PHOTOELECTRON CORP, 424B1, 1997-01-29

PHOTOELECTRON CORP
424B1, 1997-01-29
ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS

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Filed pursuant to Rule 424(b)(1)
Registration No. 333-14541
PROSPECTUS

2,000,000 Shares

LOGO
Common Stock

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All of the 2,000,000 shares of Common Stock offered hereby are being sold by
Photoelectron Corporation ("Photoelectron" or the "Company"). Prior to this
offering, there has been no public market for the Common Stock of the Company.
See "Underwriting" for a discussion of the factors considered in determining
the initial public offering price. The Common Stock has been approved for
listing on the Nasdaq Stock Market's National Market under the symbol "PECX".

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THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING
ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.

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Following the completion of this offering, PYC Corporation and Mr. Peter M.
Nomikos, an existing stockholder, Chairman of the Board, President, Chief
Executive Officer and Treasurer of the Company, will have the ability to
significantly influence all matters requiring stockholder approval. See "Risk
Factors--Control by Peter M. Nomikos, His Affiliates and Other Existing
Stockholders," and "Securities Ownership of Management and Certain Beneficial
Owners."

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

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<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.............................. $8.500 $0.595 $7.905
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Total (3).............................. $17,000,000 $1,190,000 $15,810,000
</TABLE>
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. See
"Underwriting."
(2) Before deducting estimated expenses of $855,000 payable by the Company.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 300,000 additional shares of Common Stock solely to cover over-
allotments, if any. If the Underwriters exercise such option in full, the
total Price to Public, Underwriting Discounts and Commissions and Proceeds
to Company will be $19,550,000, $1,368,500 and $18,181,500, respectively.
See "Underwriting."

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The shares of Common Stock offered by this Prospectus are being offered by
the several Underwriters named herein, subject to prior sale, when, as and if
delivered to and accepted by them and subject to the right of the Underwriters
to reject orders in whole or in part. It is expected that delivery of the
shares of Common Stock offered hereby will be made in New York, New York on or
about February 3, 1997.

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Needham & Company, Inc. Dain Bosworth
Incorporated

The date of this Prospectus is January 29, 1997.
<PAGE>

DESCRIPTION OF FRONT COVER PAGE GRAPHICS:

The graphics on the front cover page consist of one drawing, with
corresponding description, located within the top half of the page, and a
series of four smaller drawings, each with description, located within the
bottom half of the page.

A caption at the top of the page reads as follows: "The Photon Radiosurgery
System (PRS)--A Therapeutic X-Ray System for Treating. . ."

The drawing within the top half of the page measures approximately 4 inches
(width) by 4 inches (length) (based on an 8 1/2 inch by 11 inch page) and is
centered roughly within the left-hand side of the page. The drawing shows a
partially cross-sectioned view of a human head, with the PRS probe directed
downward, at approximately a 45 degree angle, into the brain. The cross-
sectioned portion of the head shows the tip of the probe inserted into a
representation of a cancerous mass. An italicized description to the right of
the drawing reads "Brain Tumors. The tip of the x-ray probe is guided
stereotactically to the center of the tumor. The tumor is then treated from
the inside out with the radiation substantially confined to the cancerous
tissue."

The four drawings within the bottom half of the page each represent a
spherical tumor, of approximately 1 1/4 inches in diameter, in a series
running roughly horizontally across the page. The series of drawings show the
stages of destruction of the tumor, the second drawing in the series shows the
insertion of the PRS probe into the tumor. A general caption is located above
and to the right of the series of drawings, and reads, in italics, as follows:
"Irradiation and destruction of a tumor using the Photon Radiosurgery System."
The four drawings in the series have the following four non-italicized
captions: (i) "Before treatment" (this drawing also sets forth labels showing
the "healthy tissue," and the "tumor," respectively; (ii) "Low energy x-rays
are absorbed by the tumor in a single-dose treatment typically lasting less
than 30 minutes; (this drawing also sets forth labels showing the "x-rays,"
and the "PRS probe," respectively) (iii) "Tumor destruction proceeds from
center;" and (iv) "Zone of destruction matched to tumor."

The phrase "(continued on inside back cover)" is located at the bottom of
the page.

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PHOTOELECTRON'S PHOTON RADIOSURGERY SYSTEM IS UNDER DEVELOPMENT AND HAS NOT
BEEN APPROVED OR CLEARED FOR COMMERCIAL SALE OR USE IN THE U.S. OR IN ANY
FOREIGN COUNTRY. REGULATORY APPROVAL COULD TAKE SEVERAL YEARS AND THERE CAN BE
NO ASSURANCE THAT SUCH APPROVAL WILL EVER BE OBTAINED OR, IF OBTAINED, THAT
THE COMPANY'S PHOTON RADIOSURGERY SYSTEM WILL ACHIEVE MARKET ACCEPTANCE. SEE
"RISK FACTORS--PRODUCT DEVELOPMENT RISKS; UNCERTAINTIES RELATING TO CLINICAL
TRIALS" AND "--ABSENCE OF REGULATORY CLEARANCES; UNCERTAINTY OF OBTAINING
SECTION 510(K) CLEARANCE."

ALL TRADENAMES AND TRADEMARKS APPEARING IN THIS PROSPECTUS ARE THE PROPERTY
OF THEIR RESPECTIVE HOLDERS.

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

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. Except as otherwise specified, the information contained in
this Prospectus has been adjusted to give effect to a one-for-two reverse stock
split of the Common Stock and the Preferred Stock to be effective prior to the
closing of this offering and the conversion of each outstanding share of
Preferred Stock into Common Stock upon such closing. Unless otherwise
specified, all information in this Prospectus assumes no exercise of the
Underwriters' over-allotment option. As used herein, unless the context
requires otherwise, the term "Company" includes Photoelectron Corporation and
its subsidiary, Photoelectron (Europe) Ltd. The Common Stock offered hereby
involves a high degree of risk. Prospective investors should carefully consider
the risks set forth under the heading "Risk Factors."

THE COMPANY

The Company is engaged in the design, development and commercialization of
the Photon Radiosurgery System ("PRS"), a proprietary, therapeutic device for
the treatment of cancerous tumors through the application of x-ray radiation
directly to the tumor site. The PRS delivers in a single treatment a high dose
of radiation through a thin, minimally invasive, needle-like probe, which emits
from its tip precisely controlled low energy x-rays that irradiate the tumor
from the inside out. The limited penetration of low energy x-rays in tissue
substantially confines the radiation to the tumor site.

The Company believes that the PRS offers a number of advantages over
conventional radiation therapies by allowing higher radiation doses with
shorter patient treatment times. Substantial confinement of the radiation to
the tumor boundaries significantly reduces the risk of radiation exposure to
the surrounding healthy tissue and important organs or critical structures.

Cancerous tumors are expected to account for 90% of the approximately 1.3
million new U.S. cancer cases anticipated in 1996. Such tumors are most often
treated through invasive surgery, the destruction of cancerous cells by
exposure to radiation, or a combination of the two.

The most common form of treatment of cancerous tumors is by invasive surgery.
The Company believes that the PRS provides an attractive, minimally invasive
alternative to surgery, resulting in significantly less patient trauma, shorter
hospital stays and lower treatment costs than surgery. The PRS can be applied
after performing a biopsy and, when desirable, use of the PRS can be coupled
with surgical procedures.

Next to surgery, radiation therapy is the most common modality of treating
cancer. Approximately 50% of all cancer patients in the U.S. receive radiation
therapy at some point during the course of their disease. Radiation can be
administered to a tumor by external beams or interstitially by inserting a
radiative source into the patient. With external beams, radiation must pass
through, and may potentially damage, healthy tissue before reaching the tumor,
whereas the PRS delivers radiation directly to the tumor site.

An established form of treatment, called brachytherapy, delivers radiation
directly to a tumor site by the insertion of radioactive isotopes. In
comparison to this form of treatment, the Company believes that the PRS offers
a greater ability to control and localize low energy radiation doses, and
avoids the costs and risks associated with the storage, handling and disposal
of radioactive materials. The Company believes that the PRS also offers
significant advantages over other forms of therapy, such as the destruction of
cancerous cells by heating, cooling or the use of laser light.

3
<PAGE>

application. The Company expects that the three basic PRS treatment methods
will be: (i) the "interstitial" irradiation of localized tumors from the inside
out; (ii) the "intracavitary" irradiation of body cavities; and (iii) the
"intraoperative" irradiation of tumors during surgery or of the beds of
surgically removed tumors in order to destroy remaining cancerous cells.

Because of the particularly sensitive nature of the brain and its surrounding
organs and critical structures, such as the optic nerves, damage from external
radiation and surgical procedures can severely harm the patient. Accordingly,
aggressive treatment of brain cancers has historically been limited. The PRS,
however, has been used to treat metastatic brain tumors in 57 patients in its
clinical trials. Although the studies are not yet complete, in the Company's
opinion, based primarily on two autopsies, the PRS has destroyed all cancerous
tissue which has been targeted with an adequate dose of radiation. Based on
these results, the Company believes that the PRS can be applied to treat
primary brain tumors and other cancerous tumors throughout the body, with
reduced risk of damage to surrounding tissue. Phase II clinical trials for the
treatment of metastatic brain tumors are currently ongoing with respect to this
application. On December 11, 1996, the Company submitted an application under
Section 510(k) of the Federal Food, Drug and Cosmetic Act, as amended (the "FDC
Act") to the U.S. Food and Drug Administration ("FDA") seeking clearance to
commercialize the current model of the PRS for treatment of metastatic brain
tumors. Locally approved clinical trials for the treatment of brain tumors are
also being performed at sites in Europe and Japan. The Company currently
anticipates that the first clinical trials to determine the safety of the PRS
for treatment of breast cancer will begin in early 1997. A protocol for human
clinical trials of the PRS to treat prostate tumors has been approved by the
ethics committee of a London hospital and animal trials relating to the use of
the PRS in treating bladder tumors are currently underway in the U.S. The
Company will consider the use of the PRS for other potential applications on an
ongoing basis.

The Company's strategy is to (i) utilize its core technology for the
treatment of metastatic brain tumors and additional applications, (ii) build
relationships with medical professionals and institutions, (iii) obtain
regulatory clearance for the PRS in the U.S. and internationally, initially for
treatment of metastatic brain tumors and subsequently for other forms of
cancer, (iv) pursue commercial acceptance of the PRS in the U.S. and
internationally by relying on internal resources and collaborative
relationships to create sales and distribution capabilities, and (v) protect
its intellectual property rights.

The Company and Toshiba Medical Systems Company, Ltd. ("Toshiba") have
entered into agreements relating to performance of clinical trials, and to
future product distribution arrangements in Japan.

The Company holds nine U.S. patents and four U.S. patent applications
relating to the PRS or its constituent or ancillary components. The Company has
also obtained or filed patent applications in other selected foreign countries.

The Company was formed in 1989 as a joint venture between Thermo Electron
Corporation ("Thermo Electron") and an investment entity organized by Peter M.
Nomikos, the Company's President and Chief Executive Officer. Mr. Nomikos co-
founded Thermo Electron with George N. Hatsopoulos, Ph.D., a director of the
Company.

The Company was incorporated in Massachusetts in 1989. The Company's
principal executive offices are located at 5 Forbes Road, Lexington,
Massachusetts 02173, and its telephone number is (617) 861-2069.

4
<PAGE>

THE OFFERING

<TABLE>
<C> <S>
Common Stock offered by the Company................ 2,000,000 shares (1)
Common Stock to be outstanding after the offering.. 6,520,104 shares (2)
Use of proceeds.................................... To fund research and
development and clinical
trials, for manufacturing
and marketing purposes and
for working capital and
other general corporate
purposes. See "Use of
Proceeds."
Nasdaq Stock Market's National Market Symbol....... PECX
</TABLE>
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(1) Assumes that the Underwriters' over-allotment option is not exercised.
(2) Based upon the number of shares outstanding at December 3, 1996. Includes
Common Stock issuable upon conversion of outstanding Preferred Stock, which
will occur automatically on the closing of this offering. Excludes
1,417,334 shares of Common Stock issuable upon exercise of warrants
outstanding at December 3, 1996 with an exercise price of $3.00 per share
and 881,249 shares of Common Stock issuable upon conversion of the
Company's 8% convertible debt outstanding at September 28, 1996 with a
weighted average conversion price of $2.28. Also excludes 812,975 shares of
Common Stock issuable upon exercise of options outstanding at December 3,
1996 with a weighted average exercise price of $4.31 per share. See Notes
6, 7, 8 and 9 of Notes to Consolidated Financial Statements, "Description
of Capital Stock," "Management--Officers and Directors," and "--Executive
Compensation" and "Certain Transactions."

5
<PAGE>

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

<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED (1)
------------------------------------------------------------ ---------------------------
DECEMBER 28, JANUARY 2, JANUARY 1, DECEMBER 31, DECEMBER 30, SEPTEMBER 30, SEPTEMBER 28,
1991 1993 1994 1994 1995 1995 1996
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<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Research and development
expenses............... $ 784 $ 1,227 $ 1,727 $ 2,086 $ 3,226 $ 1,721 $ 2,263
General and
administrative
expenses............... 116 192 251 505 866 543 1,168
Net loss................ $ (974) $ (1,586) $ (2,267) $ (2,672) $ (4,117) $ (2,331) $ (3,319)
Net loss per share...... $ (1.25) $ (1.65) $ (1.96) $ (1.96) $ (3.61) $ (2.05) $ (2.06)
Pro forma net loss per
share (2).............. $ -- $ -- $ -- $ -- $ (1.02) $ -- $ (0.74)
Weighted average common
and common equivalent
shares outstanding..... 781 959 1,160 1,362 1,140 1,139 1,613
Pro forma weighted
average common and
common equivalent
shares outstanding
(2).................... -- -- -- -- 4,035 -- 4,507
</TABLE>

<TABLE>
<CAPTION>
SEPTEMBER 28, 1996 (1)
-----------------------------
PRO FORMA (3) AS ADJUSTED (4)
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<S> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Cash and cash
equivalents............ $ 4,005 $ 18,960
Total assets............ 6,037 20,992
Total long-term debt,
including current
portion................ 2,013 2,013
Deficit accumulated
during development
stage.................. (15,744) (15,744)
Total shareholders'
equity................. 3,803 18,758
</TABLE>
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(1) Derived from unaudited financial statements.
(2) Includes 2,894,644 shares of Common Stock to be issued upon the conversion
of all of the outstanding preferred stock. The remaining 33,106 shares of
Common Stock to be issued upon the conversion of all outstanding preferred
stock is included in historical loss per share for all periods pursuant to
certain Securities and Exchange Commission requirements.
(3) Gives effect to the conversion of all of the outstanding Preferred Stock
into 2,927,750 shares of Common Stock, which will automatically occur on
the closing of this offering. The Company's Preferred Stock consists of
three separate series; 1,282,005 shares of Series A Convertible Preferred
Stock, 500,000 shares of Series B Convertible Preferred Stock, and
1,110,307 shares of Series C Convertible Preferred Stock were outstanding
as of September 28, 1996. Each share of Preferred Stock is convertible into
one share of Common Stock except that each share of Series C Convertible
Preferred Stock is convertible into 1.032 shares of Common Stock at the
initial public offering price of $8.50 per share. See Notes 6, 7, 8 and 9
of Notes to Consolidated Financial Statements, "Description of Capital
Stock," "Management--Officers and Directors," "--Executive Compensation"
and "Certain Transactions."
(4) Adjusted to give effect to the sale of the 2,000,000 shares of Common Stock
offered hereby, at the initial public offering price of $8.50 per share
after deducting the estimated underwriting discounts and commissions and
offering expenses payable by the Company. See "Use of Proceeds" and
"Capitalization."

This Prospectus contains forward-looking statements that involve risks and
uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. The cautionary statements made in this Prospectus
should be read as being applicable to all forward-looking statements wherever
they appear in this Prospectus. The Company's actual results could differ
materially from those discussed herein. Factors that could cause or contribute
to such differences include those discussed in "Risk Factors," as well as those
discussed elsewhere in this Prospectus.

6
<PAGE>

RISK FACTORS

An investment in the shares of Common Stock being offered hereby involves a
high degree of risk. In addition to the other information in this Prospectus,
the following factors should be considered carefully in evaluating an
investment in the shares.

EARLY STAGE OF THE COMPANY AND ITS PRODUCTS

The PRS, is still in development and no revenues have been generated from
product sales of the PRS to date, nor has the PRS been approved for commercial
use in the U.S. or elsewhere. The PRS and its related accessories and
components are currently the Company's only products. No assurance can be
given that the Company's development efforts will be successfully completed,
that required regulatory approvals will be obtained, or that the PRS, if
introduced to the commercial market, will be marketed successfully. See
"Business--Clinical Trials," "--Products and Product Development" and "--
Marketing and Sales; Collaborative Relationships."

HISTORY OF SIGNIFICANT OPERATING LOSSES; EXPECTATION OF FUTURE SUBSTANTIAL
LOSSES

The Company has experienced significant operating losses in each year since
its inception, due primarily to substantial research and development
expenditures, and as of September 28, 1996 the Company had an accumulated
deficit of approximately $15.7 million. The continued development and
commercialization of the PRS will likely result in substantial losses through
at least the middle of 1998. There can be no assurance that the PRS will ever
gain commercial acceptance, or that the Company will ever generate revenues or
achieve profitability. The Company's ability to achieve profitable operations
will be dependent in large part on whether it can successfully develop and
commercialize the PRS and/or any other products and make the transition to a
manufacturing and marketing company. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."

PRODUCT DEVELOPMENT RISKS; UNCERTAINTIES RELATING TO CLINICAL TRIALS

The PRS is new and, accordingly, its safety and efficacy have not yet been
fully established, and further development will be required to use the PRS in
the full range of intended applications. The PRS is still in the clinical
testing stage and such clinical testing has focused on only one application of
the PRS, the treatment of metastatic brain tumors.

Results from Phase I trials of the PRS as a treatment for metastatic brain
tumors may not be predictive of results obtained in subsequent clinical trials
or of results obtained in clinical trials for other specific applications. It
is not uncommon for medical device companies to suffer significant setbacks in
Phase II or other clinical trials, even after obtaining promising results in
Phase I or other prior trials. In addition, clinical trials of the PRS are
likely to be conducted with patients in advanced stages of cancer. These
patients could die or suffer adverse effects for reasons unrelated to the PRS,
but such events could nevertheless negatively impact clinical trial results or
regulatory approvals.

The Company has relied and will continue to rely on unaffiliated medical
institutions to perform its clinical trials in accordance with the approval
process of the FDA. There can be no assurances that the work carried out at
the institutions currently performing Phase I or II clinical trials, or that
the work carried out at any institutions performing clinical trials in the
future, will be satisfactory, or that those institutions will not cancel,
suspend or delay such trials.

Clinical trials may be delayed for a variety of reasons, including the
inability to ensure sufficient numbers of enrolled patients to meet the
clinical trial protocols. This inability can be influenced or caused by, among
other things, the rigidity of the protocols, the size of the overall patient
population, and the locations of clinical sites. The number of patients that
have completed the Company's clinical trials has been limited by a number of
factors, including the reluctance of patients or physicians to participate in
experimental clinical trials. In addition, the Company's collection of
randomized data has been made difficult by the defection from the clinical
trials of patients that wanted to receive the PRS treatment but were assigned
to the trials' non-PRS control groups. Any delays in or termination of the
Company's clinical trials could have a material adverse effect on the
Company's business, financial condition and results of operations. There can
be no assurance that clinical trials will be

7
<PAGE>

successful, that clinical trials will not be delayed, or that the PRS or any
other product will be safe or effective or capable of being successfully
developed for all intended applications. See "Business--Clinical Trials," "--
Products and Product Development" and "--Government Regulation."

ABSENCE OF REGULATORY CLEARANCES; UNCERTAINTY OF OBTAINING SECTION 510(K)
CLEARANCE

The PRS has not been approved or cleared for commercial use in the U.S. or
in any foreign country. The PRS is subject to extensive regulation in the U.S.
by the FDA and, in many instances, by comparable agencies in foreign countries
where the PRS is to be manufactured or distributed. Under the FDC Act and the
Safe Medical Devices Act of 1990 (the "SMDA"), manufacturers of medical
devices must comply with applicable provisions of the FDC Act and the SMDA and
certain associated regulations governing the safety, design, testing,
manufacturing, labeling, marketing and distribution of medical devices and the
reporting of certain information regarding the safety of medical devices. Both
the FDC Act and the SMDA require certain clearances from the FDA before
medical devices, such as the PRS, can be marketed.

Sales of medical devices outside the U.S. are subject to regulatory
requirements that vary widely from country to country. The length of time
needed to obtain approval for the sale of a particular medical device in a
foreign country may be longer, and the requirements may be more burdensome or
expensive, than that required for FDA approval. Furthermore, the export of
products manufactured by the Company will be subject to receipt of export
licenses from the U.S. Government. Such licenses are required for equipment
use in foreign clinical trials. The Company has requested and been granted
export licenses and corresponding foreign import licenses for clinical trials
in England, Japan, Australia and Germany.

On December 11, 1996 the Company filed an application under Section 510(k)
of the FDC Act with respect to the PRS for the treatment of metastatic brain
tumors. If the FDA determines that Section 510(k) procedures are not available
to the Company and the application is denied, the Company would be required to
seek FDA approval of the PRS through the submission of a Premarket Approval
("PMA"). In addition, the 510(k) clearance being sought by the Company relates
to the current version of the PRS (the "Model 3"). If such clearance is
obtained, the Company will need to request the FDA to extend such clearance to
the version of the PRS now under development (the "Model 4"). The Company
expects that the Model 4 will be the first version of the PRS to be made
commercially available, and there can be no assurances that any such
clearance, if obtained, would be so extended. In addition, even if the Company
were to obtain all Section 510(k) clearances with respect to the use of the
PRS in the treatment of metastatic brain tumors, there can be no assurances
that the Section 510(k) procedures would be applicable to any other treatment
modality. The PMA process can be expensive, lengthy and uncertain, often
requiring several years of effort. Moreover, there can be no assurances that
the Company would be successful in obtaining FDA approval through the PMA
process. The inability of the Company to obtain clearance under Section 510(k)
with respect to any particular treatment modality would have a material
adverse effect on the Company's business, financial condition and results of
operations.

There can be no assurances that regulatory clearances will be granted for
the PRS or any other future products, that the length of time for clearance
will not be extensive, or that the cost of attempting to obtain any such
clearances will not be prohibitive. Failure to obtain or maintain requisite
governmental approvals could delay or preclude the Company from further
developing and marketing the PRS and other products. Such delays could impair
the Company's ability to generate funds from operations, which in turn would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business--Government Regulation."

EXTENSIVE ONGOING GOVERNMENT REGULATION

Even if regulatory clearances are obtained, such clearances may include
significant limitations on particular uses, and the FDA strictly prohibits the
marketing or sale of approved medical devices for unapproved uses. In
addition, there can be no assurance that the FDA will not impose strict
labeling requirements that limit the use of the PRS, burdensome training
requirements or other requirements as a condition of its Section 510(k)
clearance

8
<PAGE>

or PMA, under the FDC Act, any of which could limit the Company's ability to
market the PRS. Further, in order to change or modify a product following FDA
clearance, additional clearances may be required from the FDA. In addition,
any FDA clearances may be withdrawn or limited for non-compliance with
regulatory standards or the occurrence of unforeseen problems following the
initial clearance, either of which could result in restrictions, including
withdrawal of the product from the market or sanctions or fines being imposed
on the Company, which could have a material adverse effect on the Company's
business, financial condition and results of operations.

Manufacturers of medical devices are subject to strict federal regulations
regarding quality of manufacturing, including periodic FDA inspections of
manufacturing facilities to determine compliance with Good Manufacturing
Practice ("GMP") regulations, but the Company has not to date undergone such
an inspection. These regulations include design, testing, production, control,
documentation and other requirements. The FDA has publicly stated that recent
proposed changes to the GMP regulations are intended to reduce potential
design-related problems with medical devices. In addition, in order to obtain
a Communaute Europeenne Mark (a "CE Mark") for the PRS, which is required to
market the PRS within the European Union, the Company will need to comply with
standards administered by the International Standards Organization ("ISO").
There can be no assurance that the Company will be able to attain or maintain
compliance with GMP or ISO standards, or that the Company will be able to
identify and retain manufacturers on commercially acceptable terms, or at all,
or that such manufacturers, if identified, will be adequate for the Company's
long-term needs, or that they will be able to meet all relevant regulatory
requirements. Moreover, changes in methods of manufacture may require the
performance of new clinical studies under certain circumstances. Failure of
the Company to comply with, and maintain continuing compliance with, these
regulations could result in restrictions, including withdrawal of any given
product from the market or sanctions or fines being imposed on the Company,
any of which could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Government
Regulation."

RAPID, UNPREDICTABLE AND SIGNIFICANT TECHNOLOGICAL CHANGE; HIGHLY COMPETITIVE
INDUSTRY

The medical device industry is subject to rapid, unpredictable and
significant technological change. The Company is subject to competition in the
U.S. and abroad from a variety of sources, including universities, research
institutions and medical device, chemical and biotechnology companies, many of
which have substantially greater technical, financial, and regulatory
resources than the Company and are better equipped to develop, manufacture and
market their products. These companies may develop and introduce products and
processes competitive with or superior to those of the Company. See
"Business--Background," "--Specific Applications of the PRS" and "--
Competition."

