SPECTRX INC, S-1/A, 1997-04-24

SPECTRX INC
S-1/A, 1997-04-24
ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 24, 1997

REGISTRATION NO. 333-22429

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

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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SPECTRX, INC.
(Exact name of Registrant as specified in its charter)

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<TABLE>
<S> <C> <C>
DELAWARE 3845 58-2029543
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Identification
of Classification Code Number) Number)
incorporation or organization)
</TABLE>

6025A UNITY DRIVE
NORCROSS, GEORGIA 30071
(770) 242-8723
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)

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MARK A. SAMUELS
CHIEF EXECUTIVE OFFICER
SPECTRX, INC.
6025A UNITY DRIVE
NORCROSS, GEORGIA 30071
(770) 242-8723
(Name, address, including zip code, and telephone number,
including area code, of agent of service)

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COPIES TO:

<TABLE>
<S> <C>
ROBERT D. BROWNELL, ESQ. THOMAS W. CHRISTOPHER, ESQ.
KELLY AMES MOREHEAD, ESQ. WILLIAM L. HORTON, JR., ESQ.
WILSON SONSINI GOODRICH & ROSATI WHITE & CASE
PROFESSIONAL CORPORATION 1155 AVENUE OF THE AMERICAS
650 PAGE MILL ROAD NEW YORK, NY 10036-2787
PALO ALTO, CA 94304 (212) 819-8200
(415) 493-9300
</TABLE>

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. []

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act of 1933 registration statement number of the earlier
effective registration statement for the same offering. []

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act of
1933 registration statement number of the earlier effective registration
statement for the same offering. []

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. []

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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.

================================================================================
<PAGE> 2

Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to the registration or qualification under the securities
law of any such State.

SUBJECT TO COMPLETION DATED APRIL 24, 1997

PROSPECTUS

2,000,000 SHARES

SPECTRX (LOGO)

COMMON STOCK

All of the 2,000,000 shares of Common Stock offered hereby are being sold
by SpectRx, Inc. ("SpectRx" or the "Company"). Prior to this offering, there has
been no public market for the Common Stock of the Company. It is currently
estimated that the initial public offering price will be between $10.00 and
$12.00 per share. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price. The Company has
applied to have the Common Stock approved for quotation on the Nasdaq National
Market under the symbol SPRX.

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THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.

SEE "RISK FACTORS" COMMENCING ON PAGE 6.

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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.

<TABLE>
<CAPTION>
=================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share......................... $ $ $
- -------------------------------------------------------------------------------------------------
Total(3).......................... $ $ $
=================================================================================================
</TABLE>

(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.

(2) Before deducting expenses payable by the Company estimated at $650,000.

(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 all such shares are purchased, the total Price
to Public, Underwriting Discount and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."

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

The shares of Common Stock are offered by the several Underwriters subject
to prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about , 1997, at the office of the agent of
Hambrecht & Quist LLC in New York, New York.

HAMBRECHT & QUIST VOLPE BROWN WHELAN & COMPANY

, 1997.
<PAGE> 3

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. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."

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SpectRx(TM), is a trademark of the Company. This Prospectus also includes
trade names, trademarks and registered trademarks of companies other than
SpectRx.

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<PAGE> 4

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Prospectus. The Common Stock offered hereby,
involves a high degree of risk. See "Risk Factors."

THE COMPANY

SpectRx, Inc. ("SpectRx" or the "Company") is engaged in the research and
development of products that offer less invasive and painless alternatives to
blood tests currently used for glucose monitoring, diabetes screening and infant
jaundice. The Company's goal is to introduce products that reduce or eliminate
pain, are convenient to use and provide rapid results at the point of care,
thereby improving patient well being and reducing health care costs. The
Company's glucose monitoring, diabetes screening and infant jaundice products
are based on proprietary electro-optical and microporation technology that can
eliminate the pain and inconvenience of a blood sample. The Company has entered
into collaborative arrangements with Abbott Laboratories ("Abbott"), Boehringer
Mannheim Corporation ("Boehringer Mannheim") and Healthdyne Technologies, Inc.
("Healthdyne") to facilitate the development, commercialization and introduction
of its glucose monitoring, diabetes screening and infant jaundice products,
respectively.

Diabetes is a major health care problem which according to the World Health
Organization is estimated to affect 100 million people worldwide by the year
2000. If undiagnosed and untreated, diabetes leads to severe medical
complications over time, including blindness, loss of kidney function, nerve
degeneration and cardiovascular disease. Diabetes is the sixth leading cause of
death by disease in the United States and is estimated to cost the American
economy over $90 billion annually, including indirect costs such as lost
productivity. Diabetes occurs when the body does not produce sufficient levels
of, or effectively utilize, insulin, a hormone that regulates the metabolism
(breakdown) of glucose. Glucose levels in the blood must be within a specific
concentration range to ensure proper cellular function and health. Studies
indicate that maintaining proper glucose control through adjustments to oral
medication, diet, exercise, and insulin injections can significantly reduce the
risk of complications from diabetes. Personal glucose monitoring products play a
critical role in managing diabetes by helping diabetics make the proper
adjustments to control their blood glucose levels.

The Company is developing a hand held glucose monitoring product that
combines its proprietary microporation technology with a disposable assay
cartridge. This product is intended to offer an alternative to current glucose
monitoring products, which require a blood sample usually obtained by lancing
the fingertip. The Company believes that the worldwide market for glucose
monitoring products at manufacturers' price levels is approximately $2.0 billion
annually and growing at approximately 17% a year. The North American market was
approximately $1.0 billion in 1996. The Company's prototype glucose monitoring
product uses a laser to create a micropore approximately the diameter of a human
hair. The laser creates a micropore with a depth approximately the thickness of
a sheet of paper. This micropore provides painless access to interstitial fluid,
an extracellular fluid that is prevalent throughout the body and just beneath
the skin, which contains glucose and many other analytes found in blood. Because
interstitial fluid is found throughout the body, the micropore can be created on
various parts of the body. Once access to interstitial fluid is achieved, the
device is intended to force the interstitial fluid out of the micropore and into
the disposable assay cartridge. The fluid is then analyzed using chemistry
similar to that in currently available blood glucose monitors. In a pilot study
involving 10 subjects and yielding 438 measurements, the Company found a
correlation coefficient of 0.96 between blood glucose levels measured using
conventional finger stick technology and interstitial fluid glucose levels
measured using the Company's early stage prototype. A correlation coefficient is
a quantitative representation of the relationship between two measurements with
a correlation coefficient of 1.0 indicating identical information in the
measurements. In October 1996, the Company entered into a collaborative
arrangement with Abbott under which Abbott is primarily responsible for
undertaking or funding the development, regulatory clearance, manufacture and
sale of the Company's glucose monitoring product. Under its agreement with
Abbott, the Company receives development funding, payments on achievement of
technical milestones and a royalty on Abbott's sales of the product. In
addition, Abbott has made a $3 million equity investment in the Company. If
development milestones are achieved, the Company expects Abbott to file a 510(k)
premarket notification with the United States Food and Drug Administration (the
"FDA") for its glucose monitoring product in 1999, but there can be no assurance
that this filing will occur within this time frame, or at all.

The Company has also developed a compact diabetes screening product based
on measurements of fluorescence in the lens of the eye. This product is intended
to provide an alternative to the fasting plasma glucose test, the screening
technique recommended by the American Diabetes Association (the "ADA"), which
requires a blood draw following an eight hour fasting period. The Company
believes that the market for diabetes screening tests in the United States is
approximately $300 million. While the individual looks into the Company's device
it automatically tracks the eye and

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<PAGE> 5

measures lens fluorescence, which is evaluated by the Company's proprietary
algorithm. An abnormally high level of lens fluorescence can be indicative of
prolonged exposure to high levels of glucose due to diabetes. The entire
procedure takes approximately one minute and does not require a fasting period.
In a pilot study of more than 1,300 subjects conducted by Boehringer Mannheim,
an early stage prototype of the Company's diabetes screening product
demonstrated an ability to detect diabetes comparable to the fasting plasma
glucose test. In December 1994, the Company entered into a collaborative
arrangement with Boehringer Mannheim under which Boehringer Mannheim is
primarily responsible for the clinical trials, regulatory clearance and sale of
the Company's diabetes screening product. Under the Company's agreement with
Boehringer Mannheim, the Company receives development funding and would receive
a manufacturing profit on products sold to Boehringer Mannheim. If development
milestones are achieved, the Company expects Boehringer Mannheim to file a
510(k) premarket notification with the FDA for the Company's diabetes screening
product in 1998, but there can be no assurance that this filing will occur
within this time frame, or at all.

In addition to its two products for diabetes, the Company is developing an
infant jaundice screening and monitoring product. Infant jaundice is
characterized by a yellowing of the skin and eyes caused by an excess of
bilirubin in the body. If left untreated infant jaundice may, in extreme cases,
lead to brain damage or death. Of the approximately four million newborns in the
United States each year, approximately 50% have recognizable jaundice and
approximately 1.7 million receive at least one blood test for bilirubin.
Approximately 700,000 newborns are found to have elevated bilirubin levels, and
a portion of these newborns will receive additional tests. The cost to the
patient for a bilirubin test ranges from $29.50 to $37.75. The Company's infant
jaundice product is intended to offer an alternative to conventional blood tests
for infant jaundice, which involve a traumatic heel stick to obtain a blood
sample from the infant. This product is intended to be a hand held instrument,
which incorporates a microspectrometer to collect spectroscopic information from
the skin and a proprietary, disposable calibration element. After calibration,
the instrument is applied to the skin of the infant for five to ten seconds,
during which time the bilirubin level is measured using a proprietary algorithm
that adjusts for testing difficulties due to skin color, gestational age and
other factors. Using an early stage prototype, the Company tested over 100
infants in a pilot study and found a correlation coefficient of 0.92 between
total serum bilirubin measured using a conventional blood test and that measured
using the Company's prototype. In June 1996, the Company entered into a
collaborative arrangement with Healthdyne under which Healthdyne is responsible
for regulatory approval and sales of the Company's infant jaundice product in
the United States and Canada. The Company retains manufacturing rights and is
responsible for regulatory approval and sales of the infant jaundice product
outside of the United States and Canada. Under its agreement with Healthdyne,
the Company receives license fees and would receive a manufacturing profit on
hand held instruments sold to Healthdyne and a share of any profits from the
sales of disposables by Healthdyne. The Company expects Healthdyne to commence
clinical testing and file a 510(k) premarket notification with the FDA for the
Company's infant jaundice product in 1997, but there can be no assurance that
this filing will occur within this time frame, or at all.

The Company's offices are located at 6025A Unity Drive, Norcross, Georgia
30071, and its telephone number is (770) 242-8723. The Company was incorporated
in Delaware in 1992.

RISK FACTORS

SpectRx is a development stage company with a limited operating history and
a history of operating losses. To date the Company has only tested prototypes of
its products. Because the Company's research and clinical development programs
are at an early stage, substantial additional research and development and
clinical trials will be necessary before commercial prototypes of the Company's
glucose monitoring and infant jaundice products are produced. The Company's
success is dependent upon maintaining its collaborative arrangements for the
development and commercialization of its products. These collaborative
arrangements grant a substantial amount of discretion to the collaborative
partners including the right to terminate the arrangements upon the expiration
of certain notice periods. No 510(k) premarket notification has been filed with
the FDA for any of the Company's products. There can be no assurance that the
FDA will act favorably or quickly on 510(k) submissions for the Company's
products and significant difficulties and costs may be encountered by the
Company in its efforts to obtain FDA clearance that could delay or preclude the
sale of the Company's products in the United States. In addition, there can be
no assurance that the FDA will not request additional data or require a more
extensive regulatory submission known as a premarket approval application
("PMA"), which would cause the Company to incur substantial additional costs and
delays. Even if necessary regulatory approvals are obtained, there can be no
assurance that the Company's products will gain market acceptance. Other risk
factors include the Company's dependence on licensed patent applications and
proprietary technology, the Company's need to comply with government
regulations, intense competition, the Company's dependence on sole sources of
supply and the Company's lack of manufacturing, marketing and sales experience.
For the foregoing reasons, an investment in the shares of Common Stock offered
hereby involves a high degree of risk. See "Risk Factors."

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THE OFFERING

Common Stock offered by the Company... 2,000,000 shares

Common Stock to be outstanding after
the offering.......................... 7,567,590 shares(1)

Use of Proceeds....................... For continued development, testing and
clinical trials for the Company's
products; continued research and
development; sales, marketing and
manufacturing activities; capital
expenditures; and working capital and
other general corporate purposes.

Proposed Nasdaq National Market
symbol................................ SPRX

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

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1994 1995 1996
------- ------ -------
<S> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA
Revenues................................................................. $ 122 $1,179 $ 452
Operating loss........................................................... (1,223) (793) (3,110)
Net Loss................................................................. (1,347) (680) (3,178)
Pro forma net loss per share............................................. $ (1.03)
=======
Shares used in per share calculation(2).................................. 3,094
=======
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------
ACTUAL AS ADJUSTED(3)
------- --------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA
Cash and Cash Equivalents..................................................... $ 4,721 $ 25,223
Working capital............................................................... 3,870 24,372
Total assets.................................................................. 5,946 26,448
Total liabilities............................................................. 1,192 1,192
Accumulated deficit........................................................... (6,422) (6,422)
Total stockholders' equity.................................................... 4,754 25,256
</TABLE>

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(1) Based on the number of shares outstanding as of March 31, 1997. Includes
553,126 shares of Common Stock issuable upon exercise of Warrants concurrent
with the closing of this offering; excludes 663,362 shares of Common Stock
issuable upon exercise of options outstanding on such date, which had a
weighted average exercise price of $0.64 per share; excludes 8,572 shares of
Common Stock issuable upon exercise of an outstanding warrant with an
exercise price of $1.40 per share; and excludes 47,398 shares of Common
Stock issuable pursuant to a Convertible Promissory Note at any time until
June 19, 1998 at an assumed initial public offering price of $11.00 per
share. See "Management -- Stock Plans" and "Description of Capital
Stock -- Notes, Warrants and Options."

(2) See Note 2 of Notes to Consolidated Financial Statements for an explanation
of the determination of shares used in computing net earnings per share.
(3) As adjusted (i) to reflect the sale of 2,000,000 shares of Common Stock
offered hereby at an assumed public offering price of $11.00 per share and
the receipt of the estimated proceeds therefrom, and (ii) the exercise of
warrants (which expire if they are not exercised prior to the closing of
this offering) for 553,126 shares of Common Stock and receipt of the
exercise price therefrom. See "Use of Proceeds" and "Capitalization."

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

Except as otherwise noted, all information in this Prospectus assumes (i) a
1 for 1.4 reverse stock split of the Company's Common Stock effective on
February 19, 1997, (ii) the filing and effectiveness upon the closing of this
offering of the Company's Amended and Restated Certificate of Incorporation
authorizing a class of undesignated Preferred Stock, (iii) the automatic
conversion of all outstanding shares of Preferred Stock into 3,482,762 Shares of
Common Stock upon the closing of this offering, (iv) the exercise of warrants
(which expire if they are not exercised prior to the closing of this offering)
for 553,126 shares of Common Stock with a weighted average exercise price of
$1.25 per share, and (v) no exercise of the Underwriters' over-allotment option.
See "Description of Capital Stock," "Underwriting" and Notes to Consolidated
Financial Statements.

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RISK FACTORS

This Prospectus contains forward-looking statements that involve risks and
uncertainties. Actual results could differ materially from those discussed in
the forward-looking statements as a result of certain factors, including those
set forth below and elsewhere in this Prospectus. The following risk factors
should be considered carefully in addition to the other information in this
prospectus before purchasing the shares of Common Stock offered hereby.

Early Stage of Development; No Assurance of Successful Product Development

To date, the Company has only tested prototypes of its products. Because
the Company's research and clinical development programs are at an early stage,
substantial additional research and development and clinical trials will be
necessary before commercial prototypes of the Company's glucose monitoring and
infant jaundice products are produced. The Company could encounter unforeseen
problems in the development of its products such as delays in conducting
clinical trials, delays in the supply of key components or delays in overcoming
technical hurdles. There can be no assurance that the Company will be able to
successfully address the problems that may arise during the development and
commercialization process. In addition, there can be no assurance that any of
the Company's products will be successfully developed, proven safe and
efficacious in clinical trials, meet applicable regulatory standards, be capable
of being produced in commercial quantities at acceptable costs, be eligible for
third-party reimbursement from governmental or private insurers, be successfully
marketed or achieve market acceptance. If any of the Company's development
programs are not successfully completed, required regulatory approvals or
clearances are not obtained, or products for which approvals or clearances are
obtained are not commercially successful, the Company's business, financial
condition and results of operations would be materially adversely affected.

The Company's business is subject to the risks inherent in the development
of new products using new technologies and approaches. There can be no assurance
that unforeseen problems will not develop with these technologies or
applications, that the Company will be able to successfully address
technological challenges it encounters in its research and development programs
or that commercially feasible products will ultimately be developed by the
Company. See "Business -- Research, Development and Engineering."

Dependence on Collaborative Arrangements

The Company's business strategy for the development, clinical testing,
regulatory approval, manufacturing and commercialization of its products depends
upon the Company's ability to selectively enter into and maintain collaborative
arrangements with leading medical device companies. The Company has entered into
collaborative arrangements with (i) Abbott under which Abbott is primarily
responsible for undertaking or funding the development, clinical testing,
regulatory approval process, manufacture and sale of the Company's glucose
monitoring product, (ii) Boehringer Mannheim under which Boehringer Mannheim is
primarily responsible for undertaking or funding the development, clinical
testing, regulatory approval process and sale of the Company's diabetes
screening product, and (iii) Healthdyne under which Healthdyne is primarily
responsible for undertaking or funding the development, clinical testing,
regulatory approval process and sale of the Company's infant jaundice product in
the United States and Canada. The agreements evidencing these collaborative
arrangements grant a substantial amount of discretion to each of Abbott,
Boehringer Mannheim and Healthdyne. For example, each of these collaborative
partners may terminate their respective collaborative arrangements with the
Company effective upon the expiration of certain notice periods. In addition,
the obligation of each of the Company's collaborative partners to fund or
undertake the development, clinical testing, regulatory approval process,
marketing, distribution and/or sale of the products covered by their respective
collaborative arrangements with the Company is, to a large extent, dependent
upon the satisfaction of certain goals or "milestones" by certain specified
dates, some of which are outside the Company's control. To the extent that the
obligations of the Company's collaborative partners to fund or undertake all or
certain of the foregoing activities are not contingent upon the satisfaction of
certain goals or milestones, the collaborative partners nevertheless retain a
significant degree of discretion regarding the timing of these activities and
the amount and quality of financial, personnel and other resources that they
devote to these activities. Furthermore, there can be no assurance that disputes
will not arise between the Company and one or more of

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its collaborative partners regarding their respective rights and obligations
under the collaborative arrangements. Finally, there can be no assurance that
one or more of the Company's collaborative partners will not be unable, due to
financial, regulatory or other reasons, to satisfy its obligations under its
collaborative arrangement with the Company or will not intentionally or
unintentionally breach its obligations under the arrangement.

There can be no assurance that one or more of the Company's collaborative
partners will not, for competitive reasons, support, directly or indirectly, a
company or product that competes with the Company's product that is the subject
of its collaborative arrangement with the Company. Furthermore, any dispute
between the Company and one of its collaborative partners might require the
Company to initiate or defend expensive litigation or arbitration proceedings.

Any termination of any collaborative arrangement by one of the Company's
collaborative partners, any inability of a collaborative partner to fund or
otherwise satisfy its obligations under its collaborative arrangements with the
Company and any significant dispute with, or breach of a contractual commitment
by, a collaborative partner, would likely require the Company to seek and reach
agreement with another collaborative partner or to assume, to the extent
possible and at its own expense, all the responsibilities being undertaken by
this collaborative partner. There can be no assurance that the Company would be
able to reach agreement with a replacement collaborative partner. If the Company
were not able to find a replacement collaborative partner, there can be no
assurance that the Company would be able to perform or fund the activities for
which such collaborative partner is currently responsible. Even if the Company
were able to perform and fund these activities, the Company's capital
requirements would increase substantially. In addition, the further development
and the clinical testing, regulatory approval process, marketing, distribution
and sale of the product covered by such collaborative arrangement would be
significantly delayed.

In January 1997, Healthdyne became the subject of a hostile takeover
attempt by Invacare Corporation. To date, approximately 20% of Healthdyne's
outstanding shares of common stock have been tendered to Invacare, and the offer
has been extended to April 28, 1997 and may be extended further. There can be no
assurance that a change in control of Healthdyne would not adversely affect the
Company's collaborative arrangement with Healthdyne.

Any of the foregoing circumstances could have a material adverse effect
upon the Company's business, financial condition and results of operations. See
"Business -- Collaborative Arrangements" and "-- Research, Development and
Engineering."

Limited Operating History; History of Losses and Expectations of Future Losses

The Company has a limited operating history upon which its prospects can be
evaluated. Such prospects must be considered in light of the substantial risks,
expenses and difficulties encountered by entrants into the medical device
industry, which is characterized by an increasing number of participants,
intense competition and a high failure rate. The Company has experienced
operating losses since its inception, and, as of December 31, 1996, the Company
had an accumulated deficit of approximately $6.4 million. To date, the Company
has engaged primarily in research and development efforts, and a number of the
Company's key management and technical personnel have only recently joined the
Company. The Company has never generated revenues from product sales and does
not have experience in manufacturing, marketing or selling its products. There
can be no assurance that the Company's development efforts will result in
commercially viable products, that the Company will be successful in introducing
its products, or that required regulatory clearances or approvals will be
obtained in a timely manner, or at all. There can be no assurance that the
Company's products will ever gain market acceptance or that the Company will
ever generate revenues or achieve profitability. The development and
commercialization of its products will require substantial development,
regulatory, sales and marketing, manufacturing and other expenditures. The
Company expects its operating losses to continue through 1999 as it continues to
expend substantial resources to complete development of its products, obtain
regulatory clearances or approvals, build its marketing, sales, manufacturing
and finance organizations and conduct further research and development. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business -- Manufacturing and Sources of

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Supply," "-- Sales, Marketing and Distribution," "-- Research, Development and
Engineering" and "-- Government Regulation."

Government Regulations; No Assurance of Regulatory Approvals

The design, manufacturing, labeling, distribution and marketing of the
Company's products will be subject to extensive and rigorous government
regulation in the United States and certain other countries where the process of
obtaining and maintaining required regulatory clearance or approvals is lengthy,
expensive and uncertain. In order for the Company to market its products in the
United States, the Company must obtain clearance or approval from the United
States Food and Drug Administration ("FDA"). The Company intends to seek
clearance to market each of its products through a 510(k) premarket notification
supported by clinical data. Although no 510(k) premarket notification has been
filed with the FDA for clearance to market any of the Company's products, the
Company expects 510(k) premarket notifications for clearance to market its
infant jaundice product, its diabetes screening product and its glucose
monitoring product to be filed in 1997, 1998 and 1999, respectively. There can
be no assurance that any such notifications will be filed in accordance with
this schedule, that the FDA will act favorably or quickly on such 510(k)
submissions, or that significant difficulties and costs will not be encountered
during efforts to obtain FDA clearance or approval. Specifically, the FDA may
request additional data or require additional clinical studies be conducted to
obtain 510(k) clearance for one or more of the Company's products. In addition,
there can be no assurance that the FDA will not require the submission of a
premarket approval ("PMA") application to obtain FDA approval to market one or
more of the Company's products. The PMA process is more rigorous and lengthier
than the 510(k) clearance process and can take several years from initial filing
and require the submission of extensive supporting data and clinical
information. In addition, there can be no assurance that the FDA will not impose
strict labeling or other requirements as a condition of its 510(k) clearance or
PMA approval, any of which could limit the Company's ability to market its
products. Further, if the Company wishes to modify a product after FDA clearance
of a 510(k) premarket notification or approval of a PMA, including changes in
indications or other modifications that could affect safety and efficacy,
additional clearances or approvals will be required from the FDA. Any request by
the FDA for additional data or any requirement by the FDA that the Company
conduct additional clinical studies or submit to the more rigorous and lengthier
PMA process could result in a significant delay in bringing the Company's
products to market and substantial additional research and other expenditures by
the Company. Similarly, any labeling or other conditions or restrictions imposed
by the FDA on the marketing of the Company's products could hinder the Company's
ability to effectively market its products. Any of the foregoing actions by the
FDA could delay or prevent altogether the Company's ability to market and
distribute its products and could have a material adverse effect on the
Company's business, financial condition and results of operations.

In order for the Company to market its products under development in Europe
and certain other foreign jurisdictions, the Company and its distributors and
agents must obtain required regulatory registrations or approvals and otherwise
comply with extensive regulations regarding safety, efficacy and quality in
those jurisdictions. Specifically, certain foreign regulatory bodies have
adopted various regulations governing product standards, packaging requirements,
labeling requirements, import restrictions, tariff regulations, duties and tax
requirements. These regulations vary from country to country. In order to
commence sales in Europe, the Company will be required to obtain ISO 9001
certifications and after mid-1998, the Company will be prohibited from selling
its products in Europe until such time as the Company receives CE mark
certification, which is an international symbol of quality and compliance with
applicable European medical device directives. There can be no assurance that
the Company will be successful in obtaining ISO 9001 or CE mark certification.
Failure to receive ISO 9001 or CE mark certification or other foreign regulatory
approvals could have a material adverse effect on the Company's business,
financial condition and results of operations. There can be no assurance that
the Company will obtain any other required regulatory registrations or approvals
in such countries or that it will not be required to incur significant costs in
obtaining or maintaining such regulatory registrations or approvals. Delays in
obtaining any registrations or approvals required to market the Company's
products, failure to receive these registrations or approvals, or future loss of
previously obtained registrations or approvals could have a material adverse
effect on the Company's business, financial condition and results of operations.

8
<PAGE> 10

The Company and its collaborative partners will be required to adhere to
applicable FDA regulations regarding Good Manufacturing Practice ("GMP") and
similar regulations in other countries, which include testing, control, and
documentation requirements. Ongoing compliance with GMP and other applicable
regulatory requirements will be strictly enforced in the United States through
periodic inspections by state and federal agencies, including the FDA, and in
foreign jurisdictions by comparable agencies. Failure to comply with applicable
regulatory requirements could result in, among other things, warning letters,
fines, injunctions, civil penalties, recall or seizure of products, total or
partial suspension of production, refusal of the government to grant premarket
clearance or premarket approval for devices, withdrawal of approvals previously
obtained and criminal prosecution. The restriction, suspension or revocation of
regulatory approvals or any other failure to comply with regulatory requirements
would have a material adverse effect on the Company's business, financial
condition and results of operations.

The Clinical Chemistry Branch of the FDA's Division of Clinical Laboratory
Devices (the "Branch") has traditionally been the reviewing branch for
blood-based personal glucose monitoring products. The Clinical Chemistry and
Clinical Toxicology Devices Panel (the "Panel") is an external advisory panel
that provides advice to the Branch regarding devices that are reviewed by the
Branch. The Panel met on March 20-21, 1997 to discuss invasive and non-invasive
self-monitoring blood glucose devices. The Panel submitted comments to the
Branch suggesting revisions of existing guidelines relating to the laboratory
and clinical testing of blood glucose devices. The Branch may take the Panel's
comments into consideration in determining whether to revise the existing
guidelines. To date, there has been no change in the existing 510(k) guidance
document for blood glucose monitoring devices. There can be no assurance that
the Panel's comments will not result in a FDA policy or change in FDA policy
that is materially adverse to the Company's regulatory position.

The Company will rely upon Abbott and Boehringer Mannheim to obtain United
States and foreign regulatory approvals and clearances for its glucose
monitoring and diabetes screening products, respectively, and if such approvals
or clearances are obtained the Company will rely upon these collaborative
partners to maintain them in full force and effect and to otherwise remain in
compliance with all applicable United States and foreign regulatory
restrictions. The inability or failure of such third parties to comply with the
varying regulations or the imposition of new regulations would materially
adversely effect the Company's business, financial condition and results of
operations. See "Business -- Government Regulation."

Dependence on Licensed Patent Applications and Proprietary Technology

SpectRx's success depends in large part upon its ability to establish and
maintain the proprietary nature of its technology through the patent process and
to license from others patents and patent applications necessary to develop its
products. The Company has licensed from Non-Invasive Monitoring Company, Inc.
("Nimco") one granted patent and know how related to its glucose monitoring
product, jointly applied with Altea Technologies, Inc. ("Altea") for a U.S.
patent and an international patent related to this device and has licensed this
granted patent and these patent applications to Abbott pursuant to the parties'
collaborative arrangements. SpectRx has license agreements with Georgia Tech
Research Corporation ("GTRC") that give the Company the right to use two patents
related to its diabetes screening product, and the Company has licensed this
proprietary technology to Boehringer Mannheim pursuant to the Company's
collaborative arrangement with Boehringer Mannheim. The Company has license
agreements with the University of Texas M.D. Anderson Cancer Center ("M.D.
Anderson") that give SpectRx access to one patent related to the Company's
infant jaundice product, and the Company has applied for two patents related to
this product. SpectRx has licensed the one patent and two patent applications to
Healthdyne pursuant to its collaborative arrangement with that company. In
addition, SpectRx has licensed from Joseph Lakowicz, Ph.D. of the University of
Maryland several granted patents and patent applications related to fluorescence
spectroscopy that it intends to use in its research and development efforts.

