 123"). If the compensation cost for the option plans had been determined
based on the fair value at the grant date for grants in 1995 and 1996,
consistent with the provisions of FAS 123, the pro forma net loss and net loss
per share for 1995 and 1996, would not have differed materially from reported
amounts.

F-13
<PAGE>
FOCAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

5. STOCKHOLDERS' EQUITY (CONTINUED)
The fair value of options and warrants issued at the date of grant were
estimated using the Black-Scholes model with the following weighted average
assumptions:

<TABLE>
<CAPTION>
OPTIONS GRANTED
-------------
<S> <C> <C>
1995 1996
----- -----
Expected life (years)........................................................... 5.0 5.0
Interest rate................................................................... 6.6 6.6
Volatility...................................................................... 0.3 0.3
</TABLE>

The Company has never declared nor paid dividends on any of its capital
stock and does not expect to do so in the foreseeable future.

The effects on 1995 and 1996 pro forma net loss of expensing the estimated
fair value of stock options are not necessarily representative of the effects on
reporting the results of operations for future years as the periods presented
include only one and two years, respectively, of option grants under the
Company's plans.

COMMON STOCK RESERVED FOR ISSUANCE

At December 31, 1996, the Company has reserved 10,313,192 shares of common
stock for issuance upon the conversion of the outstanding shares of convertible
preferred stock and for the exercise of all outstanding warrants and authorized
common stock options.

6. COMMITMENTS

The Company has a ten-year lease agreement expiring in 2004 for its
principal facility. In connection with this lease, the lessor funded
approximately $4,367,000 of leasehold improvements which are reimbursed as part
of the minimum lease payments. The Company has certain options to purchase the
building and the leasehold improvements.

As of December 31, 1996, the Company was required to provide a $1.2 million
letter of credit collateralizing these leasehold improvements. In addition, the
Company was required to comply with certain financial covenants. At December 31,
1996, the Company was in compliance with such covenants. Effective September
1997, the letter of credit requirement under the Company's facility operating
lease was terminated.

The Company leases the majority of its equipment, furniture and fixtures
under capital leases. Included in property and equipment at December 31, 1995
and 1996, respectively, were assets with a cost basis of $2,711,818 and
$3,492,118 acquired under capital leases. Accumulated amortization as of
December 31, 1995 and 1996, respectively, related to these assets was $1,552,848
and $2,485,480.

F-14
<PAGE>
FOCAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

As of December 31, 1996, the Company's future minimum lease payments under
capital and operating leases are as follows:

<TABLE>
<CAPTION>
BUILDING
CAPITAL OPERATING
LEASES LEASE
---------- ------------
<S> <C> <C>
1997................................................................................... $ 699,287 $ 1,068,752
1998................................................................................... 293,376 1,095,809
1999................................................................................... 35,248 1,109,337
2000................................................................................... -- 1,109,337
2001................................................................................... -- 1,109,337
Thereafter............................................................................. -- 3,084,498
---------- ------------
Total minimum lease payments........................................................... 1,027,911 $ 8,577,070
------------
------------
Less interest 59,372
----------
Present value of minimum lease payments................................................ 968,539
Less capital lease obligations due within one year..................................... 653,932
----------
Capital lease obligations--long-term portion........................................... $ 314,607
----------
----------
</TABLE>

Effective April 1997, the Company received commitments totaling $2.5 million
from a leasing company for the financing of equipment and leasehold
improvements. Under this agreement, the term for financing equipment purchases
and leasehold improvements is 48 months and 36 months, respectively. The
interest rate is established as of the commencement date for each new drawdown,
based on a treasury security index, and is fixed for the term of the financing.
There is a fixed percentage buy-out provision at the end of the lease period.
The lease financings are collateralized by the equipment and leasehold
improvements being financed. As of September 30, 1997, there were $1,290,117 in
outstanding borrowings under this financing arrangement. There are no financial
covenants in connection with this lease financing.

Total rent expense was $632,000, $1,023,770 and $1,078,803 in 1994, 1995 and
1996, respectively.