DEPENDENCE ON ONE PRODUCT

The Company expects to derive substantially all of its future revenues from
the PRS. The PRS and its related accessories and components are currently the
Company's only products. The PRS and any other products will require further
development, study and regulatory approvals before they can be marketed in the
U.S. or internationally. The Company has never commercially sold any products,
and there can be no assurance that the Company's efforts will be successful or
that the PRS and its related accessories or any other product developed by the
Company will be safe or effective, approved by regulatory authorities, capable
of being manufactured in commercial quantities at acceptable costs, or
successfully introduced to the marketplace. Although the Company expects to
use its core technology to develop products in addition to the PRS and its
related accessories and components, all of such additional products are in
early stages of development, and there can be no assurance that the Company
will be able to continue as a going concern if it is forced to rely on sales
of such other additional products as its primary source of revenues. See
"Business--Specific Applications of the PRS," "--Competition," "--Products and
Product Development," "--Clinical Trials" and "--Government Regulation."

ADVERSE EFFECT OF PATIENT LIFE EXPECTANCIES ON MARKETS FOR SPECIFIC PRODUCT
APPLICATIONS

To date, the Company has focused its efforts on one specific application of
the PRS, the treatment of metastatic brain tumors. Patients with metastatic
brain tumors already suffer from primary cancer which is

9
<PAGE>

separate from the metastatic brain tumors themselves. The average life
expectancy of patients with metastatic brain tumors is very short. Although
the PRS has been designed to provide either curative or palliative cancer
treatment, health care providers and third party payors may be reluctant to
undertake or authorize, or provide reimbursement for, PRS treatment of
patients whose anticipated life expectancies are below certain levels. While
the Company believes that the PRS can be used for a variety of other
applications, such as breast, prostate, bladder or skin cancer, where patient
life expectancies are higher than those for patients with metastatic brain
tumors, the Company has not yet begun human clinical trials for any of those
other applications. See "Business--Clinical Trials".

PATENTS AND PROPRIETARY TECHNOLOGY

The Company's ability to compete effectively in the marketplace will depend,
in part, on its ability to maintain the proprietary nature of its technology.
The Company will rely on patents, trade secrets and know-how to establish and
maintain a competitive position in the marketplace. The enforceability of
medical device patents can be highly uncertain, and relevant federal court
decisions establishing the legal standards for determining the validity and
scope of patent protection are currently in transition. In a case now pending
before the United States Supreme Court, the Court has been requested to
consider whether to alter or replace the traditional standards for determining
patent infringement under the "doctrine of equivalents." There can be no
assurance that the historical legal standards applied to questions of validity
and scope of patent protection will continue to be applied or that current
defenses (as to issued patents in the field) will offer protection in the
future. Any limitation or reduction in the Company's rights to obtain or
enforce its patents could have a material adverse effect on the Company's
ability to maintain the proprietary nature of its technology.

The Company has been issued nine U.S. patents covering the PRS and ancillary
test and calibration devices and holds four U.S. patent applications. The
Company has filed foreign patent applications in selected foreign countries
which correspond to certain of its U.S. patent applications. There can be no
assurance, however, that any applications will result in issued patents, or
that once issued, the U.S. Patent and Trademark Office or a court would
resolve issues relating to the validity and scope of the patents in a manner
favorable to the Company. Also, there can be no assurance that any current or
future patents, trade secrets or know-how will afford protection against
competitors with similar technologies or processes or that any patents issued
to the Company will not be infringed upon or designed around by others, nor
can there be any assurance that others will not independently develop
proprietary technologies or processes which are the same as or substantially
equivalent to those of the Company. In addition, there can be no assurance
that the Company will not become subject to patent infringement claims or
litigation initiated by third parties. The defense and prosecution of
intellectual property suits, and related legal and administrative proceedings,
are very costly and time-consuming, and any such litigation or proceeding
would result in substantial expense to the Company and a significant diversion
of effort by the Company's technical and management personnel. Further, any
adverse determination in such litigation or proceeding could subject the
Company to significant liabilities to the third party claimants and could
prevent the Company from manufacturing or marketing its products. See
"Business--Patents and Proprietary Rights."

UNCERTAINTY OF REIMBURSEMENT BY THIRD PARTY PAYORS

The extent to which reimbursement levels for the cost of the Company's
products and related treatment are obtained from third party payors will have
a significant impact on the Company's ability to commercialize its products.
These third party payors include private insurance companies, self-insured
employers, health maintenance organizations, federal and state sources of
payment under the Medicare and Medicaid programs, and other sources. There is
no uniform policy on reimbursement among third party payors, nor are there any
assurances that the PRS or any other Company product will qualify for
reimbursement from third party payors. Foreign countries also have their own
health care reimbursement systems, and there can be no assurance that third
party reimbursement will be made available with respect to the Company's
products under any foreign reimbursement system.

10
<PAGE>

In addition, the Company's business, financial condition and results of
operations could be adversely affected by the continuing efforts of many third
party payors to reduce the costs of health care by decreasing reimbursement
rates, or limiting or prohibiting reimbursement for certain services or
devices or through other means. Furthermore, legislative proposals to reform
government health care insurance programs, including the Medicare and Medicaid
programs, could significantly impact the purchase of health care services and
products and could result in lower prices and reduced demand for the Company's
products. The Company is unable to predict whether such proposals will be
enacted, whether other health care legislation or regulation affecting the
Company's business, financial condition and results of operations may be
proposed or enacted in the future, or what effect any such legislation or
regulation would have on the Company's business, financial condition and
results of operations. See "Business--Third Party Reimbursement."

CONTROL BY PETER M. NOMIKOS, HIS AFFILIATES AND OTHER EXISTING STOCKHOLDERS

After completion of this offering, Mr. Peter M. Nomikos, Chairman of the
Board, President, Chief Executive Officer and Treasurer of the Company will
beneficially own 51.5% of the outstanding shares of Common Stock, and the
Company's principal stockholders and certain of their affiliates (including
Mr. Nomikos) will beneficially own in the aggregate 68.1% of the outstanding
shares of Common Stock. Certain principal stockholders serve as directors or
have representatives who serve as directors of the Company. As a result of Mr.
Nomikos' ownership of Common Stock coupled with the positions he holds in the
Company, Mr. Nomikos, alone or with the other principal stockholders, will
have the ability to significantly influence all matters requiring approval by
the stockholders of the Company, including the election of all directors,
acquisitions or sales of all or substantially all of the Company's stock or
assets and other extraordinary transactions. See "Management" and "Securities
Ownership of Management and Certain Beneficial Owners."

LIKELIHOOD OF SIGNIFICANT FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL
FUNDING

The Company has expended and will continue to expend substantial funds to
continue the research and development of the PRS and other potential products,
conduct clinical trials, pursue regulatory approvals, establish commercial
scale manufacturing in its own facilities or in the facilities of others, and
market the PRS or other products.

The Company's future capital requirements will depend on a variety of
factors, including the time and costs involved in obtaining FDA and other
regulatory approvals, the results of the Company's ongoing clinical trials,
the market acceptance of the PRS and any other Company products, the expense
and results of the Company's continued scientific research and development
programs, the time and costs expended in filing, prosecuting and enforcing
patent claims, and the development of competing technologies. No assurance can
be given that the necessary funds will be available to the Company on
acceptable terms, if at all. Insufficient funds may cause the Company to
delay, scale back or eliminate some or all of its research and development,
clinical marketing and manufacturing programs or to cease operations entirely.
In addition, any additional equity financings may be dilutive to the Company's
stockholders, including investors in this offering. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

LIMITED MANUFACTURING EXPERIENCE

To achieve profitability, the Company's product or products must be
manufactured in commercial quantities, in compliance with all applicable
regulatory requirements, and at acceptable costs. Production of the PRS or
other products in commercial quantities may create technical challenges for
the Company. The Company does not have and has no immediate plans to construct
a commercial scale manufacturing facility. In order to manufacture its
products in commercial quantities, the Company would have to build or gain
access to adequate facilities or would be required to enter into agreements
with other manufacturers at significant cost. The Company intends to continue
its practice of sub-contracting the fabrication of most of its electrical and
mechanical components, while maintaining internal responsibility for unit
assembly and for manufacture of certain proprietary components. To date, the
Company's manufacturing activities have consisted only of

11
<PAGE>

manufacturing investigational devices and prototype devices for use in
clinical trials. As a result, the Company has no experience manufacturing its
products in the volumes that will be necessary for the Company to achieve
significant commercial sales, and there can be no assurance that reliable,
high-volume manufacturing can be established or maintained at commercially
reasonable costs, or that the Company will be able to make the transition to
commercial production successfully. See "Business--Manufacturing."

LIMITED MARKETING EXPERIENCE

The Company currently has no marketing or sales staff, and significant
additional expenditures, management resources and time would be required to
develop such a sales staff, or to make arrangements for sale or lease of the
Company's products through third parties. As a result, the Company's current
marketing and sales strategy will rely substantially on unaffiliated third
parties to effect the sales of its products. There can be no assurance that
the Company will be able to establish a sales force or make adequate third
party arrangements for product leasing or sales or that the Company will not
have to incur significant additional expenditures, which may include the
employment of sales personnel, in order to effect the sales of its products.
See "Business--Marketing and Sales; Collaborative Relationships."

HIGH DEPENDENCE ON KEY PERSONNEL

The Company is highly dependent on its scientific personnel and senior
management. The loss of any key personnel could significantly and adversely
impact the Company's research and development efforts or strategic objectives.
Competition among medical device companies for highly skilled scientific and
management personnel is increasingly intense. In order to achieve and maintain
the Company's commercialization of the PRS, the Company will need to attract
and retain additional key personnel, and there can be no assurance that the
Company will be able to do so. The Company has no employment agreements with
any of its employees, nor has it purchased insurance on the lives of any of
its key employees. See "Business--Employees" and "Management".

POTENTIAL COMPONENT SHORTAGES; DEPENDENCE ON LIMITED SOURCES OF SUPPLY

The Company expects that it will manufacture its products based on
anticipated product orders. The different lead times for the supply and
delivery of materials and components ordered by the Company for its products
can vary significantly, and the relative availability and cost of those
materials and components can fluctuate. The Company has built up and maintains
an inventory of certain components for the PRS, and seeks, where feasible, to
identify multiple suppliers of materials and components. However, the Company
acquires certain supplies over time from the same vendors. While the Company
intends to negotiate, where appropriate, supply contracts with certain of its
key suppliers in the future, the Company currently procures its supplies
through open purchase orders, and there can be no assurance that the Company's
vendors will continue to provide such supplies on terms acceptable to the
Company, if at all. In addition, if forecasted product orders prove to be
different than actual product orders, the Company may have excess or
inadequate inventory. There can be no assurance that alternative suppliers for
components can be found on a timely basis, or at all, in the event that such
alternative suppliers are needed. Any significant delay or interruption in the
Company's ability to acquire product components and materials could have a
material adverse effect on the Company's ability to manufacture its products
and therefore on its business, financial condition and results of operations.
See "Business--Manufacturing."

PRODUCT LIABILITY EXPOSURE; POTENTIAL UNAVAILABILITY OF INSURANCE

Use of the PRS or other products, whether for commercial applications or
during clinical trials, exposes the Company to risk of medical product
liability claims in the event that such products cause injury or result in
adverse effects. There can be no assurance that the Company would have
sufficient resources to satisfy any liability resulting from these claims.
Although the Company has obtained medical product liability insurance with
respect to the clinical testing of the PRS, there can be no assurance that the
level or breadth of such insurance coverage will be sufficient to fully cover
potential claims. Such insurance is expensive, and there can be no assurance
that it will continue to be available at an acceptable cost, if at all, or
that a medical product liability

12
<PAGE>

claim would not adversely affect the financial condition of the Company. Prior
to commercial sale of its products, the Company will be required to obtain
product liability insurance covering the commercial use of its products,
however, there can be no assurance that the Company will be able to obtain
commercially reasonable product liability insurance for the commercial sale or
use of any product.

ANTI-TAKOVER PROVISIONS; EFFECTS OF ISSUANCE OF PREFERRED STOCK

Certain provisions of the Company's Articles of Organization and By-Laws are
intended to enhance the likelihood of continuity and stability in the
composition of the Company's Board of Directors and in the policies formulated
by the Board and to delay or prevent a change in control of the Company if the
Board determines that such a change in control is not in the best interest of
the Company. These provisions could have the effect of discouraging certain
attempts to acquire the Company or to remove incumbent management even if some
or a majority of the Company's stockholders deem such an attempt to be in the
Company's best interest. As a result, these provisions could limit the price
that investors might be willing to pay in the future for shares of Common
Stock, thereby depriving stockholders of certain opportunities to sell their
stock at temporarily higher prices.

In addition, the Company will be covered by the provisions of Chapter 110F
of the Massachusetts General Laws, the Business Combination Statute. This
statute would prohibit the Company from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless
the business combination is approved in a manner prescribed by the statute. A
"business combination" includes a merger, a stock or asset sale, and other
transactions resulting in a financial benefit to the interested stockholder.
The application of this statute could have the effect of delaying or
preventing a change of control of the Company.

The Board of Directors of the Company is authorized, subject to certain
limitations, to cause the Company to issue one or more series of Preferred
Stock and, to the extent permitted by Massachusetts law, to designate
variations in the relative rights and preferences between different series. In
the event of issuance, the Preferred Stock could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a change of
control of the Company. The Company has no current plans to issue any shares
of Preferred Stock; however, there can be no assurance that the Company's
Board of Directors will not do so at some time in the future. See "Description
of Capital Stock."

NO PRIOR PUBLIC MARKET; POTENTIAL VOLATILITY OF STOCK PRICE

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. The initial public offering price
will be determined through negotiations between the Company and the
Underwriters, and may not be indicative of the market price of the Common
Stock following this offering. The market price of the Common Stock following
this offering may be highly volatile. Factors such as variations in the
Company's financial performance, announcements of technological innovations by
the Company, its competitors or providers of alternative products, and changes
in the economy generally, the financial markets or the health care industry,
could cause the market price of the Common Stock to fluctuate substantially.
In addition, the stock markets have experienced price and volume fluctuations
that have particularly affected medical device companies, resulting in changes
in the market prices of the stocks of many companies which may not have been
directly related to the operating performance of those companies. Such broad
market fluctuations may adversely affect the market price of the Common Stock
following this offering. See "Underwriting."

SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of Common Stock in the public market following
the offering made hereby could have an adverse effect on the price of the
Common Stock, and future sales of Common Stock by existing stockholders could
also have an adverse effect on such price and on the Company's ability to
raise capital. Beginning 180 days after the date of this Prospectus, 4,221,130
shares of Common Stock will be eligible for sale in the public market upon the
expiration of lock-up agreements between the Company's stockholders and the
Underwriters, subject in some cases to the volume and other restrictions of
Rule 144 under the Securities Act of 1933, as amended (the "Securities Act").
Additionally, 812,975 shares of Common Stock were subject to

13
<PAGE>

outstanding options, 1,417,334 shares of Common Stock were subject to
outstanding warrants, 881,249 shares of Common Stock were issuable upon
conversion of outstanding convertible debt and an additional 175,025 shares of
Common Stock were reserved for issuance under the Company's stock option plan.
Approximately 180 days after the date of this Prospectus, the Company intends
to register the shares subject to outstanding options and reserved for
issuance under the Company's stock plan, which shares would then be eligible
for sale in the public market, although all of these shares and all shares
acquired under employee benefit plans by employees are subject to agreements
not to sell until 180 days after the date of this Prospectus. Certain holders
of shares of Common Stock will have the right, under certain conditions, to
participate in future Company registrations. See "Shares Eligible for Future
Sale."

IMMEDIATE AND SUBSTANTIAL DILUTION

Purchasers of the Common Stock offered hereby will suffer an immediate and
substantial dilution of the net tangible book value of the Common Stock from
the initial public offering price and present shareholders will receive a
substantial increase in the book value of their shares of Common Stock. Such
immediate dilution to new investors is expected to be in the amount of $5.62
per share, at the initial public offering price of $8.50 per share. In
addition, purchasers in this offering will incur additional dilution to the
extent outstanding stock options and warrants are exercised or convertible
notes are converted into capital stock. See "Dilution."

ABSENCE OF DIVIDENDS

The Company has never paid any dividends on its capital stock, including its
Common Stock, and it is currently anticipated that no cash dividends will be
paid to the holders of the Common Stock in the foreseeable future. See
"Dividend Policy."

DISCRETION OF MANAGEMENT REGARDING APPLICATION OF PROCEEDS

The Company has proposed a tentative allocation of the net proceeds expected
to be generated from this offering. This allocation is based on expenditure
estimates and approximations and does not represent a firm commitment of the
Company to distribute the proceeds strictly in compliance with such
allocation. Accordingly, the Company's management will retain broad discretion
to change the allocation of the net proceeds generated from this offering,
based on or in response to, among other things, changes in the Company's
business plans, results of research and development programs, the status of
the Company's clinical trials, the impact of laws and regulations applicable
to the Company, the Company's assessment of competing or developing
technologies, general conditions in the healthcare and cancer treatment
industries, economic trends and the Company's specific financial condition.
There can be no assurance as to whether any such anticipated proceeds will be
generated by this offering and whether such amounts will be sufficient to meet
the Company's needs. See "Use of Proceeds."

14
<PAGE>

USE OF PROCEEDS

The Company estimates that the net proceeds to be received by the Company
from the sale of Common Stock pursuant to this offering are approximately
$15.0 million ($17.3 million if the Underwriters' over-allotment option is
exercised in full) after deducting estimated underwriting discounts and
commissions and offering expenses.

Based on the $15.0 million figure, the net proceeds of this offering have
been tentatively allocated by the Company to be used to: (i) increase the
Company's research and development efforts in a number of cancer treatment
applications ($2.2 million); (ii) continue to expand clinical trials for the
PRS ($1.7 million); (iii) obtain regulatory approvals for the PRS ($3.2
million); (iv) enhance manufacturing and marketing capabilities ($6.7
million); and (v) provide working capital, as well as for general corporate
purposes ($1.2 million). Pending such anticipated uses, the Company plans to
invest such proceeds in interest-bearing investment grade instruments. The
Company's management will retain broad discretion to change the allocation of
the net proceeds generated from this Offering. See "Risk Factors--Discretion
of Management Regarding Application of Proceeds."

The Company believes that proceeds of this offering, together with its cash
and cash equivalents, will be sufficient to meet the capital requirements of
its existing business for at least the next two years. The Company anticipates
that additional financing will be required after the net proceeds of this
offering have been expended. There can be no assurance that such additional
financing will be available when needed or on terms acceptable to the Company,
and the Company currently has no commitments to obtain any such financing. See
"Risk Factors--Likelihood of Significant Future Capital Needs; Uncertainty of
Additional Funding" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

DIVIDEND POLICY

The Company has never paid any dividends on its capital stock, including its
Common Stock. The current policy of the Company's Board of Directors is to
retain any earnings to finance the operation of the Company's business, and,
accordingly, it is anticipated that no cash dividends will be paid to the
holders of the Common Stock for the foreseeable future. See "Risk Factors--
Absence of Dividends."

15
<PAGE>

CAPITALIZATION

The following table sets forth the pro forma capitalization of the Company
to reflect the conversion of all Preferred Stock into Common Stock as of
December 3, 1996, and such capitalization as adjusted to reflect receipt of
the estimated net proceeds from the sale of 2,000,000 shares of Common Stock
offered hereby. This capitalization table should be read in conjunction with
the Company's Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Prospectus.

- --------
(1) Derived from unaudited financial statements.
(2) Reflects increase in authorized shares to be effected prior to the closing
of the offering. See "Description of Capital Stock."
(3) Includes Common Stock issuable upon conversion of the outstanding
Preferred Stock, which will occur automatically on the closing of this
offering. Excludes 1,417,334 shares of Common Stock issuable upon exercise
of warrants outstanding at December 3, 1996 with an exercise price of
$3.00 per share and 881,249 shares of Common Stock issuable upon
conversion of the Company's 8% convertible debt outstanding at September
28, 1996. Also excludes 812,975 shares of Common Stock issuable upon
exercise of options outstanding at December 3, 1996 with a weighted
average exercise price of $4.31 per share. See Notes 6, 7, 8 and 9 of
Notes to Consolidated Financial Statements, "Description of Capital
Stock," "Management--Officers and Directors," "--Executive Compensation,"
"Certain Transactions" and "Use of Proceeds."

16
<PAGE>

DILUTION

The net tangible book value of the Company at September 28, 1996 was $3.7
million or $0.82 per share of Common Stock on a pro forma basis. Pro forma net
tangible book value represents the amount of total tangible assets of the
Company less total liabilities, divided by the number of shares of Common
Stock outstanding on a pro forma basis. After giving effect to the sale of
Common Stock offered hereby (after deducting estimated underwriting discounts
and commissions and offering expenses), assuming the sale of 2,000,000 shares
of Common Stock at the initial public offering price of $8.50 per share, the
adjusted net tangible book value of the Company at September 28, 1996 would
have been $18.8 million, or $2.88 per share. This represents an immediate
increase in net tangible book value of $2.06 per share to existing
stockholders and an immediate dilution of $5.62 per share to new investors
purchasing shares in this offering. Dilution to new investors is determined by
subtracting the net tangible book value per share after the sale of Common
Stock offered hereby from the initial public offering price per share. The
following table illustrates this dilution on a per share basis:

<TABLE>
<S> <C> <C>
Assumed public offering price per share (1)................... $ 8.50
Pro forma net tangible book value per share as of September
28, 1996................................................... $0.82
Increase per share attributable to the offering............. 2.06
-----
Adjusted net tangible book value per share after the offering
(2)(3)....................................................... 2.88
------
Dilution per share to new investors (2)(3).................... $ 5.62
======
</TABLE>
- --------
(1) Assumed initial public offering price before deduction of estimated
underwriting discounts and commissions and expenses of the offering to be
paid by the Company.
(2) If the Underwriters' over-allotment option were exercised in full, the
adjusted net tangible book value per share after the offering would be
$3.10, resulting in an immediate dilution of $5.40 per share to investors
purchasing shares in this offering.
(3) If all outstanding options and warrants at September 28, 1996 to purchase
812,975 and 1,417,334 shares of Common Stock, respectively, were
exercised, in addition to the Underwriters' exercise of its over-allotment
option, the adjusted net tangible book value per share after the offering
would be $3.19, resulting in an immediate dilution of $5.31 per share to
investors purchasing in this offering.

The following table sets forth, as of September 28, 1996, on the pro forma
basis described above, the number of shares of Common Stock purchased from the
Company and the total cash consideration paid and the average price per share
paid by existing stockholders of the Company, and by investors in this
offering, based upon the initial public offering price of $8.50 per share:

<TABLE>
<CAPTION>
SHARES PURCHASED (1) TOTAL CONSIDERATION AVERAGE
----------------------- ------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
------------ ---------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing Stockholders... 4,520,104 69.3% $19,604,489 53.6% $ 4.34
New Investors........... 2,000,000 30.7 17,000,000 46.4 $ 8.50
------------ -------- ----------- -----
Total................. 6,520,104 100.0% $36,604,489 100.0%
============ ======== =========== =====
</TABLE>
- --------
(1) Includes Common Stock issuable upon conversion of the outstanding
Preferred Stock, which will occur automatically on the closing of this
offering.

The foregoing tables do not assume the exercise of outstanding options or
warrants, or the conversion of convertible debt. At September 28, 1996,
warrants to purchase 1,417,334 shares of Common Stock were outstanding, at an
exercise price of $3.00 per share. As of September 28, 1996, there was a total
of $2,013,277 of convertible debt outstanding, with a weighted average
conversion price of $2.28 per share. At September 28, 1996, there were 812,975
shares of Common Stock issuable upon exercise of all outstanding options; of
these, 422,500 shares were then exercisable. The weighted average exercise
price of all outstanding options at September 28, 1996 was $4.31. To the
extent that these options or warrants are exercised, or this convertible debt
is converted into Common Stock, there will be further dilution to new
investors. See "Management--Officers and Directors," "--Executive
Compensation," "Description of Capital Stock" and Notes 6, 7, 8 and 9 of Notes
to Consolidated Financial Statements.

17
<PAGE>

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated statement of operations data and consolidated
balance sheet data presented below as of December 31, 1994, December 30, 1995,
and the consolidated statement of operations data presented below as of
January 1, 1994, are derived from the Company's Consolidated Financial
Statements and Notes thereto included elsewhere in this Prospectus, which have
been audited by Arthur Andersen LLP, independent public accountants. The
selected consolidated statement of operations data and consolidated balance
sheet data presented below as of December 28, 1991, January 2, 1993, and the
consolidated balance sheet data presented below as of January 1, 1994, are
derived from the Company's Consolidated Financial Statements and Notes thereto
not included in this Prospectus, which have been audited by Arthur Andersen
LLP, independent public accountants. The selected consolidated financial data
for the nine-month periods ended September 30, 1995 and September 28, 1996 are
derived from the Company's unaudited Consolidated Financial Statements. The
financial data for the nine-month periods ended September 30, 1995 and
September 28, 1996 include all adjustments, consisting of normal recurring
adjustments, which the Company considers necessary for a fair presentation of
the financial position and the results of operations for those periods.
Operating results for the six months ended September 28, 1996 are not
necessarily indicative of the results that may be expected for the entire year
ended December 31, 1996. The selected consolidated financial data set forth
below should be read in conjunction with the Consolidated Financial Statements
and Notes thereto, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and other financial information included
elsewhere in this Prospectus.