9
<PAGE> 11

on such patents for any reason. In addition, there can be no assurance that
competitors, many of whom have substantial resources and have made substantial
investments in competing technologies, will not seek to apply for and obtain
patents that prevent, limit or interfere with the Company's ability to make, use
and sell its products either in the United States or in foreign markets. If any
of the Company's patents are successfully challenged, invalidated or
circumvented or the Company's right or ability to manufacture its products were
to be proscribed or limited, the Company's ability to continue to manufacture
and market its products could be adversely affected, which would likely have a
material adverse effect upon the Company's business, financial condition and
results of operations.

The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights. Certain companies in
the medical device industry have instituted intellectual property litigation,
including patent infringement actions, for legitimate and, in certain cases,
competitive reasons. In addition, the United States Patent and Trademark Office
("USPTO") may institute litigation or interference proceedings. There can be no
assurance that the Company will not become subject to patent infringement claims
or litigation or interference proceedings instituted by the USPTO to determine
the priority of inventions. The defense and prosecution of intellectual property
suits, USPTO interference proceedings and related legal and administrative
proceedings are both costly and time consuming. Litigation may be necessary to
enforce patents issued to the Company, to protect trade secrets or know how
owned by the Company or to determine the enforceability, scope and validity of
the proprietary rights of others. Any litigation or interference proceedings
brought against, initiated by or otherwise involving the Company may require the
Company to incur substantial legal and other fees and expenses and may require
some of the Company's employees to devote all or a substantial portion of their
time to the prosecution or defense of such litigation or proceedings. An adverse
determination in litigation or interference proceedings to which the Company may
become a party, including any litigation that may arise against the Company,
could subject the Company to significant liabilities to third parties, require
the Company to seek licenses from third parties or prevent the Company from
selling its products in certain markets, or at all. Although patent and
intellectual property disputes regarding medical devices are often settled
through licensing or similar arrangements, there can be no assurance that the
Company would be able to reach a satisfactory settlement of such a dispute that
would allow it to license necessary patents or other intellectual property. Even
if such a settlement were reached, the settlement process may be expensive and
time consuming and the terms of the settlement may require the Company to pay
substantial royalties. An adverse determination in a judicial or administrative
proceeding or the failure to obtain a necessary license could prevent the
Company from manufacturing and selling its products, which would have a material
adverse effect on the Company's business, financial condition and results of
operations.

In addition to patents, the Company relies on trade secrets and proprietary
know how, which it seeks to protect, in part, through confidentiality and
proprietary information agreements. There can be no assurance that such
confidentiality or proprietary information agreements will not be breached, that
the Company would have adequate remedies for any breach, or that the Company's
trade secrets will not otherwise become known to or be independently developed
by competitors. See "Business -- Patents."

Fixed Royalty Rates and Manufacturing Profits

Substantially all of the Company's revenues and profits are expected to be
derived from royalties and manufacturing profits that the Company will receive
from Abbott, Boehringer Mannheim and Healthdyne resulting from sales of its
glucose monitoring, diabetes screening and infant jaundice products,
respectively. The royalties and manufacturing profits that the Company is
expected to receive from each of its collaborative partners depend on sales of
such products. There can be no assurance that the Company, together with its
collaborative partners, will be able to sell sufficient volumes of the Company's
products to generate substantial royalties and manufacturing profits for the
Company. In addition, the Company's profit margins are not likely to increase
over time because the Company's royalty rates and manufacturing profit rates are
predetermined.

In addition, it is common practice in the glucose monitoring device
industry for manufacturers to sell their glucose monitoring devices at
substantial discounts to their list prices or to offer customers rebates on
sales of their products. Manufacturers offer such discounts or rebates to expand
the use of their products and

10
<PAGE> 12

thus increase the market for the disposable assay strips they sell for use with
their products. Because Abbott may, pursuant to its collaborative arrangement
with the Company, determine the prices at which it sells the Company's glucose
monitoring devices, it may choose to adopt this marketing strategy. If Abbott
adopts this marketing strategy and discounts the prices at which it sells the
Company's glucose monitoring devices, the royalties earned by the Company in
respect of such sales will decline. There can be no assurance that, if this
strategy is adopted, royalties earned by the Company on sales of the disposable
cartridges to be used in connection with its glucose monitoring device will be
equal to or greater than the royalties the Company would have earned had its
glucose monitoring devices not been sold at a discount. This possible reduction
in royalties on sales of the Company's glucose monitoring devices could have a
material adverse effect upon the Company's business, financial condition and
results of operations. See "Business -- Collaborative Arrangements" and
"-- Licensing Arrangements."

Uncertainty of Market Acceptance

The Company's products are based upon new methods of glucose monitoring,
diabetes screening and infant jaundice monitoring and screening, and there can
be no assurance that any of these products will gain market acceptance.
Physicians and individuals will not recommend or use the Company's products
unless they determine, based on experience, clinical data, relative cost, and
other factors, that these products are an attractive alternative to current
blood-based tests that have a long history of safe and effective use. To date,
the Company's products have been utilized by only a limited number of subjects,
and no independent studies regarding the Company's products have been published.
The lack of any such independent studies may have an adverse effect on the
Company's ability to successfully market its products. In addition, purchase
decisions for products like the Company's diabetes screening and infant jaundice
products are greatly influenced by health care administrators who are subject to
increasing pressures to reduce costs. Failure of the Company's products to
achieve significant market acceptance would have a material adverse effect on
the Company's business, financial condition and results of operations. See
"-- Uncertainty of Third-Party Reimbursement" and "Business -- Third-Party
Reimbursement."

Intense Competition

The medical device industry in general, and the markets for glucose
monitoring and diabetes screening devices and processes in particular, are
intensely competitive. If successful in its product development, the Company
will compete with other providers of personal glucose monitors, diabetes
screening tests and infant jaundice products. A number of competitors, including
Johnson & Johnson, Inc. (which owns Lifescan, Inc.), Boehringer Mannheim, Bayer
AG (which owns Miles Laboratories, Inc.) and Abbott (which owns MediSense Inc.),
are currently marketing traditional glucose monitors. These monitors are widely
accepted in the health care industry and have a long history of accurate and
effective use. Furthermore, a number of companies have announced that they are
developing products that permit non-invasive and less invasive glucose
monitoring. Accordingly, competition in this area is expected to increase.

Many of the Company's competitors have substantially greater financial,
research, technical, manufacturing, marketing and distribution resources than
the Company and have greater name recognition and lengthier operating histories
in the health care industry. There can be no assurance that the Company will be
able to effectively compete against these and other competitors. In addition,
there can be no assurance that the Company's glucose monitoring, diabetes
screening or infant jaundice products will replace any currently used devices or
systems, which have long histories of safe and effective use. Furthermore, there
can be no assurance that the Company's competitors will not succeed in
developing, either before or after the development and commercialization of the
Company's products, devices and technologies that permit more efficient, less
expensive non-invasive and less invasive glucose monitoring, diabetes screening
and infant jaundice monitoring. It is also possible that one or more
pharmaceutical or other health care companies will develop therapeutic drugs,
treatments or other products that will substantially reduce the prevalence of
diabetes or infant jaundice or otherwise render the Company's products obsolete.
Such competition could have a material adverse effect on the Company's business,
financial condition and results of operation.

11
<PAGE> 13

In addition, there can be no assurance that one or more of the Company's
collaborative partners will not, for competitive reasons, reduce its support of
its collaborative arrangement with the Company or support, directly or
indirectly, a company or product that competes with the Company's product that
is the subject of the collaborative arrangement. See "Business -- Competition."

No Manufacturing Experience; Dependence on Sole Sources of Supply

To date, the Company's manufacturing activities have consisted only of
building certain prototype devices. If the Company successfully develops its
diabetes screening and infant jaundice products and, together with Boehringer
Mannheim and Healthdyne, obtains FDA clearance and other regulatory approvals to
market these products, the Company will undertake to manufacture these products.
The Company has no experience manufacturing such products in the volumes that
would be necessary for the Company to achieve significant commercial sales.
There can be no assurance that the Company will be able to establish and
maintain reliable, full scale manufacturing of these products at commercially
reasonable costs. Although the Company has leased space that it plans to use to
manufacture its products, it may encounter various problems in establishing and
maintaining its manufacturing operations, resulting in inefficiencies and
delays. Specifically, companies often encounter difficulties in scaling up
production, including problems involving production yield, quality control and
assurance, and shortages of qualified personnel. In addition, the Company's
manufacturing facilities will be subject to GMP regulations, including possible
preapproval inspection, international quality standards and other regulatory
requirements. Difficulties encountered by the Company in manufacturing scale-up
or failure by the Company to implement and maintain its manufacturing facilities
in accordance with GMP regulations, international quality standards or other
regulatory requirements could result in a delay or termination of production,
which could have a material adverse effect on the Company's business, financial
condition and results of operations.

The microspectrometer and disposable calibration element, components of the
infant jaundice product, and the blue light module and calibration element,
components of the diabetes screening product, are each only available from one
supplier and would require a major redesign of the applicable product in order
to incorporate a substitute component. Certain other components of the infant
jaundice and diabetes screening products are currently obtained from only one
supplier, but have readily available substitute components that can be
incorporated in the applicable product with minimal design modifications. If the
Company's products require a PMA application, then the inclusion of substitute
components could require the Company to qualify the new supplier with the
appropriate government regulatory authorities. Alternatively, if the Company's
products qualify for a 510(k) premarket notification, then the substitute
components need only meet the Company's product specifications. Any significant
problem experienced by one of the Company's sole source suppliers may result in
a delay or interruption in the supply of components to the Company until such
supplier cures the problem or an alternative source of the component is located
and qualified. Any delay or interruption would likely lead to a delay or
interruption in the Company's manufacturing operations, which could have a
material adverse effect upon the Company's business, financial condition and
results of operations. See "Business -- Manufacturing and Sources of Supply."

No Marketing and Sales Experience

12
<PAGE> 14

for the marketing and sale of its infant jaundice product outside the United
States and Canada, any revenues to be received by the Company from this product
will be dependent on this third party, and the Company will likely be required
to pay a sales commission or similar amount to this party. Furthermore, the
Company is currently dependent on the efforts of Abbott and Boehringer Mannheim
for any revenues to be received from its glucose monitoring and diabetes
screening products, respectively. There can be no assurance that the efforts of
these third parties for the marketing and sale of the Company's products will be
successful. See "-- Dependence on Collaborative Arrangements,"
"Business -- Sales, Marketing and Distribution," and "-- Collaborative
Arrangements."

Product Liability Risk; Limited Insurance Coverage

The development, manufacture and sale of medical products entail
significant risks of product liability claims. The Company currently has no
product liability insurance coverage beyond that provided by its general
liability insurance. Accordingly, there can be no assurance that the Company is
adequately protected from any liabilities, including any adverse judgments or
settlements, it might incur in connection with the development, clinical
testing, manufacture and sale of its products. In addition, product liability
insurance is expensive and may not be available to the Company on acceptable
terms, if at all. A successful product liability claim or series of claims
brought against the Company that results in an adverse judgment against or
settlement by the Company in excess of any insurance coverage could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Product Liability and Insurance."

Need for Additional Capital; Uncertainty of Access to Capital

Substantial capital will be required to develop the Company's products,
including completing product testing and clinical trials, obtaining all required
United States and foreign regulatory approvals and clearances, commencing and
scaling up manufacturing and marketing its products. Pursuant to the Company's
collaborative arrangements with Abbott, Boehringer Mannheim and Healthdyne,
these collaborative partners will either directly undertake these activities or
will fund a substantial portion of these expenditures. The obligations of the
Company's collaborative partners to fund the Company's capital expenditures is
largely discretionary and depends on a number of factors, including the
Company's ability to meet certain milestones in the development and testing of
its products. There can be no assurance that the Company will meet such
milestones or that the Company's collaborative partners will continue to fund
the Company's capital expenditures. Any failure of the Company's collaborative
partners to fund its capital expenditures would have a material adverse effect
on the Company's business, financial condition and results of operations.

In addition to funds that the Company expects to be provided by its
collaborative partners, the Company may be required to raise additional funds
through public or private financing, additional collaborative relationships or
other arrangements. The Company believes that its existing capital resources and
the net proceeds of this offering will be sufficient to satisfy its funding
requirements for at least the next 24 months, but may not be sufficient to fund
the Company's operations to the point of commercial introduction of its glucose
monitoring product. There can be no assurance that any required additional
funding, if needed, will be available on terms attractive to the Company, or at
all, which could have a material adverse effect on the Company's business,
financial condition and results of operations. Any additional equity financing
may be dilutive to stockholders, and debt financing, if available, may involve
restrictive covenants. See "Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."

Uncertainty of Third-Party Reimbursement

In the United States and elsewhere, sales of medical products are
dependent, in part, on the ability of consumers of these products to obtain
reimbursement for all or a portion of their cost from third-party payors, such
as government and private insurance plans. Third-party payors are increasingly
challenging the prices charged for medical products and services. If the Company
succeeds in bringing one or more products to market, there can be no assurance
that these products will be considered cost effective and that reimburse-

13
<PAGE> 15

ment to the consumer will be available or sufficient to allow the Company to
sell its products on a competitive basis. See "Business -- Third-Party
Reimbursement."

Need to Attract and Retain Key Employees

The Company's ability to operate successfully and manage its potential
future growth depends in significant part upon the continued service of certain
key scientific, technical, managerial and finance personnel, and its ability to
attract and retain additional highly qualified scientific, technical, managerial
and finance personnel. The officers listed in the Executive Officers and
Directors table comprise the Company's key personnel. The Chief Financial
Officer and the Vice President, Operations joined the Company within the last 12
months. None of these key employees has an employment contract with the Company
nor are any of these employees covered by key person or similar insurance. In
addition, if the Company, together with its collaborative partners, is able to
successfully develop and commercialize the Company's products, the Company will
need to hire additional scientific, technical, managerial and finance personnel.
The Company faces intense competition for qualified personnel in these areas,
many of whom are often subject to competing employment offers, and there can be
no assurance that the Company will be able to attract and retain such personnel.
The loss of key personnel or inability to hire and retain additional qualified
personnel in the future could have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business -- Employees" and "Management -- Executive Officers and Directors."

Control by Directors, Executive Officers and Affiliated Entities

The Company's directors, executive officers and entities affiliated with
them, will, in the aggregate, beneficially own approximately 48% of the
Company's outstanding Common Stock following the completion of this offering.
These stockholders, if acting together, would be able to control substantially
all matters requiring approval by the stockholders of the Company, including the
election of directors and the approval of mergers and other business combination
transactions. See "Principal Stockholders."

No Prior Public Market for Common Stock; 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 or that the market price of the Common
Stock will not decline below the initial public offering price. The initial
public offering price will be determined through negotiations between the
Company and the representatives of the Underwriters and may not be indicative of
the market price of the Common Stock following this offering. The stock markets
have experienced extreme price and volume fluctuations that have substantially
affected small capitalization medical technology companies, resulting in changes
in the market prices of the stocks of many such companies that may not have been
directly related to their operating performance. Such broad market fluctuations
may adversely affect the market price of the Common Stock following this
offering. In addition, the market price of the Common Stock following this
offering may be highly volatile. Factors such as variations in the Company's
financial results, changes in the Company's collaborative arrangements, comments
by security analysts, announcements of technological innovations or new products
by the Company or its competitors, changing government regulations and
developments with respect to FDA submissions, patents and proprietary rights, or
litigation may have a material adverse effect on the market price of the Common
Stock. See "Underwriting."

Potential Adverse Effect of Shares Eligible for Future Sale

The number of shares of Common Stock available for sale in the public
market is limited by lock-up agreements under which all directors, executive
officers and certain other stockholders of the Company that beneficially own or
have dispositive power over substantially all of the shares of Common Stock
outstanding prior to this offering, including Common Stock to be issued upon the
closing of this offering upon conversion of the Company's Preferred Stock, have
agreed not to sell or otherwise dispose of any of their shares for a period of
180 days following the offering, without the prior written consent of Hambrecht
& Quist LLC. However, Hambrecht & Quist LLC may, in its sole discretion, permit
the sale or other disposition of all or any

14
<PAGE> 16

portion of the securities subject to such lock-up agreements prior to the
expiration of this 180 day period. If Hambrecht & Quist LLC were to release any
securities from the prohibitions on sales and other dispositions imposed by
these lock-up agreements, up to 1,089,827 shares of Common Stock may be eligible
for immediate sale. Although Hambrecht & Quist LLC does not have any agreements
or understandings regarding the release of any securities from the prohibitions
on sales and other dispositions imposed by these lock-up agreements, it retains
the right at any time and without notice to release from the scope of the
lock-up restrictions all or any portion of the securities currently subject to
such restrictions. The release of any securities from such prohibitions and the
subsequent sale of such shares may have an adverse effect on the ability of the
Company to raise capital and could adversely affect the market price of the
Company's Common Stock. See "Shares Eligible for Future Sale" and
"Underwriting."

Anti-Takeover Effect of Certain Charter and Bylaw Provisions on Price of Common
Stock

Certain provisions of the Company's Certificate of Incorporation and Bylaws
may have the effect of making it more difficult for a third party to acquire, or
of discouraging a third party from attempting to acquire, control of the
Company. Such provisions could limit the price that certain investors might be
willing to pay in the future for shares of the Company's Common Stock. Certain
of these provisions allow the Company to issue Preferred Stock without any vote
or further action by the stockholders, eliminate the right of stockholders to
act by written consent without a meeting and specify procedures for director
nominations by stockholders and submission of other proposals for consideration
at stockholder meetings. Certain provisions of Delaware law applicable to the
Company, including Section 203, which prohibits a Delaware corporation from
engaging in any business combination with any interested stockholders for a
period of three years unless certain conditions are met, could also delay or
make more difficult a merger, tender offer or proxy contest involving the
Company. The possible issuance of Preferred Stock, the procedures required for
director nominations and stockholder proposals and Delaware law could have the
effect of delaying, deferring or preventing a change in control of the Company,
including without limitation, discouraging a proxy contest or making more
difficult the acquisition of a substantial block of the Company's Common Stock.
These provisions could also limit the price that investors might be willing to
pay in the future for shares of the Company's Common Stock. See "Description of
Capital Stock -- Preferred Stock" and "-- Certain Charter and Bylaw Provisions
and Delaware Anti-Takeover Statute."

Immediate and Substantial Dilution

Investors purchasing shares of Common Stock in this offering will incur
immediate and substantial dilution in net tangible book value of the Common
Stock of $7.68 per share. To the extent that currently outstanding options to
purchase the Company's Common Stock are exercised, there will be further
dilution. See "Dilution."

Lack of Dividends

The Company has not paid any dividends and does not anticipate paying any
dividends in the foreseeable future. See "Dividend Policy."

15
<PAGE> 17

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered by the Company hereby at an assumed initial public offering
price of $11.00 per share are estimated to be approximately $19.8 million
(approximately $22.9 million if the Underwriters' over-allotment option is
exercised in full).

The Company anticipates that the net proceeds of this offering will be used
as follows: approximately $6.2 million to fund the further development of the
infant jaundice and diabetes screening products, approximately $3.9 million to
fund the buildup of production capacity and inventory, approximately $3.5
million to fund sales, marketing and distribution, approximately $5.2 million
for working capital for infant jaundice and diabetes screening products, and
approximately $1.0 million for other capital expenditures. The amounts actually
expended for these purposes will depend upon numerous factors, including the
results of clinical studies, the design and cost of the Company's initial
manufacturing facility and other factors. Pending the use of the net proceeds of
the offering, the Company will invest the funds in short-term, interest-bearing,
investment-grade securities. The Company believes that its existing capital
resources and the net proceeds of this offering will be sufficient to fund its
operations for at least the next 24 months, but such amounts may not be
sufficient to fund the Company's operations to the point of commercial
introduction of its glucose monitoring product. The Company expects to continue
to receive development funding from its collaborative partners to fund the
further development and commercialization of its products. See
"Business -- Collaborative Arrangements" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."

DIVIDEND POLICY

The Company has never declared or paid dividends on its Common Stock. The
Company intends to retain earnings, if any, and will not pay cash dividends in
the foreseeable future. Any future determination to pay cash dividends will be
at the discretion of the Board of Directors and will be dependent upon the
Company's financial condition, results of operations, capital requirements,
general business conditions and such other factors as the Board of Directors may
deem relevant.

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<PAGE> 18

CAPITALIZATION

The following table sets forth as of December 31, 1996, (i) the actual
capitalization of the Company, (ii) the pro forma capitalization of the Company
after giving effect to the conversion of all of the outstanding shares of
Convertible Preferred Stock into Common Stock and the exercise of warrants
(which expire if they are not exercised prior to the closing of this offering)
for 553,126 shares of Common Stock with a weighted average exercise price of
$1.25 per share, and (iii) the pro forma capitalization of the Company as
adjusted to reflect the issuance and sale of 2,000,000 shares of Common Stock
offered hereby at an assumed public offering price of $11.00 per share and the
receipt of the estimated net proceeds therefrom. This table should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.

<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED(1)
------- --------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Convertible subordinated promissory notes....................... $ 250 $ 250 $ 250
------- -------
Stockholders' equity:
Preferred Stock, 5,000,000 shares ($0.001 par value)
authorized; 4,875,835 shares issued and outstanding;
none issued and outstanding pro forma or pro forma
as adjusted......................................... 5 -- --
Common Stock, 50,000,000 shares ($0.001 par value)
authorized; 1,531,702 shares issued and outstanding;
5,567,590 shares issued and outstanding pro forma
and 7,567,590 shares issued and outstanding pro
forma as adjusted................................... 2 6 8
Additional paid-in capital............................ 11,330 12,196 32,004
Notes receivable from officers........................ (48) (48) (48)
Deferred compensation................................. (286) (286) (286)
Warrants.............................................. 173 -- --
Accumulated deficit................................... (6,422) (6,422) (6,422)
------- -------
Total stockholders' equity.................. 4,754 5,446 25,256
------- -------
Total capitalization................... $ 5,004 $ 5,696 $ 25,506
======= =======
</TABLE>

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

(1) Excludes, as of December 31, 1996, 663,362 shares of Common Stock reserved
for issuance upon exercise of outstanding options granted pursuant to the
Company's 1995 Stock Plan at a weighted average price of $0.64 per share;
8,572 shares of Common Stock issuable upon the exercise of an outstanding
warrant with an exercise price of $1.40 per share; and 47,398 shares of
Common Stock issuable pursuant to a Convertible Promissory Note at any time
until June 19, 1998 at an assumed initial public offering price of $11.00
per share. See "Management -- Stock Plans" and "Description of Capital
Stock -- Notes, Warrants and Options."

17
<PAGE> 19

DILUTION

As of December 31, 1996, the Company had a net tangible book value of
approximately $4,636,000 or approximately $0.93 per share of Common Stock. Net
tangible book value represents the amount of total tangible assets less total
liabilities divided by the number of shares of Common Stock outstanding. After
giving effect to the receipt by the Company of the net proceeds from the sale of
2,000,000 shares of Common Stock offered by the Company hereby at an assumed
initial public offering price of $11.00 per share, the conversion of all of the
outstanding shares of convertible Preferred Stock into Common Stock and the
exercise of warrants (which expire if they are not exercised prior to the
closing of this offering) for 553,126 shares of Common Stock with a weighted
average price of $1.25 per share, the pro forma net tangible book value of the
Company as of December 31, 1996 would have been approximately $25,138,000 or
approximately $3.32 per share. This represents an immediate increase in net
tangible book value per share of approximately $2.39 to existing shareholders
and an immediate dilution of approximately $7.68 per share to new investors. The
following table sets forth this per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share...................... $11.00
Pro forma net tangible book value per share as of December 31,
1996........................................................... $ .93
Increase per share attributable to new investors................ 2.39
-----
Pro forma net tangible book value per share after the Offering....... 3.32
------
Dilution per share to new investors.................................. $ 7.68
======
</TABLE>

The following table summarizes, on a pro forma basis as of December 31,
1996, the differences between existing stockholders and new investors with
respect to the total number of shares of Common Stock and Preferred Stock (all
of which Preferred Stock will be converted into Common Stock upon the closing of
the Offering) purchased from the Company, the total consideration paid and the
average price per share paid (assuming the sale of 2,000,000 shares of Common
Stock at an initial public offering price of $11.00 per share).

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- --------------
<S> <C> <C> <C> <C> <C>
Existing shareholders.... 5,567,590 73.6% $11,908,000 35.1% $ 2.14
New investors............ 2,000,000 26.4 22,000,000 64.9 11.00
--------- ----- ----------- -----
Total... 7,567,590 100.0% $33,908,000 100.0%
========= ===== =========== =====
</TABLE>

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

The above calculations do not give effect to (i) the exercise of outstanding
options to purchase 663,362 shares of Common Stock at a weighted average
exercise price of $0.64 per share outstanding on December 31, 1996, (ii) the
exercise of an outstanding warrant to purchase 8,572 shares of Common Stock at
an exercise price of $1.40 per share outstanding on December 31, 1996 and (iii)
the conversion of 47,398 shares of Common Stock pursuant to a Convertible
Promissory Note convertible at any time until June 19, 1998 at an assumed
initial public offering price of $11.00 per share. To the extent that these
options and warrants become exercisable and are exercised, or the Convertible
Promissory Note is converted, there will be further dilution to new investors.
See "Management -- Stock Plans" and "Description of Capital Stock -- Notes,
Warrants and Options."

18
<PAGE> 20

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data for the period from October 27,
1992 (date of inception) through December 31, 1993, and for the years ended
December 31, 1994, 1995 and 1996 and as of December 31, 1994, 1995 and 1996, are
derived from the Consolidated Financial Statements of the Company which have
been included elsewhere herein and have been audited by Arthur Andersen LLP,
independent public accountants. The data set forth below is qualified by
reference to and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements and Notes thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1993(1) 1994 1995 1996
------- ------- ------ -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA
Revenues............................................. $ -- $ 122 $1,179 $ 452
Expenses:
Research and development........................... 638 869 1,189 1,815
Sales and marketing................................ 196 126 146 221
General and administrative......................... 403 350 637 1,526
------- ------- ------ -------
1,237 1,345 1,972 3,562
------- ------- ------ -------
Operating loss..................................... (1,237) (1,223) (793) (3,110)
Interest Expense, net................................ -- 144 5 132
Other (Income)....................................... (20) (20) (118) (64)
------- ------- ------ -------
Net Loss............................................. $(1,217) $(1,347) $ (680) $(3,178)
======= ======= ====== =======
Pro forma net loss per share(2)...................... $ (1.03)
=======
Pro forma weighted average shares outstanding........ 3,094
=======
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------
1993 1994 1995
------- ------- -------
1996
------------------------
ACTUAL PRO FORMA(3)
------- ------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA
Cash and cash equivalents............. $ 422 $ 937 $ 107 $ 4,721 $ 5,413
Working capital....................... 313 299 (444) 3,870 4,562
Total assets.......................... 756 1,327 751 5,946 6,638
Total liabilities..................... 133 689 787 1,192 1,192
Accumulated deficit................... (1,217) (2,564) (3,244) (6,422) (6,422)
Total shareholders' equity............ 623 638 (36) 4,754 5,446
</TABLE>

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

(1) From the Company's inception on October 27, 1992 through December 31, 1993.
(2) See Note 2 of Notes to Financial Statements for a description of the
computation of pro forma net loss per share.

(3) Pro forma gives effect to the conversion of all of the outstanding shares of
Convertible Preferred Stock into Common Stock and the exercise of warrants
(which expire if they are not exercised prior to the closing of this
offering) for 553,126 shares of Common Stock with a weighted average
exercise price of $1.25 per share.

19
<PAGE> 21

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

The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and the Company's Consolidated Financial
Statements and Notes thereto included elsewhere in this Prospectus. Except for
the historical information contained herein, the discussion in this Prospectus
contains certain 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 related forward-looking statements
wherever they appear in this Prospectus. The Company's actual results could
differ materially from those discussed here. Factors that could cause or
contribute to such differences include those discussed in "Risk Factors," as
well as those discussed elsewhere herein.

OVERVIEW

SpectRx was incorporated on October 27, 1992, and since that date has
raised capital funding through the sale of preferred stock, issuance of debt
securities and collaborative arrangements. Following its initial funding in
early 1993, the Company immediately began research and development activities
with the objective of commercializing less invasive diagnostic screening and
monitoring products. As part of its business strategy, the Company has
selectively established arrangements with leading medical device companies for
the development, commercialization and introduction of its products. Since
inception, the Company has entered into collaborative arrangements with Abbott,
Boehringer Mannheim and Healthdyne for its glucose monitoring, diabetes
screening and infant jaundice products, respectively. In December 1996, the
Company sublicensed certain technology to and acquired a 64.8% interest in
FluorRx, Inc., a Delaware corporation formed for the purpose of developing and
commercializing technology related to fluorescence spectroscopy.

20
<PAGE> 22

sales of their products. Manufacturers offer such discounts or rebates to expand
the use of their products and thus increase the market for the disposable assay
strips they sell for use with their products. Because Abbott may, pursuant to
its collaborative arrangement with the Company, determine the prices at which it
sells the Company's glucose monitoring devices, it may choose to adopt this
marketing strategy. If Abbott adopts this marketing strategy and discounts the
prices at which it sells the Company's glucose monitoring devices, the royalties
earned by the Company in respect of such sales will decline. There can be no
assurance that, if this strategy is adopted, royalties earned by the Company on
sales of the disposable cartridges to be used in connection with its glucose
monitoring device will be equal to or greater than the royalties the Company
would have earned had its glucose monitoring devices not been sold at a
discount. This possible reduction in royalties on sales of the Company's glucose
monitoring devices could have a material adverse effect upon the Company's
business, financial condition and results of operations.