7. RESEARCH AND DEVELOPMENT AND LICENSING AGREEMENTS

In January 1997, the Company entered into a distribution and licensing
agreement with the Ethicon, Inc. division of Johnson & Johnson ("Ethicon") for
the research, development and commercialization of the Company's surgical
sealant products. Ethicon received marketing rights to all territories outside
North America in exchange for (a) a one-time, nonrefundable payment to the
Company for past research and development expenditures; (b) fixed quarterly
funding for two years to be applied toward future research and development
costs; (c) funding of certain additional research and development expenses; (d)
payments upon achievement of specific milestones; and (e) specified percentages
of product sales, if any, representing a combined royalty and product cost
payment. The Company retained worldwide manufacturing rights and North American
marketing rights. The term of the Ethicon Agreement extends until January 2007,
subject to one year extensions at Ethicon's discretion. In addition, Ethicon may
terminate the agreement at any time after January 2000 upon 12 months prior
written notice with or without cause.

In April 1996, the Company entered into a collaboration and license
agreement with Novartis and Chiron for the research, development and
commercialization of products for the treatment and prevention of restenosis and
received a one-time, nonrefundable payment at that time. The terms of this
agreement provide for quarterly research and development funding from Novartis
and Chiron on the basis of full-time equivalent personnel engaged on the
project. During 1996, the Company recorded approximately

F-15
<PAGE>
FOCAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

7. RESEARCH AND DEVELOPMENT AND LICENSING AGREEMENTS (CONTINUED)
$2,898,000 of revenue under this agreement. In addition, this agreement allows
for certain preclinical and commercial milestone payments and a combined royalty
and product cost payment on sales once a product has been commercialized.
Novartis and Chiron received exclusive worldwide marketing rights for the
products developed under the agreement and the Company retained worldwide
manufacturing rights. Novartis and Chiron have the right to terminate the
research collaboration with the Company upon 90 days notice, with or without
cause.

The Company entered into a collaborative research agreement with F.
Hoffmann-LaRoche Ltd. for the prevention of restenosis in 1995. Under this
agreement, Hoffmann-LaRoche made a one time, nonrefundable payment to the
Company in 1995 and the Company performed certain preclinical development
studies. During 1995 and 1996, the Company received payments totaling
approximately $1,000,000 in connection with this agreement based upon the
achievement of certain milestones. This agreement expired in March 1997.

The Company has collaborative research agreements and technology licensing
agreements with certain universities. The Company has worldwide exclusive
licenses to the technologies developed under these agreements, in exchange for
funding certain research and payment of licensing fees and royalties on
applicable product sales. Research and development expense and licensing fees
incurred under these agreements during the years ended December 31, 1994, 1995
and 1996, totaled $306,000, $295,000, and $156,000, respectively. In connection
with these agreements, the Company has research funding commitments totaling
approximately $402,000 at December 31, 1996.

8. INCOME TAXES

Due to net losses incurred by the Company in each year since its inception,
no provision for income taxes has been recorded. At December 31, 1996, the
Company had tax net operating loss carryforwards of approximately $43.8 million
and federal and state research and development tax credit carryforwards of
approximately $1.6 million which expire at various times through 2011.

Significant components of the Company's deferred tax assets as of December
31 are as follows:

<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
Deferred tax assets:
Net operating losses............................................................. $ 13,793,000 $ 17,528,000
Research and development tax credits............................................. 1,278,000 1,567,000
Other............................................................................ 292,000 545,000
------------- -------------
15,363,000 19,640,000
Valuation allowance.............................................................. (15,363,000) (19,640,000)
------------- -------------
Net deferred tax assets............................................................ $ -- $ --
------------- -------------
------------- -------------
</TABLE>

For financial reporting purposes, a valuation allowance has been provided
since realization of such deferred tax assets is not considered probable at this
time. The valuation allowance changed by $4,277,000 during 1996, due primarily
to the increase in tax credits and net operating loss carryforwards.
Additionally, the future utilization of the net operating loss carryforwards may
be subject to limitations under the change in stock ownership provisions of the
Internal Revenue Code.

F-16
<PAGE>
FOCAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

9. RELATED PARTY TRANSACTIONS

A total of $68,800 was paid to the spouse of a member of the Company's Board
of Directors for certain recruiting services performed in 1995.