<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED
-------------------------------------------------------------------------- ---------------------------
DECEMBER 28, JANUARY 2, JANUARY 1, DECEMBER 31, DECEMBER 30, SEPTEMBER 30, SEPTEMBER 28,
CONSOLIDATED STATEMENT OF 1991 1993 1994 1994 1995 1995 1996
OPERATIONS DATA: ------------ ------------ ------------ ------------- ------------ ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating expenses:
Research and development
expenses............... $ 784 $ 1,227 $ 1,727 $ 2,086 $ 3,226 $ 1,721 $ 2,263
General and
administrative
expenses............... 116 192 251 505 866 543 1,168
------- ------------ ------------ ------------ -------- -------- --------
Total operating
expenses............... 900 1,419 1,978 2,591 4,092 2,264 3,431
------- ------------ ------------ ------------ -------- -------- --------
Operating loss........... (900) (1,419) (1,978) (2,591) (4,092) (2,264) (3,431)
Interest income
(expense), net.......... (74) (167) (289) (81) (25) (67) 112
------- ------------ ------------ ------------ -------- -------- --------
Net loss................. $ (974) $ (1,586) $ (2,267) $ (2,672) $ (4,117) $ (2,331) $ (3,319)
======= ============ ============ ============ ======== ======== ========
Net loss per share....... $ (1.25) $ (1.65) $ (1.96) $ (1.96) $ (3.61) $ (2.05) $ (2.06)
======= ============ ============ ============ ======== ======== ========
Pro forma net loss per
share (1)............... -- -- -- -- (1.02) -- $ (0.74)
======== ========
Weighted average common
and common equivalent
shares outstanding...... 781 959 1,160 1,362 1,140 1,139 1,613
Pro forma weighted
average common and
common equivalent shares
outstanding (1)......... -- -- -- -- 4,035 -- 4,507
<CAPTION>
SEPTEMBER 28, SEPTEMBER 28,
DECEMBER 28, JANUARY 2, JANUARY 1, DECEMBER 31, DECEMBER 30, 1996 1996
CONSOLIDATED BALANCE 1991 1993 1994 1994 1995 ACTUAL PRO FORMA (2)
SHEET DATA: ------------ ------------ ------------ ------------- ------------ ------------- -------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash
equivalents............. $ 22 $ 210 $ 68 $ 1,778 $ 7,191 $ 4,005 $ 4,005
Total assets............. 133 425 526 2,949 8,703 6,037 6,037
Total long-term debt,
including current
portion................. 1,417 3,133 1,296 2,115 1,940 2,013 2,013
Deficit accumulated
during development
stage................... (1,782) (3,368) (5,636) (8,307) (12,425) (15,744) (15,744)
Total shareholders'
equity.................. (1,483) (2,798) (1,054) 575 6,493 3,803 3,803
</TABLE>
- -------
(1) Includes 2,894,644 shares of Common Stock to be issued upon the conversion
of all of the outstanding preferred stock. The remaining 33,106 shares of
Common Stock to be issued upon the conversion of all of the outstanding
preferred stock is included in historical loss per share for all periods
pursuant to certain Securities and Exchange Commission requirements.
(2) Gives effect to the conversion of all outstanding preferred stock into
2,927,750 shares of Common Stock, which will occur simultaneously with the
closing of this offering. The Company's preferred stock consists of three
separate series; 1,282,005 shares of Series A Convertible Preferred Stock,
500,000 shares of Series B Convertible Preferred Stock, and 1,110,307
shares of Series C Convertible Preferred Stock were outstanding as of
September 28, 1996. Each share of preferred stock is convertible into one
share of Common Stock, except that each share of Series C Convertible
Preferred Stock is convertible into 1.032 shares of Common Stock at the
initial public offering price of $8.50 per share.

18
<PAGE>

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

OVERVIEW

The Company is engaged in the design, development and commercialization of
the PRS, a proprietary, therapeutic device for the treatment of cancerous
tumors through the application of radiation directly into a tumor. To date,
the Company has not received any revenue from the sale of its products and
does not anticipate receiving any significant revenue at least until the
middle of 1998. The Company has an accumulated deficit totaling approximately
$15.7 million since its inception and expects to continue to incur losses
until such time as its commercialization efforts yield offsetting revenues.
The Company anticipates that its research and development, general and
administrative and manufacturing expenses will significantly increase during
the balance of 1996 and 1997 as it pursues the commercialization of the PRS.

Before medical devices such as the PRS can be marketed in the U.S., FDA
approval is required. Phase II clinical trials for the treatment of metastatic
brain tumors are currently being performed. Based on the results obtained in
these ongoing Phase II trials, on December 11, 1996 the Company submitted a
Section 510(k) application to the FDA seeking clearance to commercialize the
current model of the PRS for treatment of metastatic brain tumors. If the
Company receives such Section 510(k) clearance, the Company will request the
FDA to extend such clearance to the version of the PRS now under development
(the "Model 4"), which the Company expects will be the first version of the
PRS to be made commercially available. Locally approved clinical trials for
the treatment of brain tumors are also being performed at sites in Europe and
Japan. The Company currently anticipates that clinical trials to determine the
safety of the PRS for treatment of breast cancer will begin in the U.K. in
early 1997. Based upon those trials, the Company will submit an application to
the FDA to begin human clinical trials in the U.S. The possibility of treating
topical tumors of the skin and mouth with the PRS is also being explored. A
program has begun at a U.S. hospital which the Company expects to lead to
human clinical trials with the PRS in treating Kaposi's sarcomas and other
skin malignancies. Upon obtaining all necessary regulatory approvals, the
Company intends to begin commercial sales of the PRS. The Company will
consider the use of the PRS for other potential applications on an ongoing
basis. In order to support such commercialization, the Company will experience
significant working capital and other financing needs.

If all regulatory clearances are obtained, the Company intends to market
and distribute its products through a combination of collaborative
relationships and in-house sales and marketing resources. The Company has
developed and will continue to develop strategic alliances with companies that
have established distribution channels in domestic and international markets.
As part of the manufacturing process, the Company intends to sub-contract the
fabrication of most of its electrical and mechanical components. The Company
is actively pursuing full functional compliance with ISO 9001 and the FDA's
GMP standards that govern quality assurance, personnel training, process
control, customer service, design control, supply management and facility and
equipment maintenance.

In the fourth quarter of 1996, the Company extended the terms of certain
options issued to four employees of the Company. These options, by their
terms, would expire but for such extension during the 180-day "lock-up period"
following the date of this Prospectus. These options were extended to a date
which is two months after the expiration of the lock-up agreements. See
"Shares Eligible for Future Sale." These options are exercisable into an
aggregate of 23,500 shares of Common Stock, and none of said employees is an
officer or director of the Company. The Company recorded compensation expense
of $272,600 pursuant to Accounting Principals Board Opinion No. 25 in the
fourth quarter as a result of this extension.

RESULTS OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995

Research and development expenses. Research and development expenses
increased by $542,370 from $1.7 million in the first nine months of 1995 to
$2.3 million in the first nine months of 1996. These changes reflect
significant increases in activity in the Company's clinical trial efforts and
bladder and breast cancer research and development programs. A portion of the
increase in research and development expenses is attributable to pre-clinical
animal trials for the bladder application in 1996. The principal costs in
research and development were the

19
<PAGE>

Phase II clinical trials. Other factors contributing to the increase in
research and development expenses were as a result of discussions with
physicians in the U.K. to initiate clinical trials in breast tumors. Costs
were incurred in formulating the breast cancer research and trial protocol and
developing accessory equipment for the trials.

General and administrative expenses. General and administrative expenses
increased by $624,396 from $543,215 in the first nine months of 1995 to $1.2
million in the first nine months of 1996. The increase is attributable to a
growth in personnel from 16 to 25 employees and related costs. Additional
increases related to legal and professional fees related to general corporate
representation and the protection of intellectual property rights.

Interest income. Interest income increased by $179,462 from $22,633 in the
first nine months of 1995 to $202,095 in the first nine months of 1996. The
change resulted from investing the proceeds of a private placement in the
fourth quarter of 1995.

FISCAL YEAR ENDED DECEMBER 30, 1995 AND DECEMBER 31, 1994

Research and development expenses. Research and development expenses
increased by $1.1 million from $2.1 million in 1994 to $3.2 million in 1995.
In 1995, the Company extended the term of stock options to purchase 100,000
shares of Common Stock at an exercise price of $0.40 per share from seven to
twelve years. This extension resulted in the Company recording $860,000 of
compensation expense based upon an estimated fair value of $9.00 per share.
This compensation expense was allocated between research and development
expenses and general and administrative expenses. In 1995, the Company began
to increase the number of clinical sites which were conducting Phase II
clinical trials. The Company also expanded its activities outside the U.S. to
a second European site in Germany and a new site in Japan. The
commercialization of the PRS in Germany will be subject to the European
Union's Medical Devices Directive, and to the jurisdiction of the Ministry of
Health and Welfare (under the Pharmaceutical Affairs Law) in Japan. Delays in
the Company's efforts to conduct clinical trials and obtain regulatory
approvals in these countries could adversely affect the Company's financial
position and results of operations. The Company anticipates that sales of the
PRS will primarily be denominated in U.S. dollars, and recognizes that the
value of the U.S. dollar in relation to foreign currencies could have an
adverse impact on PRS sales to foreign customers. While the Company currently
has insignificant foreign currency exposure, the Company intends to regularly
monitor its foreign currency risks in connection with the commercialization of
the PRS and to take measures, including the possible purchase of foreign
currency exchange contracts, which it considers appropriate to reduce the
impact of foreign exchange fluctuations on the Company's results of
operations.

The Company and Toshiba have also entered into a Clinical Trial Agreement
dated as of December 13, 1995. Under this agreement, Toshiba has agreed to
purchase two PRS systems for use in clinical trials in Japan. Toshiba has also
agreed, subject to certain conditions and limitations, to bear overall
responsibility for the performance of the Japanese clinical trials and for
obtaining regulatory approvals in Japan. Under this agreement, Toshiba is
obligated "to bear the full cost to be incurred for any legal procedures for
conducting the Clinical Trials in Japan and for obtaining" regulatory
approvals in Japan. The Company has agreed to make available certain training
and installation services, and to provide technical information and PRS spare
parts.

Under an International Distributor Sales and Service Agreement (the "Toshiba
Agreement") between the Company and Toshiba dated December 13, 1995, the
Company has granted to Toshiba an exclusive right to sell and service the PRS
in Japan during the term of the Toshiba Agreement. Pursuant to the Toshiba
Agreement, Toshiba has agreed to provide certain training services to PRS
customers and to perform certain PRS repairs (to the extent such repairs are
not then covered by the Company warranty on the PRS). Subject to certain
termination rights, the Toshiba Agreement expires three years after all
necessary legal, regulatory or administrative approvals to import, market,
sell and use the PRS in Japan are first obtained.

20
<PAGE>

The two agreements with Toshiba described above are material to the Company,
its future financial conditions and results of operations.

General and administrative expenses. General and administrative expenses
increased by $361,672 from $505,061 in 1994 to $866,733 in 1995. The increase
is attributable to a growth in personnel from 13 in 1994 to 21 in 1995 and
related costs. The additional increases in 1995 are a function of the
allocation of the compensation expense from the stock option extension and
legal and professional fees related to general corporate representation and
the protection of intellectual property rights.

Interest income (expense). Interest expense decreased by $33,016 from
$143,661 in 1994 to $110,645 in 1995. This decrease is attributable to the
prior period conversion of debt. Interest income increased by $22,277 from
$63,473 in 1994 to $85,750 in 1995. This increase is attributable to the
receipt of offering proceeds from a private placement in the fourth quarter of
1995.

FISCAL YEAR ENDED DECEMBER 31, 1994 AND JANUARY 1, 1994

Research and development expenses. Research and development expenses
increased by $359,490 from $1.7 million in 1993 to $2.1 million in 1994. This
change is attributable to the submission to the FDA for Phase II clinical
trials. The Company also expanded its efforts to complete a new model of the
PRS by increasing acquisitions of raw materials. In addition, the Company
began installing the PRS at hospitals in the U.S. to begin the process of
qualifying the device for clinical trials.

General and administrative expenses. General and administrative expenses
increased by $254,296 from $250,765 in 1993 to $505,061 in 1994. The increase
is attributable to a growth in personnel from nine in 1993 to thirteen in 1994
and related costs. Part of the personnel increase was to start developing
manufacturing operations. Additional increases in 1994 were due to legal and
professional fees relating to general corporate representation and the
protection of intellectual property rights, and patent expenses for foreign
coverage of issued patents.

Interest income (expense). Interest expense decreased by $149,353 from
$293,014 in 1993 to $143,661 in 1994 due to the conversion of approximately
$3.6 million principal amount of convertible notes into equity on December 31,
1993. Interest income increased by $60,245 from $3,228 in 1993 to $63,473 in
1994 resulting from the investment of the net proceeds from a private
placement.

LIQUIDITY AND CAPITAL RESOURCES

Since its inception, the Company has financed its operations through the
issuance of convertible debt and Preferred and Common Stock in a series of
private placements totalling approximately $19.6 million. Consolidated working
capital was $4.1 million at September 28, 1996, compared with $7.6 million at
December 30, 1995. Included in working capital are cash and cash equivalents
of $4.0 million at September 28, 1996, compared with $7.2 million at December
30, 1995. During the first nine months of 1996, $3.1 million of cash was used
for operating activities. Prepaid expenses increased in 1996 due to costs
associated with the Company"s proposed initial public offering.

The Company used $685,463 of cash in the first nine months of 1996 for fixed
assets and leasehold improvements associated with its move to a new facility.

The Company received $629,323 of cash in the first nine months of 1996 from
the sale of Common and Preferred Stock.

The Company maintains medical product liability insurance policies with
respect to its clinical trials which the Company believes contain reasonable
deductibles and other ordinary and customary provisions. The Company believes
that these policies cover such risks in such amounts as are reasonable and
prudent under the circumstances, and the Company does not anticipate that
claims under these policies, if any, will have a material adverse impact on
the Company's liquidity or capital resources. Prior to commercial sale of its
products, the Company will be required to obtain product liability insurance
covering the commercial use of its products, however, there can be no
assurance that the Company will be able to obtain commercially reasonable
product liability insurance for the commercial sale or use of any product.

21
<PAGE>

The Company is currently involved in settlement discussions with a physician
and his employer. The Company understands that such physician believes that he
made certain contributions concerning use of the PRS to treat bladder cancer,
and that such physician believes that he is entitled to compensation for those
claimed contributions. The Company understands that such physician's employer
believes that it is entitled to a percentage interest in any amounts paid to
such physician. The position of the Company's management is that the Company
is not using any proprietary information of such physician in any device
currently under development or being sold by it. The Company's management also
believes that the outcome of this matter will not have a material effect on
the Company's financial position or results of operations.

The Company's capital requirements may change depending upon the progress of
the Company's research and development activities, progress of the clinical
trials, progress on new applications for treatment with the PRS and costs
involved with procuring and defending patents. The Company believes that
proceeds from this offering, together with its current cash and cash
equivalents, will be sufficient to meet the capital requirements of its
existing business for at least the next 24 months.

The Company's business plan calls for various applications of the PRS,
including the treatment of metastatic brain tumors, primary brain tumors, and
tumors in the breast, prostate, bladder and skin. The Company expects that the
capital requirements to complete the commercialization of the PRS to treat
metastatic brain tumors will require approximately $6.5 million from the net
proceeds of this offering. Such proceeds are needed to complete the Section
510(k) clearance, ISO 9001 approval, purchase of capital equipment for
assembly and manufacturing of components for the PRS and to support a sales
and marketing structure. At this point, the Company is not able to estimate
the capital requirements of commericalizing all applications of the PRS.

22
<PAGE>

BUSINESS

The Company is engaged in the design, development and commercialization of
the Photon Radiosurgery System ("PRS"), a proprietary, therapeutic device for
the treatment of cancerous tumors through the application of x-ray radiation
directly to the tumor site. The PRS delivers in a single treatment a high dose
of radiation through a thin, minimally invasive, needle-like probe, which
emits from its tip precisely controlled low energy x-rays that irradiate the
tumor from the inside out. The limited penetration of low energy x-rays in
tissue substantially confines the radiation to the tumor site.

The Company believes that the PRS offers a number of advantages over
conventional radiation therapies by allowing higher radiation doses with
shorter patient treatment times. Substantial confinement of the radiation to
the tumor boundaries significantly reduces the risk of radiation exposure to
surrounding healthy tissue and important organs or critical structures.

The most common form of treatment of cancerous tumors is by invasive
surgery. The Company believes that the PRS provides an attractive, minimally
invasive alternative to surgery, resulting in significantly less patient
trauma, shorter hospital stays and lower treatment costs than surgery. The PRS
can be applied after performing a biopsy and when desirable, use of the PRS
can be coupled with surgical procedures.

To date, the Company has focused its clinical efforts primarily on the
treatment of metastatic brain tumors. However, the PRS is being developed for
a variety of applications, including the treatment of primary brain tumors as
well as breast, prostate, bladder, skin and other cancers. The method of
treatment will depend on the application. The Company expects that the three
basic PRS treatment methods will be (i) the "interstitial" irradiation of
localized tumors from the inside out; (ii) the "intracavitary" irradiation of
body cavities; and (iii) the "intraoperative" irradiation of tumors or of the
beds of surgically removed tumors in order to destroy remaining cancerous
cells.

The Company and Toshiba Medical Systems Company, Ltd. ("Toshiba") have
entered into agreements relating to performance of clinical trials, and to
future product distribution arrangements in Japan.

The Company holds nine U.S. patents and four U.S. patent applications
relating to the PRS or its constituent or ancillary components. The Company
has also obtained or filed patent applications in other selected foreign
countries.

23
<PAGE>

BACKGROUND

CANCER OVERVIEW

According to the American Cancer Society, the direct medical costs incurred
in the delivery of cancer care in the U.S. will be approximately $35 billion
in 1996. Cancer care expenditures have been increasing as the number of new
cancer cases in the U.S. has increased from 785,000 in 1980 to an estimated
1,350,000 in 1996. In 1992, 23.9% of deaths in the U.S. were due to cancer,
ranking it the second leading cause of death. The incidence rate is growing at
1.8% per year. Men have a one in two lifetime risk of developing cancer and
for women the risk is one in three. The increase in cancer cases is
attributable to a number of factors, including an aging population. According
to the National Cancer Institute, people over age 65 are 10 times more likely
to develop cancer than those under age 65. In addition, environmental factors,
such as tobacco use and exposure to industrial carcinogens, continue to be
viewed as contributing to the cancer incidence rate. Approximately 554,740
deaths annually, or over 1,500 deaths daily, are currently attributable to
cancer, and approximately one out of every four deaths in the U.S. is cancer-
related.

Changing technology, earlier diagnosis, and better treatment have increased
the five-year survival rate of cancer patients from approximately 33% in 1960,
to approximately 40% in 1996. This improvement in survival rates has also
increased the demand for cancer-related products and services.

Treatment of cancer is expensive, with an annual cost per case, including
diagnosis, hospital treatment and other facility stays, usually in excess of
$10,000. Cancer patients accounted in 1993 (the latest available reporting
period) for 6% of the total days of hospital care with an average length of
stay of approximately eight days. The delivery of cancer care, as in the
healthcare market in general, has been the subject of significant cost-
containment pressures from third party payors. These pressures have driven the
development of lower cost providers and have also driven the search for
better, more cost-effective cancer treatment tools and protocols.

MAJOR CANCER TREATMENT METHODS

Surgery, radiation and chemotherapy are the traditional means of treating
cancer. While surgery and radiation focus on localized solid tumors,
chemotherapy can provide adjunctive therapy as well as address disseminated
systemic diseases, such as leukemia. Solid tumor cancers are expected to
account for greater than 90% of new cancer cases in 1996.

SURGERY

Surgical excision of tumors has historically been the preferred method of
tumor treatment. However, surgery involves highly invasive and traumatic
procedures for patients. Surgery is not an optimal or practical option in a
number of cases, including cases where tumors are difficult or impossible to
access, where a patient's medical condition does not allow for a highly
invasive procedure to be performed, or in cancer of the breast or other
locations where cosmetic factors are of concern to the patient. In addition,
the procedure of removing tissue mass surgically may either leave some
malignant cells behind or disperse them through healthy tissue.

RADIATION

Next to surgery, radiation is the dominant method of treating cancer.
Approximately 50% of all cancer patients in the U.S. receive radiation therapy
at some point during the course of their disease. An important advantage of
radiation therapy is that the radiation acts with some selectivity on cancer
cells. The absorption of radiation by a cell affects its genetic composition
and inhibits the replication of the cell, leading to its gradual death.
Cancerous cells are fast replicating and thereby are disproportionately
damaged by the radiation absorbed.

24
<PAGE>

Conventional external radiation requires the radiation to have sufficient
energy to reach the targeted tissue. Therefore, radiation originating from a
source outside the body must pass through, and may potentially damage, healthy
tissue.

Currently, the most common type of radiotherapy uses x-rays delivered by
external beams and is administered using linear accelerators ("LINACS").
LINACS are conventionally used for multiple, or "fractionated," treatments of
a tumor in up to 30 radiation sessions, or, as used more recently in the
brain, to deliver a single high dose of radiation in a procedure referred to
as stereotactic radiosurgery ("SRS"). Single-fraction LINAC treatments of
brain tumors involve a risk of overradiating a critical structure, such as the
optic nerves within the beam's path, a factor which, the Company believes, has
restricted their medical acceptance. In spite of technological refinements,
external beam radiation therapy still requires that radiation pass through
surrounding healthy tissue, resulting in the risk of damage to that tissue.

Less common methods of external radiation therapy involve the use of focused
radiation from radioactive cobalt sources and the irradiation of tumors with
proton beams. Focused cobalt radiation is generated by the Gamma Knife
manufactured by Elekta Instrument AB of Sweden. As is the case with
traditional external beam radiation, the x-rays from this device must pass
through healthy tissue prior to reaching the tumor. The Company understands
that the Gamma Knife currently costs in excess of $3 million dollars and that
its cobalt source must be replaced periodically. Proton beam treatments, in
which protons, accelerated to high speeds in a cyclotron and focused into a
variable-sized beam, have been clinically evaluated for therapy at only a few
sites. These machines cost appreciably more than the Gamma Knife, and the
Company believes that it is doubtful that many cyclotrons will be built or be
widely accessible.

In addition to external radiation therapy, radioactive seeds, probes, wires
or ribbons are sometimes inserted into a tumor ("interstitially") or into a
body cavity ("intracavitary"). This modality, known as "brachytherapy," does
not require the radiation to pass through surrounding healthy tissue, with
radiation administered slowly at lower dose rates than those used in external
beam radiation. However, the radioactive material utilized in brachytherapy
begins to decay after being implanted in the body, and is difficult to
localize or control. In addition, various state and federal laws and
regulations exist relating to the handling, storage and disposal of the
radioactive materials used in brachytherapy which require the use of shielded
containers and facilities to store and handle the materials and protect
personnel.

OTHER TREATMENTS

One cancer treatment method involves the killing of cells by significantly
changing their temperature, either upward or downward. However, this method
does not selectively differentiate between cancerous and non-cancerous cells
and is difficult to control because blood vessels exacerbate the flow of heat
away from or toward the targeted lesion. These difficulties are compounded by
the need to keep surrounding healthy tissue either sufficiently cool or warm,
depending on the method used, in order to prevent that tissue from being
destroyed. In contrast, the x-ray penetration provided by the PRS is
unaffected by blood flow, and the dose received by cells can be more
accurately defined.

Other treatments include tumor targeting and destruction by genetically
engineered drugs, the use of laser light to initiate chemical reactions that
destroy cancer cells (photodynamic therapy or "PDT"), particle beam
bombardment of malignant tumors, and the use of a device which magnetically
steers a tiny, heated metallic pellet inside the lesion to kill the diseased
cells. PDT requires the introduction of a light-sensitive drug into the
patient which is intended to preferentially concentrate in the tumor.
Irradiation of the tumor by laser light chemically destroys the cells. In
contrast to x-rays, the penetration depth of laser beams into tissue is very
limited, thereby restricting the technology to treatment of near-surface
tumors intraoperatively. Moreover, there are certain side effects associated
with the PDT drugs, with some patients remaining very sensitive to light after
the procedure. None of these treatments has yet proven more reliable than
surgery and/or radiation treatments.

25
<PAGE>

THE PRS SOLUTION

The Company believes that the PRS offers therapeutic, operational and
economic advantages over current conventional treatments.

THERAPEUTIC ADVANTAGES

Unlike external radiation sources, such as the LINAC or the Gamma Knife,
which, in order to deliver x-rays to a tumor site, require that the x-ray
beams pass through a patient's healthy tissue, the PRS's x-ray source can
inject low energy photons directly into the tumor. In this manner, radiation
can be substantially confined within the tumor boundaries thereby
significantly reducing the exposure of surrounding healthy tissue and
important organs. Interstitial delivery allows higher doses of x-rays to be
delivered to the tumor, thereby shortening aggregate treatment time to
typically less than 30 minutes, shorter than that normally required for
external therapies. With the PRS, a stronger single dose of radiation, rather
than multiple fractionated doses as prescribed with conventional external beam
therapies, can be applied. Moreover, the interstitial x-ray source of the PRS
delivers a higher dose to the tumor's central core than to its periphery.
Since, generally, a tumor's hypoxic (radiation resistant) cells occupy this
inner region, the dose distribution of the PRS is appropriate for maximum cell
destruction. Furthermore, the x-ray output of the PRS can be maintained at a
constant level, unlike, for example, radioactive isotopic seeds, which decay
after being implanted into the body. The localization of PRS radiation can
also facilitate radiation therapy for children whose cells are more actively
replicating and who are more likely to suffer side effects from external
radiation.