The Company has entered into collaborative arrangements with Abbott,
Boehringer Mannheim and Healthdyne. The agreements evidencing these
collaborative arrangements grant a substantial amount of discretion to each
collaborative partner. If one or more of the Company's collaborative partners
were to terminate its arrangement with the Company, the Company would either
need to reach agreement with a replacement collaborative partner or undertake at
its own expense the activities handled by its collaborative partner prior to
such termination, which would require the Company to develop expertise it does
not currently possess, would significantly increase the Company's capital
requirements and would limit the programs the Company could pursue. The Company
would likely encounter significant delays in introducing its products and the
development, manufacture and sale of its products would be adversely affected by
the absence of such collaborative arrangements. The termination of any of the
Company's collaborative arrangements would have a material adverse effect on the
Company's business, financial condition and results of operations.

RESULTS OF OPERATIONS

Comparison of Years Ended December 31, 1996 and 1995

General. Net losses increased to approximately $3.2 million during the
year ended December 31, 1996 from approximately $680,000 during the same period
in 1995 due to an increase in research and development expenses and general and
administrative expenses. The Company expects net losses to continue. If the
Company is unable to attain certain milestones under a collaboration agreement,
its collaborative partner may not make milestone payments under or may terminate
altogether such agreement. If this were to happen, future net losses would
escalate rapidly because of spending increases necessary to complete research,
development and clinical trials of the Company's products, commence sales and
marketing efforts and establish a manufacturing capability.

Research and development expenses. Research and development expenses
increased to approximately $1.8 million during the year ended December 31, 1996
from approximately $1.2 million during the same period in 1995. The increase in
research and development expenses was primarily due to increases in
compensation, benefit and employee recruiting costs and, to a lesser extent,
increases in consulting expenses, patent legal fees and the cost of prototype
materials purchased. The Company expects research and development expenses to
increase in the future as it begins clinical trials for its products.

Sales and marketing expenses. Sales and marketing expenses increased to
$221,000 during the year ended December 31, 1996 from $146,000 during the same
period in 1995. The increase was due primarily to compensation and recruiting
costs, product design costs and expenses related to building a marketing
organization for the Company's infant jaundice product. Sales and marketing
expenses are expected to increase in the future as the Company begins to market
this product.

General and administrative expenses. General and administrative expenses
increased to approximately $1.5 million during the year ended December 31, 1996
from approximately $637,000 during the same period in 1995. The increase in
general and administrative expenses was due to increases in compensation and
facility costs. General and administrative expenses are expected to increase in
the future as a result of overhead costs associated with research and
development activities and, to a lesser extent, expenses associated with being a
public company.

21
<PAGE> 23

Net interest expense. Net interest expense increased to $132,000 during
the year ended December 31, 1996 from an expense of $5,000 during the same
period in 1995. This increase resulted from interest incurred in conjunction
with the issuance of convertible notes, which have since been redeemed.

Comparison of Years Ended December 31, 1995 and 1994

General. Net losses decreased to approximately $680,000 during 1995 from
$1.3 million during 1994. This decrease was the result of an increase in
licensing fees earned by the Company, and other income.

Research and development expenses. Research and development expenses
increased to approximately $1.2 million during 1995 from approximately $869,000
during 1994. The increases in research and development expenses were due
primarily to increases in compensation, benefit and employee recruiting costs
and, to a lesser extent, increases in consulting expenses, patent legal fees and
the cost of prototype materials purchased.

Sales and marketing expenses. Sales and marketing expenses increased to
approximately $146,000 during 1995 from approximately $126,000 during 1994. The
increase was due primarily to increases in compensation and recruiting and
product design costs.

General and administrative expenses. General and administrative expenses
increased to approximately $637,000 during 1995 from approximately $350,000
during 1994. The increases in general and administrative expenses were due to
increases in compensation, facility costs and depreciation of furniture and
equipment.

Net interest expense. Net interest expense decreased to approximately
$5,000 during 1995 from approximately $144,000 during 1994, due to the
conversion to equity securities of notes outstanding during 1994.

LIQUIDITY AND CAPITAL RESOURCES

The Company has financed its operations since inception primarily through
private sales of its equity securities. From October 27, 1992 (inception)
through December 31, 1996, the Company received approximately $11.2 million in
net proceeds from sales of its equity securities. At December 31, 1996, the
Company had cash of approximately $4.7 million and working capital of
approximately $3.9 million, as compared to $107,000 and $(444,000),
respectively, at December 31, 1995. The increase was primarily due to receipt of
net proceeds of approximately $3.5 million from private sales of Series B
Preferred Stock, approximately $3.0 million from sales of Series C Preferred
Stock to Abbott, and $1.2 million from the sale of convertible notes (of which
$982,000 subsequently was converted into Series B Preferred Stock), which were
partially offset by the Company's operating expenses and capital expenditures.
The Company currently invests its excess cash balances and intends to invest the
estimated net proceeds of this offering primarily in short-term, investment-
grade, interest-bearing obligations until such funds are utilized in operations.

Substantial capital will be required to develop the Company's products,
including completing product testing and clinical trials, obtaining all required
United States and foreign regulatory approvals and clearances, commencing and
scaling up manufacturing and marketing its products. Pursuant to the Company's
collaborative arrangements with Abbott, Boehringer Mannheim and Healthdyne,
these collaborative partners will either directly undertake these activities or
will fund a substantial portion of these expenditures. Capital expenditures to
be funded by the Company for the remainder of 1997 are expected to be $1.1
million, including approximately $661,000 for the build up of production
capacity. The obligations of the Company's collaborative partners to fund the
Company's capital expenditures is largely discretionary and depends on a number
of factors, including the Company's ability to meet certain milestones in the
development and testing of its products. There can be no assurance that the
Company will meet such milestones or that the Company's collaborative partners
will continue to fund the Company's development expenditures. Any failure of the
Company's collaborative partners to fund its development expenditures would have
a material adverse effect on the Company's business, financial condition and
results of operations.

22
<PAGE> 24

relationships or other arrangements. The Company believes that its existing
capital resources and the net proceeds of this offering will be sufficient to
satisfy its funding requirements for at least the next 24 months, but may not be
sufficient to fund the Company's operations to the point of commercial
introduction of its glucose monitoring product. There can be no assurance that
any required additional funding, if needed, will be available on terms
attractive to the Company, or at all, which could have a material adverse effect
on the Company's business, financial condition and results of operations. Any
additional equity financing may be dilutive to stockholders, and debt financing,
if available, may involve restrictive covenants.

23
<PAGE> 25

BUSINESS

OVERVIEW

SpectRx is engaged in the research and development of products that offer
less invasive and painless alternatives to blood tests currently used for
glucose monitoring, diabetes screening and infant jaundice. The Company's goal
is to introduce products that reduce or eliminate pain, are convenient to use
and provide rapid results at the point of care, thereby improving patient well
being and reducing health care costs. The Company's products for glucose
monitoring, diabetes screening and infant jaundice are based on proprietary
electro-optical and microporation technology that can eliminate the pain and
inconvenience of a blood sample. The Company has entered into collaborative
arrangements with Abbott, Boehringer Mannheim and Healthdyne to facilitate the
development, commercialization and introduction of its glucose monitoring,
diabetes screening and infant jaundice products, respectively.

The Company is developing a hand held glucose monitoring product that
combines its proprietary microporation technology with a disposable assay
cartridge. This product is intended to offer an alternative to current glucose
monitoring products, which require a blood sample usually obtained by lancing
the fingertip. The Company believes that the worldwide market for glucose
monitoring products at manufacturers' price levels is approximately $2.0 billion
annually and growing at approximately 17% a year. The North American market was
approximately $1.0 billion in 1996. The Company's prototype glucose monitoring
product uses a laser to create a micropore approximately the diameter of a human
hair. The laser creates a micropore with a depth approximately the thickness of
a sheet of paper. This micropore provides painless access to interstitial fluid,
an extracellular fluid that is prevalent throughout the body and just beneath
the skin, which contains glucose and many other analytes found in blood. Because
interstitial fluid is found throughout the body, the micropore can be created on
various parts of the body. Once access to interstitial fluid is achieved, the
device is intended to force interstitial fluid out of the micropore and into the
disposable assay cartridge. The fluid is then analyzed using chemistry similar
to that in currently available blood glucose monitors. In a pilot study
involving 10 subjects and yielding 438 measurements, the Company found a
correlation coefficient of 0.96 between blood glucose levels measured using
conventional finger stick technology and interstitial fluid glucose levels
measured using the Company's early stage prototype. A correlation coefficient is
a quantitative representation of the relationship between two measurements, with
a correlation coefficient of 1.0 indicating identical information in the
measurements. In October 1996, the Company entered into a collaborative
arrangement with Abbott under which Abbott is primarily responsible for
undertaking or funding the development, regulatory clearance, manufacture and
sale of the Company's glucose monitoring product. Under its agreement with
Abbott, the Company receives development funding, payments on achievement of
technical milestones and a royalty on Abbott sales of the product. In addition,
Abbott has made a $3 million equity investment in the Company. If the
development milestones are achieved, the Company expects Abbott to file a 510(k)
premarket notification for its glucose monitoring product in 1999, but there can
be no assurance that this filing will occur during this time frame, or at all.

The Company has developed a compact diabetes screening product based on
measurements of fluorescence in the lens of the eye. This product is intended to
provide an alternative to the fasting plasma glucose test, the screening
technique recommended by the ADA, which requires a blood draw following an eight
hour fasting period. The Company believes that the market for diabetes screening
tests in the United States is approximately $300 million. While the individual
looks into the Company's device it automatically tracks the eye and measures
lens fluorescence, which is evaluated by the Company's proprietary algorithm. An
abnormally high level of lens fluorescence can be indicative of prolonged
exposure to high levels of glucose due to diabetes. The entire procedure takes
approximately one minute and does not require a fasting period. In a pilot study
of more than 1,300 subjects conducted by Boehringer Mannheim, an early stage
prototype of the Company's diabetes screening product demonstrated an ability to
detect diabetes comparable to the fasting plasma glucose test. In December 1994,
the Company entered into a collaborative arrangement with Boehringer Mannheim
under which Boehringer Mannheim is primarily responsible for the clinical
trials, the regulatory clearance and sale of the Company's diabetes screening
product. Under the Company's agreement

24
<PAGE> 26

with Boehringer Mannheim, the Company receives development funding and would
receive a manufacturing profit on products sold to Boehringer Mannheim. If
development milestones are achieved, the Company expects Boehringer Mannheim to
file a 510(k) premarket notification with the FDA for the Company's diabetes
screening product in 1998, but there can be no assurance that this filing will
occur within this time frame, or at all.

In addition to its two products for diabetes, the Company is developing an
infant jaundice screening and monitoring product. Infant jaundice is
characterized by a yellowing of the skin and eyes caused by an excess of
bilirubin in the body. If left untreated infant jaundice may, in extreme cases,
lead to brain damage or death. Of the approximately four million newborns in the
United States each year, approximately 50% have recognizable jaundice and
approximately 1.7 million receive at least one blood test for bilirubin.
Approximately 700,000 newborns are found to have elevated bilirubin levels, and
a portion of these newborns will receive additional tests. The cost to the
patient for a bilirubin test ranges from $29.50 to $37.75. The Company's infant
jaundice product is intended to offer an alternative to conventional blood
tests, which involve a traumatic heel stick to obtain a blood sample from the
infant. This product is intended to be a hand held instrument, which
incorporates a microspectrometer to collect spectroscopic information from the
skin, and a proprietary, disposable calibration element. After calibration, the
instrument is applied to the skin of the infant for five to ten seconds, during
which time the bilirubin level is measured using a proprietary algorithm that
adjusts for testing difficulties due to skin color, gestational age and other
factors. Using an early stage prototype, the Company tested over 100 infants in
a pilot study and found a correlation coefficient of 0.92 between total serum
bilirubin measured using a conventional blood test and that measured using the
Company's prototype. In June 1996, the Company entered into a collaborative
arrangement with Healthdyne under which Healthdyne is responsible for regulatory
approval and sales of the Company's infant jaundice product in the United States
and Canada. The Company retains manufacturing rights and is responsible for
regulatory approval and sales of the infant jaundice product outside of the
United States and Canada. Under its agreement with Healthdyne, the Company
receives license fees and would receive a manufacturing profit on hand held
instruments sold to Healthdyne and a share of any profits from the sales of
disposables by Healthdyne. The Company expects Healthdyne to commence clinical
testing and file a 510(k) premarket notification with the FDA for the Company's
infant jaundice product in 1997, but there can be no assurance that this filing
will occur within this time frame, or at all. Healthdyne has stated that it
plans to commence marketing of the product in the United States and Canada,
subject to obtaining FDA clearance and necessary Canadian regulatory approvals.
The Company expects to commence marketing of the infant jaundice marketing
product in certain European countries by the end of 1997 subject to obtaining
necessary regulatory approvals. There can be no assurance that marketing will
occur within this time frame, or at all.

SPECTRX'S BUSINESS STRATEGY

The Company's goal is to introduce products that reduce or eliminate pain,
are convenient to use and provide rapid results at the point of care, thereby
improving patient well being and reducing health care costs. To achieve this
objective, the Company is pursuing the following business strategy.

- FOCUS ON CURRENT PRODUCT PORTFOLIO. The Company intends to continue to
advance its current products to commercialization by (i) leveraging the
expertise of its collaborative partners, (ii) seeking 510(k) clearance
from the FDA for these products, (iii) expanding its internal product
development capabilities and (iv) developing its sales, marketing and
manufacturing capabilities.

- EXPAND THE MARKET FOR ITS GLUCOSE MONITORING PRODUCT. The Company
believes that its less invasive, easy-to-use glucose monitoring product
could lead to greater patient compliance with recommended glucose
monitoring rates. In addition, the Company believes that its diabetes
screening product could substantially increase the number of diagnosed
diabetics, thus increasing the demand for its glucose monitoring device
and disposable assay cartridge.

- COLLABORATE WITH MARKET LEADERS. The Company has selectively established
collaborative arrangements with Abbott, Boehringer Mannheim and Healthdyne
to develop and commercialize its products.

25
<PAGE> 27

The Company intends to continue selectively establishing strategic
relationships with leading companies, as appropriate, for the development,
commercialization and introduction of future products.

- LEVERAGE PROPRIETARY TECHNOLOGIES. The Company intends to leverage its
proprietary electro-optical and microporation technologies by developing
future products based on these technologies that can provide cost
effective, less invasive alternatives to current diagnostic or monitoring
products. For example, the Company believes its interstitial fluid
sampling technology may be applicable for monitoring analytes other than
glucose.

- ADDRESS LARGE MARKET OPPORTUNITIES. The Company intends to selectively
develop future products for large markets in which its products can (i)
apply for 510(k) clearance from the FDA, (ii) incorporate a disposable
component and (iii) qualify for third-party reimbursement.

DIABETES

Background

Diabetes occurs when the body does not produce sufficient levels of, or
effectively utilize, insulin, a hormone that regulates the metabolism
(breakdown) of glucose. Glucose levels in the blood must be within a specific
concentration range to ensure proper cellular function and health. Insulin
deficiency results in an abnormally high blood glucose concentration, which
causes protein glycation throughout the body, impairs the ability of cells to
intake glucose and has other adverse effects. In Type I (insulin-dependent
juvenile-onset) diabetes, which affects from 5% to 10% of all people with
diagnosed diabetes, the cells that make insulin have been destroyed. Type I
diabetes is treated with daily insulin injections. In the more prevalent form of
diabetes, Type II (non-insulin-dependent adult-onset) diabetes, the insulin
producing cells are unable to produce enough insulin to compensate for the
patient's poor sensitivity to the hormone in glucose using tissues such as
skeletal muscle (a condition called insulin resistance). Type II diabetes is
initially managed with proper diet, exercise and oral medication. However, based
on statistics published by the National Institutes of Health, the Company
estimates that approximately 50% of Type II diabetics will eventually require
insulin therapy.

The Glucose Monitoring Market

Many people with diabetes have difficulty achieving optimal glucose
control. For proper glucose control, each insulin injection should be adjusted
to reflect the person's current blood glucose concentration, carbohydrate
consumption, exercise pattern, stress or other illness. Accordingly, personal
glucose monitoring products have become critical in managing diabetes by
allowing diabetics to measure their glucose levels in order to adjust their
diet, exercise and use of oral medication or insulin to maintain proper blood
glucose levels.

In June 1993, the National Institutes of Health announced the results of
the Diabetes Control and Complications Trial ("DCCT"). This long term study of
approximately 1,400 people with Type I diabetes confirmed the importance of
glucose control as a determinant of long term risk of degenerative
complications. The data from the DCCT demonstrated that the risk of degenerative
complications is significantly reduced if blood glucose concentrations in people
with Type I diabetes can be brought closer to the concentrations measured in
non-diabetic individuals. For example, the DCCT study demonstrated that the risk
of complications of diabetic retinopathy, the leading cause of blindness in the
United States, could be reduced by 76% through proper glucose control. The DCCT
panel recommended that Type I diabetics measure their blood glucose four times
per day in order to maintain proper control over their glucose levels. Although
the DCCT study involved people with Type I diabetes only, a similar Japanese
study on Type II diabetics supports

26
<PAGE> 28

the conclusion of the DCCT study that maintaining low average glucose levels
reduces the risks of complications associated with diabetes.

Because glucose monitoring is an important part of the everyday life of the
world's diagnosed diabetics, the personal glucose monitoring market is
substantial. The Company believes that the worldwide market for glucose
monitoring products at manufacturers' price levels is approximately $2.0 billion
annually and to be growing at a rate of approximately 17% per year. The North
American market was approximately $1.0 billion in 1996. The Company believes
that the market for personal glucose monitoring products is driven by four main
factors: 1) an aging population; 2) the realization that tight glucose control
dramatically reduces the risk of complications; 3) the availability of
third-party reimbursement in developed nations; and 4) the promotion and
increased availability of glucose monitoring products. It is estimated that
currently diabetics monitor their glucose on average less than twice a day
instead of the DCCT recommendation of four times per day. The Company believes
that the pain and inconvenience associated with conventional finger stick blood
glucose monitoring systems is the primary reason that most people with diabetes
fail to comply with the recommendations of the DCCT panel. The Company believes
that greater awareness of the benefit of frequent self-monitoring and less
painful, more convenient monitoring products could significantly increase the
global market. There are currently no non-invasive glucose monitoring systems
commercially available.

Glucose monitoring products have evolved rapidly over time. Various factors
have allowed new entrants to establish market share in the glucose monitoring
product market, including technological advances, broader product distribution
and increased patient awareness of product innovations. These factors have also
expanded the overall size of the market for glucose monitoring products.

Current commercially available glucose monitoring systems are painful and
inconvenient. These systems require that a blood sample be obtained from a
patient, applied to a disposable test strip and then measured for glucose
concentrations using a battery-powered, hand held monitor. Under these systems,
the blood sample is usually obtained from a patient's fingertip because of the
high concentration of capillaries at this site and because the blood produced at
the fingertip can most easily be applied directly to test strips used in such
devices. These systems typically require the patient to complete the following
steps: insert the disposable test strip into the meter, lance the finger, apply
the drop of blood to the test strip and wait for the meter to display the
results. Because nerve endings are concentrated in the fingertips, this sampling
process can be painful. The level of patient discomfort is compounded by the
fact that the fingertips offer a limited surface area from which to obtain a
blood sample. Thus, the patient can be required to repeatedly sample from the
same site, eventually resulting in callouses. In addition, applying the drop of
blood to the test strip is difficult for those diabetics who have lost dexterity
in their extremities due to nerve degeneration.

The SpectRx Glucose Monitoring Product

The Company is developing a glucose monitoring product in collaboration
with Abbott that utilizes the Company's proprietary interstitial fluid sampling
technology to allow people with diabetes to easily and accurately measure their
glucose levels. Interstitial fluid is an extracellular fluid that is prevalent
throughout the body and just beneath the skin. Interstitial fluid is the means
by which proteins and chemicals, including glucose, pass between capillaries and
cells. Studies based on the Company's and independent research have indicated
that interstitial fluid glucose levels correlate closely with blood glucose
levels. The Company believes that using interstitial fluid to assay glucose
levels is more efficient than using blood because it is free of interferences
such as red blood cells, which must often be separated from the plasma prior to
measurement. SpectRx's glucose monitoring product uses the Company's
microporation technology to rapidly collect a sufficient sample of interstitial
fluid. The product is intended to measure the glucose concentration of the fluid
using disposable assay technology supplied and being designed by Abbott
specifically for use with the Company's product. Because the Company's glucose
monitoring product is designed to obtain a sample of interstitial fluid from the
outermost layers of the skin and does not require a blood sample, its use does
not stimulate pain sensors and capillaries found in the deeper layers of skin
and is thus free of the pain and blood

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involved in conventional finger stick assaying techniques. In addition, the
Company believes that the entire process will take no longer than current blood
glucose monitoring tests.

CROSS SECTION OF HUMAN SKIN
GLUCOSE MONITORING GRAPH

The Company's glucose monitoring product is designed to be comprised of a
small, hand held battery-powered, monitoring device and a proprietary,
disposable assay cartridge. The monitoring device will be placed on the skin,
and a laser or other suitable energy source mounted in the housing will be
directed onto the skin. When activated, a micropore will be painlessly created
in the outermost layer of skin, the stratum corneum. The Company believes the
creation of this micropore will not damage adjacent tissue or penetrate deeply
enough to reach the capillary bed or nerve layer below the stratum corneum. The
Company anticipates that the device will have a proprietary mechanism that will
force the interstitial fluid out of the micropore and into the disposable
cartridge. When the assay cartridge is full and the interstitial fluid has been
analyzed, the results will appear on a LCD display.

In January 1996, the Company undertook a pilot study of 10 subjects (six
diabetics and four nondiabetics) under a protocol reviewed and approved by the
Georgia Baptist Medical Center. The study was designed to evaluate the
correlation between results obtained using early stage prototypes of the
Company's glucose monitoring system and a leading conventional personal blood
glucose monitoring system. The study compared the glucose levels in interstitial
fluid and blood of 10 subjects who were each administered 75 grams of glucose.
The study, which yielded a total of 438 glucose measurements (219
contemporaneous measurements of interstitial fluid and blood), produced a
correlation coefficient of 0.96 between glucose levels in interstitial fluid and
blood.

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In October 1996, the Company entered into a collaborative arrangement with
Abbott for the development and commercialization of the Company's glucose
monitoring product. Pursuant to the arrangement the Company granted Abbott an
exclusive worldwide license for the Company's glucose monitoring product and
other related glucose monitoring devices in all countries except Singapore and
the Netherlands, where the license is non-exclusive. Pursuant to the terms of
the collaborative arrangement, Abbott has agreed to pay all costs associated
with a joint research and development program, to make certain milestone
payments to the Company and to pay the Company a royalty based on net sales.
Abbott will also be responsible for conducting clinical trials, obtaining
regulatory approval for and manufacturing, marketing, distributing and selling
the products covered by the arrangement. In addition, Abbott made a $3 million
equity investment in the Company. See "-- Collaborative Arrangements -- Abbott
Laboratories" and "Risk Factors -- Dependence on Collaborative Arrangements."

The Company expects to complete development related to the collection of
interstitial fluid, followed later by the integration of the Company's
microporation technology and Abbott's disposable assay technology into a
prototype device. The Company expects prototype development to be followed by
clinical trials and a regulatory submission. Unexpected problems may, however,
arise during the development process. In addition, Abbott retains a significant
degree of discretion regarding the timing of these activities and the amount and
quality of financial, personnel and other resources that it devotes to these
activities. Accordingly, there can be no assurance that these events will occur.
See "Risk Factors -- Early Stage of Development; No Assurance of Successful
Product Development."

The Company's glucose monitoring product will be subject to rigorous FDA
and other government regulation and may not be marketed in the U.S. unless and
until the Company has received the necessary approval or clearance from the FDA.
Pursuant to the Company's collaboration agreement with Abbott, Abbott will be
responsible for obtaining such approval or clearance. While the Company believes
the FDA may grant the Company and Abbott clearance to market the Company's
glucose monitoring device through the 510(k) premarket notification process, the
Company and Abbott will need to devote a substantial amount of time and effort
attempting to secure such clearance because they will need to demonstrate that
the device is substantially equivalent to one or more currently marketed
"predicate" glucose monitoring devices. There can be no assurance that Abbott
and the Company will be successful in obtaining clearance of a 510(k) premarket
notification in a timely manner if at all. Additionally, there can be no
assurance that the FDA will not require the submission of a PMA to obtain FDA
approval to market the Company's glucose monitoring product. See "-- Government
Regulation" and "Risk Factors -- Government Regulations; No Assurance of
Regulatory Approvals."

The Diabetes Screening Market

The ADA estimates that there are over 16 million people in the United
States with diabetes, only half of whom have been diagnosed with the disease.
The long term health care costs of a diabetic patient can be substantially
reduced if the patient can be diagnosed in the early stages of the disease so
that glucose levels can be monitored and properly controlled, thereby reducing
complications that result from long term exposure to elevated glucose levels.
These complications include diabetic retinopathy, kidney disease, nerve
degeneration and cardiovascular disease. Currently, approximately 625,000 new
cases of diabetes are diagnosed each year in the United States, and many of
those diagnosed have complications that generally appear eight to ten years
after onset of the disease. The Company believes that the low rate of diabetes
diagnosis and the failure in many cases to diagnose the disease prior to the
onset of complications is due primarily to the lack of a convenient and accurate
diabetes screening test. The Company believes that the market in the United
States for diabetes screening tests is approximately $300 million.

There are several existing diabetes screening tests in use today. The ADA
recommended diabetes screening procedure is the blood-based fasting plasma
glucose test. This test is difficult and inconvenient to administer because it
requires the patient to fast for eight hours prior to the drawing of blood, and
because the blood sample is usually sent to a laboratory for analysis, which
delays the receipt by the patient of the test results. Current methods for
diabetes screening utilizing random finger stick blood glucose tests are no
longer recommended by the ADA because the random nature of the test results in
an unacceptably low level of

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sensitivity (i.e., the ability to correctly determine that a particular person
has diabetes) and specificity (i.e., the ability to correctly determine that a
particular person does not have diabetes). Glucose urine test products, which
are available over-the-counter, have an even lower test sensitivity and
specificity and are not recommended for screening by the ADA. The low levels of
sensitivity and specificity in both the random finger stick blood glucose test
and the glucose urine test result in cases of both undetected diabetes, which
can prevent early treatment of the disease in such cases, and false indications
of diabetes, which can cause patients to incur the expense of, and devote the
time for, needless additional testing.

The SpectRx Non-Invasive Diabetes Screening Product

The SpectRx diabetes screening product is designed to detect and measure
fluorescence in the lens of the eye and evaluate that measurement using the
Company's proprietary algorithm. An abnormally high level of florescence in the
lens of the eye is indicative of prolonged exposure to high levels of glucose
due to diabetes. A measurement indicating a patient has or is likely to have
diabetes could be confirmed by subsequent testing using conventional blood-based
diagnostics. The performance of the Company's diabetes screening product has
been shown to be comparable to that of the blood-based fasting plasma glucose
test. Unlike the fasting plasma glucose test, however, the SpectRx diabetes
screening product is painless and would provide the patient with test results in
less than a minute, and would not require the patient to fast for eight hours
prior to administration of the test.

The Company's diabetes screening product is designed to be simple and
painless to use and to produce accurate point of care results in a very short
period of time. The Company believes this is likely to become as prevalent as
glaucoma testing, which is regularly performed during eye exams. Thus, the
Company believes that the product may result in increased diagnoses of the
approximately 50 million undiagnosed diabetics worldwide, including the
approximately eight million in the United States. For this reason, the Company
believes that its diabetes screening product presents a substantial opportunity
to identify new patients who can benefit from proper treatment thereby reducing
incidence of complications and their associated cost.

The Company's diabetes screening product is designed as a compact
instrument that will meet the space requirements of optometrists' and
physicians' offices and will also be suitable for retail establishments such as
pharmacies. To use the device, the individual looks into the instrument while
placing his head against a rest. The individual is instructed to look at a fixed
light as the instrument locates the eye and automatically tracks the pupil
opening. The device measures fluorescence in the lens of the eye using a
low-intensity blue light. The results of the analysis will indicate that the
patient should undergo further diagnostic testing or that there is no indication
of diabetes. In a pilot study of more than 1,300 subjects (both diabetics and
non-diabetics) conducted by Boehringer Mannheim, an early stage prototype of the
Company's diabetes screening product demonstrated an ability to detect diabetes.
The results of this pilot study indicated that the sensitivity and specificity
of the Company's diabetes screening product were comparable to the sensitivity
and specificity indicated in published studies of the fasting plasma glucose
test. The Company is currently testing four advanced prototypes of its diabetes
screening product.

The Company is currently conducting pilot clinical studies with a prototype
of its diabetes screening product. The Company believes the data from these
pilot studies are expected to provide the design changes necessary to complete
the production prototype. The Company expects Boehringer Mannheim to commence
clinical testing and file for 510(k) clearance from the FDA in 1998. Unexpected
problems may, however, arise in the development process. In addition, Boehringer
Mannheim retains a significant degree of discretion regarding the timing of
these activities and the amount and quality of financial, personnel and other
resources that it devotes to these activities. Accordingly, there can be no
assurance that this filing will occur within this time frame, or at all.

The Company has entered into a collaboration agreement with Boehringer
Mannheim, pursuant to which the Company has granted Boehringer Mannheim an
exclusive worldwide license to sell and market the Company's diabetes screening
product. The Company receives development funding and expects to receive a
manufacturing profit on products sold to Boehringer Mannheim. Boehringer
Mannheim is responsible for conducting clinical testing, obtaining regulatory
approvals for, and the marketing, distribution and sales of, the Company's
diabetes screening product. See "-- Collaborative Arrangements -- Boehringer
Mannheim Cor-

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poration" and "Risk Factors -- Early Stage of Development; No Assurance of
Successful Product Development" and "-- Dependence on Collaborative
Arrangements."