In connection with an employment agreement, interest-bearing loans
aggregating $90,000 have been made to an officer of the Company. Principal and
accrued interest are payable in full if the aggregate fair value of the common
stock owned by the officer exceeds a certain threshold. In the event that the
fair value of the common stock owned by the officer does not reach this
threshold on the earlier of twelve months from the effective date of an initial
public offering of the Company's common stock or December 31, 1999, the
outstanding balance of the loan shall be forgiven. Other officer and nonofficer
employee notes receivable, certain of which notes contain similar repayment
terms as those described above, are outstanding and included in notes receivable
from related parties in the accompanying financial statements.

Certain participants in the Company's Preferred Stock financing transactions
include venture capital funds affiliated with members of the Company's board of
directors.

10. SUBSEQUENT EVENTS

On October 16, 1997, the Board of Directors approved a 1 for 3.25 reverse
stock split of common shares effected in the form of a reverse stock dividend
which became effective on December 8, 1997. All common share and per common
share amounts included in the accompanying financial statements and notes
thereto have been retroactively restated to give effect to the reverse stock
split.

On October 16, 1997, the Board of Directors adopted the 1997 Employee Stock
Purchase Plan (Purchase Plan) and reserved 200,000 shares of common stock for
issuance thereunder. Under the Purchase Plan eligible employees may purchase
common shares at a price per share equal to 85% of the lower of the fair market
value of the common stock at the beginning of a two year offering period or the
end of each six month purchase period included in such offering period.
Participation in the offering period is limited to 10% of the employee's
compensation or $25,000 in any calendar year. The first offering period will
commence on the date of this prospectus and the Purchase Plan will terminate in
2007. The Board of Directors also approved the reservation of an additional
603,692 shares of common stock under the Company's 1992 Incentive Stock Plan.

On October 16, 1997, the Board of Directors adopted the 1997 Director Option
Plan (the "Director Plan") and reserved 150,000 shares of common stock for
issuance thereunder. Effective with the 1998 annual meeting of stockholders and
annually thereafter, each nonemployee director will automatically be granted a
nonstatutory option to purchase 5,000 shares of common stock. The exercise price
of each of these options will be equal to the fair market value of the common
stock on the date of grant. Each option granted under the Director Plan will
vest on a cumulative monthly basis over a four-year period. The Director Plan
will terminate in September 2007, unless terminated earlier in accordance with
the provisions of the Director Plan.

On October 16, 1997, the Board of Directors approved the authorization of an
additional 5,000,000 shares of preferred stock, $.01 par value, issuable in one
or more series, each of such series to have such rights and preferences,
including voting rights, dividend rights, conversion rights, redemption
privileges and liquidation preferences, as shall be determined by the Board of
Directors.

On October 16, 1997, the Board of Directors adopted a Shareholder Rights
Plan (the "Rights Plan") designed to protect shareholders from unsolicited
attempts to acquire the Company on terms that do not

F-17
<PAGE>
FOCAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

10. SUBSEQUENT EVENTS (CONTINUED)
maximize stockholder value. In connection with the Rights Plan, the Board of
Directors will designate a certain number of shares of the Company's preferred
stock as Series A Participating Preferred Stock. Under the Rights Plan, a right
to purchase one one-thousandth of one share of the Series A Preferred Stock (the
"Rights") will be distributed as a dividend for each share of common stock. The
terms of the Rights Plan provide that the Rights will become exercisable upon
the earlier of the tenth day after any person or group acquires 15% or more of
the Company's outstanding common stock or the tenth business day after any
person or group commences a tender or exchange offer which would, if completed,
result in the offer or owning 15% or more of the Company's outstanding common
stock. The Rights may generally be redeemed by action of the Board of Directors
at $0.001 per Right at any time prior to the tenth day following the public
announcement that any person or group has acquired 15% or more of the
outstanding common stock of the Company. The Rights expire on January 28, 2007.
The Rights have certain anti-takeover effects in that they would cause
substantial dilution to the party attempting to acquire the Company.

In certain circumstances, the Rights allow the Company's stockholders to
purchase the number of shares of the Company's common stock having a market
value at the time of the transaction equal to twice the exercise price of the
Rights, or in certain circumstances, the stockholders would be able to acquire
that number of shares of the acquirer's common stock having a market value, at
the time of the transaction, equal to twice the exercise price of the Rights.
The Company will continue to issue Rights with future issuances of common stock.

F-18
<PAGE>
A picture of the FOCALSEAL Surgical Sealant System including the primer and
sealant contained in the disposable applicators and the reusable light wand and
cable, and light source used to photopolymerize the FOCALSEAL sealant and
primer.