The Company believes that in contrast to surgery, the PRS is minimally
invasive and, due to its needle-like probe, can allow access to tumors
otherwise difficult or impossible to access surgically. The Company believes
that the minimally invasive nature of the PRS will offer advantages when
patient condition or cosmetic considerations do not allow highly invasive or
traumatic surgical interventions. For example, the Company believes that the
PRS can be used to irradiate breast cancer tumors, immediately after biopsy
confirmation of breast cancer, thereby reducing treatment delays and offering
an alternative to lumpectomy. In addition to its use on a stand-alone basis,
the Company believes that the PRS can be used in conjunction with current
therapies, for example to irradiate the "bed" of a surgically removed tumor
and to destroy remaining cancerous cells. Although the Company anticipates
that the primary applications for the PRS will involve the treatment of solid
tumors, the PRS has also been designed for treatment of certain diffuse
tumors, such as those within the lining of the bladder or other body cavities.

OPERATIONAL ADVANTAGES

The Company believes that the design of the PRS will make it portable and
easier to use than conventional external beam radiation therapy equipment.
Because the PRS treatment focuses on the tumor and the immediately surrounding
tissue, the Company anticipates that treatment planning will be shorter and
simpler than with conventional radiation treatments. In addition, unlike
conventional brachytherapy or the Gamma Knife, the PRS's low photon energy x-
ray source contains no radioactive material, thereby eliminating problems
associated with the storage, handling and disposal of radioactive materials
and the need to shield personnel and facilities. The PRS has been designed for
use immediately after confirmatory biopsies. When used in neurosurgical
applications, such as the treatment of brain tumors, the PRS probe can be
affixed to the stereotactic frame used to position the biopsy needle and then
inserted through the track left by the biopsy needle. Finally, the PRS is
being developed for use in a variety of different applications, and the
various probes being developed by the Company for these different applications
are expected to be interchangeable components of the PRS.

ECONOMIC ADVANTAGES

The Company believes that the price of the PRS to the hospital, surgical
center or other purchaser will be significantly below that of the equipment
used for conventional external radiation therapy methods currently available.
The Company believes that the combination of a biopsy with a short, one-time
treatment with the PRS, and an anticipated hospital stay of, generally, no
more than one day, will provide an appealing, minimally

26
<PAGE>

invasive and economically feasible choice of therapy for the patient. It is
anticipated that the cost of treatment with the PRS will be substantially less
than surgery, and less than or comparable to, other inpatient therapies.

The Company believes that the anticipated lower acquisition costs of the PRS
will make it potentially attractive not only to major urban teaching
hospitals, but also to smaller, regional health care providers, which
otherwise may not have adequate capital resources to purchase alternative
equipment.

SPECIFIC APPLICATIONS OF THE PRS

The Company has to date focused its clinical efforts on the treatment of
metastatic brain tumors. In addition to metastatic brain tumors, the Company
currently intends to seek clearance to conduct clinical trials to determine
the safety and efficacy of the PRS in treating primary brain tumors and tumors
in the breast, prostate, bladder and skin. The use of the PRS for any such
additional treatments will require completion of additional clinical testing
and the procurement of regulatory clearances, and therefore the U.S.
commercialization of the PRS for such treatments cannot reasonably be expected
to occur for at least two to five years or more. Depending on the nature and
location of the cancerous tumor, these additional treatment applications may
require the use of separate components or accessories in connection with the
PRS, but the Company believes that the basic core technology of the PRS will
not need to be significantly modified. The Company will consider the use of
the PRS for other potential applications on an ongoing basis. See "--Clinical
Trials."

BRAIN TUMORS

Primary brain and central nervous system tumors will account for 17,900 new
cases of cancer in 1996. Metastatic brain tumors, or secondary tumors formed
in the brain from malignant cells dispersed from distant primary tumor sites
in the body, have a much higher incidence rate. In fact, the brain is the
leading site for metastases to form; one in three cancer patients will develop
one or more such tumors prior to dying. Estimates place the figure in the
range of 150,000 to 400,000 patients annually. Due to their advanced age or
stage of their primary disease most of these patients will not benefit
sufficiently from treatment. However, about 35,000 of these patients are
thought by the Company to be candidates for therapy. While the Company to date
has focused its development and clinical efforts on the treatment of
metastatic brain tumors, it intends to explore the possibility, from a market
and regulatory standpoint, of utilizing the PRS for treatment of primary brain
tumors as well.

Aggressive treatment of metastatic brain tumors traditionally has been
limited. Patients with these tumors typically have received a fractionated
series of external beam whole brain radiation, which, because of the
cumulative effect on healthy tissue through which it passes, cannot be used to
treat subsequent tumors which frequently reoccur. Because of the particularly
sensitive nature of the brain and its surrounding critical organs and
structures, such as the optic nerves, damage from external radiation can
severely harm the patient. The PRS is particularly well-suited for this
application because of its targeted, low-energy approach. In addition,
although external beam radiotherapy is not recommended for young children
whose brains are still developing, highly confined interstitial irradiation
with the PRS may reduce the risk of radiotherapy to maturing brains. Phase I
clinical trials for the use of the PRS in treating metastatic brain tumors
have been completed, and Phase II clinical trials are currently being
performed. See "--Clinical Trials."

BREAST TUMORS

Breast cancer is the second leading cause of cancer deaths in women in the
U.S. In 1996, 184,300 new invasive cases of breast cancer are expected to be
diagnosed among women in the U.S., with an estimated 44,300 deaths. Current
conventional treatment methods for breast cancer include lumpectomies,
mastectomies, radiation, chemotherapy and hormone therapies or, as often is
the case, a combination of several of these.

The Company believes that the PRS could provide treatment for breast cancer
both interstitially (directly into the tumor) and as a post-surgical "boost"
to the tumor bed after the tumor has been removed surgically, with the goal of
destroying any malignant cells remaining in the tumor bed. The Company
currently anticipates

27
<PAGE>

that two clinical trials to ascertain the safety of the PRS for treatment of
breast cancer will begin in early 1997 in England. In one trial the PRS will
be tested to irradiate tumors interstitially immediately after their diagnoses
by stereotactic biopsies. In the other trial the PRS will be tested to
irradiate the tumor bed immediately after surgical excision of the tumor. The
Company is developing, for this intraoperative study, treatment accessories
and fixturing. See "--Clinical Trials."

PROSTATE TUMORS

Prostate cancer is the second leading cause of cancer deaths in men in the
U.S. In 1996, 317,100 new cases of prostate cancer are expected to be
diagnosed in the U.S. with an estimated 41,400 deaths. Treatment is presently
implemented by surgery and radiation; hormones and chemotherapy are other
options.

According to the latest data available, in 1993, 250,000 transurethral and
53,000 radical prostectomies were performed. In 1992 the hospital stay for a
patient with prostate cancer was on average approximately six days with an
overall cost of $12,226.

BLADDER TUMORS

In 1996, an estimated 52,900 new cases of bladder cancer are expected to
occur, with 11,700 deaths predicted. In 1992, hospitalization for a patient
with bladder cancer was on average approximately six days with an overall cost
of $12,936.

For bladder cancers, surgery alone or in combination with other treatments
is used in over 90% of cases. External beam irradiation is limited in
usefulness due to its damaging effects on the healthy tissue surrounding the
bladder. The Company has developed a means of delivering with the PRS
radiation only to the bladder lining by a noninvasive, transurethral method.
Although designed to treat diffuse malignancies extending over the entire
lining of the bladder, the apparatus is designed to be sufficiently versatile
to allow irradiation of localized bladder tumors as well. Initial animal
trials with this procedure are currently being conducted. If those trials are
successful, the Company will request, by the first half of 1997, FDA approval
of an Investigational Device Exemption ("IDE") to begin Phase I human trials.
See "--Clinical Trials."

SKIN TUMORS

In 1996, there are expected to be over 800,000 new cases of skin cancers.
Melanomas are expected to be diagnosed in 38,300 individuals. An additional
17,000 invasive nonmelanomas, mostly sarcomas such as Karposi's sarcoma (a
malignant skin tumor often suffered by AIDS patients), will occur. Currently
there are four primary methods of treatment utilized for skin cancers. Surgery
is the primary modality and used in 90% of cases. The others are radiation
therapy, electrodessication, in which tissue is destroyed by heat,
cryosurgery, in which tissue is destroyed by freezing, and laser therapy for
early skin cancer. The Company believes a significant number of cases of skin
cancers are amenable to treatment with the PRS either as an alternative to
present radiation therapies or as an adjunct to surgery.

For non-interstitial treatments, the Company has developed an x-ray
"shielding cone," which is intended, when fitted onto the PRS's probe tip, to
restrict the area of x-ray exposure to the region of the tumor being treated.
The Company has established a research site at a New York City hospital, and
intends to submit an application to the FDA to begin human clinical trials for
Kaposi's sarcoma and possibly other types of skin tumors in late 1997.

28
<PAGE>

OTHER POTENTIAL APPLICATIONS

Application of the PRS to the treatment of various types of tumors is not
necessarily limited to those described above. For example, the Company is
considering the applicability of the PRS for intraoperative treatment of
gynecological tumors (cervical and uterine malignancies), as well as for
minimally invasive therapy for lung, colon, rectal, liver, pancreatic and
nasopharyngeal cancers. For these other cancers, fixturing devices will need
to be developed, or existing fixturing devices will need to be modified, for
compatibility with the PRS. The Company intends to design its own devices, as
well as pursue relationships with fixture device manufacturers in order to
develop or modify their devices, as it has with respect to stereotactic
systems used in treating brain and breast tumors. For applications where a
direct path to the tumor site is not possible, the Company is exploring a
flexible version of the probe which will permit indirect access to the tumor
site.

BUSINESS STRATEGY

The Company's goal is to establish the PRS as the preferred means for the
treatment of cancerous tumors by utilizing its therapeutic, operational and
economic advantages over competing cancer treatment methods. In order to
achieve its objectives, the Company intends to pursue the following business
strategy:

UTILIZE CORE TECHNOLOGY FOR THE TREATMENT OF METASTATIC BRAIN TUMORS AND
ADDITIONAL APPLICATIONS. The PRS has been used to treat metastatic brain
tumors in 57 patients, and Phase II clinical trials for the treatment of these
brain tumors are currently ongoing. While the Company has focused its efforts
to date on the development of the PRS to treat metastatic brain tumors, the
Company intends to utilize and further develop its core PRS technology for
multiple applications based on specific market opportunities. The Company
expects these applications to include the treatment of primary brain tumors as
well as breast, prostate, bladder, skin and other cancers.

BUILD RELATIONSHIPS WITH MEDICAL PROFESSIONALS AND INSTITUTIONS. The
Company has developed strong relationships with prominent medical
professionals and institutions worldwide who have been involved in the
clinical testing of the PRS. The Company believes that the medical community's
acceptance of the PRS as a viable cancer treatment tool will significantly
impact the Company's ability to market the PRS. Therefore, the Company intends
to continue to foster and expand these important relationships, and to
leverage the relationships to gain market acceptance of the PRS. For example,
the Company has established a Medical Advisory Board, which will advise and
consult with the Company's Board of Directors and senior management. The
Company also plans to attend and provide presentations at conferences and
seminars, to seek and promote publication in scientific and industry journals
of articles or clinical studies relating to the PRS, and to initiate
consultations with members of the medical community regarding the PRS.

OBTAIN REGULATORY CLEARANCE FOR THE PRS IN THE U.S. AND INTERNATIONALLY.
The Company intends to seek regulatory clearances for the PRS in the U.S. and
abroad. On the basis of results of its ongoing human clinical trials, the
Company filed a Section 510(k) application with the FDA on December 11, 1996,
seeking limited clearance from the FDA to commercialize the PRS for treatment
of metastatic brain tumors. In addition, the Company has initiated, and
intends to continue, the process of seeking a CE Mark for the PRS. In
furtherance of its goal to obtain such a CE Mark, the Company has retained a
third party, TUV-Essen, to assist the Company with certain aspects of the
process, and the Company currently anticipates receiving a CE Mark for the PRS
by mid-1997. The Company intends to pursue regulatory clearance in other
countries as needed, and expects that it will initially introduce the PRS in
selected foreign countries where governmental regulatory approval procedures
are less burdensome and expensive than in the U.S. In addition, the Company
intends to initiate human clinical trials for applications other than brain
tumor treatment such as breast, prostate and bladder tumor treatments, and to
seek regulatory approvals for the commercialization of those applications if
the results of the underlying clinical trials so warrant.

PURSUE COMMERCIAL ACCEPTANCE OF THE PRS IN THE U.S. AND INTERNATIONALLY.
The Company intends to pursue the rapid commercialization of the PRS in the
U.S. and abroad. The Company anticipates that it will

29
<PAGE>

continue to pursue collaborative relationships with companies that have
established distribution channels in various domestic and international market
segments, as it has with Toshiba. The Company also intends to continue its
practice of developing strategic relationships with licensors or manufacturers
of equipment or technology which can be used in connection with the PRS, such
as treatment planning software and stereotactic frames, breast biopsy tables
or other fixturing devices.

PROTECT INTELLECTUAL PROPERTY RIGHTS. The Company holds nine U.S. patents
and four U.S. patent applications relating to the PRS or its constituent or
ancillary components. The Company has also obtained two patents in Australia,
and has filed patent applications in other selected foreign countries. The
Company intends to continue to pursue its patent filing strategy and to
vigorously protect its intellectual property rights against infringement. See
"Risk Factors--Patents and Proprietary Technology."

CLINICAL TRIALS

Before medical devices such as the PRS can be marketed in the U.S.,
successful completion of clinical trials, along with FDA approval, is
required. Phase I clinical trials for the use of the PRS in treating
metastatic brain tumors have been completed, and Phase II clinical trials are
currently being performed with respect to this application. Based on the
results obtained in these ongoing Phase II trials, on December 11, 1996 the
Company submitted a Section 510(k) application to the FDA seeking clearance to
commercialize the PRS for treatment of metastatic brain tumors. Locally
approved clinical trials for the treatment of brain tumors are also being
performed at sites in Europe and Japan. The Company currently anticipates that
clinical trials to determine the safety of the PRS for treatment of breast
cancer will begin in the U.K. in early 1997. Based upon those trials, the
Company will submit an application to the FDA to begin Phase I human clinical
trials. The possibility of curing topical tumors of the skin and mouth with
the PRS is also being explored. A program has begun at a U.S. hospital which
the Company expects to lead to human clinical trials with the PRS in treating
Kaposi's sarcomas and other skin malignancies. The Company will consider the
use of the PRS for other potential applications on an ongoing basis.

The following table summarizes by treatment application the status of
clinical trials in the U.S., Europe and Japan:

<TABLE>
<CAPTION>
APPLICATION STATUS
----------- ------
<S> <C> <C>
Brain tumors U.S.: Phase II in process
(interstitial and as Europe: Phase II and local trials in process
post-surgery Japan: Local trials in process
radiation "boost")
Breast tumors U.S.: Trial sites under investigation*
(interstitial and as Europe: Clinical trials planned to commence in
post-surgery early 1997*
radiation "boost")
Japan: Potential trial sites under evaluation*
Prostate tumors Europe: Protocols for trials approved in London;
clinical trials expected to commence mid-
1997*
Bladder tumors U.S.: Animal trials in process; clinical trials
expected to commence late 1997*
Skin tumors U.S.: Clinical trials expected to begin in late
1997*
</TABLE>
- --------
* FDA or local approvals are needed before commencing clinical trials.

Research studies for medical devices such as the PRS are often conducted in
a phased approach. Before any commercial sales in the U.S. of the PRS can
commence, successful completion of these clinical trials, along with FDA
approval, is required.

Phase I trials are used to demonstrate feasibility, to delineate an initial
safety profile and to identify technical, procedural and clinical factors
which may be material to the successful use of the device. Phase II

30
<PAGE>

clinical trials normally are conducted on a larger population group in order
to identify possible adverse health and safety risks and to begin gathering
efficacy data. Each of the clinical trials is to be conducted pursuant to
certain standards under protocols setting forth the objectives of the study,
the parameters to be used to monitor safety during the trials, and the
efficacy criteria which are to be evaluated. In turn, each protocol must be
submitted to the FDA. The data obtained from these trials are then used to
support a Section 510(k) or other application to the FDA requesting
commercialization approval.

In 1992, the FDA granted an IDE to the Company to perform a limited number
of human clinical trials on brain tumors. Between December 1992 and April
1993, the Company completed a ten-patient Phase I clinical trial at a major
Boston teaching hospital. The results of these trials indicated that the PRS
was capable of destroying cancerous tissue in a focally defined area. Based on
these results, that hospital asked the Company to seek FDA approval to conduct
an additional series of trials in order to treat more patients while awaiting
approval of a Phase II study. As a result, four more patients were treated
with similar results.

Based on the Phase I results, the Company sought permission from the FDA to
begin Phase II trials to treat brain tumors, and such permission was granted
in March 1994. These trials are required to establish the efficacy of the PRS
relative to currently acceptable treatment methods. The Company is performing
Phase II clinical trials on the PRS at certain institutions and their
affiliated medical facilities in Boston and London. In addition, locally
approved clinical trials are being performed in Germany, London and Tokyo.
These trials enable the treatment of patients who are not eligible for the
current Phase II trials and allow the use of treatment methods and evaluation
techniques which are different than those defined in the FDA-approved IDE
protocol for this application.

To date, 57 patients have been treated with the PRS at various hospitals.
Although the studies are not yet complete, in the Company's opinion, based
primarily on pathological evidence from the only two patients autopsied to
date with multiple brain tumors, the PRS has destroyed all cancerous tissue
which has been targeted with an adequate dose of radiation. Specifically,
these autopsies indicated that the PRS-treated tumors were entirely dead while
other tumors which had undergone external beam radiation contained viable
cancer cells. While MRIs can be utilized, with certain limitations, for
determining whether tumors have been destroyed, tissue analyses from autopsies
or surgical excisions provide the most accurate means of detecting the extent
of malignant cell destruction. However, both the hospital costs and the
reluctance of the patients' relatives to provide consent limit the number of
autopsies performed. Complications that have occurred to date, such as edema,
have generally been of the type experienced by patients undergoing brain
biopsies without PRS treatment. Edema may result from mechanical, radiative or
other trauma to tissue and is generally controllable using steroids or other
conventional methods. While the Company has been encouraged by the results of
the brain tumor trials so far, these results may not be predictive of future
results in these or any other clinical trials or of results obtained in
clinical trials for other specific applications.

Based on the results of the Phase II trials, on December 11, 1996 the
Company filed an application with the FDA under Section 510(k), seeking
clearance to commercialize the Company's current version of the PRS (the
"Model 3") for similar treatments of patients with metastatic brain tumors.
See "--Government Regulation." If clearance is received from the FDA, the
Company intends to then request that such clearance be extended to cover
"Model 4" of the PRS, which the Company expects will be the first model of the
PRS to be made commercially available. If such extension of clearance were
obtained the Company would begin such commercialization of the PRS in the U.S.
If any such clearance is not obtained, the Company would have to seek approval
by submission of a PMA application in order to market the product. The PMA
process is significantly more complex, expensive and time consuming than the
Section 510(k) application process. The PMA process typically spans several
years and may never result in approval. See "Risk Factors--Absence of
Regulatory Clearances; Uncertainty of Obtaining Section 510(k) Clearance."

With respect to other potential PRS applications, the Company anticipates
that human clinical trials to ascertain the safety of the PRS for treatment of
breast cancer will begin in early 1997, and approval of those trials from the
ethics committee at the hospital at which the trials are to be conducted has
been obtained.

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<PAGE>

A protocol for human prostate trials involving ultrasound-guided transperineal
insertion of the PRS into the prostate (using a longer PRS probe developed for
treating bladder cancer) to treat prostate lesions has been approved by the
ethics committee of a hospital in London. The Company is currently reviewing
the efficacy of combining the PRS with external beam therapy for this
application. Initial animal trials for use of the PRS in treatment of bladder
cancer are currently being conducted. If those trials are successful, the
Company will request FDA approval of an IDE to begin Phase I human trials for
diffuse, superficial bladder wall cancers, although any such approval is not
likely to be requested until late 1997. The Company has established a research
site in New York City, and expects to submit an application to the FDA to
begin human clinical trials for use of the PRS to treat Karposi's sarcoma and
other skin malignancies by late 1997.

PRODUCTS AND PRODUCT DEVELOPMENT

A complete PRS consists of (i) equipment for clinical use in treating
patients, principally consisting of the x-ray emitting probe, its electronic
control box and a standard computer-based treatment system, (ii) clinical
quality assurance equipment for use in the operating room to verify the
accuracy of the treatment, and (iii) custom equipment for use in the
laboratory to calibrate the output of the probe.

The PRS is intended to be a turn-key system. However, the Company believes
that certain PRS components or accessories will have other uses for which they
may be marketed separately. For example, the Company believes that the CCD-
microdensitometer, which is part of the PRS and which allows for testing of
radiation dosage and distribution prior to patient exposure, could be used
with conventional x-ray sources as well as with the PRS. Several prototype
units are under evaluation in the U.S. and Europe and the Company may seek
clearance to market it on a separate basis. In addition, the Company has also
designed, in support of its proprietary x-ray technology, an automated
dosimetry water tank, which provides a rapid computer-based means of measuring
the spatially distributed x-ray dose around the probe tip. While the tank was
originally designed by the Company to facilitate periodic calibration of PRS
units by hospitals, the tank can also be used to measure the dose delivered by
radioactive seeds, and the Company intends to explore further the market
potential for sales of tanks for this purpose.

The Company believes that masking the outside of the tip of the PRS probe
with a sculpted thin layer of an appropriate metal can vary the dose
distribution to conform the radiative field to more closely match the
configuration of a nonspherical tumor. The Company is investigating the
development of a "library" of masks that can be slipped over the tip of the
probe, with each mask tailored to produce a differently shaped dose
distribution. The Company is also currently considering the feasibility (from
a design, cost and market standpoint) of a PRS x-ray source which would rely
on a flexible probe in order to address endoscopically approachable body
tumors, or those "hidden" behind critical structures.

MARKETING AND SALES; COLLABORATIVE RELATIONSHIPS

The Company believes that the acceptance of the PRS by health care providers
as a viable, cost-effective alternative to conventional cancer treatment
methods will be critical to the successful commercialization of the PRS. The
Company intends to target such health care providers as hospitals, out-patient
providers, women's health centers, and small regional facilities, both within
the U.S. and abroad, as potential customers. The Company intends to market and
distribute its products through a combination of collaborative relationships
and in-house sales and marketing resources. The Company has heavily relied,
and intends to continue to heavily rely, on the pursuit of strategic alliances
with companies that have established distribution channels in domestic and
international markets.

The Company and Toshiba have entered into agreements relating to the conduct
of clinical trials in Japan, and to future product distribution arrangements
in that country. Those agreements provide that Toshiba will conduct and pay a
portion of the cost of the PRS clinical trial program in Japan, be responsible
for obtaining approval under Japan's Pharmaceutical Affairs Law to import,
market, sell and use the PRS and, once regulatory approvals are obtained,
serve as exclusive distributor for the PRS in Japan. Toshiba is purchasing
from the

32
<PAGE>

Company at a discounted price two PRS units for use in the clinical trials. The
Company has agreed to upgrade those units at no additional cost to Toshiba once
approvals are obtained to sell the PRS in Japan. Toshiba is one of the leading
medical device manufacturers and distributors in the world, and the Company
believes that Toshiba's support for the PRS will be a significant factor in
gaining acceptance for the device in the medical marketplace in Japan. Upon
entering into the clinical trial and distribution arrangement, Toshiba
purchased an equity interest in the Company which represents 5.1% of the issued
and outstanding capital stock of the Company before the consummation of this
offering.

The Company also has entered into, and plans to continue entering into,
strategic relationships with manufacturers or designers of components and
accessories relating to, or to be used in conjunction with, the PRS. The
Company believes that such relationships will enable the Company to focus its
development efforts and devote its economic resources to its core technologies,
while simultaneously providing access to those parties' customers and
distribution channels. For example, two manufacturers of stereotactic frames,
Radionics Incorporated ("Radionics") and Medical High Tech GmbH, have adapted
their frames to be compatible with the PRS, and a third frame manufacturer has
submitted designs to the Company indicating a similar intention. In addition, a
Radionics subsidiary, Radionics Software Applications ("RSA"), has developed a
version of its three-dimensional patient treatment planning program
specifically tailored for use with the PRS in conjunction with its stereotactic
frame. The Company hopes to leverage its relationships with these third parties
in order to increase market opportunities. See "Risk Factors--Limited Marketing
Experience."

MEDICAL ADVISORY BOARD

The Company has recently formed a Medical Advisory Board, which will advise
and consult with the Company's Board of Directors and senior management at such
times as the Board of Directors shall request. This advice and consultation
will relate generally to the Company's business and products, including the
PRS, as the Board of Directors deems appropriate. The Medical Advisory Board
members may be employed on a full-time basis by employers other than the
Company, and these members may have commitments to, or consulting, advisory or
other contractual relationships with, other third parties. These third party
commitments and relationships may limit the availability of the Medical
Advisory Board members to the Company, and may potentially result in conflicts
of interest. The Board of Directors has not yet convened a meeting of the
Medical Advisory Board. The following individuals have agreed to serve as
members of the Medical Advisory Board:

<TABLE>
<CAPTION>
NAME POSITION
---- --------
<C> <S>
Nicholas T. Zervas, M.D. (Chair- Higgins Professor of Neurosurgery
man)............................ Chief of the Neurosurgical Service
Massachusetts General Hospital, Boston, Massachusetts
Michael Baum, ChM. FRCS.......... Professor of Surgery
The Institute of Surgical Studies, University College
London Medical School, London, England
Basil S. Hilaris, M.D., FACR..... Professor and Chairman of the Department of Radiation Medicine
Our Lady of Mercy Medical Center
New York Medical College, New York, New York
Christoph B. Ostertag, M.D....... Professor and Director of Department of Stereotactic
Neurosurgery
Neurosurgical University Clinic
Albert-Ludwigs University, Freiburg, Germany
Kintomo Takakura, M.D., Ph.D..... Director of Neurological Institute
Professor and Chairman of Neurosurgery
Tokyo Women's Medical College, Tokyo, Japan
</TABLE>

The Company is proposing that each member of the Medical Advisory Board, with
the exception of Dr. Zervas, be issued options to purchase 1,000 shares of the
Company's Common Stock for each full year that

33
<PAGE>

such member serves on the Medical Advisory Board. The exercise price per share
for the options issued with respect to the member's first year of service on
the Medical Advisory Board is to be equal to the initial public offering price
hereunder, and the exercise price per share for the options issued with
respect to any subsequent year of service on the Medical Advisory Board is to
be the fair market value of such share (as determined by the Company's Board
of Directors) on the first day of such year of service. Each member would also
receive a fee of $1,000 per regular or special Medical Advisory Board meeting
attended in person (together with reimbursement of reasonable travel
expenses), and a fee of $500 per each such Medical Advisory Board meeting
participated in by means of conference telephone arrangements. The Company is
proposing to pay Dr. Zervas, the current Chairman of the Medical Advisory
Board, a stipend of $10,000 for each year that he serves on the Medical
Advisory Board.