INFANT JAUNDICE

Background

Infant jaundice is a condition that primarily affects newborns within the
first three to 10 days of life. If left untreated infant jaundice may, in
extreme cases, lead to brain damage or death (kernicterus). Jaundice is
characterized by a yellowing of the skin and eyes caused by an excess of
bilirubin in the body. Bilirubin is a normal waste product resulting from the
breakdown of red blood cells and is removed from the body by the liver. Prior to
birth, the bilirubin in an infant is processed by the mother's liver and
excreted. After birth, an infant must eliminate bilirubin without the mother's
help. It may take the infant's system several days to begin eliminating the
bilirubin faster than it is produced. Infants who are born prematurely, who are
underfed, or who belong to certain ethnic groups are at increased risk of
developing jaundice. The initial screening of jaundice is the observation of
yellow skin. This is a subjective determination prone to errors due to differing
skin colors and gestational ages. If a baby is selected for further jaundice
testing, the current procedure requires that a blood sample be obtained from the
infant, usually by lancing the infant's heel, which is a traumatic process for
the infant. Since jaundice normally presents in infants 36 to 72 hours after
birth, infants who are sent home after a short hospital stay pursuant to managed
care guidelines in the United States are at risk because the condition may not
have presented prior to release.

The Infant Jaundice Screening and Monitoring Market

Of the approximately four million newborns each year in the United States,
approximately 50% have recognizable jaundice and approximately 1.7 million
receive at least one blood test for bilirubin. Approximately 700,000 newborns
are found to have elevated bilirubin levels, and a portion of these newborns
will receive additional tests. The cost to the patient for a bilirubin test
ranges from $29.50 to $37.75. Many of those infants in the United States
diagnosed with jaundice will undergo phototherapy, a treatment that converts
bilirubin into a water soluble form that can be processed and eliminated from
the infant's system. The Company believes that the average newborn under active
phototherapy treatment receives three to four bilirubin monitoring tests.

The SpectRx Non-Invasive Infant Jaundice Product

The Company's infant jaundice product is based upon reflection spectroscopy
that measures bilirubin regardless of skin color or gestational age. The product
is designed to provide rapid, point of care bilirubin measurements and to serve
as an initial screening and ongoing monitoring device. The Company believes that
the device has the potential to replace the painful heel stick procedure
currently utilized.

The design of the Company's infant jaundice product consists of a hand
held, battery-operated instrument, which sits in a compact recharger base. This
instrument incorporates a microspectrometer to collect spectroscopic information
from the skin and a proprietary, disposable calibration element. After
calibration, the instrument is applied to the skin of the infant for five to ten
seconds, during which time the bilirubin level is measured by collecting
spectroscopic information from the skin and analyzing it using a proprietary
algorithm that adjusts for testing difficulties due to skin color, gestational
age and other factors.

Using an early stage prototype, the Company tested over 100 infants in a
pilot study conducted at Northside Hospital and found a correlation coefficient
of 0.92 between total serum bilirubin measured using conventional blood tests
and that measured using the Company's prototype. In addition, the Company has
ongoing pilot study programs at Northside Hospital, Gwinnett Women's Hospital
and Pennsylvania Hospital.

The Company is currently conducting pilot clinical trials at two sites
using a laboratory prototype of its infant jaundice product. The Company expects
Healthdyne to commence clinical testing and file for 510(k) clearance from the
FDA in 1997. Healthdyne has stated that it plans to commence marketing of the
product in the United States and Canada, subject to obtaining FDA clearance and
necessary Canadian regulatory approvals. Subject to obtaining necessary
regulatory approvals, the Company expects to commence marketing of the infant
jaundice monitoring product in certain European countries by the end of 1997.
Unexpected

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problems may arise in the development and regulatory approval process. In
addition, Healthdyne retains a significant degree of discretion regarding the
timing of these activities and the amount and quality of financial, personnel
and other resources that they devote to these activities. Accordingly, there can
be no assurance that the filing schedule will be met, if at all.

The Company's infant jaundice product is being developed pursuant to a
collaborative arrangement with Healthdyne. Under the terms of the arrangement,
SpectRx will develop and manufacture the product and Healthdyne will pay the
costs associated with the FDA approval process and conducting clinical trials.
In addition, Healthdyne will pay for a portion of the product development.
Healthdyne has been granted a license to market and sell the product in the
United States and Canada, while SpectRx retains the rights to sell the product
in all other world markets. See "-- Collaborative Arrangements -- Healthdyne
Technologies, Inc." and "Risk Factors -- Dependence on Collaborative
Arrangements."

COLLABORATIVE ARRANGEMENTS

Abbott Laboratories

In October 1996, SpectRx entered into a Research & Development and License
Agreement (the "Abbott Agreement") with Abbott for the development and
commercialization of the Company's glucose monitoring product in the field of
extracting interstitial fluid samples for glucose monitoring (the "Field").
Pursuant to the Agreement, SpectRx has granted to Abbott a worldwide license
under its patents, patent applications and know how (the "Technology") useful in
the Field, including improvements, to manufacture and sell products in the
Field. The license is exclusive in all countries except Singapore and the
Netherlands where the license is non-exclusive. Abbott also has certain rights
of first negotiation with the Company regarding any rights the Company may have
to license the Technology for the development and commercialization of other
products relating to the measurement of analytes in interstitial fluid and the
delivery of therapeutic agents based on such measurements. Under the Abbott
Agreement, SpectRx receives from Abbott development funding, payments on
achievement of milestones and a royalty on Abbott product sales. In addition,
Abbott made a $3 million equity investment in SpectRx.

Under the Abbott Agreement, the parties have agreed to jointly conduct a
research program to demonstrate that the Company's glucose monitoring product
can extract an adequate sample of interstitial fluid in a targeted time period.
During the joint development program Abbott will pay mutually agreed development
costs. SpectRx is responsible for the completion of a prototype and its human
clinical testing. Thereafter, if Abbott wishes to commercialize the product, it
is responsible for further product development and obtaining all required
regulatory approvals. After obtaining these regulatory approvals, Abbott is
required to diligently pursue the sales of the products but is not prohibited
from marketing competing products. If Abbott elects not to commercialize the
product, the agreement may be terminated by either party. Abbott has a fixed
period from the date of notice to the Company of its intention to commercialize
the product in which to complete commercialization and begin shipment of
products. If such commercialization has not been completed within the permitted
time, SpectRx may terminate the agreement.

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Under the Abbott Agreement, all technology invented solely by SpectRx
during the joint development program is owned solely by SpectRx. All technology
invented solely by Abbott and all clinical data, regulatory filings and
government marketing approvals developed solely by Abbott is the property of
Abbott. On certain early termination events, SpectRx has a right to obtain a
license to certain of the relevant Abbott technology. Technology jointly
invented during the joint development program will be jointly owned pursuant to
a royalty sharing arrangement.

The Abbott Agreement remains in effect until the expiration of the last
licensed patent to expire. Abbott has the right to terminate the Abbott
Agreement without cause upon not less than 60 days' prior notice to the Company
at any time prior to the first shipment of products and upon not less than 120
days' prior notice to the Company thereafter. If Abbott terminates without cause
after completion of the research program but before the first product is
shipped, Abbott must pay to the Company a one time development program milestone
payment. Abbott may terminate the Abbott Agreement upon not less than 30 days'
prior notice to the Company for certain product development failures or failure
to obtain key patent protection.

Boehringer Mannheim Corporation

In December 1994, SpectRx entered into a Development and License Agreement
(the "Development Agreement") with Boehringer Mannheim Corporation with respect
to a non-invasive instrument that measures changes in the lens of the human eye
for the purpose of detecting diabetes. Pursuant to the Development Agreement,
SpectRx has granted to Boehringer Mannheim an exclusive, worldwide license to
sell and market the Company's diabetes screening product. SpectRx receives
development funding from Boehringer Mannheim Corporation pursuant to the
Development Agreement. The Development Agreement remains exclusive for so long
as Boehringer Mannheim meets certain minimum volume purchase requirements set
forth in the Supply Agreement with Boehringer Mannheim (discussed below). The
Development Agreement may be terminated at any time by Boehringer Mannheim upon
written notice to SpectRx.

In January 1996, Boehringer Mannheim and SpectRx entered into a Supply
Agreement for the supply by SpectRx to Boehringer Mannheim of the Company's
diabetes screening product (the "Supply Agreement"). Boehringer Mannheim's
purchase price for the Company's diabetes screening product is calculated
pursuant to a formula based on a gross margin. Boehringer Mannheim is required
to meet minimum annual purchase requirements for the diabetes screening product
each year or Boehringer Mannheim forfeits its exclusivity under the marketing
license granted in the Development Agreement. The term of the Supply Agreement
is coincident with the term of the Development Agreement. Boehringer Mannheim
may terminate the Supply Agreement for material breach (including a failure to
supply adequate requirements) of the agreement by the Company which breach
remains unremedied for 30 days after notice to the Company, in which case
Boehringer Mannheim is deemed to have acquired a manufacturing license under the
Development Agreement. If Boehringer Mannheim acquires this manufacturing
license, it must pay royalties to SpectRx on Boehringer Mannheim sales of the
diabetes screening product. SpectRx has agreed that during the term of the
Supply Agreement it will not enter into any agreement to develop or manufacture
a non-invasive diabetes detection instrument using the same or similar
technology as used in the Company's diabetes screening product other than with
Boehringer Mannheim affiliates. Boehringer Mannheim is not restricted from
pursuing the development of a diabetes screening instrument with another party.

Healthdyne Technologies, Inc.

In June 1996, SpectRx entered into a Purchasing and Licensing Agreement
with Healthdyne (the "Healthdyne Agreement"). Pursuant to the Healthdyne
Agreement, Healthdyne is responsible for clinical trials, the regulatory
approval process and sale of the Company's infant jaundice product in the United
States and Canada. The Company retains manufacturing rights and is responsible
for the regulatory approval process and sale of the infant jaundice product
outside of the United States and Canada. Under the Healthdyne Agreement the
Company receives from Healthdyne licensing fees and a manufacturing profit on
products sold to Healthdyne and shares any profit from the sales of disposables
by Healthdyne. Healthdyne receives an exclusive license for the United States
and Canada (i) to use and sell instruments for non-invasive bilirubin
measurement ("Instruments"), (ii) to use and sell disposable probes, tips or
other devices which, when used

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with Instruments, measure bilirubin levels ("Disposables") and items accessory
to and not necessary for the operation of Instruments or Disposables
("Accessories"), and (iii) to make Instruments, Disposables and/or Accessories
(collectively, "Licensed Products"). Unless SpectRx is unable to supply Licensed
Products, Healthdyne must purchase its requirements for Licensed Products from
SpectRx. Healthdyne has agreed to pay SpectRx's cost for manufacturing each
Licensed Product. Healthdyne and SpectRx then share equally the margin earned on
the sale of Licensed Products. In order to maintain license exclusivity,
Healthdyne has agreed to purchase from SpectRx certain minimum amounts of
Licensed Products or pay a royalty to SpectRx for an equivalent number of
Licensed Products. In the event that SpectRx is unable to supply Licensed
products, Healthdyne receives a license to manufacture the Licensed Products and
pays a royalty to SpectRx on sales of Licensed Products.

SpectRx has granted to Healthdyne the exclusive option to acquire an
exclusive license for the United States and Canada, on terms substantially
similar to those contained in the Healthdyne Agreement, in respect of any new
intellectual property that comes into existence after the effective date of the
Healthdyne Agreement, covers devices that would compete, directly or indirectly,
with the Licensed Products and for which SpectRx has the right and authority to
grant licenses. In such event, Healthdyne has agreed to reimburse SpectRx for
one-half of SpectRx's cost to develop and commercialize such product, in lieu of
paying any license fees. If Healthdyne fails to exercise such option, SpectRx
may license such intellectual property to any third party on terms no more
favorable than those offered to Healthdyne.

The Healthdyne Agreement remains in effect for the longer of fifteen years
or until the expiration date of the last licensed patent to expire. Upon
expiration of the Healthdyne Agreement, Healthdyne has the option to renew the
Healthdyne Agreement for additional fifteen year terms indefinitely. Healthdyne
also has the right to terminate the Healthdyne Agreement without cause upon not
less than 30 days' written notice to the Company. In the event that certain
milestones are not achieved before certain specified dates, Healthdyne has the
right to assume the commercialization efforts with respect to the Licensed
Products, in which case: (i) all further development funding payable to SpectRx
under the Healthdyne Agreement ceases, (ii) Healthdyne must pay SpectRx a
royalty, and (iii) SpectRx must compensate Healthdyne for commercialization
costs through a royalty offset.

In January 1997, Healthdyne became the subject of a hostile takeover
attempt by Invacare Corporation. To date, approximately 20% of Healthdyne's
outstanding shares of Common stock have been tendered to Invacare, and the offer
has been extended to April 28, 1997 and may be extended further. There can be no
assurance that a change in control of Healthdyne would not adversely affect the
Company's collaborative arrangement with Healthdyne.

LICENSING ARRANGEMENTS

Georgia Tech Research Corporation

The Company has a license agreement with Georgia Tech Research Corporation
("GTRC") pursuant to which GTRC has granted the Company an exclusive, worldwide
license (including the right to grant sublicenses) to make, use and sell
products that incorporate GTRC's know how related to a method of using
non-invasive instrumentation to quantitatively measure molecular changes in
living human lenses for the purposes of diagnosing diabetes and precataractous
conditions (the "GTRC Agreement"). Under the license, the Company must pay a
royalty to GTRC on net sales of any such products manufactured and sold by the
Company. The term of the GTRC Agreement is until the expiration date of the last
expiring patent covering any of the technology licensed or, if no patent issues,
for 15 years from the date of execution of the GTRC Agreement.

Altea Technologies, Inc.

In March 1996, SpectRx entered into a License and Joint Development
Agreement (the "Altea/Nimco Agreement") among the Company, Altea and
Non-Invasive Monitoring Company, Inc. ("Nimco") pursuant to which certain rights
in respect of jointly developed technology are allocated between the Company and
Altea. Both Altea and Nimco are jointly controlled by Jonathan Eppstein, a Vice
President of the Company,

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and his sister. See "Certain Transactions." The Altea/Nimco Agreement also
covers one patent and one patent application owned by Nimco and provides for
continued joint development efforts between SpectRx and Altea as mutually
agreed. The Altea/Nimco Agreement further provides for the joint ownership by
SpectRx and Altea of certain patents and technology relating to the
transdermal/intradermal movement of substances utilizing various methods. Under
the Altea/Nimco Agreement, SpectRx receives worldwide, exclusive rights to any
technology for monitoring applications covered by the Nimco patents and related
joint technology and Altea receives exclusive, worldwide rights to any
technology for delivery applications covered by the joint technology. Future
inventions made by each of SpectRx and Altea based on newly developed technology
are included within the Altea/Nimco Agreement.

SpectRx is obligated to pay royalties to Nimco for products using its
technology and to Altea for products using its technology, in each case based on
net sales of products and net revenues from sublicensees. Royalties on products
using both Nimco and Altea technology will be allocated as mutually agreed.
Minimum annual royalties are payable by SpectRx to Altea. See Note 10 of Notes
to Consolidated Financial Statements. If actual accrued royalties are less than
the minimum royalty amount, SpectRx may pay Altea the difference or the license
will become non-exclusive. Thereafter, SpectRx must offer a right of first
refusal to acquire exclusive rights to the monitoring technology to Altea.

The term of the Altea/Nimco Agreement is for the life of the patents
covered by the agreement. The agreement may be terminated by any party in the
event of a default by any other party that is not cured within 90 days of notice
to the defaulting party. The agreement may be terminated globally by Altea if
SpectRx fails to commercialize any product, use or application utilizing the
monitoring technology in any major country by the date of the first commercial
shipment date under the Abbott Agreement and may be terminated by Altea with
respect to certain regions if SpectRx fails to commercialize any product, use or
application in those regions by this date. SpectRx may terminate the agreement
upon not less than three months prior notice to Altea and Nimco if given before
it has commercialized the technology and upon not less than six months prior
notice to each party if given after commercialization has commenced. Except in
the case of termination of the agreement by SpectRx for breach, upon termination
all technology and joint technology shall become the exclusive property of
Altea, except the Nimco patents. If the agreement is terminated by SpectRx for
breach, all rights to the monitoring technology in the countries in which
SpectRx has retained its exclusive rights shall become the exclusive property of
SpectRx, each party shall retain non-exclusive rights to the monitoring
technology in other countries, and Altea shall retain all rights to the delivery
technology. If SpectRx loses its rights to the monitoring technology for failure
to commercialize (but not due to breach), Altea and Nimco, after their
reacquisition of rights from SpectRx, will pay an amount of money by way of a
royalty to SpectRx according to a formula to reflect each party's relative
investment.

The University of Texas M.D. Anderson Cancer Center

In March 1996, SpectRx, entered into a Patent License Agreement with the
Board of Regents (the "Board") of the University of Texas System and M.D.
Anderson pursuant to which the Board granted SpectRx an exclusive license under
certain of its patents to manufacture, have manufactured, use and sell products
within the United States for use within the licensed field of optical
measurement of bilirubin in human tissue (the "MDA Patent License Agreement").
SpectRx has the right to assign this license to affiliates and the right to
sublicense the foregoing rights. In connection with the MDA Patent License
Agreement, SpectRx has agreed to pay all expenses incurred in prosecuting and
maintaining the patents licensed and a royalty on net sales of products that
incorporate the licensed patents, subject to annual minimum royalty payments.
See Note 10 of Notes to Consolidated Financial Statements. The term of the MDA
Patent License Agreement is until the expiration date of the last expiring
patent licensed. The Board has the right at any time after one year from the
effective date of the MDA Patent License Agreement to terminate the license if
SpectRx, within 90 days after written notice from the Board, fails to provide
written evidence satisfactory to the Board that SpectRx has commercialized or is
actively and effectively attempting to commercialize an invention licensed under
the MDA Patent License Agreement.

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Joseph Lakowicz, Ph.D.

The Company has a license agreement with Joseph Lakowicz, Ph.D. whereby Dr.
Lakowicz has granted the Company an exclusive, worldwide license (including the
right to grant sublicenses) to make, use, and sell medical products that
incorporate Dr. Lakowicz's intellectual property related to lifetime
fluorescence technology (the "Lakowicz Agreement"). The intellectual property
consists of a portfolio of granted patents, patent applications and foreign
filings in the area of lifetime fluorescence technology. The Company has agreed
to pay a royalty to Dr. Lakowicz on net sales of such products manufactured and
sold. Additionally, the Company is committed to fund certain research programs
under the direction of Dr. Lakowicz. See Note 10 of Notes to Consolidated
Financial Statements. The Company has sublicensed some parts of this
intellectual property related to invasive blood tests to its majority owned
subsidiary, FluorRx, Inc. The term of the Lakowicz Agreement is until the
expiration date of the last expiring patent covering any of the technology
licensed.

RESEARCH, DEVELOPMENT AND ENGINEERING

To date, the Company has been engaged primarily in the research,
development and testing of the Company's glucose monitoring, diabetes screening
and infant jaundice products, including research for and development of its core
electro-optical and microporation technologies. Since inception, the Company has
incurred approximately $4.5 million in research and development expenses, net of
approximately $490,000 of which was reimbursed through collaborative
arrangements. Three distinct groups within the Company conduct research,
development and engineering. One group consists of 16 engineers and support
personnel who design optics, electronics, mechanical components and software for
the infant jaundice and diabetes screening products. A second group consists of
10 scientists and engineers who devote their time to the development of
microporation technology for the monitoring of glucose and other analytes. The
third group consists of four engineers and scientists focused on investigating
new applications for the Company's core electro-optical and microporation
technologies.

The Company believes that the interstitial fluid sampling technology under
development at SpectRx and Abbott for use in connection with the Company's
glucose monitoring product may also be used to develop alternatives for certain
blood tests where the analyte being tested is also present in comparable volumes
in interstitial fluid. Abbott has a right of first negotiation with the Company
regarding the use of interstitial fluid sampling technology for these
applications.

In 1996, SpectRx executed a licensing agreement with Dr. Lakowicz of the
University of Maryland pursuant to which the Company licenses a portfolio of
intellectual property related to lifetime fluorescence technology, a technology
used to determine the spectroscopic fingerprint of a substance. The Company
believes lifetime fluorescence technology may have applications including in
vitro blood chemistry, molecular diagnostics, flow cytometry, combinatorial
chemistry for pharmaceutical discovery research and noninvasive optical
diagnostics.

To date, the Company has only tested prototypes of its glucose monitoring,
diabetes screening and infant jaundice products. Because the Company's research
and clinical development programs are at an early stage, substantial additional
research and development and clinical trials will be necessary before commercial
prototypes of the Company's glucose monitoring and infant jaundice products are
produced. The Company could encounter unforeseen problems in the development of
its products such as delays in conducting clinical trials, delays in the supply
of key components or delays in overcoming technical hurdles. There can be no
assurance that the Company will be able to successfully address the problems
that may arise during the development and commercialization process. In
addition, there can be no assurance that any of the Company's products will be
successfully developed, proven safe and efficacious in clinical trials, meet
applicable regulatory standards, be capable of being produced in commercial
quantities at acceptable costs, be eligible for third-party reimbursement from
governmental or private insurers, be successfully marketed or achieve market
acceptance. If any of the Company's development programs are not successfully
completed, required regulatory approvals or clearances are not obtained, or
products for which approvals or clearances are obtained

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are not commercially successful, the Company's business, financial condition and
results of operations would be materially adversely affected.

In addition, a substantial amount of the research and development work
required to develop the Company's products is either performed or funded by the
Company's collaborative partners. There can be no assurance that the Company's
collaborative partners will be willing or able to continue to perform and to
fund this research and development work. Any failure by one or more of the
Company's collaborative partners to continue to perform or fund such work could
significantly delay or prevent the development or commercialization of the
Company's products, which could have a material adverse effect upon the
Company's business, financial condition and results of operations. See
"-- Collaborative Arrangements" and "-- Licensing Arrangements" and "Risk
Factors -- Dependence on Collaborative Arrangements."

MANUFACTURING AND SOURCES OF SUPPLY

One element of the Company's business strategy is to manufacture certain of
its products and to outsource the production of other, high volume products and
associated disposables. To date, the Company's manufacturing activities have
consisted only of building certain prototype devices. If the Company
successfully develops its diabetes screening and infant jaundice products and,
together with Boehringer Mannheim and Healthdyne, obtains FDA clearance and
other regulatory approvals to market these products, the Company will undertake
to manufacture these products. The Company has no experience manufacturing such
products in the volumes that would be necessary for the Company to achieve
significant commercial sales. Currently four individuals are employed by the
Company to accomplish the pre-production planning, quality system development,
facility development and production scaling that will be needed to bring
production to commercial levels. There can be no assurance that the Company will
be able to establish and maintain reliable, full scale manufacturing of these
products at commercially reasonable costs. Although the Company has leased space
that it plans to use to manufacture its products, it may encounter various
problems in establishing and maintaining its manufacturing operations, resulting
in inefficiencies and delays. Specifically, companies often encounter
difficulties in scaling up production, including problems involving production
yield, quality control and assurance, and shortages of qualified personnel. In
addition, the Company's manufacturing facilities will be subject to GMP
regulations, including possible preapproval inspection, international quality
standards and other regulatory requirements. Difficulties encountered by the
Company in manufacturing scale-up or failure by the Company to implement and
maintain its manufacturing facilities in accordance with GMP regulations,
international quality standards or other regulatory requirements could result in
a delay or termination of production, which could have a material adverse effect
on the Company's business, financial condition and results of operations.

SALES, MARKETING AND DISTRIBUTION

The Company has elected to focus the sales and distribution of its current
products through its collaborative partners. The Company believes that by
aligning with larger, more established partners, in

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<PAGE> 39

specific market segments, it can utilize its partners' already developed
strengths and more effectively and quickly penetrate the market place. The
Company's primary efforts to date have been to build the skill and information
base to identify and quantify market segments to which the Company's
technologies can be economically developed and marketed.

Abbott has the exclusive right to market and sell the Company's glucose
monitoring product in all countries except Singapore and the Netherlands, where
the license is non-exclusive. Boehringer Mannheim has the exclusive worldwide
right to market and sell the Company's diabetes screening product. Healthdyne
has the exclusive right to market and sell the Company's infant jaundice product
in the United States and Canada. Thus, if the Company, together with its
collaborative partners successfully develops its products and obtains FDA
clearance or approval and other regulatory approvals to market these products,
the Company will be heavily dependent upon the willingness and ability of its
collaborative partners to market the products. There can be no assurance that
the Company's collaborative partners will be willing and able to devote
sufficient financial, administrative and personnel resources to successfully
market the Company's products. Any failure by one or more the Company's
collaborative partners to commit sufficient resources to the marketing and sales
of the Company's products could significantly adversely affect the sales, and
revenues from the sales, of these products, which could have a material adverse
effect upon the Company's business, financial condition and results of
operations.

If the Company, together with Healthdyne, successfully develops the
Company's infant jaundice product and obtains, in countries other than the
United States and Canada, necessary regulatory approvals and clearances to
market this product, the Company will be responsible for marketing this product
in these countries. The Company has no experience in marketing or selling
medical device products and only has a three-person marketing and sales staff.
In order to successfully market and sell its infant jaundice product outside the
United States and Canada, the Company must either develop a marketing and sales
force or enter into arrangements with third parties to market and sell this
product. There can be no assurance that the Company will be able to successfully
develop a marketing and sales force or that it will be able to enter into
marketing and sales agreements with third parties on acceptable terms, if at
all. If the Company develops its own marketing and sales capabilities, it will
compete with other companies that have experienced and well-funded marketing and
sales operations. If the Company enters into a marketing arrangement with a
third party for the marketing and sale of its infant jaundice product outside of
the United States and Canada, any revenues to be received by the Company from
this product will be dependent on this third party, and the Company will likely
be required to pay a sales commission or similar amount to this party.
Furthermore, the Company is currently dependent on the efforts of Abbott and
Boehringer Mannheim for any revenues to be received from its glucose monitoring
and diabetes screening products, respectively. There can be no assurance that
the efforts of these third parties for the marketing and sale of the Company's
products will be successful. See "-- Collaborative Arrangements" and "Risk
Factors -- Dependence on Collaborative Arrangements."

PATENTS

The Company has pursued a strategy of developing and acquiring patents and
patent rights and licensing technology. SpectRx's success depends in large part
upon its ability to establish and maintain the proprietary nature of its
technology through the patent process and to license from others patents and
patent applications necessary to develop its products. The Company has licensed
from Nimco one granted patent and know how related to its glucose monitoring
product, jointly applied with Altea for a U.S. patent and an international
patent related to this device and has licensed this granted patent and these
patent applications to Abbott pursuant to the parties' collaborative
arrangements. SpectRx has license agreements with GTRC that give the Company the
right to use two patents related to its diabetes screening product, and the
Company has licensed this proprietary technology to Boehringer Mannheim pursuant
to the Company's collaborative arrangement with Boehringer Mannheim. The Company
has license agreements with M.D. Anderson that give SpectRx access to one patent
related to the Company's infant jaundice product, and the Company has applied
for two patents related to this product. SpectRx has licensed the one patent and
two patent applications to Healthdyne pursuant to its collaborative arrangement
with that company. In addition, SpectRx has licensed from

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<PAGE> 40

Dr. Joseph Lakowicz of the University of Maryland several granted patents and
patent applications related to fluorescence spectroscopy that it intends to use
in its research and development efforts.

There can be no assurance that one or more of the patents held directly by
the Company or licensed by the Company from third parties, including the
disposable components to be used in connection with its glucose monitoring and
infant jaundice products, or processes used in the manufacture of the Company's
products, will not be successfully challenged, invalidated or circumvented or
that the Company will otherwise be able to rely on such patents for any reason.
In addition, there can be no assurance that competitors, many of whom have
substantial resources and have made substantial investments in competing
technologies, will not seek to apply for and obtain patents that prevent, limit
or interfere with the Company's ability to make, use and sell its products
either in the United States or in foreign markets. If any of the Company's
patents are successfully challenged, invalidated or circumvented or the
Company's right or ability to manufacture its products were to be proscribed or
limited, the Company's ability to continue to manufacture and market its
products could be adversely affected, which would likely have a material adverse
effect upon the Company's business, financial condition and results of
operations.

COMPETITION

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<PAGE> 41

MediSense, Inc.) are currently marketing traditional glucose monitors. These
monitors are widely accepted in the health care industry and have a long history
of accurate and effective use. Furthermore, a number of companies have announced
that they are developing products that permit non-invasive and less invasive
glucose monitoring. Accordingly, competition in this area is expected to
increase.

GOVERNMENT REGULATION

All of the Company's products are regulated as medical devices. Medical
device products are subject to rigorous FDA and other governmental agency
regulations in the United States and may be subject to regulations of relevant
foreign agencies. The FDA regulates the clinical testing, manufacture, labeling,
packaging, marketing, distribution and record keeping for such products in order
to ensure that medical products distributed in the United States are safe and
effective for their intended uses. Noncompliance with applicable requirements
can result in import detentions, fines, civil penalties, injunctions,
suspensions or losses of regulatory approvals or clearances, recall or seizure
of products, operating restrictions, refusal of the government to approve
product export applications or allow the Company to enter into supply contracts,
and criminal prosecution. Failure to obtain regulatory approvals, the
restriction, suspension or revocation of regulatory approvals or clearances, if
obtained, or any other failure to comply with regulatory requirements would a
have a material adverse effect on the Company's business, financial condition
and results of operations.