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN 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. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO
WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO
ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 18
Dividend Policy........................................................... 18
Capitalization............................................................ 19
Dilution.................................................................. 20
Selected Financial Data................................................... 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................................................. 22
Business.................................................................. 25
Management................................................................ 45
Certain Transactions...................................................... 53
Principal Stockholders.................................................... 55
Description of Capital Stock.............................................. 57
Shares Eligible for Future Sale........................................... 62
Underwriting.............................................................. 64
Legal Matters............................................................. 66
Experts................................................................... 66
Additional Information.................................................... 66
Index to Financial Statements............................................. F-1
</TABLE>

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

UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

2,500,000 SHARES

[LOGO]

COMMON STOCK

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

PROSPECTUS

, 1997

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

LEHMAN BROTHERS
PIPER JAFFRAY INC.
PACIFIC GROWTH EQUITIES, INC.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of Common Stock being registered. All amounts are estimates except
the SEC registration fee and the NASD filing fee.

<TABLE>
<S> <C>
SEC registration fee......................................................... $ 11,326
NASD filing fee.............................................................. 4,238
Nasdaq National Market listing fee........................................... 40,000
Printing and engraving costs................................................. 125,000
Legal fees and expenses...................................................... 250,000
Accounting fees and expenses................................................. 100,000
Blue Sky fees and expenses................................................... 5,000
Transfer Agent and Registrar fees............................................ 5,000
Miscellaneous expenses....................................................... 59,436
---------
Total.................................................................... $ 600,000
---------
---------
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law allows for the
indemnification of officers, directors and any corporate agents in terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act of 1933, as amended (the "Act"). The Registrant's Restated
Certificate of Incorporation to be filed upon the closing of the offering to
which this Registration Statement relates (Exhibits 3.1 and 3.2 hereto) and the
Registrant's Bylaws (Exhibist 3.3 and 3.4 hereto) provide for indemnification of
the Registrant's directors, officers, employees and other agents to the extent
and under the circumstances permitted by the Delaware General Corporation Law.
The Registrant also intends to enter into agreements with its directors and
executive officers that will require the Registrant among other things to
indemnify them against certain liabilities that may arise by reason of their
status or service as directors to the fullest extent not prohibited by Delaware
law.

The Underwriting Agreement provides for indemnification by the Underwriters
of the Registrant, its directors and officers, and by the Registrant of the
Underwriters, for certain liabilities, including liabilities arising under the
Act, and affords certain rights of contribution with respect thereto.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

Since January 1, 1994, the Registrant has issued and sold the following
unregistered securities:

In February 1994, the Company issued a warrant to purchase 24,324 shares of
Series D Preferred Stock at a purchase price of $3.70 per share in connection
with an equipment leasing arrangement.

In August 1994, the Company issued 1,730,840 shares of Series D Preferred
Stock at a price of $3.70 per share to a group of 18 venture capital and
institutional investors. All investors participating in such financing were
accredited investors within the meaning of Rule 501(a) under the Securities Act.

In August 1994, the Company issued a warrant to purchase 5,000 shares of
Series D Preferred Stock at an exercise price of $3.70 per share in connection
with obtaining a letter of credit from a commercial bank.

II-1
<PAGE>
In November 1994, the Company issued warrants to purchase an aggregate of
25,000 shares of Series D Preferred Stock at an exercise price of $4.255 per
share as compensation for placement agency services provided in connection with
the Company's August 1994 financing.

In April 1996, the Company issued 11,322,152 shares of Series E Preferred
Stock at a price of $1.74 per share to a group of 34 venture capital and
institutional investors, including shares of Series E Preferred Stock reissued
in exchange for an aggregate of 1,537,951 shares of Series E Preferred Stock
issued in December 1995 at a price of $3.15 per share. All investors
participating in such financing were accredited investors within the meaning of
Rule 501(a) under the Securities Act.

In April 1996, the Company issued a warrant to purchase 63,362 shares of
Common Stock at a purchase price of $0.37 per share as compensation for
placement agency services provided in connection with the Company's April 1996
financing.