PATENTS AND PROPRIETARY RIGHTS

A U.S. patent directed to the base PRS technology was issued to the Company
in October 1992. Two patents were issued to the Company in 1995 directed to
shaped radiation patterns and electron beam steering, respectively. From 1994
through 1996, three U.S. patents directed to use of the PRS to treat brain
tumors were issued to the Company. A U.S. patent, directed to a flexible probe
PRS for endoscopic purposes, was also issued to the Company in 1995. Another
U.S. patent was issued to the Company in 1996 for an apparatus for use in x-
ray dosimetry for the PRS. One U.S. patent, issued in 1996, and two pending
U.S. patent applications are directed to use of the PRS to deliver x-rays to
internal surfaces and adjoining regions of body cavities, such as the bladder,
esophagus, anal region, nasal orifice and gynecological area. One pending
application has been allowed by the Patent Office and grant of patent is
expected shortly in that application. The Company owns two other pending
patent applications relating to use of the PRS, and to the Company's CCD
microdensitometer. The Company has foreign patent applications in selected
foreign countries which correspond to certain of its U.S. patent applications.
To date, two patents corresponding to the Company's initial patent have issued
in Australia; the other foreign applications are pending. See "Risk Factors--
Patents and Proprietary Technology" and "--Rapid, Unpredictable and
Significant Technological Change; Highly Competitive Industry."

MANUFACTURING

The Company intends to continue its practice of sub-contracting the
fabrication of most of its electrical and mechanical components while
maintaining in-house responsibility for unit assembly and for manufacture of
certain proprietary components. The Company believes that this strategy can
serve to reduce administrative costs, facilitate supplier partnership, and
reduce inventory requirements. In general, the Company's procurement strategy
is to keep the number of its suppliers low while identifying as many multiple
sources as possible. Given the Company's current, limited supply needs,
however, the Company acquires certain supplies, over time, from the same
vendors. While the Company intends to negotiate, where appropriate, supply
contracts with certain of its key suppliers in the future, the Company
currently procures its supplies through open purchase orders, and there can be
no assurances that the Company's vendors will continue to provide such
supplies on terms acceptable to the Company, if at all.

The Company intends to implement the necessary operational systems to
support the successful commercial production of the PRS and any other
products. Specifically, the Company intends to continue to pursue full
functional compliance with ISO 9001 and the FDA's GMP standards that govern,
among other things, quality assurance, personnel training, process control,
customer service, design control, supply management and facility and equipment
maintenance. See "Risk Factors--Limited Manufacturing Experience" and "--
Potential Component Shortages; Dependence on Limited Sources of Supply."

COMPETITION

The medical device industry is highly competitive. The Company believes that
there are numerous universities, research institutions and medical device,
chemical and biotechnology companies that are engaged in the development of
cancer treatment therapies. Many of these entities have substantially greater
technical,

34
<PAGE>

financial and regulatory resources than the Company and may be better equipped
to develop, manufacture, and market their products.

For example, in order to achieve successful commercialization, the PRS will
need to compete with the LINACS and the Gamma Knife, each of which is an
established and well-known cancer therapy within the medical community, and,
as well, with lesser known radiation therapies such as proton beam treatment
and
brachytherapy. In addition, the Company is aware of various other cancer tumor
treatment methods currently under development; any of these methods, if
successfully developed, could have a different approach or means of
accomplishing the intended purposes of the Company's product which might
render the Company's technology uncompetitive. While the Company believes that
the PRS offers certain therapeutic, operational and economic advantages over
the cancer treatment methods likely to compete with the PRS, there can be no
assurance that the Company will be able to compete successfully within this
highly competitive market.

The Company believes that its ability to compete in the marketplace will
depend on its technological advantages and the strength of its patent
position, its ability to complete clinical trials and to obtain regulatory
approvals for its products in a timely fashion, its competence in developing
and maintaining collaborative relationships, its transition to commercial
manufacturing and marketing, and its ability to achieve and maintain a
superior cost structure relative to other competitive treatments. See "Risk
Factors--Rapid, Unpredictable and Significant Technological Change; Highly
Competitive Industry."

GOVERNMENT REGULATION

U.S.

The PRS is subject to regulation in the U.S. by the FDA and, in many
instances, by comparable agencies in foreign countries where the PRS is to be
manufactured or distributed. Under the FDC Act and the SMDA, manufacturers of
medical devices must comply with applicable provisions of the FDC Act and the
SMDA and certain associated regulations governing the safety, design testing,
manufacturing, labeling, marketing and distribution of medical devices and the
reporting of certain information regarding the safety of medical devices. Both
the FDC Act and the SMDA require certain clearances from the FDA before
medical devices, such as the PRS, can be marketed. The Company intends to
pursue a strategy intended to result in marketing clearance of as many PRS
components as possible as quickly as possible in order to maximize flexibility
in the marketing of the PRS and its components.

FDA permission to distribute a new device can be obtained in either of two
ways. The first process (which is the more comprehensive of the two) applies
to a new device that is not substantially equivalent to an existing, legally
marketed product, and requires generally that the Company establish the safety
and effectiveness of the device through specific procedures. A PMA application
must be submitted to the FDA that contains, among other things, the results of
clinical trials performed pursuant to FDA-approved protocols. The PMA
application also contains other information required under the FDC Act such as
a full description of the device and its components, a full description of the
methods, facilities and controls used for manufacturing and proposed labeling.
Finally, the manufacturing site for the device subject to the PMA must pass an
FDA preapproval inspection. The PMA process can be expensive, uncertain and
lengthy, often requiring several years to complete.

The second of the two FDA processes is available for a new or significantly
modified device which is "substantially equivalent" to an existing legally
marketed device. Such a new device may be commercially introduced when, after
submission of a premarket notification to the FDA under Section 510(k), the
FDA issues an order permitting commercial distribution. The FDA has recently
been requiring a more rigorous demonstration of substantial equivalence than
in the past. As between the two sets of procedures (the PMA approval procedure
and the Section 510(k) clearance procedure), the PMA procedures are normally
more complex and time consuming than Section 510(k) procedures, since the PMA
procedures are for products that are not comparable to any other product in
the market. However, even the Section 510(k) procedures are time-consuming and
expensive.

35
<PAGE>

On December 11, 1996, the Company filed a Section 510(k) application with
respect to the current model of the PRS for the treatment of metastatic brain
tumors. Under the Section 510(k) procedures, the Company will be required to
prove that the PRS is substantially equivalent to legally marketed products.
The Company has contended in its Section 510(k) application that for purposes
of Section 510(k), the PRS may be considered "substantially equivalent" to, as
a predicate device, a specific isotope after-loader used in brachytherapy, the
interstitial insertion of radioactive seeds, probes, wires or ribbons into a
tumor or body cavity. The product acceptance period for a Section 510(k)
application is normally about four to twelve months from the date the
application is deemed complete by the FDA, although there can be no assurance
that the review period will not extend beyond such period. Even if the FDA
grants Section 510(k) clearance for the current model of the PRS, known as
"Model 3," the Company will need to request that the FDA extend Section 510(k)
clearance to "Model 4" of the PRS, which is the version of the PRS which the
Company expects to commercialize. There can be no assurance that the FDA will
so extend such clearance, if obtained.

If the Company is unable to avail itself of the Section 510(k) procedures
(whether because it is unable to prove that the PRS is substantially
equivalent to existing products as described above or otherwise), it will need
to seek FDA approval under the PMA procedure. As discussed above, the
preparation of a PMA application is significantly more complex, expensive and
time consuming than the Section 510(k) procedure. Even if the Company were
able to proceed to seek PMA approval, it would need to do so based on
additional clinical tests conforming to FDA approved protocols, and such
approval would likely not be obtained, if at all, until at least 1999.

The Section 510(k) application filed by the Company includes all PRS
treatment components and associated laboratory equipment for calibration and
dose verification. Treatment planning software developed by a third party
manufacturer, which has not been used in clinical PRS treatments to date, will
require separate FDA clearance or approval prior to marketing in the U.S.

In addition to the clearance and approval procedures described above, the
FDA also imposes various requirements on manufacturers and sellers of medical
devices under its jurisdiction, such as labeling, manufacturing practices,
record keeping and reporting requirements. The FDA may also require the
ongoing monitoring of products which have been cleared for commercialization
under the those procedures.

The PRS has not been cleared or approved for commercial use in the U.S. or
in any foreign country. There can be no assurances that the Company's clinical
trials of the PRS will be successful, or that clearances will be granted for
the PRS or any other future products, if any, or that the length of time for
clearance will not be extensive, that the cost of attempting to obtain any
such clearances will not be prohibitive, or that the Company will have
sufficient funds to pursue such clearance. Failure to obtain or maintain
requisite governmental approvals could delay or preclude the Company from
further developing and marketing the PRS and other products. Such delays could
impair the Company's ability to generate funds from operations, which in turn
would have a material adverse effect on the Company's business, financial
condition and results of operations, even after regulatory clearance is
obtained.

Even if regulatory approvals are obtained, such approvals may include
significant limitations on particular uses. In addition, those approvals may
be withdrawn or limited for non-compliance with regulatory standards or the
occurrence of unforeseen problems following the initial approval (either of
which could result in restrictions, including withdrawal of the product from
the market or sanctions or fines being imposed on the Company).

In addition, the export of products manufactured by the Company will be
subject to receipt of export licenses from the U.S. Government. Such licenses
are required for equipment use in foreign clinical trials. The Company has
requested and been granted export licenses and corresponding foreign import
licenses for clinical trials in England, Japan, Australia and Germany. See
"Risk Factors--Absence of Regulatory Approvals; Uncertainty of Obtaining
Section 510(k) Clearance" and "--Extensive Ongoing Governmental Regulation;

36
<PAGE>

FOREIGN COUNTRIES

The regulatory climate relating to the marketing of medical devices within
the European Union is currently in transition while the European Union's
Medical Device Directive is being implemented. The Medical Device Directive
(June 1993) stipulates the regulatory requirements adopted by the European
Union, pursuant to which "National Competent Authorities" approve European
commercialization of new medical products through a procedure whereby both the
products and the manufacturing facilities must conform to well defined
specifications.

The transition period for the Medical Device Directive will end in June
1998; after the expiration of this transition period, all medical devices to
be marketed in any European Union country must first obtain a CE Mark. The CE
Mark is an international symbol of adherence to quality assurance standards.
Obtaining a CE Mark with respect to a particular medical device requires the
submission of information that is similar in certain respects to that which is
submitted to the FDA in connection with a Section 510(k) notification. In
order for the Company to sell its products in Europe, it must comply with
European Union directives relating to manufacturing and quality assurance
documentation under the ISO 9000 series standards and to the performance,
safety, and manufacture (and quality assurance) of the particular device.

In order to have the capacity to examine a large number of new products, the
National Competent Authorities have mandated Notified Bodies (nongovernmental
organizations) to act as their agents and qualify equipment in accordance with
EC standards. In October 1995, the Company engaged TUV-Essen, one of these
Notified Bodies, to act as its agent in qualifying the equipment to obtain a
CE Mark. TUV-Essen is in the process of performing a design review of the
equipment and will, after the appropriate modifications are made, test for
final approval of the system.

Sales of medical devices within other jurisdictions outside the U.S. and
Europe are subject to regulatory requirements that vary widely from country to
country. The time required to obtain approval for sale in a foreign country
may be longer or shorter than that required for FDA approval, and the
requirements may differ. There can be no assurance that the Company will be
able to obtain the necessary regulatory approvals or clearance in any given
country on a timely basis or at all, and delays in receipt of or failure to
receive such approvals could have a material adverse effect upon the Company's
business, financial condition and results of operations. See "Risk Factors--
Absence of Regulatory Approvals; Uncertainty of Obtaining Section 510(k)
Clearance" and "--Extensive Ongoing Governmental Regulation."

THIRD PARTY REIMBURSEMENT

If regulatory approvals are obtained for commercial use of the PRS, the
potential revenues derived from marketing of the PRS will depend in large part
upon whether the PRS will qualify for reimbursement from third party payors,
including private insurance companies, self-insured employers, health
maintenance organizations and federal and state sources of payment under the
Medicare and Medicaid programs, and other sources. As a general matter, each
third party payor has developed independent criteria for determining whether a
particular device or treatment modality should be reimbursable and the Company
cannot predict whether or to what extent the PRS will gain acceptance for
reimbursement with any third party payors. However, the Company believes that
the reduced capital and operation costs of the PRS when compared to competing
modalities, together with the expected lower hospitalization costs, will
encourage third party payors to provide reimbursement for PRS-based
procedures.

In addition, many third party payors in the U.S., including the federal
Medicare program and many state Medicaid programs, are planning to shift or
have shifted to partially or fully capitated systems. Under such systems
providers receive either a fixed payment amount per diagnosis or general
treatment approach regardless of the specific treatment modality, or a fixed
payment amount to provide for all the care needs of a patient over time
regardless of illness. To the extent that the PRS is comparatively more cost
effective than existing treatment modalities, providers subject to partial or
fully capitated systems will have an incentive to utilize the PRS.

37
<PAGE>

The levels of revenues and profitability of sales of medical devices may be
affected by the continuing efforts of governmental and third party payors to
contain or reduce the costs of health care through various means and the
initiatives of third party payors with respect to the availability of
reimbursement. For example, in the U.S. there have been, and the Company
expects that there will continue to be, a number of federal and state
proposals to subject pricing or profitability of medical devices to
governmental control. Although the Company cannot predict what legislative
reforms may be proposed or adopted or what actions federal, state or private
payors for health care products may take in response to any health care reform
proposals or legislation, the existence and pendency of such proposals could
have a material adverse effect on the Company in general.

With respect to health care reimbursement in the European Union (the "EU"),
there are presently no EU-wide reimbursement procedures; the majority of the
EU member nations each have a dominant national health service with distinct
and unique reimbursement policies and procedures. In addition, private
insurers within the EU offer a great variety of benefits. It is anticipated
that by June 1998, when the Medical Devices Directive becomes mandatory in the
EU, the principal prerequisite for reimbursing a procedure involving new
medical equipment will be obtaining a CE Mark as described in more detail
above. See "Business--Government Regulation."

Other foreign countries also have their own health care reimbursement
systems, and there can be no assurance that third party reimbursement will be
made available to the Company under any foreign reimbursement system. See
"Risk Factors--Adverse Effect of Patient Life Expectancies on Markets for
Specific Product Applications" and "--Uncertainty of Reimbursement by Third
Party Payors."

EMPLOYEES

The Company presently has 25 employees, including a Director of Clinical
Research and Regulatory Affairs, and Production and Engineering Managers. None
of the Company's employees is covered by a collective bargaining agreement,
and the Company believes that its relationship with its employees is good. See
"Risk Factors--High Dependence on Key Personnel."

PROPERTIES

The Company currently occupies approximately 15,000 square feet of space in
a building located in Lexington, Massachusetts under a lease expiring in 2002,
and is negotiating for an additional 2,600 square feet of space in the same
building. This facility is suitable for research and development, corporate
administration and assembly of the PRS, and the Company believes that it will
be adequate to meet its foreseeable requirements through at least 1999. The
Company has an option commencing in 1999 to lease additional space in the same
building.

LEGAL PROCEEDINGS

The Company has been notified that an individual and his employer believe
that they have certain rights with regard to their understanding of the
Company's planned use of the PRS for treatment of tumors in body cavities. No
formal legal proceedings have been initiated and the Company is in discussions
with such parties. In the opinion of management, the resolution of this matter
will not have a material adverse effect upon the Company's business, financial
condition or results of operations.

There can be no assurance that future claims against the Company will not
have a material adverse effect on the Company's business, financial condition
and results of operations.

38
<PAGE>

MANAGEMENT

OFFICERS AND DIRECTORS

The officers and directors of the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Peter M. Nomikos................. 64 Chairman of the Board, President,
Chief Executive Officer and Treasurer
Peter E. Oettinger, Ph.D. (1).... 59 Vice President, Chief Operating Officer
and Director
John J. Crowley.................. 40 Director of Finance and Controller
William O. Flannery.............. 51 Clerk
George N. Hatsopoulos, Ph.D.
(1)............................. 70 Director
Roger D. Wellington (1).......... 69 Director
</TABLE>
- --------
(1) Members of the Audit Committee

PETER M. NOMIKOS has served as Chairman of the Board, President, Chief
Executive Officer and Treasurer of the Company since its founding in 1989. Mr.
Nomikos was a co-founder of Thermo Electron Corporation ("Thermo Electron")
where he was a director until 1976. For the past 30 years, Mr. Nomikos has
resided in London and has been involved in maritime shipping as Managing
Director of Nomikos (London) Ltd. He devotes on average approximately 150
hours per month (or roughly two-thirds of his professional time) to directing
the overall business activities of the Company in the U.S. and abroad.
Approximately one-third of Mr. Nomikos' professional time is devoted to his
other professional activities, including those relating to PYC Corporation.

PETER E. OETTINGER, PH.D. has served as Vice President, Chief Operating
Officer and a Director of the Company since its founding in 1989. From 1978 to
1988, Dr. Oettinger was Manager of Research and Development of Thermo
Electron's Direct Energy Conversion Operation, and Thermo Electron's Laser
Laboratory. Dr. Oettinger has a B.S. from Cornell University, an M.S. from the
California Institute of Technology and a Ph.D. from Stanford University.

JOHN J. CROWLEY has served as the Controller of the Company since 1991.
Prior to joining the Company, Mr. Crowley was the Controller of Applications
Systems Corporation, a software company. Mr. Crowley has a B.S. in accounting
from Bentley College.

GEORGE N. HATSOPOULOS, PH.D., has served as a Director of the Company since
its founding in 1989. Dr. Hatsopoulos has been Chairman of the Board and Chief
Executive Officer of Thermo Electron and has served as a Director of Thermo
Electron since 1956. Dr. Hatsopoulos is also a Director of BBN Corporation,
Thermedics Inc., Thermo Ecotek Corporation, Thermo Fibertek Inc., Thermo
Instrument Systems Inc., Thermo Optek Inc., ThermoQuest Corporation and
ThermoTrex Corporation.

ROGER D. WELLINGTON has served as a Director of the Company since its
founding in 1989. Mr. Wellington serves as President and Chief Executive
Officer of Wellington Consultants, Inc. and Wellington Associates, Inc.,
international business consulting firms he founded in 1994 and 1989,
respectively. Prior to 1989, Mr. Wellington served for more than five years as
Chairman of the Board of Augat Inc., a manufacturer of electromechanical
components. Prior to 1988, he also held the positions of President and Chief
Executive Officer of Augat Inc. Mr. Wellington is also a Director of BBN
Corporation and Thermo Electron.

WILLIAM O. FLANNERY has served as the Clerk and General Counsel of the
Company since 1992. Mr. Flannery is engaged in the private practice of law in
Framingham, Massachusetts and serves Of Counsel to the law firm of Goulston &
Storrs, P.C., Boston, Massachusetts. Mr. Flannery served as General Counsel
for Thermo Electron from 1985 to 1992 and as its Corporate Vice President for
Administration from 1989 to 1992.

<PAGE>

The Company intends to expand its Board of Directors by adding two or three
outside directors. The Company also intends to seek to hire a new employee, or
promote an existing employee, to serve as the Company's Chief Financial
Officer and to hire a new employee to oversee the Company's marketing efforts.

COMMITTEES OF THE BOARD OF DIRECTORS; COMPENSATION OF DIRECTORS

The Board of Directors has appointed an Audit Committee, which has general
responsibility for supervision of financial controls as well as accounting and
audit activities of the Company. The Audit Committee has the responsibility to
annually review the qualifications of the Company's independent certified
public accountants, make recommendations to the Board of Directors concerning
the selection of the accountants and review the planning, fees and results of
the accountants' audit. The current members of the Audit Committee are Messrs.
Hatsopoulos, Oettinger and Wellington.

Outside Directors of the Company currently receive an annual stipend of
$2,000, a fee of $1,000 per regular or special Directors meeting attended in
person (together with reimbursement of reasonable travel expenses), a fee of
$500 per each such Directors meeting participated in by means of conference
telephone arrangements and a fee of $500 per any regular or special meeting of
any Committee of the Board of Directors, whether attended in person or
participated in by conference telephone arrangements (together, in the event
not coincident with a Directors meeting, with reimbursement of reasonable
travel expenses). Directors who are employees of the Company receive no
compensation as members of the Board of Directors.

EXECUTIVE COMPENSATION

The following table sets forth summary information concerning the
compensation paid by the Company to Mr. Nomikos, the Company's Chairman of the
Board, President, Chief Executive Officer and Treasurer, and Dr. Oettinger,
the Company's Vice President and Chief Operating Officer, for the fiscal year
ended December 28, 1996. No other officers or employees of the Company
received salary and bonus in excess of $100,000 for all services rendered to
the Company during the year then ended.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------------------------------------------
OTHER
NAME AND PRINCIPAL ANNUAL LONG-TERM ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION COMPENSATION COMPENSATION
- ------------------ ---- -------- ----- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Peter M. Nomikos
Chairman of the Board,
President, Chief
Executive Officer
and Treasurer (1)..... 1996 -- -- -- -- $50,000 (2)
Peter E. Oettinger,
Ph.D.
Vice President, Chief
Operating Officer and
a Director............ 1996 $116,742 -- -- -- --
</TABLE>
- --------
(1) Although Mr. Nomikos devotes substantial time to the business of the
Company, he is also engaged in other business activities through a London-
based company.
(2) Mr. Nomikos' compensation was awarded prior to this offering in shares of
Common Stock based upon the fair market value of the Common Stock at the
beginning of the fiscal year. For fiscal 1996, Mr. Nomikos received 5,556
shares of Common Stock at an $9.00 per share value.

40
<PAGE>

The following table sets forth certain information relating to grants of
stock options made during the fiscal year ended December 28, 1996 to each of
Mr. Nomikos and Dr. Oettinger.

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------
PERCENT OF POTENTIAL REALIZABLE
TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO EXERCISE PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES OR BASE OPTION TERM
OPTIONS IN FISCAL PRICE EXPIRATION ----------------------
NAME GRANTED YEAR ($/SH) DATE 5%($) 10%($)
- ---- ---------- ---------- -------- -------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Peter M. Nomikos........ 12,500 6.0% $9.00 March 18, 2003 $ 37,004 $ 94,552
12,500 6.0% 8.50 July 17, 2003 43,254 100,802
------ ---- ---------- -----------
25,000 12.0% $ 80,258 $ 195,354
Peter E. Oettinger,
Ph.D................... 12,500 6.0% $9.00 March 18, 2003 $ 37,004 $94,552
12,500 6.0% 8.50 July 17, 2003 43,254 100,802
------ ---- ---------- -----------
25,000 12.0% $ 80,258 $ 195,354
</TABLE>

The following table sets forth certain information regarding stock option
exercises during the fiscal year ended December 28, 1996 and stock options
held at such year end by Mr. Nomikos and Dr. Oettinger.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL OPTIONS AT FISCAL
YEAR END YEAR END (1)
------------------------- -----------------------------
SHARES ACQUIRED VALUE
NAME ON EXERCISE RECEIVED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE (1)
- ---- --------------- -------- ----------- ------------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Peter M. Nomikos........ 0 -- 23,500 36,500 $ 148,500 $31,500
Peter E. Oettinger,
Ph.D. ................. 0 -- 129,500 43,000 1,012,000 70,500
</TABLE>
- --------
(1) Based on the initial public offering price of the Common Stock ($8.50 per
share), less the option exercise price.
COMPENSATION AND INSIDER PARTICIPATION

The entire Board of Directors was responsible for determining the
compensation of executive officers during fiscal 1996. Mr. Nomikos and Dr.
Oettinger, the Company's President and Chief Executive Officer, and Vice
President and Chief Operating Officer, respectively, are Directors and,
although they did not participate in deliberations relating to their own
compensation, each participated in deliberations relating to the compensation
of the other.

STOCK PLANS

1989 STOCK OPTION PLAN

The Company, effective January 20, 1989, adopted a non-qualified stock
option plan (the "Stock Option Plan") for persons selected by the Board of
Directors of the Company, including key employees, officers, directors and
consultants of the Company and its affiliates. The Stock Option Plan is
administered by the Company's Board of Directors, which determines the terms
of options granted under the plan, including the number of shares subject to
each option and the option price. In general, options which have been granted
under the plan expire no later than seven, ten or twelve years after the date
of grant and vest over a period of 45 months or five or seven years from the
date of grant. When an optionee ceases to be a director, employee or
consultant of the Company or a subsidiary, an option terminates either upon or
shortly after termination.