In the United States, medical devices are classified into one of three
classes (Class I, II or III), on the basis of the controls deemed necessary by
the FDA to reasonably assure their safety and effectiveness. Under FDA
regulations, Class I devices are subject to general controls (for example,
labeling, premarket notification and adherence to GMP), and Class II devices are
subject to general and special controls (for example,

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<PAGE> 42

performance standards, postmarket surveillance, patient registries, and FDA
guidelines). Generally, Class III devices are those which must receive premarket
approval from the FDA to ensure their safety and effectiveness (for example,
life-sustaining, life-supporting and implantable devices, or new devices which
have not been found substantially equivalent to legally marketed Class I or II
devices).

A medical device manufacturer may seek clearance to market a medical device
by filing a 510(k) premarket notification with the FDA if a medical device
manufacturer establishes that a newly developed device is "substantially
equivalent" to either a device that was legally marketed prior to May 28, 1976,
the date upon which the Medical Device Amendments of 1976 were enacted, or to a
device that is currently legally marketed and has received 510(k) premarket
clearance from the FDA. The 510(k) premarket notification must be supported by
appropriate information, including, where appropriate, data from clinical
trials, establishing the claim of substantial equivalence to the satisfaction of
the FDA. Commercial distribution of a device for which a 510(k) premarket
notification is required can begin only after the FDA issues an order finding
the device to be "substantially equivalent" to a predicate device. The FDA has
recently been requiring a more rigorous demonstration of substantial equivalence
than in the past. It generally takes from four to 12 months from the date of
submission to obtain clearance of a 510(k) submission, but it may take
substantially longer. The FDA may determine that a proposed device is not
substantially equivalent to a legally marketed device, or that additional
information is needed before a substantial equivalence determination can be
made. The Company believes that its products will qualify for 510(k) premarket
notification.

A "not substantially equivalent" determination, or a request for additional
information, could delay the market introduction of new products that fall into
this category and could have a material adverse effect on the Company's
business, financial condition and results of operations. For any of the
Company's products that are cleared through the 510(k) process, modifications or
enhancements that could significantly affect the safety or efficacy of the
device or that constitute a major change to the intended use of the device will
require new 510(k) submissions or approval of a PMA. Any modified device for
which a new 510(k) premarket notification is required cannot be distributed
until 510(k) clearance is obtained for the modified device. There can be no
assurance that the Company will obtain 510(k) clearance in a timely manner, if
at all, for any devices or modifications to devices for which it may submit a
510(k) notification.

A PMA application must be submitted if a proposed device is not
substantially equivalent to a legally marketed Class I or Class II device, or
for a Class III device for which FDA has called for PMAs. The PMA application
must contain valid scientific evidence to support the safety and effectiveness
of the device which includes the results of clinical trials, all relevant bench
tests, and laboratory and animal studies. The PMA must also contain a complete
description of the device and its components, and a detailed description of the
methods, facilities and controls used for manufacture, including, where
appropriate, the method of sterilization and its assurance. In addition, the
submission must include proposed labeling, advertising literature and training
methods (if required). If human clinical trials of a device are required in
connection with a PMA application, and the device presents a "significant risk,"
the sponsor of the trial (usually the manufacturer or the distributor of the
device) is required to file an investigational device exemption ("IDE")
application prior to commencing human clinical trials. The IDE application must
be supported by data, typically including the results of animal and laboratory
testing, and a description of how the device will be manufactured. If the IDE
application is reviewed and approved by the FDA and one or more appropriate
institutional review boards ("IRBs"), human clinical trials may begin at a
specific number of investigational sites with a specific number of patients, as
approved by the FDA. If the device presents a "nonsignificant risk" to the
patient, a sponsor may begin clinical trials after obtaining approval for the
study by one or more appropriate IRBs, but FDA approval for the commencement of
the study is not required. Sponsors of clinical trials are permitted to sell
those devices distributed in the course of the study provided such compensation
does not exceed recovery of costs of manufacture, research, development and
handling. An IDE supplement must be submitted to and approved by FDA before a
sponsor or an investigator may make a significant change to the investigational
plan that may affect the plan's scientific soundness or the rights, safety or
welfare of human subjects.

Upon receipt of a PMA application, the FDA makes a threshold determination
as to whether the application is sufficiently complete to permit a substantive
review. If the FDA determines that the PMA application is sufficiently complete
to permit a substantive review, the FDA will accept the application for

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<PAGE> 43

filing. An incomplete application will be returned to the sponsor and must be
resubmitted and accepted for filing before the application will be substantively
reviewed. Once the submission is accepted for filing, the FDA begins an in-depth
review of the PMA. An FDA review of a PMA application generally takes one to two
years from the date the PMA application is accepted for filing, but may take
significantly longer. The review time is often significantly extended by the FDA
asking for more information or clarification of information already provided in
the submission. During the PMA review period, the submission may be sent to an
FDA-selected scientific advisory panel composed of physicians and scientists
with expertise in the particular field. The FDA scientific advisory panel issues
a recommendation to the FDA that may include conditions for approval. The FDA is
not bound by the recommendations of the advisory panel. Toward the end of the
PMA review process, the FDA will conduct an inspection of the manufacturer's
facilities to ensure that the facilities are in compliance with applicable GMP
requirements.

If the FDA evaluations of both the PMA application and the manufacturing
facilities are favorable, the FDA will issue an approvable letter, which usually
contains a number of conditions which must be met in order to secure final
approval of the PMA. When those conditions have been fulfilled to the
satisfaction of the FDA, the agency will issue a PMA approval letter authorizing
commercial marketing of the device for certain indications and intended uses.
The PMA review process can be expensive, uncertain and lengthy. A number of
devices for which a PMA has been sought have never been approved for marketing.
The FDA may also determine that additional clinical trials are necessary, in
which case the PMA may be significantly delayed while such trials are conducted
and data is submitted in an amendment to the PMA. Modifications to the design,
labeling or manufacturing process of a device that is the subject of an approved
PMA, its labeling, or manufacturing process may require approval by the FDA of
PMA supplements or new PMAs. Supplements to a PMA often require the submission
of the same type of information required for an initial PMA, except that the
supplement is generally limited to that information needed to support the
proposed change from the product covered by the original PMA. The FDA generally
does not call for an advisory panel review for PMA supplements. There can be no
assurance that, if required, the Company will be able to meet the FDA's PMA
requirements or that any necessary approvals will be received. Failure to comply
with regulatory requirements would have a material adverse effect on the
Company's business, financial condition and results of operations.

Regulatory approvals and clearances, if granted, may include significant
labeling limitations and limitations on the indicated uses for which the product
may be marketed. In addition, to obtain such approvals and clearances, the FDA
and certain foreign regulatory authorities impose numerous other requirements
with which medical device manufacturers must comply. FDA enforcement policy
strictly prohibits the marketing of approved medical devices for unapproved
uses. Any products manufactured or distributed by the Company pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
the FDA. The FDA also requires the Company to provide it with information on
death and serious injuries alleged to have been associated with the use of the
Company's products, as well as any malfunctions that would likely cause or
contribute to death or serious injury. Failure to comply with applicable
regulatory requirements can result in, among other things, warning letters,
fines, injunctions, civil penalties, recall or seizure of products, total or
partial suspension of production, refusal by the government to grant premarket
clearance or premarket approval for devices, withdrawals of approvals and
criminal prosecutions.

The Company is required to register with the FDA as a device manufacturer
and list its products with the Agency. The Company also is subject to biannual
inspections, for compliance with GMP, by the FDA and state agencies acting under
contract with the FDA. The GMP regulations require that the Company manufacture
its products and maintain its documents in a prescribed manner with respect to
manufacturing, testing, quality assurance and quality control activities. The
FDA also has promulgated final regulatory changes to the GMP regulations that
require, among other things, design controls and maintenance of service records,
and which will increase the cost of complying with GMP requirements.

Labeling and promotional activities are subject to scrutiny by the FDA and
in certain instances, by the Federal Trade Commission. The FDA actively enforces
regulations prohibiting marketing of products for unapproved users. The Company
and its products are also subject to a variety of state and local laws and
regulations in those states and localities where its products are or will be
marketed. Any applicable state or local regulations may hinder the Company's
ability to market its products in those states or localities. Manufacturers are
also subject to numerous federal, state and local laws relating to such matters
as safe

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working conditions, manufacturing practices, environmental protection, fire
hazard control and disposal of hazardous or potentially hazardous substances.
There can be no assurance that the Company will not be required to incur
significant costs to comply with such laws and regulations now or in the future
or that such laws or regulations will not have a material adverse effect upon
the Company's ability to do business.

International sales of the Company's products are subject to the regulatory
requirements of each target country. The regulatory review process varies from
country to country. The ISO 9000 series of standards for quality operations have
been developed to ensure that companies know the standards of quality to which
they must adhere to receive certification. The European Union has promulgated
rules which require that medical products receive by mid-1998 the right to affix
the CE mark, an international symbol of adherence to quality assurance standards
and compliance with applicable European medical device directives. The ISO 9001
certification will be one of the CE mark certification requirements required by
mid-1998. Failure to receive the right to affix the CE mark will prohibit the
Company from selling its products in member countries of the European Union.

The Company will rely upon its corporate partners to obtain certain United
States and foreign regulatory approvals and if such approvals are obtained the
Company will rely upon its corporate partners to remain in compliance with
ongoing United States and foreign regulatory restrictions. The inability or
failure of such third parties to comply with the varying regulations or the
imposition of new regulations would materially adversely effect the Company's
business, financial condition and results of operations.

THIRD-PARTY REIMBURSEMENT

In the United States, patients, hospitals and physicians who purchase
medical devices such as the Company's products, generally rely on third-party
payors, principally federal Medicare, state Medicaid and private health
insurance plans, to reimburse them for all or a portion of the cost of the
medical device. Reimbursement for devices that have received FDA approval has
generally been available in the United States. In addition, certain health care
providers are gradually adopting a managed care system in which such providers
contract to provide comprehensive health care services for a fixed cost per
person. The Company is unable to predict what changes will be made in the
reimbursement methods utilized by third-party health care payors. Although the
Company anticipates that patients, hospitals and physicians will justify the use
of the Company's products by the attendant cost savings and clinical benefits
that the Company believes will be derived from the use of its products, there
can be no assurance that this will be the case. Furthermore, the Company could
be adversely affected by changes in reimbursement policies of governmental or
private health care payors. Any inability of patients, hospitals, physicians and
other users of the Company's products to obtain sufficient reimbursement from
health care payors for the Company's products or adverse changes in relevant
governmental policies or the policies of private third-party payors regarding
reimbursement for such products could have a material adverse effect on the
Company's business, financial condition and results of operations.

If the Company obtains the necessary foreign regulatory approvals, market
acceptance of the Company's products in international markets will be dependent,
in part, upon the availability of reimbursement within prevailing health care
payment systems. Reimbursement and health care payment systems in international
markets vary significantly by country and include both government sponsored
health care and private insurance. Although the Company intends to seek
international reimbursement approvals, there can be no assurance that such
approvals will be obtained in a timely manner, if at all. Any failure to receive
international reimbursement approvals could have an adverse effect on market
acceptance of the Company's products in the international markets in which such
approvals are sought.

PRODUCT LIABILITY AND INSURANCE

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may not be available to the Company on acceptable terms, if at all. A successful
product liability claim or series of claims brought against the Company that
results in an adverse judgment against or settlement by the Company in excess of
any insurance coverage could have a material adverse effect on the Company's
business, financial condition and results of operations.

EMPLOYEES

As of December 31, 1996, the Company had 41 employees and consulting or
other contract arrangements with 24 additional persons to provide services to
the Company on a full- or part-time basis. Of the 65 people so employed or
engaged by the Company, 41 are engaged in research and development activities,
three are engaged in sales and marketing activities, three are engaged in
regulatory affairs and quality assurance, eight are engaged in manufacturing and
development, and 10 are engaged in administration and accounting. No employees
are covered by collective bargaining agreements, and the Company believes it
maintains good relations with its employees. The Company's ability to operate
successfully and manage its potential future growth depends in significant part
upon the continued service of certain key scientific, technical, managerial and
finance personnel, and its ability to attract and retain additional highly
qualified scientific, technical, managerial and finance personnel. None of these
key employees has an employment contract with the Company nor are any of these
employees covered by key person or similar insurance. In addition, if the
Company, together with its collaborative partners, is able to successfully
develop and commercialize the Company's products, the Company will need to hire
additional scientific, technical, managerial and finance personnel. The Company
faces intense competition for qualified personnel in these areas, many of whom
are often subject to competing employment offers, and there can be no assurance
that the Company will be able to attract and retain such personnel. The loss of
key personnel or inability to hire and retain additional qualified personnel in
the future could have a material adverse effect on the Company's business,
financial condition and results of operations.

FACILITIES

The Company leases approximately 30,000 square feet in Norcross, Georgia,
which comprise the Company's administrative, research and development, marketing
and production facilities and the Company's planned manufacturing facility. The
Company's lease for the portion of this facility housing the finance department
and certain planned manufacturing operations extends through 1999, the portion
housing certain research and development operations expires in June 2000 and the
portion housing administration, sales and marketing, engineering and certain
other planned manufacturing operations expires in March 2001.

LEGAL PROCEEDINGS

The Company is not a party to any legal proceedings.

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MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

Executive officers and directors of the Company, and their ages as of April 24,
1997:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------- --- -------------------------------------------
<S> <C> <C>
Mark A. Samuels............................ 39 President, Chief Executive Officer and
Director
Keith D. Ignotz............................ 49 Executive Vice President, Chief Operating
Officer and Director
Thomas H. Muller, Jr....................... 55 Executive Vice President, Chief Financial
Officer and Secretary
Robert G. Rothfritz........................ 48 Vice President, Operations
Jonathan A. Eppstein....................... 44 Vice President, Transdermal Systems
Richard L. Fowler.......................... 40 Vice President, Engineering
Charles G. Hadley(1)(2).................... 40 Director
Jack R. Kelly, Jr.(1)(2)................... 62 Director
</TABLE>

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

(1) Member of the Compensation Committee of the Board of Directors.
(2) Member of the Audit Committee of the Board of Directors.

Mark A. Samuels has served as a member of the Company's Board of Directors,
President and CEO since co-founding the Company in 1992. Prior to that time, Mr.
Samuels was a founder of Laser Atlanta Optics, Inc., an optical sensor company,
where he held the position of President and Chief Executive Officer until 1992,
and was a director until October 1996. While at Laser Atlanta Optics, Mr.
Samuels focused on the development of commercial and medical applications of
electro-optics. Mr. Samuels earned a B.S. in Physics and an M.S. (Electrical
Engineering) from Georgia Institute of Technology.

Keith D. Ignotz has served as a member of the Company's Board of Directors
and Chief Operating Officer since co-founding the Company in 1992. Formerly, Mr.
Ignotz was President of Humphrey Instruments SmithKline Beckman (Japan),
President of Humphrey Instruments GMBH (Germany), and Senior Vice President of
Allergan Humphrey Inc., a $100 million per year ophthalmic diagnostic company.
Mr. Ignotz is a member of the board of directors of Vismed, Inc. (Dicon), an
ophthalmic diagnostic products company, and Pennsylvania College of Optometry.
Mr. Ignotz earned a B.A. in Sociology from San Jose State University and an
M.B.A. from Pepperdine University.

Thomas H. Muller, Jr. has served as the Company's Chief Financial Officer
since joining the Company in December 1996. Prior to that time, Mr. Muller was
President of Muller & Associates, an operational and financial management
services company and Chief Financial Officer of Nurse On Call, Inc. From 1984 to
1992, Mr. Muller was Chief Financial Officer of HBO & Company, a provider of
information systems and services to the health care industry. Mr. Muller earned
a B.I.E. in Industrial Engineering from Georgia Institute of Technology and an
M.B.A. from Harvard Business School.

Robert G. Rothfritz, has served as the Company's Vice President of
Operations since joining the Company in July 1996. From 1994 to 1996, Mr.
Rothfritz was Director of Manufacturing for Atlantic Envelope Company, a
National Service Industries, Inc. division, and from 1993 to 1994, he was a
Senior Manager, Manufacturing Systems Leader for Ethicon EndoSurgery, a Johnson
& Johnson division. From 1988 to 1992, Mr. Rothfritz was Vice President,
Operations for the Oral Care Division of Bausch & Lomb, Inc. Mr. Rothfritz
earned a B.S. in Mechanical Engineering from Georgia Institute of Technology.

Jonathan A. Eppstein has served as the Company's Vice President of
Transdermal Systems since December 1996, and was Vice President of Research and
Development since co-founding the Company in 1992. Prior to that time, Mr.
Eppstein was Systems Engineering Manager and Director of Medical Programs for
Laser Atlanta Optics, Inc. Mr. Eppstein earned a B.S. in Electrical Engineering
and a M.S. in

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Mathematics from Western Michigan University. Mr. Eppstein, together with his
sister, controls Altea and Nimco.

Richard L. Fowler has served as the Company's Vice President of Engineering
since joining the Company in February 1996. Prior to that time, Mr. Fowler
worked for Laser Atlanta Optics, Inc., where he held the positions of President
and Chief Executive Officer from August 1994 to February 1996. As Vice President
of Engineering for Laser Atlanta Optics from 1992 to 1994, Mr. Fowler managed
the development of three laser sensor products. Mr. Fowler earned a B.S. in
Electrical Engineering from University of Texas.

Charles G. Hadley has served as a member of the Company's Board of
Directors since 1993. Since 1988, Mr. Hadley has been general partner of Cashon
Biomedical Associates, L.P., which is the managing general partner of the
Hillman Medical Ventures Partnerships. These venture capital funds focus on
early stage medical technology. Mr. Hadley earned a B.A. from George Washington
University and a J.D. and M.B.A. from Stanford University.

Jack R. Kelly, Jr. has served as a member of the Company's Board of
Directors since February, 1993. Since 1983, Mr. Kelly has been a general partner
of Noro-Moseley Partners, a venture capital fund. Prior to 1983, Mr. Kelly was
the Chief Operating Officer for Scientific Atlanta. Mr. Kelly is a director of
Syntellect, Inc. and Novoste Corporation. Mr. Kelly earned a B.S. in Physics
from Georgia State University.

All directors hold their offices until the next stockholder meeting of the
Company and until their successors are elected and qualified or until their
earlier resignation or removal. The Company's executive officers are appointed
by the Board of Directors and serve until their successors are elected or
appointed.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee of the Board of Directors of the Company makes
recommendations concerning salaries, incentives and other forms of compensation
for directors, officers and other employees of the company, subject to
ratification by the full Board of Directors. The Compensation Committee also
administers the Company's various stock plans. In 1996, the Compensation
Committee consisted of Jack R. Kelly, Jr. and Mark A. Samuels, the Company's
President and Chief Executive Officer, until December 10, 1996. While a member
of the Compensation Committee, Mr. Samuels borrowed approximately $228,000 from
the Company pursuant to two separate promissory notes. Presently, Charles G.
Hadley and Jack R. Kelly, Jr. comprise the Compensation Committee. See
"Management--Stock Plans" and "Certain Transactions."

DIRECTOR COMPENSATION

Directors currently receive no cash fees for services provided in that
capacity but are reimbursed for out-of-pocket expenses they incur in connection
with their attendance at meetings of the Board. Upon closing of the offering,
nonemployee directors ("Outside Directors") will receive payments of $3,000 per
quarter, $1,000 per meeting attended in person ($500 if attended by telephone)
and $500 per committee meeting attended, up to a maximum of $20,000 per year,
and all directors will be reimbursed for expenses actually incurred in attending
meetings of the Board of Directors and its committees. Upon closing of the
offering, Outside Directors may be granted options to purchase Common Stock
under the 1995 Stock Option Plan.

46
<PAGE> 48

EXECUTIVE COMPENSATION

The following table sets forth the compensation paid by the Company during
the fiscal year ended December 31, 1996 to the Chief Executive Officer and its
five other most highly compensated executive officers (the Chief Executive
Officer and such other executive officers are hereinafter referred to as the
"Executive Officers"):

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
------------------------------- STOCK OPTION
NAME AND PRINCIPAL POSITION SALARY BONUS OTHER(1) SHARES
- ---------------------------------------------------- -------- ------ -------- ------------
<S> <C> <C> <C> <C>
Mark A. Samuels..................................... $150,000 $ -- -- 114,287
President and Chief Executive Officer
Keith D. Ignotz..................................... 150,000 -- -- 89,287
Chief Operating Officer
Thomas H. Muller, Jr................................ 3,918(2) -- -- 60,715
Executive Vice President, Chief Financial Officer
and Secretary

Robert G. Rothfritz................................. 43,846(3) -- -- 21,429
Vice President, Operations
Jonathan A. Eppstein................................ 95,385 -- -- --
Vice President, Transdermal Systems
Richard L. Fowler................................... 78,872 3,046 -- 21,429
Vice President, Engineering
</TABLE>

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

(1) Other annual compensation in the form of perquisite and other personal
benefits, securities or property has been omitted in those cases where the
aggregate amount of such compensation is the lesser of either $50,000 or
10% of the total of annual salary and bonus reported for the named
Executive Officer.
(2) Includes salary from December 20, 1996 upon commencement of employment. Mr.
Muller's current annual compensation is $130,000.
(3) Includes salary from July 8, 1996 upon commencement of employment. Mr.
Rothfritz's current annual compensation is $95,000.

47
<PAGE> 49

STOCK OPTION INFORMATION

The following table sets forth certain information for the fiscal year
ended December 31, 1996, with respect to each grant of stock options to the
Executive Officers:

OPTION GRANTS DURING YEAR ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT
INDIVIDUAL GRANTS ASSUMED ANNUAL
----------------------------------------------- RATES OF
% OF TOTAL STOCK PRICE
OPTIONS APPRECIATION FOR
GRANTED EXERCISE OPTION TERM(2)
OPTIONS TO EMPLOYEES PRICE PER EXPIRATION ------------------
NAME GRANTED IN 1996(1) SHARE DATE 5% 10%
- ------------------------------------ ------- ------------ --------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Mark A. Samuels..................... 114,287 34% $ .70 2006 $50,312 $127,500
Keith D. Ignotz..................... 89,287 26% .70 2006 39,306 99,610
Thomas H. Muller, Jr................ 60,715 18% 2.45 2006 93,549 237,072
Robert G. Rothfritz................. 21,429 6% .70 2006 9,434 23,907
Jonathan A. Eppstein................ -- -- -- -- -- --
Richard L. Fowler................... 21,429 6% .70 2006 9,434 23,907
</TABLE>

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

(1) In 1996, the Company granted employees and consultants options to purchase
an aggregate of 338,940 shares of Common Stock.
(2) In accordance with the rules of the Securities and Exchange Commission (the
"Commission"), shown are the gains or "option spreads" that would exist for
the respective options granted. These gains are based on the assumed rates
of annual compound stock price appreciation of 5% and 10% applied to the
grant price from the date the option was granted over the full option term.
These assumed annual compound rates of stock price appreciation are
mandated by the rules of the Commission and do not represent the Company's
estimate or projection of future Common Stock prices.

AGGREGATED OPTION EXERCISES IN 1996 AND DECEMBER 31, 1996 OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT VALUE OF UNEXERCISED IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1996 IN-THE-MONEY OPTIONS (1) THE IPO PRICE (2)
--------------------------- --------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------- ----------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mark A. Samuels........... 31,027 136,832 $ 157,133 $ 674,841 $ 327,781 $ 1,427,417
Keith D. Ignotz........... 27,901 114,958 142,128 569,846 295,583 1,202,115
Thomas H. Muller, Jr...... -- 60,715 -- 185,181 -- 519,113
Robert G. Rothfritz....... 2,232 19,197 10,714 92,146 22,990 197,729
Jonathan A. Eppstein...... 109,657 62,488 580,086 330,562 1,183,119 674,246
Richard L. Fowler......... 4,018 17,411 19,286 83,573 41,385 179,333
</TABLE>

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

(1) Based upon an assumed fair market value of $5.50 per share as of December
31, 1996 less the exercise price per share.
(2) Based upon an assumed initial public offering price of $11.00 less the
exercise price per share.

STOCK PLANS

1995 Stock Plan. A total of 1,428,572 shares of Common Stock have been
reserved for issuance under the Company's 1995 Stock Plan (the "Stock Plan").
Under the Stock Plan, as of March 31, 1997, options to purchase an aggregate
663,362 shares were outstanding, 403 shares of Common Stock had been purchased
pursuant to exercises of stock options and stock purchase rights and 764,807
shares were available for future grant.

48
<PAGE> 50

The Stock Plan provides for the grant of incentive stock options within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), nonqualified stock options and stock purchase rights to employees and
consultants of the Company. Incentive stock options may be granted only to
employees. The Stock Plan is administered by the Board of Directors or a
committee appointed by the Board of Directors, which determines the terms of
options granted, including the exercise price and the number of shares subject
to each option. The Board of Directors also determines the schedule upon which
options become exercisable. The exercise price for employees generally of
incentive stock options granted under the Stock Plan must be at least equal to
the fair market value of the Company's Common Stock on the date of grant.
However, for any employee holding more than 10% of the voting power of all
classes of the Company's stock, the exercise price will be no less than 110% of
the fair market value. The exercise price of nonqualified stock options is set
by the administrator of the Stock Plan. The maximum term of options granted
under the Stock Plan is ten years. In the event of a merger, reorganization or
change in the ownership of the Company, all options outstanding under the Plan
shall be fully vested.

In the event a consultant or an employee is terminated, such employee or
consultant will have at least 30 days after such termination to exercise any
vested non-qualified option and any vested incentive stock option. After the
applicable exercise period, all unexercised options will be canceled. All
unvested options will
be canceled as of the date of the employee's termination. In the event of a
merger, sale of substantially all of the Company's assets or change in the
ownership of the Company, all options outstanding under the Stock Plan shall be
fully vested. Each such vested option will remain exercisable in accordance with
the terms under which such option was granted.

Employee Stock Purchase Plan. The Company's Employee Stock Purchase Plan
(the "Purchase Plan") was adopted by the Company's Board of Directors and
approved by the Company's stockholders in January 1997. The Purchase Plan is
intended to qualify under Section 423 of the Code. The Company has reserved
214,286 shares of Common Stock for issuance under the Purchase Plan. Under the
Purchase Plan, an eligible employee will be granted an option to purchase shares
of Common Stock from the Company through payroll deductions of up to 10% of his
or her compensation, at a price per share equal to 85% of the lower of (i) the
fair market value of the Company's Common Stock on the first day of an offering
period under the Purchase Plan or (ii) the fair market value of the Company's
Common Stock on the last day of an offering period. Except for the first
offering period, each offering period will last for six months and will commence
the first day on which the national stock exchanges and the Nasdaq National
Market System are open for trading on or after May 1 and November 1 of each
year. The first offering period will begin upon the effective date of this
offering and will end on October 31, 1997. On the last day of each offering
period, the option to purchase the shares will be exercised automatically, and
the maximum number of full shares subject to the option will be purchased for
the employee with the accumulated payroll deductions in his or her account. Any
employee who is customarily employed for at least 20 hours per week and more
than five months per calendar year and who has been so employed for at least
three consecutive months on or before the commencement date of an offering
period is eligible to participate in the Purchase Plan. An employee may elect to
withdraw from the Purchase Plan by withdrawing all, but not less than all,
payroll deductions from his account prior to the exercise date, and a
termination of employment will be treated as a withdrawal from the Purchase
Plan.

In the event of merger of the Company with or into another corporation, all
outstanding options will either be assumed or an equivalent option will be
substituted by the successor corporation, unless the Board in its discretion
accelerates the exercise date of such options or cancels the options and refunds
all payroll deductions collected from the employees. If the Board accelerates
the exercise date, it must give the employees ten days' notice of the new
exercise date.

LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS

The Company's Amended and Restated Certificate of Incorporation limits the
liability of directors to the maximum extent permitted by Delaware law. Delaware
law provides that directors of a corporation will not be personally liable for
monetary damages for breach of their fiduciary duties as directors, except
liability for (i) breach of their duty of loyalty to the corporation or its
stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) unlawful payments of
dividends or

49
<PAGE> 51

unlawful stock repurchases or redemptions, or (iv) any transaction from which
the director derived an improper personal benefit. Such limitation of liability
does not apply to liabilities arising under the federal or state securities laws
and does not affect the availability of equitable remedies such as injunctive
relief or rescission.

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

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

At present, there is no pending litigation or proceeding involving a
director or officer of the Company in which indemnification is required or
permitted, and the Company is not aware of any threatened litigation or
proceeding that may result in a claim for such indemnification.

50
<PAGE> 52

CERTAIN TRANSACTIONS

On October 31, 1996, the Company loaned Mark A. Samuels, President, Chief
Executive Officer and a director of the Company, $200,000. The loan, which is
evidenced by a promissory note secured by Common Stock of the Company and other
securities, bears interest at the rate of 6.72% per year and becomes due and
payable on the earlier of October 31, 2001 or 120 days after the date when he
ceases to be an employee of the Company. The outstanding balance, including
interest, as of January 31, 1997 was approximately $203,000. Mark A. Samuels'
largest aggregate amount of indebtedness outstanding to the Company in 1996 was
approximately $235,000.

On October 31, 1996, the Company loaned Keith D. Ignotz, Chief Operating
Officer and a director of the Company, $200,000. The loan, which is evidenced by
a promissory note secured by Series B Preferred Stock of the Company and other
securities, bears interest at the rate of 6.72% per year and becomes due and
payable on the earlier of October 31, 2001 or 120 days after the date when he
ceases to be an employee of the Company. The outstanding balance, including
interest, as of January 31, 1997 was approximately $203,000. Keith D. Ignotz's
largest aggregate amount of indebtedness outstanding to the Company in 1996 was
approximately $227,000.