Since the Company's inception through September 30, 1997, the Company has
issued 5,167,601 shares of Common Stock upon exercise of stock options granted
to employees and consultants of the Company under the Company's 1992 Incentive
Stock Plan. The exercise price of such options ranged from $0.22 to $1.25 per
share.

The foregoing share and per share amounts do not give effect to the
Company's 1 for 3.25 reverse stock split that will be effected in connection
with the offering of the shares registered hereunder and the conversion of
Preferred Stock into Common Stock that will occur upon completion of such
offering.

The sales of the above securities were deemed to be exempt from registration
under the Securities Act in reliance on Section 4(2) of the Securities Act, or
Regulation D promulgated thereunder, or Rule 701 promulgated under Section 3(b)
of the Securities Act, as transactions by an issuer not involving a public
offering or transactions pursuant to compensatory benefit plans and contracts
relating to compensation as provided under such Rule 701. The recipients of
securities in each such transaction represented their intention to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the share
certificates and instruments issued in such transactions. All recipients had
adequate access, through their relationships with the Company, to information
about the Registrant.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(A) EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- --------------- -------------------------------------------------------------------------------------------------
<C> <S>
1.1* Underwriting Agreement.
3.1* Certificate of Incorporation of Focal, Inc., a Delaware corporation, as currently in effect.
3.2* Form of Restated Certificate of Incorporation of the Registrant to be filed after the closing of
the offering made under this Registration Statement.
3.3* Bylaws of the Registrant, as currently in effect.
3.4* Bylaws of the Registrant, as proposed to be amended in connection with this offering.
4.1* Specimen Common Stock Certificate.
4.2* Representative Form of Common Stock Purchase Warrant.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
10.1* Form of Indemnification Agreement between the Registrant and each of its directors and officers.
10.2* 1992 Incentive Stock Plan, as amended, and form of Stock Option Agreement thereunder.
10.3* 1997 Employee Stock Purchase Plan and forms of agreements thereunder.
</TABLE>

II-2
<PAGE>
<TABLE>
<C> <S>
10.4* 1997 Directors' Option Plan and forms of agreements thereunder.
10.5* Restated Investors Rights Agreement dated April 12, 1996 among the Registrant and certain
stockholders of the Registrant.
10.6* Lease Agreement dated April 4, 1994 between Registrant and The Mutual Life Insurance Company of
New York relating to lease of facility located at 4 Maguire Road, Lexington, MA, as amended to
date.
10.7* Master Lease Agreement dated October 30, 1992 between Registrant and Comdisco, Inc.
10.8* Master Lease Agreement dated February 28, 1994 between Registrant and MMC/GATX Limited
Partnership I.
10.9* Master Loan and Security Agreement dated April 18, 1997 between Registrant and Transamerica
Leasing.
10.10+* Patent and Technology License Agreement dated June 11, 1992 between Registrant and University of
Texas.
10.11+* Exclusive License Agreement dated August 7, 1992 among Registrant, Marvin Slepian, M.D. and
Endoluminal Therapeutics, Inc.
10.12+* Collaboration and License Agreement dated April 25, 1996 between Registrant, Ciba Corporation and
Chiron Corporation.
10.13+* Distribution, License and Supply Agreement dated January 2, 1997 between Registrant and Ethicon,
Inc.
10.14* Agreement for Consulting Services dated November 15, 1991 between Registrant and Robert Langer,
Ph.D.
10.15* Agreement for Consulting Services dated August 7, 1992 between Registrant and Marvin Slepian,
M.D.
10.16* Agreement for Consulting Services and Sabbatical Employment dated June 1, 1992 between Registrant
and Jeffrey Hubbell.
10.17 [reserved]
10.18* Form of Restricted Stock Purchase Agreement.
10.19* Loan Agreement dated March 29, 1995 between Registrant and Ronald Rudowsky.
10.20* Loan Agreement dated February 28, 1997 between Registrant and Arthur Coury, Ph.D.
10.21* Form of Preferred Shares Rights Agreement between Registrant and Norwest Bank Minnesota N.A.
11.1 Calculation of earnings per share.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2* Consent of Wilson Sonsini Goodrich & Rosati (included in Exhibit 5.1).
23.3* Consent of Arnall Golden & Gregory, LLP.
24.1* Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>

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

* Exhibit previously filed.

+ Confidential treatment has been requested for certain portions of this
Exhibit.