41
<PAGE>

Shares purchased upon the exercise of an option are subject to transfer
restrictions, which in general preclude the holder from transferring them
without the Company's consent, except by will or the laws of descent and
distribution or pursuant to a qualified domestic relations order. These
transfer restrictions are to lapse 90 days after the initial public offering
of Common Stock by the Company.

The Company's Board of Directors voted on July 17, 1996 to terminate the
Stock Option Plan, and no further options may be issued under the plan after
that date. The Company has granted under the Stock Option Plan non-qualified
stock options to purchase a total of 733,225 shares of Common Stock at
exercise prices ranging from $0.40 to $9.00 per share.

EMPLOYEE STOCK PURCHASE PLAN

An Employee Stock Purchase Plan (the "Stock Purchase Plan") was adopted by
the Board of Directors on March 18, 1994. In 1994, the Company issued 121,000
shares of Common Stock to employees of the Company pursuant to the Stock
Purchase Plan at a price of $3.00 per share. A total of 85,500 of these shares
are fully paid and non-assessable. Consideration for the remaining 35,500
shares was in the form of promissory notes executed by the employees in favor
of the Company. These promissory notes, with an aggregate face amount of
$106,500, are being repaid by the employees through automatic bi-weekly
payroll deductions. As of September 28, 1996 $57,931 was owed under the notes,
which are scheduled to be repaid in full by April 2, 1999.

The Company's Board of Directors voted on July 17, 1996 to terminate the
Stock Purchase Plan, and no further shares may be issued under the plan after
that date.

1996 EQUITY INCENTIVE PLAN

On July 17, 1996, the Board of Directors of the Company adopted the 1996
Equity Incentive Plan (the "1996 Plan") for employees, officers, directors and
consultants of the Company and its subsidiaries, and recommended approval of
the plan by the stockholders. The 1996 Plan provides for grants of incentive
stock options to employees (including officers) of the Company, and for grants
of non-qualified stock options to such employees as well as to directors and
consultants of the Company and its subsidiaries. In addition, persons eligible
to receive non-qualified stock options can be awarded shares of Common Stock
and given the opportunity to purchase shares of Common Stock. A total of
266,775 shares of Common Stock may be issued under the 1996 Plan. To date,
91,750 stock options have been granted under the 1996 Plan.

The 1996 Plan is administered by the Board of Directors of the Company,
which may delegate any or all of its responsibilities to a Committee of two or
more Board members who, if the Company registers any class of any equity
security pursuant to Section 12 of the Securities Exchange Act of 1934 (the
"Exchange Act"), must qualify as non-employee directors within the meaning of
Rule 16b-3 adopted pursuant to the Exchange Act. The plan administrator
determines the recipients and terms of all stock rights granted under the
plan, including in the case of all options, the option price. Except in the
case of some incentive stock options, as described below, the term of all
options granted under the plan may not exceed ten years.

Special rules apply to incentive stock options. The exercise price of all
incentive stock options granted under the 1996 Plan must be at least equal to
the fair market value of the Common Stock of the Company on the date of grant.
If an incentive stock option is granted to an optionee who owns stock
representing more than 10% of the voting power of the Company's outstanding
capital stock, the exercise price of the option must equal at least 110% of
the fair market value of the Common Stock on the date of grant and the maximum
term of the option cannot exceed five years. No incentive stock option may be
transferred by the optionee other than by will or the laws of descent and
distribution, and should the holder of an incentive stock option cease to be
employed by the Company and any of its subsidiaries, he or she (or his or her
estate, personal representative or beneficiary in the event of death) will no
longer be able to exercise the option to the extent of the shares not
exercisable upon termination of employment, and will have a limited period of
time after termination of employment within which to exercise the option (in
general, three months in the case of termination other than by reason of
disability or death, one year in the event of disability, and 180 days in the
event of death, unless the option expires earlier by its terms).

42
<PAGE>

At the request of an optionee, the plan administrator can take whatever
action is necessary to convert such optionee's incentive stock options into
non-qualified options. Also, an optionee's rights with respect to options and
other rights granted under the 1996 Plan are to be appropriately adjusted when
certain events occur, such as a stock dividend or split, a recapitalization,
or a merger or sale of assets.

The Board of Directors of the Company has the authority to amend or
terminate the 1996 Plan provided that, in general, no amendment may alter or
impair the rights of a grantee under any option previously granted without
that grantee's consent and shareholder approval must be obtained within 12
months before or after the Board adopts a resolution authorizing certain
actions, including the extension of the expiration date of the 1996 Plan or
the increase in the number of shares reserved for issuance under the 1996
Plan. Unless sooner terminated, the 1996 Plan will terminate on July 16, 2006.

401(K) PLAN

On April 1, 1995, the Company terminated its Simplified Employee Pension
Plan and adopted the Photoelectron Corporation 401(k) Retirement Plan, a
standardized prototype plan which is intended to qualify under Sections 401(a)
and 501 of the Code (the "401(k) Plan"). All employees who have completed
three months of service with the Company and who have attained age 21 are
eligible to participate in the 401(k) Plan, except that all employees on the
effective date of the 401(k) Plan immediately became eligible to participate.
The 401(k) Plan provides that each participant may contribute from 2% up to
15% of his or her compensation. The Company may also make discretionary
matching contributions equal to no more than 6% of each participant's
compensation. The 401(k) Plan is intended to qualify under Section 401(a) of
the Code so that contributions to the Plan, and income earned on Plan
contributions, are not taxable to participants until withdrawn from the 401(k)
Plan, and so that any contributions by the Company will be deductible by the
Company when made. Discretionary Company contributions and the investment
earnings thereon vest at the rate of 20% a year after one year of service and
become fully vested in any event at normal retirement age (age 65).

EXTENSION OF CERTAIN OPTIONS

In the fourth quarter of 1996, the Company extended the terms of certain
options issued to four employees of the Company. These options, by their
terms, would expire but for such extension during the 180-day "lock-up period"
following the date of this Prospectus. These options were extended to a date
which is two months after the expiration of the lock-up agreements. These
options are exercisable into an aggregate of 23,500 shares of Common Stock,
and none of said employees is an officer or director of the Company. The
Company recorded compensation expense of $272,600 pursuant to Accounting
Principals Board Opinion No. 25 in the fourth quarter as a result of this
extension for its fiscal quarter ending December 28, 1996. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Overview" and "Shares Eligible for Future Sale."

43
<PAGE>

CERTAIN TRANSACTIONS

The Company utilizes certain administrative resources of Thermo Electron on
an as-needed basis without a formal contract and is charged at actual cost for
such services. The Company paid $3,120, $7,715 and $4,322 in 1993, 1994 and
1995, respectively, for these services. George N. Hatsopoulos, Ph.D., a
director of the Company, is Chairman of the Board and Chief Executive Officer
of Thermo Electron.

The Company is provided with certain services by Thermo Power Corporation, a
majority-owned subsidiary of Thermo Electron. These services include data
processing services, administrative services and machine shop services, which
are charged to the Company at actual cost. The Company paid $36,734, $267,582
and $313,942 in 1993, 1994 and 1995, respectively, for these services. As of
December 31, 1994 and December 30, 1995, $42,460 and $19,113, respectively,
was payable to Thermo Power Corporation and was included in accounts payable
in the accompanying consolidated balance sheets.

The Company entered into a Convertible Note and Warrant Purchase Agreement
dated as of May 13, 1992, as amended (the "1992 Debt Agreement"), pursuant to
which the Company sold a $4,252,000 8% Convertible Demand Note (the "1992
Note") to Peter M. Nomikos, Chairman of the Board, President, Chief Executive
Officer and Treasurer of the Company. The principal amount of the 1992 Note,
and all interest accrued thereon, is due and payable on demand. The principal
amount of the 1992 Note is convertible into Common Stock at $3.00 per share.
Currently, the aggregate principal amount outstanding under the 1992 Note is
$705,000.

In 1993, 1,282,005 shares of Common Stock were issued upon the conversion of
$3,846,015 of principal and accrued interest under the 1992 Notes. On March
18, 1994, the Company's Board of Directors approved the issuance of 1,282,005
shares of Series A Convertible Preferred Stock to Mr. Nomikos in exchange for
these shares of Common Stock. The Series A Convertible Preferred Stock will be
converted into Common Stock on a one-for-one basis upon the closing of this
offering.

The warrant purchase rights under the 1992 Debt Agreement entitle Mr.
Nomikos to acquire warrants for $0.20, pursuant to which he may purchase
shares of Common Stock at $3.00 per share. Mr. Nomikos (or his assignee)
acquired warrants to purchase 575,000 shares of Common Stock in 1993, and
warrants to purchase 235,000 shares in 1995. Mr. Nomikos did not acquire any
such warrants in 1994. At September 28, 1996, warrants to purchase an
aggregate of 1,417,334 shares of Common Stock were outstanding. All warrants
issued to date are now held by PYC Corporation.

In 1994, the Company sold an aggregate of 121,000 shares of Common Stock to
Dr. Peter Oettinger, John Crowley and other employees of the Company for $3.00
per share pursuant to the Company's Employee Stock Purchase Plan. Dr.
Oettinger, a director and officer of the Company, purchased 50,000 shares, all
of which are fully paid and nonassessable. Mr. Crowley, Controller of the
Company, purchased 10,000 shares, 5,000 of which are fully paid and non-
assessable and 5,000 of which are being paid for through bi-weekly payroll
deductions, in accordance with the terms of the Employee Stock Purchase Plan.

In 1994, the Company completed the issuance of 500,000 shares of Series B
Convertible Preferred Stock to Thermo Electron, Petronome Corporation and
other private investors at a purchase price of $8.00 per share. Thermo
Electron, a holder of more than 5% of the Company's Common Stock, purchased
43,750 shares. Petronome Corporation ("Petronome"), a corporation in which
Peter M. Nomikos has investment and voting power, purchased 55,250 shares. The
Series B Convertible Preferred Stock will be converted into Common Stock on a
one-for-one basis upon the closing of this offering.

In 1996, the Company issued 1,110,307 shares of Series C Convertible
Preferred Stock to Petronome and other private investors. The purchase price
for 27,173 of the shares acquired by Petronome and 663,943 of the shares
acquired by such other private investors was $9.00 per share, and the purchase
price for 98,222 of the shares acquired by Petronome and 320,969 of the shares
acquired by such other investors was $8.10 per share. The latter discounted
price was paid by those stockholders that had acquired the right to such
discount in connection with their purchase of Series B Preferred Stock. Each
share of Series C Convertible Preferred Stock will convert into 1.032 shares
of Common Stock upon the closing of this offering.

44
<PAGE>

SECURITIES OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of December 3, 1996 and as adjusted
to reflect the sale by the Company of the shares of Common Stock offered
hereby (assuming no exercise of the Underwriters over-allotment option), by
(i) each person (or group of affiliated persons) known by the Company to be
the beneficial owner of more than 5% of the outstanding Common Stock (assuming
conversion of all outstanding warrants and convertible debt, and conversion of
all Preferred Stock), (ii) each of the Company's directors, (iii) each of the
Company's executive officers who received salary and bonus in excess of
$100,000 for all services rendered during the fiscal year ended December 28,
1995, and (iv) all of the Company's executive officers and directors as a
group. Except as otherwise indicated in the footnotes to this table, the
Company believes that the persons named in this table have voting and
investment power with respect to all the shares of Common Stock indicated. The
following table also includes shares of Common Stock that the following
persons have the right to acquire within sixty (60) days.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED PERCENT OF
PRIOR TO OFFERING (1) COMMON STOCK
------------------------- ------------------------------
DIRECTORS, OFFICERS AND 5% STOCKHOLDERS NUMBER BEFORE OFFERING AFTER OFFERING
- --------------------------------------- ------------------------- --------------- --------------
<S> <C> <C> <C>
Peter M. Nomikos....................... 4,465,098 (2) 66.9% 51.5%
Peter E. Oettinger, Ph.D. ............. 179,500 (3) 3.9 2.7
George N. Hatsopoulos, Ph.D. .......... 16,000 (4) * *
Roger D. Wellington.................... 16,000 (5) * *
Sociedad Internacional De Finanzas SA.. 380,764 8.4 5.8
Montevideo, Uruguay
Thermo Electron Corporation............ 833,334 (6) 17.8 12.5
81 Wyman Street
Waltham, Massachusetts 02254
Toshiba Medical Systems Company, Ltd... 229,086 5.1 3.5
26-5, 3-Chome, Hongo Bunkyo-Ku
Tokyo 113 Japan
PYC Corporation........................ 3,727,735 (7) 62.8 47.0
c/o Aegeus Shipping Co., Ltd.
TANPY Building
17-19 Akti Miaouli
Piraeus 185 35 Greece
All directors and executive officers as
a group (5 persons)................... 4,697,098 68.6 53.1
</TABLE>
- --------
* Less than 1%.
(1) Includes the number of shares and percentage ownership represented by such
shares determined to be beneficially owned by a person in accordance with
the rules of the Securities and Exchange Commission. Such shares, however,
are not deemed outstanding for the purposes of computing the percentage
ownership of each other person. The number of shares beneficially owned by
a person includes shares of Common Stock subject to options held by that
person that are currently exercisable or exercisable within 60 days of
December 3, 1996. Such exercisable options are shown in the footnotes to
this table for each such person. The persons named in this table have
voting and investment power with respect to all shares of Common Stock
shown as owned by them, subject to community property laws where
applicable and except as indicated in the other footnotes to this table.
(2) Includes 23,500 shares subject to vested options granted by the Company,
and 713,863 shares issuable upon conversion of convertible debt. Also
includes 1,417,334 shares issuable upon exercise of outstanding warrants
owned by PYC Corporation, of which Mr. Nomikos is the President. Mr.
Nomikos has been granted investment power and the authority to vote such
shares by PYC Corporation.
(3) Includes 129,500 shares subject to options granted by the Company. Also
includes 44,444 shares anticipated to be transferred to the Oettinger
Children Irrevocable Trust by the end of 1996.
(4) Includes 16,000 shares subject to options granted by the Company. Does not
include any shares owned by Thermo Electron, as to which Dr. Hatsopoulos
disclaims beneficial ownership.
(5) Includes 16,000 shares subject to options granted by the Company.
(6) Includes 170,730 shares issuable upon conversion of convertible debt owned
by Thermo Electron.
(7) Includes 1,417,334 shares issuable upon exercise of outstanding warrants.

45
<PAGE>

DESCRIPTION OF CAPITAL STOCK

The Company is restating its Articles of Organization (as so restated, the
"Articles") and By-Laws (as so restated, the "By-Laws") to be effective prior
to the consummation of this offering. Upon such restatement, the authorized
capital stock of the Company will consist of 15,000,000 shares of Common
Stock, $0.0l par value, and 7,500,000 shares of Preferred Stock, $0.0l par
value.

COMMON STOCK

As of December 3, 1996, there were 4,520,104 shares of Common Stock issued
and outstanding and held of record by 37 stockholders, after giving effect to
the conversion of all outstanding shares of Preferred Stock which will occur
upon the consummation of the offering. The holders of the Company's Common
Stock are entitled to receive ratably such dividends as may be declared by the
Board of Directors out of funds legally available therefor, subject to the
prior rights of holders of Preferred Stock of the Company. Upon any
liquidation of the Company, after payment of all indebtedness, the assets of
the Company will be distributed pro rata to the holders of the Common Stock
subject to such rights as may have been granted to the holders of any
outstanding Preferred Stock. Holders of the Common Stock have no preemptive,
subscription, redemption or conversion rights and are entitled to one vote for
each share held of record on each matter submitted to a vote of stockholders.
All but 35,500 of the outstanding shares of Common Stock are, and the shares
of Common Stock being sold in this offering will be, upon payment of the full
consideration therefor, fully paid and nonassessable. The remaining 35,500
shares were issued in 1994 to employees pursuant to the Employee Stock
Purchase Plan and are being paid for in installments.

PREFERRED STOCK

Upon the consummation of this offering, the Board of Directors will be
authorized, subject to certain limitations, to cause the Company to issue
Preferred Stock. The Preferred Stock is so-called "blank check" preferred
stock, which authorizes the Board of Directors of the Company from time to
time to establish one or more series of Preferred Stock and, to the extent
permitted by Massachusetts law, to designate variations in the relative rights
and preferences between different series, including (i) the number of shares
to constitute each series and the distinguishing designations thereof, (ii)
the dividend rate on the shares of each series and the preferences, if any,
and the special and relative rights of the shares of each series as to
dividends, (iii) whether the shares of each series shall be redeemable and, if
redeemable, the price, terms and manner of redemption, (iv) the preferences,
if any, and the special and relative rights of the shares of each series upon
liquidation of the Company, (v) whether the shares of each series shall be
convertible into shares of any other class or series of capital stock of the
Company and, if so, the conversion price or ratio and other conversion rights,
(vi) the conditions under which the shares of each series shall have separate
voting rights or no voting rights and (vii) such other designations,
preferences and relative, participating, optional or other special rights and
qualifications, limitations or restrictions of each series to the full extent
permitted by the laws of Massachusetts. The Company has no present plans to
issue any shares of Preferred Stock. See "Risk Factors--Anti-Takeover
Provisions; Effects of Issuance of Preferred Stock."

All Preferred Stock issued and outstanding prior to the closing of this
offering will convert to Common Stock upon such closing. Each share of Series
A Convertible Preferred Stock and Series B Convertible Preferred Stock will
convert into one share of Common Stock. Each outstanding share of Series C
Convertible Preferred Stock will convert into 1.032 shares of Common Stock.

46
<PAGE>

CONVERTIBLE DEBT AND WARRANTS

The Company entered into a Subordinated Convertible Note Purchase Agreement
dated as of May 22, 1990, as amended (the "1990 Debt Agreement"), pursuant to
which the Company sold $300,000 of its 8% Subordinated Notes (the "1990
Notes"). The principal amount of the 1990 Notes, and all interest accrued
thereon, are due and payable on May 31, 1997. Upon maturity, the principal
amount of the 1990 Notes is convertible into Common Stock at $0.80 per share.

The Company entered into a Subordinated Convertible Note Purchase Agreement
dated as of July 11, 1991, as amended (the "1991 Debt Agreement"), pursuant to
which the Company sold $500,000 of its 8% Convertible Notes (the "1991
Notes"). The principal amount of the 1991 Notes, and all interest accrued
thereon, are due and payable on July 31, 1998. Upon maturity, the principal
amount of the 1991 Notes is convertible into Common Stock at $3.00 per share.

The Company entered into a $4,500,000 Convertible Note and Warrant Purchase
Agreement dated as of May 13, 1992, as amended (the "1992 Debt Agreement"),
pursuant to which the Company sold a $4,252,000 8% Convertible Demand Note
(the "1992 Note"). As of September 28, 1996, a principal balance of $705,000
remains outstanding under the 1992 Note. The principal amount of the 1992
Note, and all interest accrued thereon, is due and payable on demand. The
principal amount of the 1992 Note is convertible into Common Stock at $3.00
per share.

The debt evidenced by the 1990, 1991 and 1992 Notes is subordinated to
certain senior debt, which includes all indebtedness of the Company for
borrowed money, which is not by its terms subordinate and junior to or on a
parity with the 1990, 1991 and 1992 Notes. The conversion price applicable to
the principal amount of the debt is subject to weighted average anti-dilution
protection in the event of the issuance or sale of Common Stock or other
securities of the Company at a price per share less than the applicable
conversion value under such note(s). Pursuant to the 1990, 1991 and 1992 Debt
Agreements (the "Debt Agreements"), accrued and unpaid interest is convertible
into Common Stock at a conversion value equal to the fair market value of the
Company's Common Stock on the first day of the fiscal quarter in which the
interest accrued. Prior to the effective date of this offering, fair market
value is determined based upon the most recent sale price of capital stock.
After the effective date of the offering, fair market value is based upon the
average market price over the first ten trading days of the quarter in which
the interest accrues. All accrued and unpaid interest under any of the Debt
Agreements is convertible at the option of the holder at any time, and is
automatically converted upon the conversion of any outstanding principal.

As of September 28, 1996, outstanding principal and accrued interest on the
1990, 1991 and 1992 Notes were convertible to 881,249 shares of Common Stock.

CERTAIN CHARTER AND BY-LAW PROVISIONS

The Company's Articles and By-Laws contain certain provisions that are
intended to enhance the likelihood of continuity and stability in the
composition of the Company's Board of Directors and in the policies formulated
by the Board and to delay or prevent a change in control of the Company if the
Board determines that such a change in control is not in the best interest of
the Company and its stockholders. These provisions could have the effect of
discouraging certain attempts to acquire the Company or remove incumbent
management even if some or a majority of the Company's stockholders deem such
an attempt to be in the Company's best interest.

Consistent with Massachusetts law, the By-Laws provide that stockholders may
take action without a meeting only if all shareholders entitled to vote on the
action consent to the action in writing. The written consents must be filed
with the records of the meetings of stockholders. This provision may
discourage any other person from making a tender offer for Common Stock,
because such person or entity, even if it acquired a majority of the
outstanding voting securities of the Company, would be able to take action as
a stockholder (such as electing new directors or approving a merger) only at a
duly called stockholders meeting and not by written consent.

47
<PAGE>

The Board of Directors is permitted pursuant to the Articles to consider
special factors, such as employee welfare and the future prospects of the
Company, in determining what the Directors reasonably believe to be in the
best interests of the Company when evaluating proposed tender or exchange
offers or business combinations.

The Articles provide that no director of the Company shall be liable to the
Company or its stockholders for monetary damages for any breach of fiduciary
duty, except to the extent such exculpation from liability is not permitted
under Massachusetts law. This provision does not prevent stockholders from
obtaining injunctive or other equitable relief against directors nor does it
shield directors from liability under federal or state securities laws. The
By-Laws provide that the Company shall indemnify its directors and officers to
the full extent permitted by law.

The Articles provide that a majority vote of each class of stock entitled to
vote will be required for amendments to the Articles or a merger or
consolidation of the Company.

MASSACHUSETTS ANTI-TAKEOVER LAWS

The Company will be covered by the provisions of Chapter 110F of the
Massachusetts General Laws, the Business Combination Statute. Under Chapter
110F, a Massachusetts corporation with more than 200 stockholders may not
engage in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
becomes an interested stockholder, unless (i) the interested stockholder
obtains the approval of the Board of Directors for the proposed business
combination prior to becoming an interested stockholder, (ii) the interested
stockholder acquires 90% of the outstanding voting stock of the corporation
(excluding shares held by certain affiliates of the corporation) at the time
it becomes an interested stockholder or (iii) the business combination is
approved at the time it is proposed by both the Board of Directors and the
holders of two-thirds of the outstanding voting stock of the corporation
(excluding shares held by the interested stockholder). An "interested
stockholder" is a person who, together with affiliates and associates, owns
(or at anytime within the prior three years did own) 5% or more of the
outstanding voting stock of the corporation. A "business combination" includes
a merger, a stock or asset sale, and other transactions resulting in a
financial benefit to the interested stockholder.

The By-Laws provide that the provisions of Chapter 110D of the Massachusetts
General Laws, the Control Share Statute, will not apply to the Company. The
Control Share Statute, however, provides that the Company may in the future
become prospectively subject to the statute by vote of its Board of Directors.
In general, if this statute were applicable, it would provide that any person
or entity that acquired 20% or more of the Company's outstanding voting stock
could not vote such stock unless the other stockholders of the Company were to
so authorize.

Chapter 156B, Section 50A, of the Massachusetts General Laws, states that a
publicly-held Massachusetts corporation must, unless electing not to be
covered by the statute, have a classified board of directors consisting of
three classes as nearly equal in size as possible, unless the corporation
elects not to be covered by Section 50A. In addition, under this statute,
directors can be removed only for cause (as defined in the statute) by the
affirmative vote of the holders of a majority of the outstanding shares of
capital stock of the Company generally entitled to vote in the election of
directors. The Company has elected not to have the provisions of this statute
apply to it. See "Risk Factors--Anti-Takeover Provisions; Effects of Issuance
of Preferred Stock."

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Company's Common Stock is American
Stock Transfer and Trust Company.

48
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, the Company will have 6,520,104 shares of
Common Stock outstanding (assuming no exercise or conversion of outstanding
options, warrants or convertible debt after October 31, 1996). Of these
shares, the 2,000,000 shares sold in this offering will be freely tradable
without restriction or further registration under the Securities Act of 1933,
as amended (the "Securities Act"), except that any shares purchased by
"affiliates" of the Company, as that term is defined in Rule 144 ("Rule 144")
under the Securities Act ("Affiliates"), may generally only be sold in
compliance with the limitations of Rule 144 described below.

SALES OF RESTRICTED SHARES

The remaining 4,520,104 shares of Common Stock are deemed "Restricted
Shares" under Rule 144. 3,359,359 Restricted Shares will be eligible for sale
in the public market in accordance with Rule 144 under the Act beginning 90
days after the date of this Prospectus (subject to compliance with the volume
and other limitations of Rule 144 described below); substantially all of these
shares are subject to the Lock-up Agreements described below. The remaining
1,160,745 outstanding Restricted Shares will not be eligible for resale under
Rule 144 until after the expiration of a two-year holding period from the date
such Restricted Shares were acquired from the Company or an Affiliate, and may
be resold in the public market only in compliance with the registration
requirements of the Act or pursuant to a valid exemption therefrom;
substantially all of these shares are subject to Lock-up Agreements. In
addition, certain securityholders have the right to have their Restricted
Shares registered by the Company under the Securities Act as described below.