On June 30, 1994, the Company loaned Mark A. Samuels, President, Chief
Executive Officer and a director of the Company, approximately $28,000 in
connection with his purchase of Common Stock of the Company. The loan is
evidenced by a promissory note secured by the underlying stock, bears interest
at the rate of 6% per year and becomes due and payable on June 30, 1999. The
outstanding balance, including interest, as of January 31, 1997 was
approximately $32,000.

On June 30, 1994, the Company loaned Keith D. Ignotz, Chief Operating
Officer and a director of the Company, approximately $21,000 in connection with
his purchase of Common Stock of the Company. The loan, which is evidenced by a
promissory note secured by the underlying stock, bears interest at the rate of
6% per year and becomes due and payable on June 30, 1999. The outstanding
balance, including interest, as of January 31, 1997 was approximately $24,000.

On September 16, 1996, the Company loaned Laser Atlanta Optics, Inc.
("LAO") $30,000. Mark A. Samuels was treasurer and a director of LAO until
October 1996, and owns more than 10% of LAO's equity securities. Richard L.
Fowler, Vice President, Engineering of the Company, was secretary and a director
of LAO until November 1996. Keith D. Ignotz was a director of LAO until October
1996, and owns more than 10% of LAO equity securities. The loan bore interest at
a rate of 6% per year and was repaid in full as of December 31, 1996.

On March 1, 1996, the Company issued 28,572 shares of Common Stock to LAO
pursuant to the Assignment and Bill of Sale, dated February 29, 1996, between
the Company and LAO ("Assignment"). Under the terms of the Assignment, LAO
relinquished any and all claims it may have had to the right, title and interest
in and to any technology, patents, products, uses, and applications related to
transdermal monitoring and delivery in exchange for payment of $10.00 by the
Company and the 28,572 shares of the Company's Common Stock.

On December 5, 1996, the Company purchased 129,000 shares of FluorRx, Inc.
Series A Preferred Stock, thereby acquiring a 64.8% interest in FluorRx, Inc.
Mark A. Samuels is a director of FluorRx, Inc., and Keith D. Ignotz is Vice
President, Secretary and a director of FluorRx, Inc. In addition, the Company
has a third seat on the Board of Directors, which is currently vacant. In
connection with the purchase of this stock, the Company has agreed to loan
FluorRx, Inc. up to $100,000. This loan, which has not been made, would be
evidenced by a convertible promissory note, would bear interest at the rate of
8% per year and would become due and payable on December 5, 1997.

On March 1, 1996, the Company entered into a License and Joint Development
Agreement (the "Altea/Nimco Agreement") with Altea Technologies, Inc. ("Altea")
and Non-Invasive Monitoring Company, Inc. ("Nimco"). Jonathan Eppstein, Vice
President, Transdermal Systems of the Company, and Deborah Eppstein, Jonathan
Eppstein's sister, are principals of Altea and Nimco. On March 8, 1996, the
Company issued 71,429 shares of Common Stock to Altea pursuant to section 3.1 of
the Altea/Nimco

51
<PAGE> 53

Agreement. Also pursuant to the Altea/Nimco Agreement, in June 1995, March 1996,
September 1996 and November 1996, the Company paid, $5,000 to Nimco, and $1,100,
$19,000 and $150,000 to Altea, respectively. See "Business -- Licensing
Arrangements."

On October 10, 1996, the Company entered into a Research & Development and
License Agreement (the "Abbott Agreement") with Abbott. In connection with the
Abbott Agreement, on October 21, 1996, Abbot purchased $3,000,000 of equity in
the Company in the form of Series C Preferred Stock, and thereby became a holder
of 6.4% of the Company's outstanding equity prior to this offering. See
"Business -- Collaborative Arrangements."

On November 6, 1995 and April 15, 1996, the Company sold Convertible
Subordinated Promissory Notes ("Notes"), which automatically converted into
278,548 aggregate shares of Series B Preferred Stock on an as converted basis,
and Stock Purchase Warrants ("Warrants") to purchase 317,614 aggregate shares of
Common Stock. On August 30, 1996, the Company sold shares of Series B Preferred
Stock which automatically convert to 908,621 shares of Common Stock upon the
closing of this offering at an as-converted price of $5.60 per share. On October
21, 1996, the Company sold shares of Series C Preferred Stock which
automatically convert to 357,143 shares of Common Stock upon the closing of this
offering at an as-converted price of $8.40 per share. The purchasers of the
Notes, Warrants, Series B Preferred Stock, and Series C Preferred Stock included
the following directors, entities affiliated with directors and 5% shareholders.

<TABLE>
<CAPTION>
NUMBER OF SHARES
SHARES OF SHARES OF
WARRANT PURCHASED SERIES B SERIES C
NOTE PURCHASE UNDER PREFERRED PREFERRED
NAME AMOUNT PRICE WARRANT STOCK STOCK
- ----------------------------------------------- -------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
DIRECTORS AND ENTITIES AFFILIATED WITH
DIRECTORS:
Entity Affiliated with Charles G. Hadley(1)
(Hillman Medical Ventures Partnerships(2))... $348,040 $6,960 74,581 450,381 --
Entity Affiliated with Jack Kelly(1)
(Noro-Moseley Partners, L.P.(3))............. 348,040 6,960 74,581 137,882 --
Keith D. Ignotz(4)............................. 59,804 1,196 12,815 20,009 --
OTHER 5% SHAREHOLDERS:
Abbott Laboratories(5)......................... -- -- -- -- 357,143
</TABLE>

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

(1) Charles G. Hadley and Jack Kelly each sit on the Board of Directors of the
Company pursuant to the Series A Preferred Stock Purchase Agreement which
provides that as of February 5, 1993, "the Company's Board of Directors
will consist of Mark A. Samuels and Keith D. Ignotz, two persons chosen by
the Purchasers and a fifth person to be chosen by the holders of Common
Stock."
(2) Hillman Medical Ventures 1995 L.P. held a $250,000 Note that converted into
Series B Preferred Stock, holds a Warrant for 53,572 shares of Common Stock
purchased for $5,000 and holds 48,288 shares of Series B Preferred Stock on
an as converted basis; Hillman Medical Ventures 1996 L.P. held a $98,040
Note that converted into Series B Preferred Stock, holds a Warrant for
21,009 shares of Common Stock purchased for $1,960 and holds 402,093 shares
of Series B Preferred Stock on an as converted basis. The Hillman Medical
Ventures partnerships hold 27.2% of the Company's outstanding equity prior
to this offering. The general partners of the Hillman Medical Ventures
partnerships are Cashon Biomedical Associates L.P. and Hillman/Dover
Limited Partnership. The general partner of Hillman/Dover Limited
Partnership is a wholly-owned subsidiary of The Hillman Company, a firm
engaged in diversified investments and operations. The Hillman Company is
controlled by Henry L. Hillman, Elsie Hilliard Hillman and C.G.
Grefenstette, Trustees of the Henry L. Hillman Trust, which Trustees may be
deemed the beneficial owners of the 1,515,201 shares owned by the Hillman
Medical Ventures partnerships.
(3) Noro-Moseley Partners, L.P. holds 18.9% of the Company's outstanding equity
prior to this offering.
(4) Keith Ignotz sits on the Board of Directors of the Company, is the Executive
Vice President and Chief Operating Officer, and holds 6.9% of the Company's
outstanding equity prior to this offering.
(5) Abbott holds 6.4% of the Company's outstanding equity prior to this
offering.

52
<PAGE> 54

PRINCIPAL STOCKHOLDERS

The following table sets forth as of March 31, 1997, and as adjusted to
reflect the sale of the shares of Common Stock offered hereby, certain
information with respect to the beneficial ownership of the Common Stock as to
(i) each person known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock, (ii) each director of the Company, (iii)
each of the Executive Officers named in the Summary Compensation Table, and (iv)
all directors and executive officers of the Company as a group.

<TABLE>
<CAPTION>
PERCENT OF SHARES
NUMBER OF OUTSTANDING
SHARES ------------------------
BENEFICIALLY BEFORE THE AFTER THE
BENEFICIAL OWNER OWNED(1) OFFERING OFFERING(2)
- ---------------------------------------------------------- --------- ---------- -----------
<S> <C> <C> <C>
Hillman Medical Ventures Partnerships(3).................. 1,515,201 27.2% 20.0%
824 Market Street
Suite 900
Wilmington, DE 19801
Noro-Moseley Partners(4).................................. 1,050,631 18.9% 13.9%
4200 Northside Parkway
Building 9
Atlanta, GA 30327
Mark A. Samuels(5)........................................ 468,897 8.4% 6.2%
c/o SpectRx, Inc.
6025A Unity Drive
Norcross, GA 30071
Keith D. Ignotz(6)........................................ 428,412 7.6% 5.6%
c/o SpectRx, Inc.
6025A Unity Drive
Norcross, GA 30071
Abbott Laboratories....................................... 357,143 6.4% 4.7%
100 Abbott Park Road
Abbott Park, IL 60064
Jonathan A. Eppstein(7)................................... 208,081 3.7% 2.7%
Richard L. Fowler(8)...................................... 30,726 * *
Thomas H. Muller, Jr.(9).................................. 6,324 * *
Robert G. Rothfritz(10)................................... 4,464 * *
Charles G. Hadley(11)..................................... 1,515,201 27.2% 20.0%
Jack R. Kelly, Jr.(12).................................... 1,050,631 18.9% 13.9%
All directors and executive officers as a group (8
persons)(13)............................................ 3,712,736 64.4% 47.9%
</TABLE>

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

(*) Less than 1%

(1) Applicable percentage ownership based on 5,567,590 shares of Common Stock
as of March 31, 1997, together with applicable options for such
stockholder. Beneficial ownership is determined in accordance with the
rules of the Commission, based on factors including voting and investment
power with respect to shares. Shares of Common Stock subject to the options
currently exercisable, or exercisable within 60 days after March 31, 1997,
and any warrants to purchase shares of Common Stock are deemed outstanding
for computing the percentage ownership of any other person.

(2) After giving effect to the issuance of 2,000,000 shares of Common Stock
offered hereby.

(3) Consists of 402,093 shares owned by Hillman Medical Ventures 1996 L.P.,
48,288 shares owned by Hillman Medical Ventures 1995 L.P., 214,728 shares
owned by Hillman Medical Ventures 1994 L.P., 714,286 shares owned by
Hillman Medical Ventures 1993 L.P., a warrant exercisable for 21,009 shares
owned by Hillman Medical Ventures 1996 L.P., a warrant exercisable for
53,572 shares owned by Hillman Medical Ventures 1995 L.P., and a warrant
exercisable for 61,225 shares owned by Hillman Medical Ventures 1994 L.P.
The general partners of the Hillman Medical Ventures partnerships are
Cashon Biomedical Associates L.P. and Hillman/Dover Limited Partnership.
The general partner of

53
<PAGE> 55

Hillman/Dover Limited Partnership is a wholly-owned subsidiary of The
Hillman Company, a firm engaged in diversified investments and operations.
The Hillman Company is controlled by Henry L. Hillman, Elsie Hilliard
Hillman and C.G. Grefenstette, Trustees of the Henry L. Hillman Trust,
which Trustees may be deemed the beneficial owners of the 1,515,201 shares
owned by the Hillman Medical Ventures partnerships.
(4) Consists of 908,702 shares held by Noro-Moseley Partners and 141,929 shares
issuable pursuant to four warrants to purchase shares of Common Stock. Mr.
Kelly disclaims beneficial ownership of the shares held by Noro-Moseley
Partners.

(5) Consists of 420,386 shares held by Mr. Samuels and 48,511 shares subject to
stock options that are exercisable within 60 days of March 31, 1997.

(6) Consists of 362,099 shares held by Mr. Ignotz, 42,783 shares subject to
stock options that are exercisable within 60 days of March 31, 1997 and
23,530 shares issuable pursuant to two warrants to purchase shares of
Common Stock.

(7) Consists of 11,296 shares held by Mr. Eppstein, 71,429 shares held by Altea
of which Mr. Eppstein has beneficial ownership and 125,356 shares subject
to stock options that are exercisable within 60 days of March 31, 1997.

(8) Consists of 24,476 shares held by Mr. Fowler and 6,250 shares subject to
stock options that are exercisable within 60 days of March 31, 1997.

(9) Consists of 6,324 shares subject to options held by Mr. Muller that are
exercisable within 60 days of March 31, 1997.

(10) Consists of 4,464 shares subject to stock options held by Mr. Rothfritz
that are exercisable within 60 days of March 31, 1997.

(11) Consists of 402,093 shares owned by Hillman Medical Ventures 1996 L.P.,
48,288 shares owned by Hillman Medical Ventures 1995 L.P., 214,728 shares
owned by Hillman Medical Ventures 1994 L.P., 714,286 shares owned by
Hillman Medical Ventures 1993, a warrant exercisable for 21,009 shares
owned by Hillman Medical Venture 1996 L.P., a warrant exercisable for
53,572 shares owned by Hillman Medical Venture 1995 L.P., and a warrant
exercisable for 61,225 shares owned by Hillman Medical Venture 1993 L.P.
The general partners of the Hillman Medical Ventures partnerships are
Cashon Biomedical Associates L.P. and Hillman/Dover Limited Partnership.
The general partner of Hillman/Dover Limited Partnership is a wholly-owned
subsidiary of The Hillman Company, a firm engaged in diversified
investments and operations. The Hillman Company is controlled by Henry L.
Hillman, Elsie Hilliard Hillman and C.G. Grefenstette, Trustees of the
Henry L. Hillman Trust, which Trustees may be deemed the beneficial owners
of the 1,515,201 shares owned by the Hillman Medical Ventures partnerships.
(12) Consists of 908,702 shares held by Noro-Moseley Partners and 141,929 shares
issuable pursuant to four warrants to purchase shares of Common Stock. Mr.
Kelly disclaims beneficial ownership of the shares held by Noro-Moseley
Partners.

(13) Includes an aggregate 233,688 shares issuable pursuant to options and
warrants exercisable within 60 days of March 31, 1997.

54
<PAGE> 56

DESCRIPTION OF CAPITAL STOCK

Upon completion of the offering, the total number of shares of all classes
of stock which the Company has authority to issue will be 50,000,000 shares of
Common Stock, $0.001 par value, and 5,000,000 shares of undesignated preferred
stock, $0.001 par value. As of March 31, 1997, there were 5,567,590 shares of
Common Stock outstanding which were held of record by 53 shareholders, and no
shares of undesignated Preferred Stock outstanding. Upon completion of this
offering and assuming no exercise of options after March 31, 1997, the Company
will have outstanding 7,567,590 shares of Common Stock, 7,867,590 shares if the
Underwriter's over-allotment option is exercised.

COMMON STOCK

The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of shareholders. Subject to
preferences that may be applicable to any outstanding preferred stock, holders
of Common Stock are entitled to receive ratably such dividends as may be
declared by the Board of Directors of the Company out of funds legally available
therefor and in liquidation proceedings. Holders of Common Stock have no
preemptive or subscription rights and there are no redemption rights with
respect to such shares. The outstanding shares of Common Stock are, and the
shares of Common Stock offered hereby will be, fully paid and nonassessable.

PREFERRED STOCK

The Company's Board of Directors is authorized, without further shareholder
action, to issue preferred stock in one or more series and to fix the voting
rights, liquidation preferences, dividend rights, repurchase rights, conversion
rights, redemption rights and terms, including sinking fund provisions, and
certain other rights and preferences, of the preferred stock.

Although there is no current intention to do so, the Board of Directors of
the Company may, without shareholder approval, issue shares of a class or series
of preferred stock with voting and conversion rights which could adversely
affect the voting power or dividend rights of the holders of Common Stock and
may have the effect of delaying, deferring or preventing a change in control of
the Company.

NOTES, WARRANTS AND OPTIONS

The Company has issued a Convertible Promissory Note ("Note") convertible
into shares of its Common Stock on or at any time following the closing of this
offering and on or before June 19, 1998. The number of shares issuable under the
Note is equal to the outstanding principal and accrued interest divided by
one-half of the per share purchase price paid by the public in this offering. As
of March 31, 1997, and assuming an initial public offering price of $11.00 per
share, the Note could convert to 47,398 shares of Common Stock.

The Company has issued warrants to purchase its Common Stock from time to
time in connection with certain financing arrangements. Warrants to purchase a
total of 561,698 shares of Common Stock have been issued by the Company at a
weighted average exercise price of $1.25 per share in connection with certain
transactions. All warrants except one for 8,572 shares of Common Stock are
currently exercisable and expire upon the closing of this offering. All
outstanding warrant agreements provide for antidilution adjustments in the event
of certain mergers, consolidations, reorganizations, recapitalizations, stock
dividends, stock splits or other changes in the corporate structure of the
Company. Holders of these warrants will be entitled to certain rights to cause
the Company to register the sale of such shares under the Securities Act. See
"Shares Eligible for Future Sale."

As of March 31, 1997, the Company had issued options to purchase a total of
663,362 shares of Common Stock pursuant to the Company's 1995 Stock Plan (the
"Stock Plan") at a weighted average exercise price of $0.64 per share.
Recommendations for option grants under the Stock Plan are made by the
Compensation Committee, subject to ratification by the full Board of Directors.
The Compensation Committee may issue options with varying vesting schedules, but
all options granted pursuant to the Stock Plan must be exercised within ten
years from the date of grant.

55
<PAGE> 57

REGISTRATION RIGHTS OF CERTAIN HOLDERS

The holders of 4,035,888 shares of Common Stock (the "Registrable
Securities") or their transferees are entitled to certain registration rights
with respect to the registration of such shares under the Securities Act of
1933, as amended (the "Securities Act"). These rights are provided under the
terms of the Amended and Restated Registration Rights Agreement between the
Company and the holders of the Registrable Securities. The holders of at least
80% of the Registrable Securities (or any lesser number of shares of Registrable
Securities having an expected aggregate offering price greater than $7.5
million) may require, respectively, subject to certain limitations in the Stock
Purchase Agreements, on one or two occasions, after the later of September 1,
1998 or six months after the effective date of this Prospectus, that the Company
use its best efforts to register the Registrable Securities for public resale.
In addition, if, following this offering, the Company registers any of its
Common Stock either for its own account or for the account of other security
holders, the holders of Registrable Securities are entitled to include their
shares of Common Stock in the registration. These shares will not form a part of
the shares of the Common Stock registered in this offering. A holder's right to
include shares in an underwritten registration statement is subject to the
ability of the underwriters to limit the number of shares included in the
offering. The holder or holders of Registrable Securities may also require the
Company to register all or a portion of their Registrable Securities on Form S-3
when use of such form becomes available to the Company, provided, among other
limitations, that the proposed aggregate selling price, net of underwriting
discounts and commissions, is at least $500,000. All registration expenses must
be borne by the Company and all selling expenses relating to Registrable
Securities must be borne by the holders of the securities being requested. If
such holders, by exercising their demand registration rights, cause a large
number of securities to be registered and sold in the public market, such sales
could have an adverse effect on the market price for the Company's Common Stock.
If the Company were to initiate a registration and include Registrable
Securities pursuant to the exercise of piggyback registration rights, the sale
of such Registrable Securities may have an adverse effect on the Company's
ability to raise capital.

CERTAIN CHARTER AND BYLAW PROVISIONS AND DELAWARE ANTI-TAKEOVER STATUTE

Certain provisions of the Restated Certificate of Incorporation and the
Company's Bylaws may have the effect of making it more difficult for a third
party to acquire, or of discouraging a third party from attempting to acquire,
control of the Company. Such provisions could limit the price that certain
investors might be willing to pay in the future for shares of Common Stock.
Certain of these provisions allow the Company to issue Preferred Stock without
any vote or further action by the stockholders and eliminate the right of
stockholders to act by written consent without a meeting. These provisions may
make it more difficult for stockholders to take certain corporate actions and
could have the effect of delaying or preventing a change in control of the
Company. In addition, the Company is subject to Section 203 of the Delaware
General Corporation Law which, subject to certain exceptions, prohibits a
Delaware corporation from engaging in any business combination with any
interested stockholder for a period of three years following the date that such
stockholder became an interested stockholder, unless: (1) prior to such date,
the board of directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder, or (2) upon consummation of the transaction which
resulted in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for purposes of
determining the number of shares outstanding of those shares owned (i) by
persons who are directors and also officers and (ii) employee stock plans in
which employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or exchange
offer, or (iii) on or subsequent to such time the business combination is
approved by the board of directors and authorized at an annual or special
meeting of stockholders, and not by written consent, by the affirmative vote of
at least 66 2/3% of the outstanding voting stock which is not owned by the
interested stockholder.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar with respect to the Common Stock will be
Suntrust Bank in Atlanta, Georgia, and its telephone number is (404) 724-3762.

56
<PAGE> 58

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering and assuming no exercise of options after
March 31, 1997, the Company will have outstanding 7,567,590 shares of Common
Stock (7,867,590 shares if the Underwriter's over-allotment option is
exercised). Of these shares, the 2,000,000 shares (2,300,000 shares if the
Underwriters' over-allotment option is exercised in full) sold in this offering
will be freely tradable without restriction or further registration under the
Securities Act unless purchased by "affiliates" of the Company as that term is
defined in Rule 144 of the Securities Act ("Rule 144"). The remaining 5,567,590
shares outstanding upon completion of this offering will be "restricted
securities" as that term is defined under Rule 144 (the "Restricted Shares").
Each of the officers, directors and certain other stockholders of the Company
that beneficially own or have dispositive power over substantially all of the
Restricted Shares have agreed with the Underwriters not to sell or otherwise
dispose of any shares of Common Stock for a period of 180 days after the date of
this Prospectus (the "Lock-up Period") without the written consent of Hambrecht
& Quist LLC. Hambrecht & Quist LLC, in its sole discretion at any time and
without notice, may release any or all shares from the lock-up agreements and
permit holders of the shares to resell all or any portion of their shares at any
time prior to the expiration of the Lock-up Period. See "Underwriting." The
number of shares of Common stock available for sale in the public market is
further limited by restrictions under the Securities Act.

Because of the restrictions noted above, on the date of this Prospectus, no
shares other than the 2,000,000 shares (2,300,000 shares if the Underwriter's
over-allotment option is exercised) offered hereby will be eligible for sale.
Beginning 180 days after the date of this Prospectus (or earlier with the prior
written consent of Hambrecht & Quist LLC), 1,413,885 shares, including 324,058
shares issuable upon exercise of currently outstanding vested options, will be
eligible for sale in the public market without restriction. In addition,
3,446,493 shares will be eligible for sale subject to certain volume
limitations. The remaining 1,031,270 shares held by existing stockholders will
become eligible for sales from time to time upon the expiration of the minimum
holding period prescribed by Rule 144.

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 from the later of the date such
Restricted Shares are acquired from the Company and (if applicable) the date
they were acquired from an affiliate, is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of 1% of
the then outstanding shares of Common Stock or the average weekly trading volume
in the Nasdaq National Market System during the four calendar weeks preceding
the filing of Form 144 with respect to such sale. Sales under Rule 144 are also
subject to certain requirements as to the manner and notice of sales and the
availability of public information concerning the Company. All shares, including
Restricted Shares, held by affiliates of the Company eligible for sale in the
public market under Rule 144 are subject to the foregoing volume limitations and
other restrictions. In addition, an individual that is not deemed to have been
an affiliate of the Company at any time during the 90 days preceding a sale, and
who has beneficially owned for at least three years the shares proposed to be
sold, would be entitled to sell such shares under paragraph(k) thereof without
regard to the requirements described above.

The Commission has adopted an amendment to Rule 144 and paragraph(k)
thereof that would reduce the applicable requisite holding periods to one year
and two years, respectively. This amendment will be effective 60 days after its
publication in the Federal Register. The figures listed in this prospectus
assume the effectiveness of this amendment.

In general, Rule 701 permits resales of shares issued pursuant to certain
compensatory benefit plans and contracts commencing 90 days after the issuer
becomes subject to the reporting requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), in reliance upon Rule 144 but without
compliance with certain restrictions, including the holding period requirements,
contained in Rule 144. Prior to the expiration of the Lock-up Period, the
Company intends to register on a registration statement on Form S-8, (i) a total
of 214,286 shares of Common Stock reserved for issuance under the Purchase Plan
and (ii) assuming no exercise of options after March 31, 1997, 663,362 shares of
Common Stock subject to outstanding options under the Stock Plan and 764,807
shares reserved for future issuance pursuant to such

57
<PAGE> 59

plan. Such registration will permit the resale of shares so registered by
non-affiliates in the public market without restriction under the Securities
Act.

Prior to this offering, there has been no public market for the Common
Stock of the Company, and any sale of substantial amounts of Common Stock in the
open market may adversely affect the market price of the Common Stock offered
hereby. See "Risk Factors -- Potential Adverse Effect of Shares Eligible for
Future Sale."

58
<PAGE> 60

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, through their Representatives, Hambrecht & Quist LLC
and Volpe Brown Whelan & Company, LLC, have severally agreed to purchase from
the Company the following respective number of shares of Common Stock:

<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
------------------------------------------------------------------ ---------
<S> <C>
Hambrecht & Quist LLC.............................................
Volpe Brown Whelan & Company, LLC.................................

---------
Total...................................................
========
</TABLE>

The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in the Company's business and the receipt of
certain certificates, opinions and letters from the Company, its counsel and
independent auditors. The nature of the Underwriters' obligation is such that
they are committed to purchase all shares of Common Stock offered hereby if any
of such shares are purchased.

The Underwriters propose to offer the shares of Common Stock directly to
the public at the initial public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not in
excess of $ per share. The Underwriters may allow and such dealers may
reallow a concession not in excess of $ per share to certain other dealers.
After the initial public offering of the shares, the offering price and other
selling terms may be changed by the Representatives of the Underwriters. The
Representatives have informed the Company that the Underwriters do not intend to
confirm sales to accounts over which they exercise discretionary authority.

The Company has granted to the Underwriters an option, exercisable no later
than 30 days 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 discount, set forth on the cover page of this Prospectus. To the
extent that the Underwriters exercise this option, each of the Underwriters will
have a firm commitment to purchase approximately the same percentage thereof
which the number of shares of Common Stock to be purchased by it shown in the
above table bears to the total number of shares of Common Stock offered hereby.
The Company will be obligated, pursuant to the option, to sell shares to the
Underwriters to the extent the option is exercised. The Underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of shares of Common Stock offered hereby.

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 an order for the purchase of shares in whole or in part.

The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriters may be required to make in respect thereof.

The Company, including the executive officers and directors, who will
beneficially own in the aggregate 3,712,736 shares of Common Stock after the
offering, have agreed that they will not, without the prior written consent of
Hambrecht & Quist LLC, offer, sell, or otherwise dispose of any shares of Common
Stock, options or warrants to acquire shares of Common Stock or securities
exchangeable for or convertible into shares of Common Stock owned by them during
the 180-day period following the date of this Prospectus. The Company has agreed
that it will not, without prior written consent of Hambrecht & Quist LLC, offer,
sell or

59
<PAGE> 61

otherwise dispose of any shares of Common Stock, options or warrants to acquire
shares of Common Stock or securities exchangeable for or convertible into shares
of Common Stock during the 180-day period following the date of this Prospectus,
except that the Company may issue shares upon the exercise of options granted
prior to the date hereof, and may grant additional options under its stock
option plans, provided that, without the prior written consent of Hambrecht &
Quist LLC, such additional options shall not be exercisable during such period.

Prior to the offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock will be determined
by negotiation among the Company and the Representatives. Among the factors to
be considered in determining the initial public offering price are prevailing
market and economic conditions, revenues and earnings of the Company, market
valuations of other companies engaged in activities similar to the Company,
estimates of the business potential and prospects of the Company, the present
state of the Company's business operations, the Company's management and other
factors deemed relevant. The estimated initial public offering price range set
forth on the cover of this preliminary prospectus is subject to change as a
result of market conditions and other factors.

In connection with this Offering, the Representatives, on behalf of the
Underwriters, other underwriters and certain other persons participating in this
Offering 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.

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Wilson Sonsini Goodrich & Rosati, P.C. Certain legal matters relating
to patents in connection with this offering will be passed on by Fleshner & Kim;
Kilpatrick Stockton LLP; and Thorpe, North & Western. Certain legal matters in
connection with the offering will be passed upon for the Underwriters by White &
Case.

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 report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said report.

The statements in this Prospectus (only to the extent such statements
describe the legal status of patents handled, or in the case of Kilpatrick
Stockton LLP prosecuted, by the following counsel) under the caption "Risk
Factors -- Dependence on Licensed Patent Applications and Proprietary
Technology" and "Business -- Patents" have been reviewed and approved by
Fleshner & Kim; Kilpatrick Stockton LLP; and Thorpe, North & Western.

The statements in this Prospectus under the caption "Risk Factors -- No
Assurance of Regulatory Approvals" and "Business -- Government Regulation" have
been reviewed and approved by Medical Device Consultants, Inc.

ADDITIONAL INFORMATION

The Company has filed with the Commission a Registration Statement, of
which this Prospectus constitutes a part, under the Securities Act with respect
to the shares of Common Stock offered hereby. This Prospectus omits certain
information contained in the Registration Statement, and reference is made to
the Registration Statement and the exhibits thereto for further information with
respect to the Company and the Common Stock offered hereby. Statements contained
herein concerning the provisions of any documents are not necessarily an
exhaustive description of such documents, and reference is made to the copy of
each such document filed as an exhibit to the Registration Statement. Each such
statement is qualified in its entirety by

60
<PAGE> 62

such reference. The Registration Statement, including exhibits filed therewith,
may be inspected without charge 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 Citicorp
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such materials may be obtained from the Public Reference Section of
the Commission, Room 1034, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and its public reference facilities in New York, New York and
Chicago, Illinois, at prescribed rates. In addition, the Commission maintains a
World Wide Web site that contains reports, proxy and information statements that
are filed electronically with the Commission. The address of the site is
http://www.sec.gov.