** To be filed by amendment.

(B) FINANCIAL STATEMENT SCHEDULES

None

Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.

II-3
<PAGE>
ITEM 17. UNDERTAKINGS

The undersigned Registrant hereby undertakes that:

(a) It will provide to the Underwriters at the closing as 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.

(b) Insofar as indemnification by the Registrant for liabilities arising
under the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant, 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 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.

(c) 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 the 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.

(d) 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-4
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Lexington, State of
Massachusetts, on the 8th day of December, 1997.

FOCAL, INC.

By: /s/ DAVID M. CLAPPER*
-----------------------------------------
David M. Clapper, PRESIDENT
AND CHIEF EXECUTIVE OFFICER

Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:

SIGNATURE TITLE DATE
- ------------------------------ --------------------------- ----------------

President, Chief Executive
/s/ DAVID M. CLAPPER* Officer and Director
- ------------------------------ (Principal Executive December 8, 1997
(David M. Clapper) Officer)

Vice President, Finance and
/s/ W. BRADFORD SMITH Chief Financial Officer
- ------------------------------ (Principal Financial and December 8, 1997
(W. Bradford Smith) Accounting Officer)

/s/ HENRY BREM* Director
- ------------------------------ December 8, 1997
(Henry Brem, M.D.)

/s/ JANET EFFLAND* Director
- ------------------------------ December 8, 1997
(Janet Effland)

/s/ ROBERT LANGER* Director
- ------------------------------ December 8, 1997
(Robert Langer, Ph.D.)

/s/ MARK J. LEVIN* Director
- ------------------------------ December 8, 1997
(Mark J. Levin)

/s/ MICHAEL J. LEVINTHAL* Director
- ------------------------------ December 8, 1997
(Michael J. Levinthal)

II-5

<PAGE>

<TABLE>
<C> <S> <C>
/s/ FRED E. SILVERSTEIN* Director
- ------------------------------ December 8, 1997
(Fred E. Silverstein, M.D.)

/s/ JESSE I. TREU* Director
- ------------------------------ December 8, 1997
(Jesse I. Treu, Ph.D.)
</TABLE>

*By: /s/ W. BRADFORD SMITH
-------------------------
(W. Bradford Smith,
ATTORNEY-IN-FACT)

II-6
<PAGE>
INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBITS PAGE
- --------- ---------
<C> <S> <C>
1.1* Underwriting Agreement.........................................................................
3.1* Certificate of Incorporation of Focal, Inc., a Delaware corporation, as currently in effect....
3.2* Form of Restated Certificate of Incorporation of the Registrant to be filed after the closing
of the offering made under this Registration Statement.......................................
3.3* Bylaws of the Registrant, as currently in effect...............................................
3.4* Bylaws of the Registrant, as proposed to be amended in connection with
this offering................................................................................
4.1* Specimen Common Stock Certificate..............................................................
4.2* Representative Form of Common Stock Purchase Warrant...........................................
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation..........................
10.1* Form of Indemnification Agreement between the Registrant and each of its directors and
officers.....................................................................................
10.2* 1992 Incentive Stock Plan, as amended, and form of Stock Option Agreement thereunder...........
10.3* 1997 Employee Stock Purchase Plan and forms of agreements thereunder...........................
10.4* 1997 Directors' Option Plan and forms of agreements thereunder.................................
10.5* Restated Investors Rights Agreement dated April 12, 1996 among the Registrant and certain
stockholders of the Registrant...............................................................
10.6* Lease Agreement dated April 4, 1994 between Registrant and The Mutual Life Insurance Company of
New York relating to lease of facility located at 4 Maguire Road, Lexington, MA, as amended
to date......................................................................................
10.7* Master Lease Agreement dated October 30, 1992 between Registrant and
Comdisco, Inc................................................................................
10.8* Master Lease Agreement dated February 28, 1994 between Registrant and
MMC/GATX Limited Partnership I...............................................................
10.9* Master Loan and Security Agreement dated April 18, 1997 between Registrant and Transamerica
Leasing......................................................................................
10.10+* Patent and Technology License Agreement dated June 11, 1992 between Registrant and University
of Texas.....................................................................................
10.11+* Exclusive License Agreement dated August 7, 1992 among Registrant,
Marvin Slepian, M.D. and Endoluminal Therapeutics, Inc.......................................
10.12+* Collaboration and License Agreement dated April 25, 1996 between Registrant,
Ciba Corporation and Chiron Corporation......................................................
10.13+* Distribution, License and Supply Agreement dated January 2, 1997 between Registrant and
Ethicon, Inc.................................................................................
10.14* Agreement for Consulting Services dated November 15, 1991 between Registrant and Robert Langer,
Ph.D.........................................................................................
10.15* Agreement for Consulting Services dated August 7, 1992 between Registrant and Marvin Slepian,
M.D..........................................................................................
10.16* Agreement for Consulting Services and Sabbatical Employment dated June 1, 1992 between
Registrant and Jeffrey Hubbell...............................................................
10.17 [reserved].....................................................................................
10.18* Form of Restricted Stock Purchase Agreement....................................................
10.19* Loan Agreement dated March 29, 1995 between Registrant and Ronald Rudowsky.....................
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS PAGE
- --------- ---------
<C> <S> <C>
10.20* Loan Agreement dated February 28, 1997 between Registrant and
Arthur Coury, Ph.D...........................................................................
10.21* Form of Preferred Shares Rights Agreement between Registrant and Norwest Bank Minnesota N.A....
11.1 Calculation of earnings per share..............................................................
23.1 Consent of Ernst & Young LLP, Independent Auditors.............................................
23.2* Consent of Wilson Sonsini Goodrich & Rosati (included in Exhibit 5.1)..........................
23.3* Consent of Arnall Golden & Gregory, LLP........................................................
24.1* Power of Attorney..............................................................................
27.1 Financial Data Schedule........................................................................
</TABLE>