The Company, its executive officers and certain other securityholders of the
Company have agreed pursuant to certain agreements (the "Lock-up Agreements")
that they will not without the prior written consent of the underwriters,
offer, sell or otherwise dispose of any shares of Common Stock or any
securities convertible into or exchangeable or exerciseable for any shares of
Common Stock for a period of 180 days from the date of this Prospectus.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an Affiliate, who has beneficially
owned Restricted Shares for at least two years is entitled to sell, within any
three-month period, a number of such shares that does not exceed the greater
of (i) one percent of the then outstanding shares of Common Stock
(approximately 65,200 shares immediately after this offering), or (ii) the
average weekly trading volume in the Common Stock in the over-the-counter
market during the four calendar weeks preceding the date on which notice of
such sale is filed. In addition, under Rule 144(k), a person who is not an
Affiliate and has not been an Affiliate for at least three months prior to the
sale and who has beneficially owned Restricted Shares for at least three years
may resell such shares without compliance with the foregoing requirements. In
meeting the two and three year holding periods described above, a holder of
Restricted Shares can include the holding periods of a prior owner who was not
an Affiliate.

The Securities and Exchange Commission has recently proposed amendments to
Rule 144 and Rule 144(k) that would permit resales of Restricted Shares under
Rule 144 after a one-year, rather than a two-year holding period, subject to
compliance with the other provisions of Rule 144, and would permit resale of
Restricted Shares by non-Affiliates under Rule 144(k) after a two-year, rather
than a three-year holding period. Assuming adoption of such amendments,
approximately 472,000 Restricted Shares will be eligible for sale in the
public market immediately after this offering pursuant to Rule 144(k),
substantially all of which shares are subject to the Lock-up Agreements, and
approximately 4,520,104 Restricted Shares will become eligible for sale in the
public market pursuant to Rule 144 beginning 90 days after the date of this
Prospectus (subject to compliance with the volume and other limitations of
Rule 144), substantially all of which shares are subject to the Lock-up
Agreements. Additional Restricted Shares will become eligible for sale under
Rule 144 from time to time.

The Company intends to file one or more registration statements on Form S-8
under the Securities Act to register up to 1,000,000 shares of Common Stock
subject to outstanding stock options and Common Stock issued or issuable
pursuant to the Company's stock option plans and stock purchase plan. The
Company plans to file

49
<PAGE>

these registration statements within 180 days following the closing of this
offering, and such registration statements are expected to become effective
upon filing. Shares covered by these registration statements will thereupon be
eligible for sale in the public markets, subject to the Lock-up Agreements, to
the extent applicable.

OPTIONS

As of December 3, 1996, options to purchase a total of 812,975 shares of
Common Stock were outstanding at a weighted average exercise price $4.31 per
share; 717,600 of the shares issuable pursuant to such options are subject to
Lock-up Agreements. An additional 175,025 shares of Common Stock are available
for future grants under the Company's stock option plan. See "Management--
Stock Plans."

WARRANTS

As of December 3, 1996, warrants to purchase 1,417,334 shares of Common
Stock were outstanding, at an exercise price of $3.00 per share; all of the
shares issuable pursuant to such warrants are subject to Lock-up Agreements.

CONVERTIBLE DEBT

As of September 28, 1996, there was $2,013,277 of convertible debt
outstanding. This debt is convertible into 881,249 shares of Common Stock with
a weighted average conversion price of $2.28 per share. All such shares
issuable pursuant to the conversion of such debt are eligible for sale
pursuant to Rule 144 beginning 90 days after the date of this Prospectus
(subject to compliance with the volume and other limitations of Rule 144). All
of such shares are subject to Lock-up Agreements.

REGISTRATION RIGHTS

In the event the Company proposes to register any of its securities under
the Securities Act after the completion of this offering, certain
securityholders of the Company (the "Rightsholders") will, subject to certain
exceptions, be entitled to include shares of Common Stock held by them in such
registration. However, the managing underwriter of any such offering may
exclude for marketing reasons some or all of such Registrable Shares from such
registration. The Company is generally required to bear the expenses of all
such registrations, except underwriting discounts and commissions.

50
<PAGE>

UNDERWRITING

Under the terms and subject to the conditions of the Underwriting Agreement,
the Underwriters named below, for whom Needham & Company, Inc. and Dain
Bosworth Incorporated 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 of Common Stock
set forth opposite their respective names below. The Underwriting Agreement
provides that the obligations of the Underwriters to pay for and accept
delivery of the shares of Common Stock are subject to certain conditions
precedent, and that the Underwriters are committed to purchase and pay for all
of such shares if any are purchased.

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Needham & Company, Inc. ............................................. 505,000
Dain Bosworth Incorporated........................................... 505,000
Bear, Stearns & Co. Inc. ............................................ 45,000
Alex. Brown & Sons Incorporated...................................... 45,000
Hambrecht & Quist LLC................................................ 45,000
Lehman Brothers...................................................... 45,000
Montgomery Securities................................................ 45,000
Morgan Stanley & Co. Incorporated.................................... 45,000
NatWest Securities Limited........................................... 45,000
Oppenheimer & Co., Inc. ............................................. 45,000
Robertson, Stephens & Company LLC.................................... 45,000
Smith Barney Inc. ................................................... 45,000
UBS Securities LLC................................................... 45,000
Adams, Harkness & Hill, Inc. ........................................ 25,000
Allen & Company...................................................... 25,000
William Blair & Company, LLC......................................... 25,000
EVEREN Securities, Inc. ............................................. 25,000
Fahnestock & Co. Inc. ............................................... 25,000
First Albany Corporation............................................. 25,000
Friedman, Billings, Ramsey & Co., Inc. .............................. 25,000
Interstate/Johnson Lane Corporation.................................. 25,000
Janney Montgomery Scott Inc. ........................................ 25,000
Josephthal Lyon & Ross Incorporated.................................. 25,000
Neuberger & Berman, LLC.............................................. 25,000
Piper Jaffray Inc. .................................................. 25,000
Raymond James & Associates, Inc. .................................... 25,000
Tucker Anthony Incorporated.......................................... 25,000
Wessels, Arnold & Henderson, L.L.C. ................................. 25,000
Black & Company, Inc. ............................................... 15,000
Fechtor, Detwiler & Co., Inc. ....................................... 15,000
Oscar Gruss & Son Incorporated....................................... 15,000
Hampshire Securities Corporation..................................... 15,000
Ormes Capital Markets, Inc. ......................................... 15,000
Sanders Morris Mundy................................................. 15,000
Shepard Financial Group, Inc. ....................................... 15,000
R.J. Steichen & Company.............................................. 15,000
---------
Total............................................................ 2,000,000
=========
</TABLE>

The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession not in excess of $0.32 per share. The
Underwriters may allow, and

51
<PAGE>

such dealers may reallow, a concession not in excess of $0.10 per share to
certain other dealers. After the public offering, the public offering price,
concession and reallowance to dealers may be reduced by the Representatives.
No such reduction shall change the amount of proceeds to be received by the
Company as set forth on the cover page of this Prospectus. The Representatives
have advised the Company that the Underwriters do not intend to confirm sales
of shares of the Common Stock to any accounts over which they exercise
discretionary authority.

The Company has granted the Underwriters an option, exercisable during the
30-day period after the date of this Prospectus, to purchase up to 300,000
additional shares of Common Stock at the initial public offering price, less
the underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent the Underwriters exercise such option, each of the
Underwriters will have a firm commitment to purchase approximately the same
percentage of such additional shares that the number of shares of Common Stock
to be purchased by it shown in the above table represents as a percentage of
the 2,000,000 shares offered hereby. If purchased, such additional shares will
be sold by the Underwriters on the same terms as those on which the 2,000,000
shares are being sold.

The Underwriting Agreement contains covenants of indemnity between the
Underwriters and the Company against certain civil liabilities, including
liabilities under the Securities Act.

The Company has agreed not to offer, sell or otherwise dispose of any shares
of Common Stock for a period of 180 days after the date of this Prospectus
without the prior written consent of Needham & Company, Inc., except for the
shares of Common Stock offered hereby and except that the Company may issue
securities pursuant to the Company's stock option plans and upon the exercise
of outstanding options. The Company's officers and certain other
securityholders have agreed that they will not, directly or indirectly, offer
to sell, sell, or otherwise dispose of shares of Common Stock or any
securities convertible or exchangeable therefor, for a period of 180 days
after the date of this Prospectus, without the prior written consent of
Needham & Company, Inc. Needham & Company, 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. See "Shares Eligible for Future Sale."

The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the
right to reject any order for the purchase of shares in whole or in part.

Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock was determined
by negotiations between the Company and the Representatives. The material
factors considered in such negotiations were prevailing market and economic
conditions, market valuations of other companies engaged in activities similar
to the Company, the history of and prospects for the industry in which the
Company competes, estimates of the business potential and prospects of the
Company, the present state of the Company's business operations and the
Company's management. See "Risk Factors--No Prior Public Market; Potential
Volatility of Stock Price."

LEGAL MATTERS

The validity of the shares offered hereby will be passed upon for the
Company by Goulston & Storrs, P.C., Boston, Massachusetts. Certain legal
matters will be passed upon for the Underwriters by Testa, Hurwitz &
Thibeault, LLP, Boston, Massachusetts.

EXPERTS

The financial statements included in this Prospectus and elsewhere in the
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and
are included herein in reliance upon the authority of said firm as experts in
giving said reports.

52
<PAGE>

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission,
Washington, D.C. 20549 (the "Commission"), a Registration Statement on Form S-
1 under the Securities Act of 1933, as amended, with respect to the Common
Stock offered hereby. This Prospectus does not contain all of the information
set forth in that Registration Statement and the exhibits and schedules
thereto. For further information with respect to the Company and such Common
Stock, reference is hereby made to the Registration Statement including the
exhibits and the schedules thereto. Statements contained in this Prospectus
and the description of any contract or other document referred to herein 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 and the exhibits thereto may be
inspected and copied at prescribed rates at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the regional offices of the Commission
located at Seven World Trade Center, 13th Floor, New York, New York 10048 and
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. The Commission
also maintains a Web site that contains reports, proxy statements and
information statements and other information regarding registrants that file
electronically with the Commission, including the Company. The address of such
Web site is http://www.sec.gov.

The Company intends to furnish its stockholders with annual reports
containing consolidated financial statements certified by its independent
auditors and quarterly reports for the first three quarters of each fiscal
year containing unaudited consolidated financial information.

53
<PAGE>

PHOTOELECTRON CORPORATION AND SUBSIDIARY

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Report of Independent Public Accountants, Arthur Andersen LLP ..... F-2
Consolidated Balance Sheets as of September 28, 1996, December 30,
1995 and December 31, 1994........................................ F-3
Consolidated Statements of Operations for the years ended December
30, 1995, December 31, 1994 and January 1, 1994, the nine months
ended September 28, 1996 and September 30, 1995 and from inception
to September 28, 1996............................................. F-4
Consolidated Statements of Cash Flows for the years ended December
30, 1995, December 31, 1994 and January 1, 1994, the nine months
ended September 28, 1996 and September 30, 1995 and from inception
to September 28, 1996............................................. F-5
Consolidated Statements of Shareholders' (Deficit) Equity at Sep-
tember 28, 1996, December 30, 1995, December 31, 1994, January 1,
1994, January 2, 1993, December 28, 1991, December 29, 1990, De-
cember 28, 1989 and at initial issuance........................... F-6
Notes to Consolidated Financial Statements......................... F-7 to F-14
</TABLE>

F-1

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders and Board of Directors of
Photoelectron Corporation and Subsidiary:

We have audited the accompanying consolidated balance sheets of
Photoelectron Corporation and subsidiary (a Massachusetts corporation in the
development stage) as of December 31, 1994 and December 30, 1995, and the
related consolidated statements of operations, shareholders' (deficit) equity
and cash flows for each of the three years ended December 30, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Photoelectron Corporation and subsidiary as of December 31, 1994 and December
30, 1995, and the results of their operations and their cash flows for each of
the three years ended December 30, 1995, in conformity with generally accepted
accounting principles.

Boston, Massachusetts /s/ Arthur Anderson LLP
March 20, 1996
(except with respect
to the matters discussed
in Note 9 as to which the
date is December 11, 1996)

F-2
<PAGE>

PHOTOELECTRON CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 30, SEPT. 28, PRO FORMA
1994 1995 1996 SEPT. 28, 1996
------------ ------------ ------------ --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equiva-
lents................. $ 1,778,181 $ 7,191,268 $ 4,005,254 $ 4,005,254
Inventories............ 625,520 495,590 353,290 353,290
Prepaid expenses....... 68,649 121,936 334,319 334,319
Other current assets... 4,040 70,274 31,790 31,790
----------- ------------ ------------ ------------
Total current assets.. 2,476,390 7,879,068 4,724,653 4,724,653
----------- ------------ ------------ ------------
PROPERTY AND EQUIPMENT:
Computer equipment..... 211,442 255,091 287,309 287,309
Lab and production
equipment............. 196,702 288,181 420,218 420,218
Clinical site equip-
ment.................. 169,531 611,813 674,935 674,935
Furniture and fix-
tures................. 59,910 65,333 91,677 91,677
Leasehold improve-
ments................. 119,048 175,203 606,945 606,945
----------- ------------ ------------ ------------
756,633 1,395,621 2,081,084 2,081,084
Less--Accumulated de-
preciation and amorti-
zation................ 283,772 572,188 768,387 768,387
----------- ------------ ------------ ------------
472,861 823,433 1,312,697 1,312,697
----------- ------------ ------------ ------------
Total assets.......... $ 2,949,251 $ 8,702,501 $ 6,037,350 $ 6,037,350
=========== ============ ============ ============
LIABILITIES AND
SHAREHOLDERS'
(DEFICIT) EQUITY
CURRENT LIABILITIES:
Accounts payable....... $ 151,747 $ 204,023 $ 128,657 $ 128,657
Accrued expenses....... 81,844 51,085 15,771 15,771
Accrued payroll and
benefits.............. 25,358 14,524 76,854 76,854
Current portion of con-
vertible subordinated
notes................. 181,000 -- 448,230 448,230
Current portion of ob-
ligation under capital
leases................ 9,208 -- -- --
----------- ------------ ------------ ------------
Total current liabili-
ties................. 449,157 269,632 669,512 669,512
----------- ------------ ------------ ------------
LONG-TERM DEBT:
Convertible subordi-
nated notes and other
advances, net of cur-
rent portion.......... 1,925,169 1,940,230 1,565,047 1,565,047
----------- ------------ ------------ ------------
SHAREHOLDERS' EQUITY
(NOTES 2, 3 AND 8):
Preferred stock, $0.01
par value--
Authorized--7,500,000
shares
Issued and outstand-
ing--1,782,005,
2,881,201, 2,892,312
and none at December
31, 1994, December 30,
1995, September 28,
1996 and pro forma,
respectively.......... 17,820 28,812 28,923 --
Common stock, $0.01 par
value--
Authorized--15,000,000
shares
Issued and outstand-
ing--1,105,950,
1,583,554, 1,592,354
and 4,520,104 at De-
cember 31, 1994, De-
cember 30, 1995, Sep-
tember 28, 1996 and
pro forma, respective-
ly.................... 11,059 15,837 15,923 45,201
Capital in excess of
par value--common
stock................. 1,184,394 2,343,018 2,357,180 19,559,288
Capital in excess of
par value--preferred
stock................. 7,763,966 17,102,574 17,202,463 --
Subscription receiv-
able.................. (94,874) (573,004) (57,931) (57,931)
Deficit accumulated
during development
stage................. (8,307,440) (12,424,598) (15,743,767) (15,743,767)
----------- ------------ ------------ ------------
Total shareholders'
equity............... 574,925 6,492,639 3,802,791 3,802,791
----------- ------------ ------------ ------------
Total liabilities and
shareholders' equi-
ty................... $ 2,949,251 $ 8,702,501 $ 6,037,350 $ 6,037,350
=========== ============ ============ ============
</TABLE>

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

F-3
<PAGE>

PHOTOELECTRON CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>

YEAR ENDED NINE MONTHS ENDED PERIOD FROM
--------------------------------------- ------------------------ INCEPTION
JANUARY 1, DECEMBER 31, DECEMBER 30, SEPT. 30, SEPT. 28, (JANUARY 4, 1989)
1994 1994 1995 1995 1996 TO JUNE 29, 1996
----------- ------------ ------------ ----------- ----------- -----------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Operating Expenses:
Research and
development expenses.. $ 1,726,909 $ 2,086,399 $ 3,225,530 $ 1,720,946 $ 2,263,316 $ 11,936,983
General and
administrative
expenses.............. 250,765 505,061 866,733 543,215 1,167,611 3,278,672
----------- ----------- ----------- ----------- ----------- ------------
Total operating ex-
penses................ 1,977,674 2,591,460 4,092,263 2,264,161 3,430,927 15,215,655
----------- ----------- ----------- ----------- ----------- ------------
Operating loss......... (1,977,674) (2,591,460) (4,092,263) (2,264,161) (3,430,927) (15,215,655)
----------- ----------- ----------- ----------- ----------- ------------
Interest income......... 3,228 63,473 85,750 22,633 202,095 399,691
Interest expense........ (293,014) (143,661) (110,645) (89,805) (90,337) (927,803)
----------- ----------- ----------- ----------- ----------- ------------
Interest (expense)
income, net........... (289,786) (80,188) (24,895) (67,172) 111,758 (528,112)
----------- ----------- ----------- ----------- ----------- ------------
Net loss............... $(2,267,460) $(2,671,648) $(4,117,158) $(2,331,333) $(3,319,169) $(15,743,767)
=========== =========== =========== =========== =========== ============
Net loss per common and
common equivalent
share................. $ (1.96) $ (1.96) $ (3.61) $ (2.05) $ (2.06)
=========== =========== =========== =========== ===========
Pro forma net loss per
share................. $ -- $ -- $ (1.02) $ -- $ (0.74)
=========== =========== =========== =========== ===========
Weighted average common
and common equivalent
shares outstanding..... 1,159,606 1,362,098 1,140,416 1,139,107 1,612,735
</TABLE>

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

F-4
<PAGE>

PHOTOELECTRON CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
PERIOD FROM
FISCAL YEAR ENDED NINE MONTHS ENDED INCEPTION
--------------------------------------- --------------------------- (JANUARY 4, 1989)
JANUARY 1, DECEMBER 31, DECEMBER 30, SEPTEMBER 30, SEPTEMBER 28, TO SEPTEMBER 28,
1994 1994 1995 1995 1996 1996
----------- ------------ ------------ ------------- ------------- -----------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERAT-
ING ACTIVITIES:
Net loss............... $(2,267,460) $(2,671,648) $(4,117,158) $(2,331,333) $(3,319,169) $(15,743,767)
Adjustments to recon-
cile net loss to net
cash used in operating
activities--
Depreciation and amor-
tization.............. 71,773 146,806 288,416 177,881 196,199 776,978
Noncash interest con-
verted to subordinated
notes................. 283,710 130,853 109,331 93,831 73,045 840,493
Noncash salary con-
verted to common
stock................. 50,000 50,000 50,000 -- -- 200,000
Noncash research and
development expense
converted to subordi-
nated notes........... -- 9,000 -- -- -- 9,000
Noncash salary stock
options extension..... -- -- 860,000 -- -- 860,000
Changes in current ac-
counts--
Inventories............ (171,372) (454,148) 129,930 66,906 142,300 (353,020)
Prepaid expenses....... 19,565 (38,804) (53,287) (363,311) (212,383) (334,319)
Other current assets... (17,542) 14,920 (66,234) (57,412) 38,484 (31,790)
Accounts payable....... 31,984 52,380 52,276 130,870 (75,366) 128,657
Accrued expenses....... 162,747 (77,590) (43,341) (2,868) 27,016 199,877
----------- ----------- ----------- ----------- ----------- ------------
Net cash used in oper-
ating activities...... (1,836,595) (2,838,231) (2,790,067) (2,285,436) (3,129,874) (13,447,891)
----------- ----------- ----------- ----------- ----------- ------------
CASH FLOWS FROM INVEST-
ING ACTIVITIES:
Purchases of equipment
and leasehold
improvements.......... (133,141) (389,600) (638,988) (392,874) (685,463) (2,056,238)
Proceeds from sale of
equipment and
leasehold
improvements.......... -- 9,845 -- -- -- 9,845
----------- ----------- ----------- ----------- ----------- ------------
Net cash used in in-
vesting activities.... (133,141) (379,755) (638,988) (392,874) (685,463) (2,046,393)
----------- ----------- ----------- ----------- ----------- ------------
CASH FLOWS FROM FINANC-
ING ACTIVITIES:
Proceeds from issuance
of common stock....... -- 268,127 -- -- 18,073 585,200
Proceeds from issuance
of preferred stock.... -- 3,935,771 8,849,600 4,809,851 611,250 13,396,620
Proceeds from issuance
of subordinated
convertible notes..... 1,725,000 737,000 -- -- -- 5,322,000
Proceeds from issuance
of warrants........... 115,000 -- -- -- -- 236,453
Payments under capital
lease obligations..... (11,528) (13,120) (7,458) (6,343) -- (40,735)
----------- ----------- ----------- ----------- ----------- ------------
Net cash provided by
(used in) financing
activities............ 1,828,472 4,927,778 8,842,142 4,803,508 629,323 19,499,538
----------- ----------- ----------- ----------- ----------- ------------
INCREASE (DECREASE) IN
CASH AND CASH
EQUIVALENTS............ (141,264) 1,709,792 5,413,087 2,125,198 (3,186,014) 4,005,254
CASH AND CASH
EQUIVALENTS, BEGINNING
OF PERIOD.............. 209,653 68,389 1,778,181 1,778,181 7,191,268 --
----------- ----------- ----------- ----------- ----------- ------------
CASH AND CASH
EQUIVALENTS, END OF
PERIOD................. $ 68,389 $ 1,778,181 $ 7,191,268 $ 3,903,379 $ 4,005,254 $ 4,005,254
=========== =========== =========== =========== =========== ============
CASH PAID FOR:
Interest............... $ -- $ -- $ -- $ -- $ -- $ --
=========== =========== =========== =========== =========== ============
CASH FLOWS FROM NONCASH
FINANCING ACTIVITIES:
Conversion of salary
expense to common
stock................. $ 50,000 $ 50,000 $ 50,000 $ -- $ -- $ 250,000
=========== =========== =========== =========== =========== ============
Conversion of
convertible
subordinated notes to
common stock.......... $ 3,846,015 $ -- $ 253,402 $ -- $ -- $ 4,027,015
=========== =========== =========== =========== =========== ============
Conversion of common
stock to preferred
stock................. $ -- $ 3,846,015 $ -- $ -- -- $ 3,846,015
=========== =========== =========== =========== =========== ============
Capital lease obliga-
tion incurred for
equipment............. $ 11,661 $ -- $ -- $ -- $ -- $ 40,783
=========== =========== =========== =========== =========== ============
Conversion of
convertible
subordinated notes to
warrants.............. $ -- $ 47,000 $ -- $ -- $ -- $ 47,000
=========== =========== =========== =========== =========== ============
</TABLE>

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

F-5
<PAGE>

PHOTOELECTRON CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY

<TABLE>
<CAPTION>
COMMON PREFERRED DEFICIT
STOCK STOCK ACCUMULATED
PREFERRED COMMON CAPITAL IN CAPITAL IN DURING
STOCK, $0.01 STOCK, $0.01 EXCESS OF EXCESS SUBSCRIPTION DEVELOPMENT
PAR VALUE PAR VALUE PAR VALUE OF PAR VALUE RECEIVABLE STAGE
------------ ------------ ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
INITIAL ISSUANCE OF
COMMON STOCK........... $ -- $ 7,475 $ 291,525 $ -- $ -- $ --
Net loss............... -- -- -- -- -- (414,045)
------- -------- ---------- ----------- -------- ------------
BALANCE, DECEMBER 28,
1989................... -- 7,475 291,525 -- -- (414,045)
Net loss............... -- -- -- -- -- (394,275)
------- -------- ---------- ----------- -------- ------------
BALANCE, DECEMBER 29,
1990................... -- 7,475 291,525 -- -- (808,320)
Net loss............... -- -- -- -- -- (973,773)
------- -------- ---------- ----------- -------- ------------
BALANCE, DECEMBER 28,
1991................... -- 7,475 291,525 -- -- (1,782,093)
Issuance of common
stock................. -- 2,042 147,958 -- -- --
Issuance of warrants... -- -- 121,453 -- -- --
Net loss............... -- -- -- -- -- (1,586,239)
------- -------- ---------- ----------- -------- ------------
BALANCE, JANUARY 2,
1993................... -- 9,517 560,936 -- -- (3,368,332)
Issuance of common
stock................. -- 166 49,833 -- -- --
Conversion of convert-
ible subordinated
notes and related ac-
crued interest into
common stock.......... -- 12,820 3,833,195 -- -- --
Issuance of warrants... -- -- 115,000 -- -- --
Net loss............... -- -- -- -- -- (2,267,460)
------- -------- ---------- ----------- -------- ------------
BALANCE, JANUARY 1,
1994................... -- 22,503 4,558,964 -- -- (5,635,792)
Issuance of common
stock................. -- 1,376 411,625 -- (94,874) --
Conversion of common
stock into preferred
stock, Series A....... 12,820 (12,820) (3,833,195) 3,833,195 -- --
Issuance of preferred
stock, Series B....... 5,000 -- -- 3,930,771 -- --
Issuance of warrants... -- -- 47,000 -- -- --
Net loss............... -- -- -- -- -- (2,671,648)
------- -------- ---------- ----------- -------- ------------
BALANCE, DECEMBER 31,
1994................... 17,820 11,059 1,184,394 7,763,966 (94,874) (8,307,440)
Issuance of common
stock................. -- 64 49,938 -- 21,870 --
Conversion of convert-
ible subordinated
notes and related ac-
crued interest into
common stock.......... -- 4,714 248,686 -- -- --
Issuance of preferred
stock, Series C....... 10,992 -- -- 9,338,608 (500,000) --
Extension of stock op-
tions................. -- -- 860,000 -- -- --
Net loss............... -- -- -- -- -- (4,117,158)
------- -------- ---------- ----------- -------- ------------
BALANCE, DECEMBER 30,
1995................... 28,812 15,837 2,343,018 17,102,574 (573,004) (12,424,598)
------- -------- ---------- ----------- -------- ------------
Issuance of Common
Stock................. -- 86 14,162 -- 15,073 --
Proceeds from issuance
of Series C preferred
stock................. 111 -- -- 99,889 500,000 --
Net loss............... -- -- -- -- -- (3,319,169)
------- -------- ---------- ----------- -------- ------------
BALANCE SEPTEMBER 28,
1996................... $28,923 $ 15,923 $2,357,180 $17,202,463 $(57,931) $(15,743,767)
======= ======== ========== =========== ======== ============
</TABLE>

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

F-6
<PAGE>

PHOTOELECTRON CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 30, 1995

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Operations and Relationship to Principal Shareholders

On January 4, 1989, Photoelectron Corporation (the "Company") was founded as
a joint financing by PYC Corporation ("PYC") and Thermo Electron Corporation
("Thermo Electron"). Since inception, the majority of the Company's time and
effort has been focused on the design, development and commercialization of
the Photon Radiosurgery System ("PRS"), a proprietary, therapeutic device for
the treatment of cancerous tumors through the application of radiation
directly into a tumor. The PRS delivers radiation through a thin, minimally
invasive, needle-like probe, which emits from its tip precisely regulated x-
ray photons.