61
<PAGE> 63

SPECTRX, INC.
(A DEVELOPMENT STAGE COMPANY)

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.............................................. F-2

Consolidated Balance Sheets as of December 31, 1995 and 1996.......................... F-3

Consolidated Statements of Operations for the Years ended December 31, 1994, 1995,
1996, and the Period From Inception (October 27, 1992) to December 31, 1996......... F-4

Consolidated Statements of Stockholders' (Deficit) Equity for the Period from
Inception (October 27, 1992) to December 31, 1996................................... F-5

Consolidated Statements of Cash Flows for the Years ended December 31, 1994, 1995,
1996 and the Period From Inception (October 27, 1992) to December 31, 1996.......... F-6

Notes to Consolidated Financial Statements............................................ F-7
</TABLE>

F-1
<PAGE> 64

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To SpectRx, Inc.:

We have audited the accompanying consolidated balance sheets of SPECTRX,
INC. (a Delaware corporation in the development stage) as of December 31, 1995
and 1996 and the related consolidated statements of operations, stockholders'
(deficit) equity, and cash flows for each of the three years in the period ended
December 31, 1996 and for the period from inception (October 27, 1992) to
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SpectRx, Inc. as of December
31, 1995 and 1996 and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1996 and for the period from
inception (October 27, 1992) to December 31, 1996 in conformity with generally
accepted accounting principles.

Arthur Andersen LLP

Atlanta, Georgia
February 24, 1997

F-2
<PAGE> 65

SPECTRX, INC.
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
----------------- DECEMBER 31,
1995 1996 1996
------- ------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................................... $ 107 $ 4,721
Accounts receivable............................................ 216 1
Other current assets........................................... 20 90
------- -------
Total current assets................................. 343 4,812
------- -------
Property and equipment, net of accumulated depreciation of $148
and $274 in 1995 and 1996, respectively...................... 300 596
------- -------
OTHER ASSETS, net:
Purchased technology........................................... 108 126
Due from related parties....................................... -- 412
------- -------
Total other assets................................... 108 538
------- -------
$ 751 $ 5,946
======= =======
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Accounts payable............................................... $ 166 $ 557
Accrued liabilities............................................ 146 385
Convertible subordinated promissory notes...................... 475 --
------- -------
Total current liabilities............................ 787 942
------- -------
CONVERTIBLE SUBORDINATED PROMISSORY NOTES...................... -- 250
------- -------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' (DEFICIT) EQUITY:
Series A convertible preferred stock, $0.001 par value;
3,560,000 shares authorized, 3,103,784 shares issued and
outstanding in 1995 and 1996................................. 3 3 --
Series B convertible preferred stock, $0.001 par value;
1,375,000 shares authorized, 0 and 1,272,051 shares issued
and outstanding in 1995 and 1996, respectively............... -- 1 --
Series C convertible preferred stock, $0.001 par value; 500,000
shares authorized, 0 and 500,000 shares issued and
outstanding in 1995 and 1996, respectively................... -- 1 --
Common stock, $0.001 par value; 15,000,000 shares authorized,
1,409,643 and 1,531,702 shares issued and outstanding in 1995
and 1996, respectively....................................... 1 2 6
Additional paid-in capital..................................... 3,138 11,330 12,196
Deferred Compensation.......................................... -- (286) (286)
Notes receivable from officers................................. (48) (48) (48)
Warrants....................................................... 114 173 --
Deficit accumulated during development stage................... (3,244) (6,422) (6,422)
------- ------- -------
Total stockholders' (deficit) equity................. (36) 4,754 $ 5,446
=======
------- -------
$ 751 $ 5,946
======= =======
</TABLE>

The accompanying notes are an integral part of these consolidated balance
sheets.

F-3
<PAGE> 66

SPECTRX, INC.
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND THE PERIOD FROM INCEPTION (OCTOBER 27, 1992) TO DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(OCTOBER 27,
YEAR ENDED DECEMBER 31, 1992) TO
--------------------------------- DECEMBER 31,
1994 1995 1996 1996
------- ------- --------- ------------
<S> <C> <C> <C> <C>
REVENUES....................................... $ 122 $ 1,179 $ 452 $ 1,753
------- ------- ------- -------
EXPENSES:
Research and development....................... 869 1,189 1,815 4,511
Sales and marketing............................ 126 146 221 689
General and administrative..................... 350 637 1,526 2,916
------- ------- ------- -------
1,345 1,972 3,562 8,116
------- ------- ------- -------
Operating loss....................... (1,223) (793) (3,110) (6,363)
INTEREST EXPENSE, NET.......................... 144 5 132 281
OTHER (INCOME)................................. (20) (118) (64) (222)
------- ------- ------- -------
NET LOSS....................................... $(1,347) $ (680) $ (3,178) $ (6,422)
======= ======= ======= =======
PRO FORMA NET LOSS PER COMMON AND COMMON
EQUIVALENT SHARE............................. $ (1.03)
=======
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING........................... 3,093,583
=======
</TABLE>

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

F-4
<PAGE> 67

SPECTRX, INC.
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIT) EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK
------------------ ------------------ ---------------- ------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ------ --------- ------ ------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, October 27, 1992
(inception)........................... -- $ -- -- $ -- -- $ -- -- $ --
Initial stockholders' contribution at
$0.001 per share...................... -- -- -- -- -- -- 1,178,584 1
Net loss............................... -- -- -- -- -- -- -- --
-- -- -- --
--------- --------- ------- ---------
BALANCE, December 31, 1992............. -- -- -- -- -- -- 1,178,584 1
Issuance of Series A preferred stock at
$1 per share, net of issuance costs of
$12................................... 1,850,000 2 -- -- -- -- -- --
Net loss............................... -- -- -- -- -- -- -- --
-- -- -- --
--------- --------- ------- ---------
BALANCE, December 31, 1993............. 1,850,000 2 -- -- -- -- 1,178,584 1
Issuance of common stock at $0.21 per
share................................. -- -- -- -- -- -- 231,074 --
Conversion of subordinated notes at $1
per share............................. 1,253,784 1 -- -- -- -- -- --
Series A Preferred stock warrants
issued in connection with convertible
subordinated promissory notes......... -- -- -- -- -- -- -- --
Net loss............................... -- -- -- -- -- -- -- --
-- -- -- --
--------- --------- ------- ---------
BALANCE, December 31, 1994............. 3,103,784 3 -- -- -- -- 1,409,658 1
Common stock warrants issued in
connection with convertible
subordinated promissory notes......... -- -- -- -- -- -- -- --
Net loss............................... -- -- -- -- -- -- -- --
-- -- -- --
--------- --------- ------- ---------
BALANCE, December 31, 1995............. 3,103,784 3 -- -- -- -- 1,409,658 1
Common stock warrants issued in
connection with convertible
subordinated promissory notes......... -- -- -- -- -- -- -- --
Conversion of subordinated notes....... -- -- 389,951 -- -- -- -- --
Issuance of Series B preferred stock at
$4 per share, net of issuance costs of
$23................................... -- -- 882,100 1 -- -- -- --
Issuance of Series C preferred stock at
$6 per share, net of issuance costs of
$24 and royalty payments of $223...... -- -- -- -- 500,000 1 -- --
Exercise of stock options at $0.21 per
share................................. -- -- -- -- -- -- 403 --
Issuance of common stock in settlement
of a dispute valued at $0.49 per
share................................. -- -- -- -- -- -- 28,572 --
Issuance of common stock for purchased
technology valued at $0.49 per
share................................. -- -- -- -- -- -- 71,429 1
Exercise of common stock warrant at
$1.12 per share....................... -- -- -- -- -- -- 21,640 --
Issuance of stock options at $0.70 and
$2.45 per share, valued at $1.05 and
$5.50 per share, respectively......... -- -- -- -- -- -- -- --
Amortization of deferred
compensation.......................... -- -- -- -- -- -- -- --
Net loss............................... -- -- -- -- -- -- -- --
-- -- -- --
--------- --------- ------- ---------
BALANCE, December 31, 1996............. 3,103,784 $ 3 1,272,051 $ 1 500,000 $ 1 1,531,702 $ 2
========= == ========= == ======= == ========= ==

<CAPTION>
DEFICIT
NOTES ACCUMULATED TOTAL

ADDITIONAL RECEIVABLE DURING STOCKHOLDERS'

PAID-IN DEFERRED FROM DEVELOPMENT (DEFICIT)

CAPITAL COMPENSATION OFFICERS WARRANTS STAGE EQUITY

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

<S> <C> <C> <C> <C> <C> <C>
BALANCE, October 27, 1992
(inception)........................... $ -- $ -- $ -- $ -- $ -- $ --

Initial stockholders' contribution at
$0.001 per share...................... 1 -- -- -- -- 2

Net loss............................... -- -- -- -- (36) (36)

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

BALANCE, December 31, 1992............. 1 -- -- -- (36) (34)

Issuance of Series A preferred stock at
$1 per share, net of issuance costs of
$12................................... 1,836 -- -- -- -- 1,838

Net loss............................... -- -- -- -- (1,181) (1,181)

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

BALANCE, December 31, 1993............. 1,837 -- -- -- (1,217) 623

Issuance of common stock at $0.21 per
share................................. 48 -- (48) -- -- --

Conversion of subordinated notes at $1
per share............................. 1,253 -- -- -- -- 1,254

Series A Preferred stock warrants
issued in connection with convertible
subordinated promissory notes......... -- -- -- 79 -- 79

Net loss............................... -- -- -- -- (1,347) (1,347)

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

BALANCE, December 31, 1994............. 3,138 -- (48) 79 (2,564) 609

Common stock warrants issued in
connection with convertible
subordinated promissory notes......... -- -- -- 35 -- 35

Net loss............................... -- -- -- -- (680) (680)

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

BALANCE, December 31, 1995............. 3,138 -- (48) 114 (3,244) (36)

Common stock warrants issued in
connection with convertible
subordinated promissory notes......... -- -- -- 59 -- 59

Conversion of subordinated notes....... 1,560 -- -- -- -- 1,560

Issuance of Series B preferred stock at
$4 per share, net of issuance costs of
$23................................... 3,504 -- -- -- -- 3,505

Issuance of Series C preferred stock at
$6 per share, net of issuance costs of
$24 and royalty payments of $223...... 2,752 -- -- -- -- 2,753

Exercise of stock options at $0.21 per
share................................. -- -- -- -- -- --

Issuance of common stock in settlement
of a dispute valued at $0.49 per
share................................. 14 -- -- -- -- 14

Issuance of common stock for purchased
technology valued at $0.49 per
share................................. 34 -- -- -- -- 35

Exercise of common stock warrant at
$1.12 per share....................... 24 -- -- -- -- 24

Issuance of stock options at $0.70 and
$2.45 per share, valued at $1.05 and
$5.50 per share, respectively......... 304 (304) -- -- -- --

Amortization of deferred
compensation.......................... -- 18 -- -- -- 18

Net loss............................... -- -- -- -- (3,178) (3,178)

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

BALANCE, December 31, 1996............. $ 11,330 $ (286) $(48) $173 $(6,422) $ 4,754

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

</TABLE>

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

F-5
<PAGE> 68

SPECTRX, INC.
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND THE PERIOD FROM INCEPTION (OCTOBER 27, 1992) TO DECEMBER 31, 1996
(IN THOUSANDS)

<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(OCTOBER 27,
YEAR ENDED DECEMBER 31, 1992) TO
--------------------------- DECEMBER 31,
1994 1995 1996 1996
------- ------- ------- ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................................ $(1,347) $ (680) $(3,178) $ (6,422)
------- ------- ------- -------
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................... 83 111 182 396
Amortization of debt discount............................... 67 5 66 138
Issuance of stock in settlement of dispute.................. -- -- 14 14
Amortization of deferred compensation....................... -- -- 18 18
Changes in assets and liabilities:
Accounts receivable....................................... (16) (200) 215 (1)
Other assets.............................................. (10) 14 (60) (98)
Due from related parties.................................. -- -- (412) (412)
Accounts payable.......................................... 100 158 391 557
Accrued liabilities....................................... -- -- 317 517
Deferred revenue.......................................... 534 (534) -- --
------- ------- ------- -------
Total adjustments...................................... 758 (446) 731 1,129
------- ------- ------- -------
Net cash used in operating activities.................. (589) (1,126) (2,447) (5,293)
------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment........................... (80) (177) (422) (870)
Payment of royalties.......................................... -- -- (223) (223)
Other Assets.................................................. (3) (32) (49) (205)
------- ------- ------- -------
Net cash used in investing activities.................. (83) (209) (694) (1,298)
------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Under revolving credit facility............................... (25) -- -- --
Issuance of common stock...................................... -- -- -- 2
Issuance of Series A preferred stock.......................... -- -- -- 1,850
Issuance of Series B preferred stock.......................... -- -- 3,528 3,528
Issuance of Series C preferred stock.......................... -- -- 3,000 3,000
Issuance of stock warrants.................................... 12 5 18 35
Exercise of warrant........................................... -- -- 24 24
Payment of stock issuance costs............................... -- -- (47) (59)
Issuance of convertible subordinated promissory notes......... 1,200 500 1,232 2,932
------- ------- ------- -------
Net cash provided by financing activities.............. 1,187 505 7,755 11,312
------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 515 (830) 4,614 4,721
CASH AND CASH EQUIVALENTS, beginning of period.................. 422 937 107 --
------- ------- ------- -------
CASH AND CASH EQUIVALENTS, end of period........................ $ 937 $ 107 $ 4,721 $ 4,721
======= ======= ======= =======
CASH PAID FOR:
Interest...................................................... $ -- $ -- $ -- $ --
Income taxes.................................................. $ -- $ -- $ -- $ --
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Conversion of subordinated promissory notes to preferred
stock....................................................... $ 1,254 $ -- $ 1,560 $ 2,814
Stock issued for subscription receivable...................... $ 48 $ -- $ -- $ 48
Warrants issued in connection with convertible subordinated
notes....................................................... $ 67 $ 30 $ 41 $ 138
Issuance of common stock for purchased technology............. $ -- $ -- $ 35 $ 35
</TABLE>

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

F-6
<PAGE> 69

SPECTRX, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996

1. ORGANIZATION AND BACKGROUND

SpectRx, Inc. ("SpectRx" or the "Company") is engaged in the research and
development of products that offer less invasive and painless alternatives to
blood tests currently used for glucose monitoring, diabetes screening and infant
jaundice. The Company's goal is to introduce products that reduce or eliminate
pain, are convenient to use and provide rapid results at the point of care,
thereby improving patient well being and reducing health care costs. The
Company's glucose monitoring, diabetes screening and infant jaundice products
are based on proprietary electro-optical and microporation technology that can
eliminate the pain and inconvenience of a blood sample. The Company has entered
into collaborative arrangements with Abbott Laboratories ("Abbott"), Boehringer
Mannheim Corporation ("Boehringer Mannheim") and Healthdyne Technologies, Inc.
("Heathdyne") to facilitate the development, commercialization and introduction
of its glucose monitoring, diabetes screening and infant jaundice products,
respectively.

The developmental nature of the Company's activities is such that inherent
risks exist in its operations. The Company is subject to a number of risks
including, successful product development, dependence on collaborative
arrangements, fixed royalty rates and manufacturing profits, dependence on
licensed patent applications and proprietary technology, completion of
regulatory approvals, a market for its products, competition from well
established larger companies and the potential for other non-invasive products,
the potential need for additional financing, a lack of sales experience, product
liability and a dependence upon key personnel. While management believes that
the Company will be successful, there are no assurances of successful future
operations.

In the first quarter of 1997, the Company is planning an initial public
offering (the "Offering") of its Common Stock (Note 12). In connection with the
Offering, the Board of Directors approved a reverse stock split of 1-for-1.4 for
the Company's Common Stock effective February 19, 1997. Accordingly, all share,
per share, weighted average share, stock option, and common stock warrant
information has been restated to reflect the split. The reverse stock split will
have no effect upon the number of shares of preferred stock issued and
outstanding, just the number of shares of common stock into which the preferred
stock will convert. Accordingly, all preferred stock, preferred stock warrants,
and preferred stock price amounts have not been adjusted for the reverse stock
split. Upon completion of the planned offering, the total of shares of all
classes of stock which the Company has authority to issue will be 50,000,000
shares of Common Stock, $0.001 par value, and 5,000,000 shares of undesignated
preferred stock, $0.001 par value.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of
SpectRx, Inc. and, since December 5, 1996, its 65%-owned subsidiary, FluorRx,
Inc. ("FluorRx") (Note 3). All significant intercompany amounts have been
eliminated.

PRESENTATION

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 at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

F-7
<PAGE> 70

SPECTRX, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash and cash equivalents.

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over estimated useful lives of five to seven years.
Expenditures for repairs and maintenance are expensed as incurred. Property and
equipment are summarized as follows at December 31, 1995 and 1996 (in
thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1995 1996
---- ----
<S> <C> <C>
Equipment............................................................. $381 $689
Furniture and fixtures................................................ 67 181
---- ----
448 870
Less accumulated depreciation......................................... 148 274
---- ----
Property and equipment, net................................. $300 $596
==== ====
</TABLE>

OTHER ASSETS

Other assets include purchased technology of $108,000 and $126,000 at
December 31, 1995 and 1996, respectively, which is being amortized using the
straight-line method over its estimated useful life of five years.

PATENT COSTS

Costs incurred in filing, prosecuting and maintaining patents are expensed
as incurred. Such costs aggregated approximately $3,000, $71,000 and $165,000 in
1994, 1995 and 1996, respectively.

REVENUE RECOGNITION

Revenue from collaborative research and development agreements is recorded
when earned. Other periodic license fee payments under collaborative agreements
related to future performance are deferred and recognized as income when earned.

RESEARCH AND DEVELOPMENT

Research and development expenses consist of expenditures for research
conducted by the Company and payments made under contracts with consultants. All
research and development costs are expensed as incurred.

INCOME TAXES

Income taxes have been provided using the liability method in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes."

PRO FORMA NET LOSS PER SHARE

Pro forma net loss per share is computed using the weighted average number
of shares of Common Stock and dilutive Common Stock equivalent shares ("CSEs")
issuable upon the conversion of convertible preferred stock (using the
if-converted method) and stock options and warrants (using the treasury stock
method). Pursuant to the Securities and Exchange Commission Staff Accounting
Bulletin No. 83, common stock and

F-8
<PAGE> 71

SPECTRX, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CSEs issued at prices below the expected public offering price during the
12-month period prior to the Offering have been included in the calculation as
if they were outstanding for all periods presented prior to the Offering,
regardless of whether they are dilutive.

Historical net loss per share has not been presented in view of anticipated
change in capital structure upon the closing of the Offering.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The book values of cash, trade accounts receivable, trade accounts payable,
and other financial instruments approximate their fair values principally
because of the short-term maturities of these instruments. The fair value of the
Company's long term debt is estimated based on the current rates offered to the
Company for debt of similar terms and maturities. Under this method, the fair
value of the Company's long term debt was not significantly different than the
stated value at December 31, 1996.

LONG-LIVED ASSETS

The Company periodically reviews the values assigned to long-lived assets,
such as property and equipment and purchased technology, to determine if any
impairments are other than temporary. Management believes that the long-lived
assets in the accompanying balance sheets are appropriately valued.

3. FORMATION OF FLUORRX, INC.

In December 1996, the Company sublicensed certain technology to and
acquired a 64.8% interest in FluorRx, a newly organized Delaware corporation
formed for the purpose of developing and commercializing technology related to
fluorescence spectroscopy. The Company's interest is represented by three seats
on FluorRx's board of directors, one of which is currently vacant, and 129,000
shares of FluorRx's Series A Convertible Preferred Stock purchased for $250,000.
Concurrently, the Company agreed to provide a series of convertible promissory
notes of up to $100,000. The notes bear interest at 8% and are due and payable
December 5, 1997. The Company has the option to convert any outstanding balance
under the facility into Series A Convertible Preferred Stock at a price per
share of $1.94. As of December 31, 1996, FluorRx had not borrowed any amounts
under the facility.

For the year ended December 31, 1996, FluorRx incurred an operating loss of
$58,000, which the Company has fully consolidated.

4. CONVERTIBLE SUBORDINATED PROMISSORY NOTES

In April and June 1994, the Company issued 8% convertible subordinated
promissory notes for $1,000,000 and $200,000 respectively. Pursuant to the terms
of these notes, all outstanding principal and accrued interest were converted in
December 1994 into 1,253,784 shares of Series A Convertible Preferred Stock.
Warrants to purchase 360,000 shares of Series A Preferred Stock were issued with
the promissory notes in consideration for additional proceeds of $12,000 (Note
8). The value of these warrants was determined to be $79,000 based on the
difference between the stated interest rate and the Company's estimated
effective borrowing rate for the term of the notes. The noncash allocation to
the warrants of $67,000 was accounted for as a debt discount and was expensed as
additional interest expense during 1994.

In November 1995 and April 1996, the Company issued 10% convertible
subordinated promissory notes for $500,000 and $982,000, respectively. Pursuant
to the terms of these notes, all outstanding principal and accrued interest were
converted in August 1996 into 389,951 shares of Series B Convertible Preferred
Stock. Warrants to purchase 107,143 and 210,470 shares of common stock were
issued with the promissory notes in consideration for additional proceeds of
$5,000 and $18,000, respectively, in November 1995 and April 1996,

F-9
<PAGE> 72

SPECTRX, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

respectively (Note 8). The value of the warrants issued in November 1995 and
April 1996 was determined to be $35,000 and $59,000, respectively, based on the
difference between the stated interest rate and the Company's estimated
effective borrowing rate for the terms of the notes. The noncash allocation to
the warrants of $30,000 and $41,000 in November 1995 and April 1996,
respectively, was accounted for as a debt discount. The unamortized debt
discount was expensed as additional interest expense upon the conversion of the
notes in August 1996. At December 31, 1995, the unamortized debt discount
amounted to $25,000.

In June 1996, the Company issued an 8% convertible subordinated promissory
note for $250,000. Principal and interest are payable June 1998. Upon an initial
public offering, as defined, the holder of the note may convert outstanding
principal and interest into common stock at a conversion rate equal to one-half
of the per share initial public offering price.

5. STOCKHOLDERS' (DEFICIT) EQUITY

The Company's Series A, B and C convertible preferred stock (collectively,
"Preferred Stock") is convertible at the option of the holder at any time into
0.7143 shares of Common Stock, adjusted for the reverse stock split discussed in
Note 1. In the event of a public offering, as defined, the shares of Preferred
Stock are automatically converted into 0.7143 share of Common Stock. The holders
of the Series A, B, and C preferred stock are entitled to annual noncumulative
dividends, if declared, at a rate of $0.10, $0.40 and $0.60 per share,
respectively. No dividends have been declared to date. In addition, the holders
of the Series A, B and C Preferred Stock have certain liquidation preferences of
an amount equal to $1.00, $4.00 and $6.00 per share, respectively. The holders
of Preferred Stock are entitled to the number of votes equal to the number of
shares of Common Stock into which each share of Preferred Stock could be
converted on the record date. The holders of the Series A, B and C Preferred
Stock have been issued certain demand registration rights.

The Company has also authorized 3,560,000, 1,375,000 and 500,000 shares of
Series A-1, B-1 and C-1 convertible preferred stock (collectively, "Shadow
Preferred"), respectively. Shadow Preferred is issuable in the case of certain
dilutive events. A dilutive event is generally defined as a sale of Common
Stock, or equivalent, at a per share price less than that originally paid by the
preferred stockholders. Generally, the number of issuable Shadow Preferred
shares is equivalent to the number of outstanding shares of the corresponding
Preferred Stock. Upon the occurrence of a dilutive event, Preferred Stock
converts into an equivalent number of Shadow Preferred shares plus additional
common shares that has the effect of mitigating any dilution to the Preferred
Stockholders. Upon the issuance of a class of Shadow Preferred, the
corresponding class of Preferred Stock is canceled. As of December 31, 1996,
there have been no dilutive events.

In June 1994, 231,072 shares of Common Stock were sold, in exchange for
promissory notes, to certain founding officers at estimated fair market value of
$0.21 per share (Note 9). These shares were deemed restricted stock and, in
certain termination related circumstances, were subject to repurchase by the
Company at fair market value, as defined. All restrictions on these shares
expired by January 1997.

6. INCOME TAXES

The Company has incurred net operating losses since inception. As of
December 31, 1996, the Company had net operating loss ("NOL") carryforwards of
approximately $6,300,000 available to offset its future income tax liability.
The NOL carryforwards begin to expire in the year 2007. The Company has recorded
a valuation allowance for all NOL carryforwards. Utilization of existing NOL
carryforwards may be limited in future years, if significant ownership changes
have occurred.

F-10
<PAGE> 73

SPECTRX, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Components of deferred tax assets are as follows at December 31, 1995 and
1996:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1996
----------- -----------
<S> <C> <C>
NOL carryforwards........................................... $ 1,225,000 $ 2,394,000
Valuation allowance......................................... (1,225,000) (2,394,000)
----------- -----------
Deferred tax assets......................................... $ 0 $ 0
=========== ===========
</TABLE>

7. COMMITMENTS AND CONTINGENCIES

Future minimum rental payments at December 31, 1996 under noncancelable
operating leases for office space and equipment are as follows:

Rental expense was $42,000, $49,000 and $92,000 in 1994, 1995 and 1996,
respectively.

In the past, the Company has been subject to certain asserted and
unasserted claims against certain intellectual property rights owned and
licensed by the Company. A successful claim against intellectual property rights
owned or licensed by the Company could subject the Company to significant
liabilities to third parties, require the Company to seek licenses from third
parties, or prevent the Company from selling its products in certain markets or
at all. In the opinion of management, there are no known claims against the
Company's owned or licensed intellectual property rights that will have a
material adverse impact on the Company's financial position or results of
operations.

8. STOCK OPTIONS AND WARRANTS

STOCK OPTIONS

In May 1995, the Company adopted the 1995 Stock Option Plan (as amended the
"Plan"), under which 1,428,572 shares of Common Stock are authorized and
reserved for use in the Plan. The Plan allows the issuance of incentive stock
options, nonqualified stock options and stock purchase rights. The exercise
price of options is determined by the Company's Board of Directors, but
incentive stock options must be granted at an exercise price equal to the fair
market value of the Company's Common Stock as of the grant date. Options
generally become exercisable over four years and expire ten years from the date
of grant. At December 31, 1996, options to purchase 764,807 shares of Common
Stock were available for future grant under the Plan.

F-11
<PAGE> 74

SPECTRX, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Stock option activity is as follows at December 31, 1996:

<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
OPTIONS PRICE PER SHARE
--------- -----------------
<S> <C> <C>
Plan inception, May 1995................................... -- $ --
Granted.................................................. 329,834 $0.21
Canceled................................................. (3,983) $0.21
-------
Outstanding, December 31, 1995............................. 325,851 $0.21
Granted.................................................. 338,940 $1.05
Exercised................................................ (403) $0.21
Canceled................................................. (1,026) $0.21
-------
Outstanding, December 31, 1996............................. 663,362 $0.64
=======
Exercisable, December 31, 1996............................. 212,957 $0.32
=======
</TABLE>

The following table sets forth the number of shares, weighted average
exercise price, and remaining contractual lives by groups of similar price and
grant date:

<TABLE>
<CAPTION>
NUMBER WEIGHTED WEIGHTED AVERAGE
OF AVERAGE CONTRACTUAL
SHARES PRICE LIFE
- ------- -------- ----------------
<S> <C> <C>
324,422 $ .21 2.6 years
269,652 .70 3.5 years
69,288 2.45 3.9 years
</TABLE>

In June 1996, November 1996 and December 1996, the Company granted options
to purchase 269,652, 8,573 and 60,715, respectively, shares of Common Stock at
exercise prices of $0.70, $2.45 and $2.45 per share, respectively. In connection
with the issuance of these options, the Company recognized $304,000 as deferred
compensation for the excess of the deemed value for accounting purposes of the
Common Stock issuable upon exercise of such options over the aggregate exercise
price of such options. This deferred compensation is amortized ratably over the
vesting period of the options.

During 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation," which defines a fair value-based
method of accounting for an employee stock option plan or similar equity
instrument and encourages all entities to adopt that method of accounting for
all of their employee stock compensation plans. However, it also allows an
entity to continue to measure compensation cost for those plans using the method
of accounting prescribed by Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees." Entities electing to remain with the
accounting in APB No. 25 must make pro forma disclosures of net income and, if
presented, earnings per share, as if the fair value-based method of accounting
defined in the statement had been applied.

The Company has elected to account for its stock-based compensation plan
under APB No. 25; however, the Company has computed for pro forma disclosure
purposes the value of all options granted during 1995 and 1996 using the Black
Scholes option pricing model as prescribed by SFAS No. 123 and using the
following weighted average assumptions used for grants in 1995 and 1996:

<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Risk-free interest rate............................................. 6.0% 6.6%
Expected dividend yield............................................. --% --%
Expected lives...................................................... 4 years 4 years
Expected volatility................................................. 90% 90%
</TABLE>

F-12
<PAGE> 75

SPECTRX, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The total values of the options granted during the years ended December 31,
1995 and 1996 were computed as approximately $46,000 and $511,000, respectively,
which would be amortized over the vesting period of the options. If the Company
had accounted for these plans in accordance with SFAS No. 123, the Company's
reported net loss and pro forma net loss per share for the years ended December
31, 1995 and 1996 would have increased by the following pro forma amounts:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1996
----- -------
<S> <C> <C>
Net loss:
As reported....................................................... $(680) $(3,178)
Pro forma......................................................... (694) (3,226)
Primary EPS:
As reported....................................................... -- (1.03)
Pro forma......................................................... -- (1.04)
</TABLE>

WARRANTS

In connection with establishing a revolving line of credit in 1993, a bank
received warrants giving the bank the right to purchase 8,572 shares of Common
Stock of the Company at $1.40 per share. These warrants expire in 2003. None of
the proceeds from the original draw on the line of credit were allocated to the
warrants. During 1994, the Company terminated the revolving line of credit.