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

* Exhibit previously filed.

+ Confidential treatment has been requested for certain portions of this
Exhibit.

<PAGE>
EXHIBIT 11.1

STATEMENT RE COMPUTATION OF PER SHARE EARNINGS

<TABLE>
<CAPTION>
Year Ended
December 31, Nine-Month Period ended September 30,
1996 1996 1997
------------ -------------- -------------
<S> <C> <C> <C>
Shares used to compute pro forma net income (loss)
per share:
Weighted average common
shares issued and outstanding 681,547 671,106 2,113,934

Weighted average common
equivalent shares assumed issued and outstanding - - 122,130

Weighted average common shares assumed
issued and outstanding upon conversion
of preferred stock and warrants 7,407,351 7,147,614 8,151,023

Incremental common shares, derived from
common and common equivalent shares
issued within 12 months of the registration
statement filing, assumed to be issued and
outstanding for all periods presented 182,532 182,532 163,708
---------------- -------------- --------------

Shares used in computing Pro Forma net
income (loss) per share 8,271,430 8,001,252 10,550,795
---------------- -------------- --------------
---------------- -------------- --------------

Net income (loss) ($10,158,089) ($7,459,638) $445,831
----------------- --------------- --------------
----------------- --------------- --------------

Pro Forma net income (loss) per share ($1.23) ($0.93) $.04
----------------- --------------- --------------
----------------- --------------- --------------
</TABLE>

<PAGE>
Exhibit 23.1

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the captions "Experts" and
"Selected Financial Data" and to the use of our report dated February 7, 1997
(except as to the first paragraph of Note 10, as to which the date is December
8, 1997), in Amendment No. 3 to the Registration Statement (Form S-1 No.
333-38379) and related Prospectus of Focal, Inc.

/s/ ERNST & YOUNG LLP

Boston, Massachusetts

December 8, 1997

<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 SEP-30-1997
<CASH> 5465 5161
<SECURITIES> 6743 8054
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 12679 13749
<PP&E> 3732 5790
<DEPRECIATION> (2598) (3438)
<TOTAL-ASSETS> 14089 16,491
<CURRENT-LIABILITIES> 3676 4495
<BONDS> 0 0
0 0
243 243
<COMMON> 7 22
<OTHER-SE> 9849 12211
<TOTAL-LIABILITY-AND-EQUITY> 14089 16,491
<SALES> 0 0
<TOTAL-REVENUES> 3098 12831
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 13855 13035
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 92 81
<INCOME-PRETAX> (10158) 446
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (10150) 446
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (10158) 446
<EPS-PRIMARY> (.93) .04
<EPS-DILUTED> 0 0

</TABLE>