The Company is in the development stage and has yet to generate any revenues
and has no assurance of future revenues. To management's knowledge, no company
has yet marketed a salable product using technology similar to the PRS that
has been developed by the Company. Even if marketing efforts are successful,
substantial time will pass before significant revenues will be realized, and
the Company may require additional funds during this period, which may not be
available to it.

The Company completed its 14-patient Investigative Device Exemption ("IDE")
Phase I trials as required by the U.S. Food and Drug Administration ("FDA")
and received approval for the next phase of FDA review. The Company began
conducting Phase II clinical trials at U.S. hospitals in December 1994 and
enrolling Phase II clinical trial patients during 1994 and 1995. Based on the
results of the Phase II trials to date, the Company intends to submit certain
data from these trials in support of a Section 510(k) application to the FDA.
The Company expects that this Section 510(k) application would seek clearance
from the FDA to commercialize the PRS for similar treatments of patients with
metastatic brain tumors. The Company expects to submit such a Section 510(k)
application before the end of 1996. If clearance is received from the FDA, the
Company would begin such commercialization of the PRS in the U.S. If such
clearance is not obtained, the Company would have to seek approval by
submission of a Premarket Approval ("PMA") application in order to market the
product. The PMA process is significantly more complex, expensive and time
consuming than the Section 510(k) application process. The PMA process
typically spans several years and may never result in approval. Upon clearance
by the FDA of the Company's Section 510(k) or PMA application, the Company
will begin to manufacture and market the device on a commercial basis in the
U.S. Simultaneously, the Company is pursuing a CE Mark for the device, which
will allow commercialization in Europe.

On December 13, 1995, the Company and Toshiba Medical Systems Company Ltd.
("Toshiba") entered into an agreement pursuant to which Toshiba will help to
develop and then support the clinical trials of the PRS in Japan. The
development and support of the clinical trials will include purchasing two
complete systems of the PRS for use in the clinical trials, installing and
maintaining the PRS systems and providing assistance to the physicians and
hospitals conducting the trials, including collection and analysis of clinical
data. The costs of Toshiba's support of the clinical trials will be borne by
Toshiba, and accordingly will not be reflected in the Company's financial
statements. Once regulatory approvals for the PRS are obtained, Toshiba will
serve as its exclusive distributor in Japan. Toshiba has also invested
approximately $2 million in the Company's Series C Preferred Stock offering.
Toshiba is not obligated to purchase additional shares of the Company's common
or preferred stock. (See Note 7).

Mr. Peter M. Nomikos was a co-founder of Thermo Electron in 1956. His family
maintains a beneficial ownership in Thermo Electron and its subsidiaries. As
of December 30, 1995, Mr. Peter M. Nomikos is the majority beneficial owner of
the Company. Thermo Electron and PYC are the only shareholders holding in
excess of 10% of the Company's outstanding stock. The remainder is being held
by company employees and outside investors.

F-7
<PAGE>

PHOTOELECTRON CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Fiscal Years

The Company has adopted a fiscal year ending on the Saturday nearest
December 31. References to 1995, 1994 and 1993 are for the fiscal years ended
December 30, 1995, December 31, 1994 and January 1, 1994, respectively.

Inventory

Inventories are stated at the lower of cost (first-in, first-out basis) or
market and include materials, labor and overhead. The Company has parts,
supplies and manufactured parts in inventory which are intended to be used and
capitalized as part of the Company's PRS that will be used in the Phase II
clinical trials.

Use of Estimates

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

Property and Equipment

The cost of additions and improvements are capitalized while maintenance and
repairs are charged to expense as incurred. The Company provides for
depreciation and amortization on the straight-line method over the estimated
useful lives of the property as follows:

<TABLE>
<CAPTION>
ASSET CLASSIFICATION ESTIMATED USEFUL LIFE
-------------------- ---------------------
<S> <C>
Machinery and equip-
ment................... 5 Years
Clinical site equip-
ment................... The shorter of three years or the life of agreement
Furniture and fixtures.. 3-5 Years
Leasehold improvements.. The shorter of the term of the lease or the life of the asset
</TABLE>

Management believes that the useful lives selected result in net book values
which approximate net realizable values based upon alternate future uses.
Periodically, management reviews specific assets to verify this assertion.

Cash and Cash Equivalents

Cash and cash equivalents include the Company's operating accounts and
holdings of a money market mutual fund.

Income Taxes

The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
109, Accounting for Income Taxes, as of the beginning of 1989. Under SFAS No.
109, deferred tax assets and liabilities are recognized for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. The amount of deferred tax asset or liability is
based on the difference between the financial statement and tax bases of
assets and liabilities using enacted tax rates in effect for the year in which
the differences are expected to be reflected in the tax return.

F-8
<PAGE>

PHOTOELECTRON CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Research and Development Expenses

Costs classified as research and development expenses in the accompanying
consolidated statements of operations are costs incurred in connection with
programs funded by the initial investment of Thermo Electron and PYC in
addition to amounts advanced under the convertible subordinated debenture
agreement and the private placements that occurred in 1994 and 1995. Research
and development expenses include the portion of indirect costs allocable to
research and development efforts based on actual labor hours incurred.

In connection with the Phase II FDA clinical trials, as well as the efforts
to obtain the CE Mark, PRS units have been provided to certain hospitals to
conduct the clinical trials. The cost of these units and the related
accumulated depreciation is included in property and equipment in the
accompanying consolidated balance sheets. The cost of the units is charged to
research and development expenses over the term of the agreements with the
hospitals.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary, Photoelectron (Europe) Ltd. All
material intercompany accounts and transactions have been eliminated.

Foreign Currency

All assets and liabilities of the Company's foreign subsidiary are
translated at year-end exchange rates, and revenues and expenses are
translated at average exchange rates for the year in accordance with SFAS No.
52, Foreign Currency Translation. Resulting translation adjustments are
reflected as a separate component of shareholders' deficit titled Cumulative
Translation Adjustment. Foreign currency transaction gains and losses included
in the accompanying consolidated statements of operations are not material for
the three years presented.

Loss Per Share

Pursuant to Securities and Exchange Commission requirements, loss per share
has been presented for all periods. Weighted average common and common
equivalent shares outstanding include the weighted average common shares
outstanding for the period and for all periods include the effect of the
assumed exercise of stock options as well as the assumed conversion of Series
C Preferred Stock issued within one year prior to the Company's proposed
initial public offering.

Fair Value of Financial Instruments

The fair value of the Company's cash and cash equivalents approximates the
recorded amounts. The fair value of the Company's convertible subordinated
notes is primarily determined by the ability to convert those notes into
common stock. The fair value of the convertible subordinated notes is
approximately $10,600,000 and approximately $7,800,000 at December 31, 1994
and 1995 based upon the estimated fair value of the underlying Common Stock.

Unaudited Interim Financial Period

The consolidated financial statements for the nine months ended September
28, 1996 and September 30, 1995 are unaudited. The statements have been
prepared by the Company on the same basis as the audited

F-9

<PAGE>

PHOTOELECTRON CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

statements and include all adjustments which are, in the opinion of
management, of a normal and recurring nature and necessary for the fair
presentation of the results of operations and cash flows pursuant to the rules
and regulations of the Securities and Exchange Commission. Results of interim
periods are not necessarily indicative of results for the entire year.

(2) INCOME TAXES

The components of the deferred tax asset at December 31, 1994 and December
30, 1995 are as follows:

<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Deferred tax asset--
Federal tax loss carryforwards........................ $ 2,484 $ 3,349
Federal tax credit carryforwards...................... 435 612
State tax loss carryforwards.......................... 660 944
State tax credit carryforwards........................ 410 573
Other, net............................................ 152 304
------- -------
4,141 5,782
Valuation allowance................................... (4,141) (5,782)
------- -------
Deferred tax asset.................................. $ -- $ --
======= =======
</TABLE>

As of December 30, 1995, the Company had federal net operating loss
carryforwards of approximately $9,800,000, state net operating loss
carryforwards of approximately $9,500,000, federal tax credit carryforwards of
approximately $612,000, and state tax credit carryforwards of approximately
$573,000. Due to the fact that the Company has sustained cumulative losses,
the potential future benefit of these attributes, which expire in the years
2004 through 2010, is fully reserved by means of a valuation allowance because
their realization is uncertain.

Certain stock transactions may result in a change of control under Sections
382 and 383 of the Internal Revenue Code of 1986, as amended; and as a result,
the net operating loss and tax credit carryforwards available to be utilized
in any given year may be limited, and certain amounts of the net operating
loss carryforwards may expire unutilized due to such limitations.

(3) EMPLOYEE BENEFIT PLAN

In April 1995, the Company terminated its Simplified Employee Pension Plan
("SEPP") and adopted a 401(k) Plan. No obligations arose from the termination
of he SEPP. The impact of the SEPP was not material to the operating results
prior to termination. The Company contributes 25% up to the first 6% of annual
earnings for each employee with at least three months of service. During 1995,
the Company contributed approximately $9,000.

(4) RELATED PARTY TRANSACTIONS

Thermo Electron Corporation

On January 4, 1989, the Company entered into a corporate service agreement
with Thermo Electron. Under this agreement, Thermo Electron provided certain
administrative services, including legal advice and services, certain employee
benefit administration, tax advice and preparation, space allocation and
utilities. This agreement terminated on December 31, 1989. The Company has
continued to utilize Thermo Electron's resources since that

F-10
<PAGE>

PHOTOELECTRON CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

date on an as-needed basis without a formal contract and is charged at actual
cost for such services. The Company paid $3,120, $7,715, and $4,322 in 1993,
1994 and 1995, respectively, for these services.

Thermo Power Corporation

The Company is provided with certain services by Thermo Power Corporation, a
60%-owned subsidiary of Thermo Electron. These services include data
processing services, administrative services and machine shop services, which
are charged to the Company at actual cost. The Company paid $36,734, $267,582
and $313,942 in 1993, 1994 and 1995, respectively, for these services. As of
December 31, 1994 and December 30, 1995, $42,460 and $19,113, respectively,
was payable to Thermo Power Corporation and was included in accounts payable
in the accompanying consolidated balance sheets.

Management believes that the fees charged by Thermo Electron and Thermo
Power Corporation are reasonable and such fees are representative of the
expenses the Company would have incurred on a stand-alone basis.

(5) COMMITMENTS AND CONTINGENCIES

Litigation

The Company is party to legal matters which arise in the normal course of
business. Management, after reviewing these matters with legal counsel, is of
the opinion that the resolution of these matters will not have a material
effect on the financial condition or results of operations.

Leases

The Company subleases office and research facilities under an agreement that
expires on April 1, 1997. The accompanying consolidated statements of
operations include expenses for this operating lease of $79,170, $81,028 and
$162,867 for 1993, 1994 and 1995, respectively. Future minimum payments due
under this lease are $174,183 in 1996 and $43,546 in 1997.

(6) CONVERTIBLE SUBORDINATED NOTES

On January 4, 1989, the Company issued and sold $181,000 of 8% subordinated
convertible debenture to Thermo Electron, due in 1995. The debentures are
convertible into shares of the Company's Common Stock at a conversion price of
$0.30. On December 30, 1995, Thermo Electron elected to convert its $181,000
subordinated convertible debenture and accrued interest into 471,354 shares of
Common Stock. On May 22, 1990, the Company issued and sold $125,000 and
$175,000 principal amounts of 8% subordinated convertible debentures to Thermo
Electron and Mr. Peter M. Nomikos, respectively, due in 1997. The debentures
are convertible into shares of the Company's Common Stock at a conversion
price of $0.80 Also in 1990, the Company issued and sold $52,000 principal
amount of 8% subordinated convertible debentures to Mr. Peter M. Nomikos, due
in 1997. The note is convertible into shares of the Company's Common Stock at
a conversion price of $3.00. In 1991, the Company issued and sold $448,000
principal amount of 8% subordinated convertible debentures to Mr. Peter M.
Nomikos. The debentures are convertible into shares of the Company's Common
Stock at a conversion price of $3.00. All of these debentures provide for the
conversion of accrued interest into Common Stock at the option of the holder.
The accrued interest is convertible into Common Stock at a conversion price
equal to the fair market value of the Company's common stock on the first day
of the fiscal quarter in which the interest to be converted accrued.

F-11
<PAGE>

PHOTOELECTRON CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

On May 13, 1992, the Company entered into a $4,500,000 8% convertible
subordinated demand note and warrant purchase agreement with Mr. Peter M.
Nomikos. These notes are convertible into Common Stock at a conversion price
of $3.00 at the option of the holder, which expires seven years from the dates
of issuance. The Company has borrowed $4,252,000 in the form of a demand loan
with detachable warrant purchase rights under this agreement. The warrant
purchase rights entitle the holder to purchase warrants for $0.20. Each
warrant is exercisable upon issuance and allows the holder to purchase one
share of Common Stock at $3.00. At December 31, 1995, warrants to purchase
1,417,334 shares of the Company's Common Stock were outstanding. These
warrants expire seven years from the issuance date. All warrants purchased by
Mr. Nomikos have been accounted for as Common Stock capital in excess of par
value. All earned but unpaid interest on the subordinated convertible
debentures and demand loans are convertible into Common Stock at a conversion
price equal to the fair market value of the Company's Common Stock on the
first day of the fiscal quarter in which the interest to be converted accrued.

In 1993, 1,282,005 shares of Common Stock were issued upon the conversion of
$3,547,000 principal amount of subordinated convertible debentures and
$299,015 of related accrued interest. In 1994, these shares of Common Stock
were converted into Series A Convertible Preferred Stock (See Note 7).

(7) COMMON AND PREFERRED STOCK

On January 4, 1989, the Company authorized 6,000,000 shares of $0.01 par
value Common Stock and issued 147,488 shares to Thermo Electron and 600,000
shares to PIC at $0.40 per share. The Company authorized an additional
9,000,000 shares of Common Stock in 1994 to accommodate possible stock
issuance as a result of stock splits, note conversions and options issued
under the stock option plan and potential future stock offerings. In 1992, Mr.
Peter M. Nomikos was granted stock in lieu of compensation for 1990, 1991 and
1992 in the cumulative amount of 204,167 common shares. In 1993, 1994 and
1995, Mr. Peter M. Nomikos was granted stock in lieu of compensation in the
amount of 16,667, 16,667 and 6,250 shares of Common Stock, respectively. All
such shares were recorded as compensation expense at the estimated fair value
per share on the date that such shares were granted to Mr. Nomikos. In fiscal
1993, 1,709,340 shares of Common Stock were issued upon the conversion of
$3,846,015 of subordinated convertible debentures and accrued interest (See
Note 6).

The Company has authorized 7,500,000 shares of $0.01 par value preferred. On
March 18, 1994, the Board of Directors approved the conversion of 1,282,005
shares of Common Stock held by Mr. Peter M. Nomikos into Series A Convertible
Preferred Stock on a one-for-one basis. These shares permit the holder to
convert his or her holdings into Common Stock on a one-for-one basis, subject
to certain anti-dilution provisions. The Series A Convertible Preferred Stock
has a liquidation preference of $3.00 per share (See Note 6).

The Company sold 500,000 shares of Series B Convertible Preferred Stock at
$8.00 per share in 1994. These shares permit the holder to convert his or her
holdings into Common Stock on a one-for-one basis, subject to certain anti-
dilution provisions. The Series B Convertible Preferred Stock has a
liquidation preference of $8.00 per share, which is senior to the Company's
Common Stock and junior to the Series A Convertible Preferred Stock. The
purchase of the Series B shares also entitled the purchaser to rights to
participate in the Company's next offering of preferred stock at a 10%
discount. The rights entitle the purchaser to this discount on an amount of
shares equal to the purchaser's pro rata participation in the Series B
offering.

The Company sold 680,005 shares of Series C Convertible Preferred Stock at
$9.00 per share in 1995. The Company also sold 419,191 additional shares of
Series C Convertible Preferred Stock in exchange for $8.10 per share. This
latter, discounted price was paid by those stockholders who acquired such
right in the Series B offering as described above. These shares permit the
holder to convert his or her holdings into Common Stock

F-12

<PAGE>

PHOTOELECTRON CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

on a one-for-one basis, subject to certain anti-dilution provisions. The
Series C Convertible Preferred Stock has a liquidation preference of $9.00 per
share, which is senior to the Company's Common Stock and junior to the Series
A and B Convertible Preferred Stock.

All of the Company's convertible preferred stock automatically converts to
Common Stock upon the closing of an initial public offering. In compliance
with certain Securities and Exchange Commission requirements a pro forma
balance sheet has been presented.

In 1994, the Company sold 121,000 shares of Common Stock to employees of the
Company for $3.00 per share pursuant to a one-time employee stock purchase
offering. A total of 85,500 of those shares were paid for at the time of the
offering. Consideration for the remaining 35,500 shares was in the form of
promissory notes executed by employees in favor of the Company. These notes
were in an initial aggregate amount of $106,500.

(8) STOCK OPTION PLAN

The Company has a nonqualified stock option plan for key employees,
directors and consultants, which was adopted in 1989. The stock option plan
requires that options may be granted at any price determined by the Board of
Directors. Options granted under the plan expire seven to twelve years after
the date of grant and in general vest at 20% per year. When an optionee ceases
to be an employee, director or consultant of the Company, their options
terminate either upon or shortly after termination of employment. In 1994, the
Board of Directors reserved 1,250,000 common shares for employee stock
options.

A summary of stock option activity is as follows:

<TABLE>
<CAPTION>
NUMBER OF EXERCISE
SHARES PRICE PER SHARE
--------- ---------------
<S> <C> <C>
Outstanding, January 2, 1993....................... 352,750 $0.40-$3.00
Granted.......................................... 122,000 $3.00
------- -----------
Outstanding, January 1, 1994....................... 474,750 $0.40-$3.00
Granted.......................................... 121,750 $3.00-$8.00
------- -----------
Outstanding, December 31, 1994..................... 596,500 $0.40-$8.00
Granted.......................................... 21,000 $8.00-$9.00
------- -----------
Outstanding, December 30, 1995..................... 617,500 $0.40-$9.00
Exercisable, December 30, 1995..................... 399,250 $0.40-$8.00
======= ===========
</TABLE>

The Company accounts for stock options under Accounting Principles Board
Opinion No. 25 (APB No. 25). All stock options granted to date have been at an
exercise price equal to or greater than the fair value of the Company's Common
Stock on the date of grant. In 1995, the Company extended the term of options
to purchase 100,000 shares of Common Stock at $0.40 per share from seven to
twelve years. This extension resulted in a new measurement date under APB No.
25, and accordingly, based upon a current fair value of $9.00 per share the
Company recorded $860,000 of compensation expense. Upon exercise of options,
net proceeds, including the tax benefit realized, are credited to equity.

In December 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock
Based Compensation", which is to become effective for fiscal years beginning
after December 15, 1995. SFAS 123 requires that stock-based compensation be
recorded or disclosed at its fair value. The Company expects to continue to
account for stock-based compensation under APB 25 and accordingly will
disclose the pro forma effects on earnings per share as if SFAS 123 had been
adopted.

F-13
<PAGE>

PHOTOELECTRON CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(9) SUBSEQUENT EVENT

In 1996, the Company entered into a new operating lease for its office and
research facilities expiring in 2002. The minimum lease payments under the new
agreement are $148,420 in 1996, $222,630 in 1997, $222,630 in 1998, $222,630
in 1999, $222,630 in 2000 and $352,500 thereafter.

On December 3, 1996, the stockholders of the Company approved a one-for-two
reverse stock split of the Company's Common Stock and Preferred Stock. All
share and per share information have been retroactively restated to reflect
this reverse stock split.

Also during the period from December 30, 1995 to September 28, 1996, options
to purchase 207,475 shares of Common Stock were granted at exercise prices
ranging from $8.50 to $9.00.

On July 17, 1996, the Board of Directors of the Company adopted the 1996
Equity Incentive Plan (the "1996 Plan") for employees, officers, directors and
consultants of the Company and its subsidiaries, and recommended approval of
the plan by the stockholders. The 1996 Plan provides for grants of incentive
stock options to employees (including officers) of the Company, and for grants
of non-qualified stock options to such employees as well as to directors and
consultants of the Company and its subsidiaries. In addition, persons eligible
to receive non-qualified stock options can be awarded shares of Common Stock
and given the opportunity to purchase shares of Common Stock. A total of
266,775 shares of Common Stock may be issued under the 1996 Plan. Of the
207,475 options to purchase shares of Common Stock granted in 1996, options to
purchase 91,750 shares of Common Stock have been granted under the 1996 plan.

In the fourth quarter of 1996, the Company extended the terms of certain
options issued to four employees of the Company. These options, by their
terms, would expire but for such extension during the 180-day "lock-up period"
following the date of the Company's Prospectus. These options were extended to
a date which is two months after the expiration of the lock-up agreements.
These options are exercisable into an aggregate of 23,500 shares of Common
Stock, and none of said employees is an officer or director of the Company. As
a result of the extension the Company recorded compensation expense of
$272,600.

On December 11, 1996 the Company submitted a Section 510(k) application to
the FDA with respect to the current version of the PRS for the treatment of
metastatic brain tumors.

F-14
<PAGE>

DESCRIPTION OF BACK COVER PAGE GRAPHICS:

The back cover page graphics consist of one photograph and two drawings,
each with a descriptive caption. The single photograph is located in the upper
left-hand corner of the page and measures approximately 2 3/4 inches (length)
by 3 3/4 inches (width) (based on a 8 1/2 inch by 11 inch page). Above the
photograph is the following caption: "The Photon Radiosurgery System (PRS)-A
Therapeutic X-Ray System for Treating. . ." The photograph shows two surgeons,
one of whom is holding the PRS. The patient to which the surgeons are adjacent
is shielded and not visible within the photograph. To the right of the
photograph is the italicized caption: "Neurosurgeons preparing to treat a
brain tumor."

The first of the two drawings is centered approximately halfway down the
length of the page along the right hand side of the page. The drawing, which
is approximately 5 inches (length) by 1 inch (width) shows the PRS with its
probe directed upwards and parallel to the margin of the page. Approximately
80% of the length of the probe is shown to lie through a tube labeled
"Urethra," with the tip of the probe within a cross sectional view of the
bladder. The various layers of the bladder representation are labeled "Bladder
Wall Cancer," "Muscle," and "Mucosa," and the cavity-conforming device shown
within the bladder is labeled as such. An italicized caption directly below
the drawing reads: "Treatment of bladder wall cancer." Directly to the left of
the drawing is the italicized "bullet" caption "Bladder Tumors."

The second of the two drawings is located within the lower left-hand corner
of the page and measures approximately 3 1/2 inches (width) by 5 inches
(length). The drawing shows the upper torso of a woman lying horizontally on a
table, with the PRS probe, attached to a fixturing device located beneath the
table, directed towards her breast. The drawing also shows the arms of an
operator adjusting the fixturing device. To the right of the drawing, near the
lower right hand corner of the picture, is the following italicized caption:
"Treatment of a breast tumor following biopsy." Directly above the drawing is
the italicized "bullet" caption "Breast Tumors."

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

<PAGE>

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

NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION 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. 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 DATE SUBSEQUENT TO THE DATE HEREOF.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Use of Proceeds.......................................................... 15
Dividend Policy.......................................................... 15
Capitalization........................................................... 16
Dilution................................................................. 17
Selected Consolidated Financial Data..................................... 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 19
Business................................................................. 23
Management............................................................... 39
Certain Transactions..................................................... 44
Securities Ownership of Management and Certain Beneficial Owners......... 45
Description of Capital Stock............................................. 46
Shares Eligible for Future Sale.......................................... 49
Underwriting............................................................. 51
Legal Matters............................................................ 52
Experts.................................................................. 52
Additional Information................................................... 53
Index to Consolidated Financial Statements............................... F-1
</TABLE>

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

UNTIL FEBRUARY 23, 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPEC-
TUS. THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.

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

2,000,000 Shares

LOGO

Common Stock

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

PROSPECTUS

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

Needham & Company, Inc.

Dain Bosworth
Incorporated

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

January 29, 1997

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