In connection with the April and June 1994 note sale (Note 4), the Company
issued warrants to purchase 360,000 shares of Series A Convertible Preferred
Stock at an exercise price of $1.00 per share. These warrants are exercisable
through June 1999.

In connection with the November 1995 and April 1996 note sales (Note 4),
the Company issued warrants to purchase 317,613 shares of Common Stock at an
exercise price per share of 20% of the price per share paid in the next equity
financing of $5,000,000 or more, inclusive of the notes and warrants subject to
conversion. In August 1996, the exercise price was set at $1.12 per share. These
warrants are exercisable through November 2000 and April 2001.

A summary of the warrants to purchase Common Stock and Preferred Stock
which remain outstanding (and for which Common and Preferred Stock are reserved
for issuance) is as follows as of December 31, 1996:

<TABLE>
<CAPTION>
NUMBER OF SHARES
- -------------------- PRICE
COMMON SERIES A PER SHARE EXPIRATION
- ------- -------- --------- ----------
<S> <C> <C> <C>
8,572 $1.40 2003
360,000 1.00 1999
107,143 1.12 2000
188,830 1.12 2001
</TABLE>

Under the terms of a certain license and technology agreement (Note 10),
the Company issued a right to Altea Technologies, Inc. ("Altea") to obtain a
warrant for the purchase of up to 588,572 shares of Common Stock at $.21 per
share. Upon a liquidity event (for which the Offering would qualify), as
defined, Altea had the option to sell all rights to the licensed technology in
exchange for a warrant to purchase up to 588,572 shares of Common Stock,
depending on the achievement of certain milestones with respect to the licensed
technology. Altea has not elected to exercise its right to obtain the warrant;
and the Company will continue with the existing royalty arrangement.

Upon the close of the Offering, all warrants except a warrant exercisable
for 8,572 shares of Common Stock become immediately exercisable and expire if
not exercised.

F-13
<PAGE> 76

SPECTRX, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. RELATED-PARTY TRANSACTIONS

In connection with a June 1994 sale of restricted stock, the Company loaned
two officers of the Company $48,525. These loan were secured by Common Stock of
the Company held by the officers, bear interest at 6% per annum and become
payable on June 30, 1999.

In March 1996, the Company issued 28,572 shares of Common Stock to Laser
Atlanta Optics, Inc. ("LAO") in settlement of a dispute. The Company and LAO are
related through a common group of shareholders. The shares were valued at
$14,000, which was expensed upon issuance. In September 1996 the Company loaned
LAO $30,000, which was repaid in December 1996.

In October 1996, the Company loaned two officers a total of $400,000. The
loans are secured by Common Stock and Series B Preferred Stock of the Company
and common stock of LAO held by the officers. The loans bear interest at 6.72%
per annum and are due and payable October 2001.

In March 1996, the Company entered into a license and joint development
agreement with Altea, a company equally owned by Jonathan Eppstein, an officer
and principal stockholder of the Company, and his sister (Notes 8 and 10). On
March 8, 1996, pursuant to the terms of the agreement, the Company received
certain rights to technology useful in glucose monitoring, issued 71,429 shares
of Common Stock at the par value, which were valued at $35,000, and made cash
payments totaling $25,000 for the rights to the technology. The Company paid
royalties to Altea totaling $273,000 during 1996.

In October 1996, the Company entered into a Research & Development and
License Agreement (the "Abbott Agreement") with Abbott for the development and
commercialization of the Company's glucose monitoring product. Under the Abbott
Agreement, the Company receives from Abbott development funding, payments on
achievement of milestones and a royalty on Abbott product sales. In connection
with the Abbott Agreement, Abbott purchased $3 million of Series C Preferred
Stock. As the preferred stock investment was related to the sublicense of
glucose monitoring technology, the Company remitted a royalty to Altea of
$273,000.

A portion of the proceeds from the Company's sale of convertible
subordinated promissory notes and Series A and B Preferred Stock were received
from officers, directors or other parties related to the Company as a result of
previous equity transactions. The sales were conducted concurrently with and on
the same terms as those entered into with unrelated parties.

10. LICENSE AND TECHNOLOGY AGREEMENTS

As part of the Company's efforts to conduct research and development
activities and to commercialize potential products, the Company, from time to
time, enters into agreements with certain organizations and individuals that
further those efforts but also obligate the Company to make future minimum
payments or to remit royalties ranging from 1% to 3% of revenue from sale of
commercial products developed from the research.

The Company generally has the option not to make required minimum royalty
payments, in which case the Company loses the exclusive license to develop
applicable technology. Minimum required payments to maintain exclusive rights to
licensed technology are as follows at December 31, 1996:

F-14
<PAGE> 77

SPECTRX, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

No royalty payments were made during 1994 or 1995. During 1996, the Company
paid $273,000 in royalties in connection with the sale of the Series C Preferred
Stock, of which $50,000 was expensed as required minimum payments and $223,000
was netted with the proceeds of the related stock sale.

Additionally, the Company is obligated to obtain and maintain certain
patents, as defined by the agreements.

11. REVENUES FROM COLLABORATIVE AGREEMENTS

The Company has entered into collaborative research and development
agreements (the "Agreements") with collaborative partners for the joint
development, regulatory approval, manufacturing, marketing, distribution and
sales of products. The Agreements generally provide for nonrefundable payments
upon contract signing and additional payments upon reaching certain milestones
with respect to technology. The Abbott Agreement requires Abbott to remit
royalties to the Company based on net product sales and to reimburse certain
direct expenses incurred by the Company. Reimbursed expenses of $0, $0 and
$490,000 for the years ended December 31, 1994, 1995 and 1996 have been netted
with research and development expenses in the accompanying statements of
operations. In connection with the Healthdyne and Boehringer Mannheim
Agreements, the partners are required to purchase products manufactured by the
Company at a predetermined profit margin subject to renegotiation between the
parties in certain instances.

Major customers who contributed 10% or more of the Company's total revenues
from collaborative agreements were as follows for the years ended December 31,
1994, 1995, and 1996:

<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Boehringer Mannheim.................... 98.4% 68.8% -- %
Healthdyne............................. -- 10.7 100.0
Teijin................................. -- 20.5 --
</TABLE>

12. SUBSEQUENT EVENTS (UNAUDITED)

INITIAL PUBLIC OFFERING

In the first quarter of 1997, the Company is planning an initial public
offering of its Common Stock (the "Offering"). The Company plans to issue
2,000,000 (plus an additional 300,000 if the Underwriter's over-allotment option
is exercised in full) shares at an estimated initial public offering price of
between $10.00 and $12.00 per share. There can be, however, no assurance that
the Offering will be completed at a per share price within the estimated range
or at all.

PRO FORMA STOCKHOLDERS' (DEFICIT) EQUITY

The pro forma stockholders' equity at December 31, 1996 gives effect to the
conversion of all outstanding shares of Preferred Stock into 3,482,762 shares of
Common Stock and warrants exercisable for 553,126 shares of Common Stock, upon
the close of the Company's Offering.

PREFERRED STOCK

In January 1997, the Company authorized 5,000,000 shares of Preferred Stock
with a $0.001 par value. The Board of Directors has the authority to issue these
shares and to fix dividends, voting and conversion rights, redemption
provisions, liquidation preferences, and other rights and restrictions.

F-15
<PAGE> 78

SPECTRX, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

EMPLOYEE STOCK PURCHASE PLAN

In connection with the Offering, the Company intends to adopt an employee
stock purchase plan under which the Company may issue up 214,286 shares of
Common Stock. Eligible employees may use up to 10% of their compensation to
purchase through payroll deductions the Company's Common Stock at the end of
each plan year for 85% of the lower of the beginning or ending stock price in
the plan year.

F-16
<PAGE> 79

APPENDIX -- DESCRIPTION OF GRAPHICS

INSIDE FRONT COVER OF THE PROSPECTUS

The inside of the Prospectus front cover contains three artists' renditions of
the Company's glucose monitoring microporation technology and the page is
entitled "SpectRx Glucose Monitoring Microporation Technology."

OVERALL DESCRIPTION AT TOP OF PAGE: Above the artwork on the inside front cover
of the Prospectus is the following language:

"The SpectRx glucose monitoring product is intended as a painless
alternative to current blood glucose monitoring products that require a
blood sample drawn from an incision created by a lancet."

DESCRIPTION #1: This illustration in the upper left hand corner of the page
depicts the diameter of the micropore created by the SpectRx Glucose Monitoring
product. For size comparison, a human hair is depicted next to the micropore.

CAPTION: "The micropore magnified 200 times. Note the size of the micropore in
relation to the human hair to the right."

DESCRIPTION #2: This illustration is being pointed to by the box that is around
the micropore in the illustration in the bottom left of the page and is a blowup
of the micropore. The illustration depicts the depth that the micropore
penetrates the skin. Moreover, the diameter of the micropore is compared to that
of a human hair depicted on the left of the illustration.

CAPTION: "The SpectRx micropore is approximately the diameter of a human hair
and penetrates through a layer of skin about the thickness of a piece of paper."

DESCRIPTION #3: This illustration depicts a cross section of the skin and
labels the location of the stratum corneum, the free nerve endings (pain
receptors), the blood vessels and the sweat glands. The illustration also
depicts the depth that a lancet must penetrate to reach the capillary bed in
order to obtain a blood sample. Finally, the illustration depicts the depth that
the micropore penetrates the skin. There is a box around the micropore with an
arrow attached to it that points to the illustration on the upper right of the
page (see Description #2).

CAPTION: "A cross section showing the relationship between a micropore
painlessly created to access interstitial fluid with the Company's proprietary
technology and an incision used to draw blood using a standard lancet."

OVERALL CAPTION AT BOTTOM OF PAGE: Under all the artwork on this page set out
within a box is the following caption:

THE COMPANY MUST RECEIVE PRE-MARKET APPROVAL OR CLEARANCE FROM U.S. FOOD
AND DRUG ADMINISTRATION BEFORE ANY OF THE COMPANY'S PRODUCTS CAN BE DISTRIBUTED
COMMERCIALLY IN THE UNITED STATES. SUCH APPROVAL OR CLEARANCE HAS NOT YET BEEN
APPLIED FOR AND THERE CAN BE NO ASSURANCE THAT SUCH AN APPLICATION WILL BE MADE
OR IF MADE, WILL BE OBTAINED. TO DATE, THE COMPANY HAS ONLY TESTED PROTOTYPES OF
ITS PRODUCTS. SUBSTANTIAL ADDITIONAL RESEARCH AND DEVELOPMENT AND CLINICAL
TRIALS WILL BE NECESSARY BEFORE COMMERCIAL PROTOTYPES OF THE COMPANY'S PRODUCTS
ARE PRODUCED. THERE CAN BE NO ASSURANCE THAT ANY OF THE COMPANY'S PRODUCTS WILL
BE SUCCESSFULLY DEVELOPED, PROVEN SAFE AND EFFICACIOUS IN CLINICAL TRIALS OR
MEET APPLICABLE REGULATORY STANDARDS. SEE "RISK FACTORS -- GOVERNMENT
REGULATIONS; NO ASSURANCE OF REGULATORY APPROVALS" AND "-- EARLY STAGE OF
DEVELOPMENT; NO ASSURANCE OF SUCCESSFUL PRODUCT DEVELOPMENT."

The diagram presented on page 27 depicts a drawing of a cross section of
human skin.

DESCRIPTION #1: This illustration depicts the cross section of human skin.
Words around the drawing label the layers of skin with and without pain sensors
and label a micropore and hairshaft and other levels of the skin.

CAPTION #1: The title above this illustration reads: "Cross Section of the
Human Skin."
<PAGE> 80

INSIDE BACK COVER OF THE PROSPECTUS

The inside of the Prospectus back cover is divided into two sections. The top
half of the page is entitled "Diabetes Screening Product" and contains two
photographs, which depict this product. The bottom half of the page is entitled
"Infant Jaundice Product" and contains three photographs, which depict blood
tests currently used and the Company's infant jaundice product.

DIABETES SCREENING PRODUCT

OVERALL DESCRIPTION AT TOP OF PAGE: Above the artwork on the inside back cover
of the Prospectus is the following language:

"The SpectRx diabetes screening product is designed to identify diabetics
by painlessly measuring the fluorescence in the lens of the eye."

DESCRIPTION #1: The illustration in the upper right hand corner of the page
depicts a close-up of the lens of a human eye with the reflective fluorescence
created by the SpectRx diabetes screening product.

CAPTION: The Company's diabetes screening product makes measurements in the
lens of the eye.

DESCRIPTION #2: The illustration in the mid-left hand side of the page depicts
a prototype of the SpectRx Diabetes screening product on a counter top with a
test subject gazing into the prototype to illustrate the manner in which a
subject would be screened.

CAPTION: Prototypes of the Company's diabetes screening product undergoing
pilot studies.

INFANT JAUNDICE PRODUCT

OVERALL DESCRIPTION IN THE MIDDLE OF THE PAGE: Above the artwork related to the
infant jaundice product is the following language:

"The Company's infant jaundice product is intended to offer an alternative
to conventional blood tests."

DESCRIPTION #1: The illustration on the far left depicts an infant undergoing a
heel stick currently used to test for jaundice.

CAPTION: "A representation of the heel stick blood test currently used on
infants."

DESCRIPTION #2: The illustration in the center of this section depicts a
prototype of the Company's infant jaundice product.

CAPTION: "A prototype of the Company's infant jaundice instrument in a hospital
pilot study."

DESCRIPTION #3: The illustration on the far right of this section depicts a
prototype of the Company's infant jaundice product.

CAPTION: "A prototype of the Company's handheld infant jaundice product and
disposable."

OVERALL CAPTION AT BOTTOM OF PAGE: Under all the artwork on this page set out
within a box is the following caption:

<PAGE> 81

[CRC DIABETES SCREENING]
<PAGE> 82

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

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT
IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
Use of Proceeds....................... 16
Dividend Policy....................... 16
Capitalization........................ 17
Dilution.............................. 18
Selected Consolidated Financial
Data................................ 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 20
Business.............................. 24
Management............................ 45
Certain Transactions.................. 51
Principal Stockholders................ 53
Description of Capital Stock.......... 55
Shares Eligible for Future Sale....... 57
Underwriting.......................... 59
Legal Matters......................... 60
Experts............................... 60
Additional Information................ 60
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>

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

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

2,000,000 SHARES
SPECTRX(LOGO)
COMMON STOCK

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

PROSPECTUS
-----------------------

HAMBRECHT & QUIST

VOLPE BROWN WHELAN

& COMPANY

, 1997

============================================================
<PAGE> 83

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

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

<TABLE>
<CAPTION>
AMOUNT
TO BE PAID
----------
<S> <C>
Registration Fee.......................................................... $ 8,400
NASD Filing Fee........................................................... 3,260
The Nasdaq National Market System Listing Fee............................. 36,500
Printing.................................................................. 100,000
Legal Fees and Expenses................................................... 350,000
Accounting Fees and Expenses.............................................. 130,000
Blue Sky Fees and Expenses................................................ 13,000
Registrar and Transfer Agent Fees......................................... 6,000
Miscellaneous............................................................. 2,840
--------
Total........................................................... $650,000
========
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law permits a corporation
to include in its charter documents, and in agreements between the corporation
and its directors and officers, provisions expanding the scope of
indemnification beyond that specifically provided by the current law.

Article VII of the Registrant's Certificate of Incorporation provides for
the indemnification of directors to the fullest extent permissible under
Delaware law.

Article VII of the Registrant's Bylaws provides for the indemnification of
officers, directors and third parties acting on behalf of the corporation if
such person acted in good faith and in a manner reasonably believed to be in and
not opposed to the best interest of the corporation, and, with respect to any
criminal action or proceeding, the indemnified party had no reason to believe
his conduct was unlawful.

The Registrant has entered into indemnification agreements with its
directors and executive officers, in addition to indemnification provided for in
the Registrant's Bylaws, and intends to enter into indemnification agreements
with any new directors and executive officers in the future.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

(a) From January 1, 1994 through December 31, 1996, the Registrant has
issued and sold the following unregistered securities (all numbers are adjusted
to reflect the Company's 1-for-1.4 reverse stock split):

(1) On June 30, 1994, the Registrant sold 131,711 and 99,361 shares of
its Common Stock to Mark A. Samuels and Keith D. Ignotz, respectively. Mr.
Samuels and Mr. Ignotz each purchased the above shares in exchange for
Promissory Notes executed in favor of the Registrant in the aggregate
amounts of $27,659.25 and $20,865.75, respectively. Both Promissory Notes
have maturity dates of June 30, 1999. The entire amount payable on each
Promissory Note in respect of principal and interest remains outstanding.

(2) On November 6, 1995, the Registrant sold to two investors
Convertible Promissory Notes for an aggregate purchase price of $500,000
which automatically converted to Series B Preferred Stock at an as
converted price of $5.60 per share.

II-1
<PAGE> 84

(3) On November 6, 1995, the Registrant sold to two investors Warrants
to purchase 107,144 shares of Common Stock at an as converted exercise
price of $1.12 per share.

(4) On April 15, 1996, the Registrant sold to 20 investors Convertible
Promissory Notes for an aggregate purchase price of $982,141 which
automatically converted to Series B Preferred Stock at an as converted
price of $5.60 per share.

(5) In March of 1996, two entities were issued an aggregate of 71,429
shares of the Common Stock of the Registrant as payment for a license.

(6) On April 15, 1996, the Registrant sold to 20 investors Warrants to
purchase 210,470 shares of Common Stock at an as converted exercise price
of $1.12 per share.

(7) On August 14, 1996, one option holder exercised an option to
purchase 403 shares of the Common Stock of the Registrant at a per share
exercise price of approximately $0.21.

(8) On August 30, 1996, the Registrant sold shares of Series B
Preferred Stock, which automatically convert into 908,621 shares of Common
Stock upon the closing of this offering, to 29 investors at an as converted
price of $5.60 per share, payable in cash or conversion of debt.

(9) On October 21, 1996, the Registrant sold 357,143 shares of Series
C Preferred Stock, which automatically convert into 357,143 shares of
Common Stock upon the closing of this offering, to one investor at an as
converted price of $8.40 per share.

(10) On October 26, 1996, one warrant holder exercised a warrant to
purchase 21,640 Shares of the Common Stock of the Registrant at a per share
exercise price of approximately $1.12.

(b) There were no underwriters, brokers or finders employed in connection
with any of the transactions set forth above.

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

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits

<TABLE>
<C> <C> <S>
1.1* -- Form of Underwriting Agreement.
3.1* -- Certificate of Incorporation of the Company, as amended, as currently
in effect.
3.2* -- Form of Restated Certificate of Incorporation of the Company, to be
filed immediately following the closing of the offering made under this
Registration Statement.
3.3* -- Bylaws of the Company.
4.1 -- Specimen Common Stock Certificate.
5.1* -- Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
10.1* -- 1997 Employee Stock Purchase Plan and form of agreement thereunder.
10.2* -- 1995 Stock Plan, as amended, and form of Stock Option Agreement
thereunder.
10.3* -- Series A Preferred Stock Purchase Agreement, dated February 5, 1993,
between the Company and certain investors.
10.4* -- Note and Warrant Purchase Agreement, dated November 6, 1995 and April
15, 1996, between the Registrant and certain investors.
</TABLE>

II-2
<PAGE> 85

<TABLE>
<C> <C> <S>
10.5* -- Series B Preferred Stock Purchase Agreement, dated August 30, 1996,
between the Company and certain investors.
10.6* -- Series C Preferred Stock Purchase Agreement, dated October 21, 1996,
between the Company and Abbott Laboratories (included in Exhibit
10.23).
10.7* -- Stock Purchase Agreement, dated June 30, 1994, between Mark A. Samuels
and the Company.
10.8* -- Stock Purchase Agreement, dated June 30, 1994, between Keith D. Ignotz
and the Company.
10.9* -- Assignment and Bill of Sale, dated February 29, 1996, between LAO and
the Company.
10.10* -- Security Agreement, dated October 31, 1996, between Mark A. Samuels and
the Company.
10.11* -- Security Agreement, dated October 31, 1996, between Keith D. Ignotz and
the Company.
10.12A+* -- License Agreement, dated May 7, 1991, between GTRC and LAO.
10.12B* -- Agreement for Purchase and Sale of Technology, Sale, dated January 16,
1993, between LAO and the Company.
10.12C* -- First Amendment to License Agreement, dated October 19, 1993, between
GTRC and the Company.
10.13* -- Clinical Research Study Agreement, dated July 22, 1993, between Emory
University and the Company.
10.14A+* -- Development and License Agreement, dated December 2, 1994, between
Boehringer Mannheim Corporation and the Company.
10.14B+* -- Supply Agreement, dated January 5, 1996, between Boehringer Mannheim
and the Company.
10.15* -- Sponsored Research Agreement, No. SR95-006, dated May 3, 1995, between
University of Texas, M.D. Anderson Cancer Center and the Company.
10.16* -- Sole Commercial Patent License Agreement, dated May 4, 1995, between
Martin Marietta Energy Systems, Inc. and the Company.
10.17* -- Joint Development Agreement, dated July 10, 1995, between Teijin and
the Company.
10.18A* -- License Agreement, dated November 22, 1995, between Joseph R. Lakowicz,
Ph.D. and the Company.
10.18B* -- Amendment of License Agreement, dated November 28, 1995, between Joseph
R. Lakowicz, Ph.D. and the Company.
10.18C -- Second Amendment to License Agreement, dated March 26, 1997, between
Joseph R. Lakowicz, Ph.D. and the Company.
10.19* -- License and Joint Development Agreement, dated March 1, 1996, between
NonInvasive-Monitoring Company, Inc., Altea Technologies, Inc. and the
Company.
10.20+* -- Patent License Agreement, dated March 12, 1996, between the Board of
Regents of the University of Texas System, M.D. Anderson and the
Company.
10.21+* -- Purchasing and Licensing Agreement, dated June 19, 1996, between
Healthdyne and the Company.
10.22* -- Research Services Agreement, dated September 3, 1996, between Sisters
of Providence in Oregon doing business as the Oregon Medical Laser
Center, Providence St. Vincent Medical Center and the Company.
10.23+* -- Research and Development and License Agreement, dated October 10, 1996,
between Abbott Laboratories and the Company.
10.24* -- Lease, dated September 21, 1993, between National Life Insurance
Company d/b/a Plaza 85 Business Park and the Company, together with
amendments 1, 2 and 3 thereto and Tenant Estoppel Certificate, dated
September 20, 1994.
11.1* -- Calculation of earnings per share.
</TABLE>

II-3
<PAGE> 86

<TABLE>
<C> <C> <S>
21.1* -- List of Subsidiaries of the Company.
23.1 -- Consent of Arthur Andersen LLP, Independent Public Accountants.
23.2* -- Consent of Counsel (included in Exhibit 5.1).
23.3 -- Consent of Fleshner & Kim, patent counsel for the Company.
23.4 -- Consent of Kilpatrick Stockton LLC, patent counsel for the Company.
23.5 -- Consent of Thorpe, North & Western, patent counsel for the Company.
23.6 -- Consent of Medical Device Consultants.
24.1* -- Power of Attorney.
27.1* -- Financial Data Schedule
</TABLE>

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

+ Confidential treatment requested for portions of these agreements.

* Previously filed.

(b) Financial Statement Schedules

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

ITEM 17. UNDERTAKINGS

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.

The undersigned registrant hereby undertakes to provide to the Underwriter
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.

The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
the form of prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4) or 497 (h) under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II-4
<PAGE> 87

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Norcross,
State of Georgia, on the 24th day of April, 1997.

SPECTRX, INC.

By: /s/ MARK A. SAMUELS
--------------------------------------
Mark A. Samuels
President and Chief Executive Officer

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

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- -------------------------------- ---------------
<C> <S> <C>

/s/ MARK A. SAMUELS President, Chief Executive April 24, 1997
- --------------------------------------------- Officer and Director
Mark A. Samuels

/s/ KEITH D. IGNOTZ* Executive Vice President, Chief April 24, 1997
- --------------------------------------------- Operating Officer and Director
Keith D. Ignotz

/s/ THOMAS H. MULLER, JR. Executive Vice President, Chief April 24, 1997
- --------------------------------------------- Financial Officer and
Thomas H. Muller, Jr. Secretary

/s/ CHARLES G. HADLEY* Director April 24, 1997
- ---------------------------------------------
Charles G. Hadley

/s/ JACK R. KELLY, JR.* Director April 24, 1997
- ---------------------------------------------
Jack R. Kelly, Jr.

*By: /s/ MARK A. SAMUELS
- ---------------------------------------------
Mark A. Samuels
Attorney-in-Fact
</TABLE>

II-5
<PAGE> 88

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ----- ---------------------------------------------------------------------
<C> <C> <S> <C>
1.1* -- Form of Underwriting Agreement.......................................
3.1* -- Certificate of Incorporation of the Company, as amended, as currently
in effect............................................................
3.2* -- Form of Restated Certificate of Incorporation of the Company, to be
filed immediately following the closing of the offering made under
this Registration Statement..........................................
3.3* -- Bylaws of the Company................................................
4.1 -- Specimen Common Stock Certificate....................................
5.1* -- Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation..........................................................
10.1* -- 1997 Employee Stock Purchase Plan and form of agreement thereunder.
10.2* -- 1995 Stock Plan, as amended, and form of Stock Option Agreement
thereunder...........................................................
10.3* -- Series A Preferred Stock Purchase Agreement, dated February 5, 1993,
between the Company and certain investors............................
10.4* -- Note and Warrant Purchase Agreement, dated November 6, 1995 and April
15, 1996, between the Registrant and certain investors...............
10.5* -- Series B Preferred Stock Purchase Agreement, dated August 30, 1996,
between the Company and certain investors............................
10.6* -- Series C Preferred Stock Purchase Agreement, dated October 21, 1996,
between the Company and Abbott Laboratories (included in Exhibit
10.23)...............................................................
10.7* -- Stock Purchase Agreement, dated June 30, 1994, between Mark A.
Samuels and the Company..............................................
10.8* -- Stock Purchase Agreement, dated June 30, 1994, between Keith D.
Ignotz and the Company...............................................
10.9* -- Assignment and Bill of Sale, dated February 29, 1996, between LAO and
the Company..........................................................
10.10* -- Security Agreement, dated October 31, 1996, between Mark A. Samuels
and the Company......................................................
10.11* -- Security Agreement, dated October 31, 1996, between Keith D. Ignotz
and the Company......................................................
10.12A+* -- License Agreement, dated May 7, 1991, between GTRC and LAO...........
10.12B* -- Agreement for Purchase and Sale of Technology, Sale, dated January
16, 1993, between LAO and the Company................................
10.12C* -- First Amendment to License Agreement, dated October 19, 1993, between
GTRC and the Company.................................................
10.13* -- Clinical Research Study Agreement, dated July 22, 1993, between Emory
University and the Company...........................................
10.14A+* -- Development and License Agreement, dated December 2, 1994, between
Boehringer Mannheim Corporation and the Company......................
10.14B+* -- Supply Agreement, dated January 5, 1996, between Boehringer Mannheim
and the Company......................................................
10.15* -- Sponsored Research Agreement, No. SR95-006, dated May 3, 1995,
between University of Texas, M.D. Anderson Cancer Center and the
Company..............................................................
10.16* -- Sole Commercial Patent License Agreement, dated May 4, 1995, between
Martin Marietta Energy Systems, Inc. and the Company.................
10.17* -- Joint Development Agreement, dated July 10, 1995, between Teijin and
the Company..........................................................
10.18A* -- License Agreement, dated November 22, 1995, between Joseph R.
Lakowicz, Ph.D. and the Company......................................
10.18B* -- Amendment of License Agreement, dated November 28, 1995, between
Joseph R. Lakowicz, Ph.D. and the Company............................
</TABLE>

<PAGE> 89

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ----- ---------------------------------------------------------------------
<C> <C> <S> <C>
10.18C -- Second Amendment to License Agreement, dated March 26, 1997, between
Joseph R. Lakowicz, Ph.D. and the Company.
10.19* -- License and Joint Development Agreement, dated March 1, 1996, between
NonInvasive-Monitoring Company, Inc., Altea Technologies, Inc. and
the Company..........................................................
10.20+* -- Patent License Agreement, dated March 12, 1996, between the Board of
Regents of the University of Texas System, M.D. Anderson and the
Company..............................................................
10.21+* -- Purchasing and Licensing Agreement, dated June 19, 1996, between
Healthdyne and the Company...........................................
10.22* -- Research Services Agreement, dated September 3, 1996, between Sisters
of Providence in Oregon doing business as the Oregon Medical Laser
Center, Providence St. Vincent Medical Center and the Company........
10.23+* -- Research and Development and License Agreement, dated October 10,
1996, between Abbott Laboratories and the Company....................
10.24* -- Lease, dated September 21, 1993, between National Life Insurance
Company d/b/a Plaza 85 Business Park and the Company, together with
amendments 1, 2 and 3 thereto and Tenant Estoppel Certificate, dated
September 20, 1994...................................................
11.1* -- Calculation of earnings per share....................................
21.1* -- List of Subsidiaries of the Company..................................
23.1 -- Consent of Arthur Andersen LLP, Independent Public Accountants.......
23.2* -- Consent of Counsel (included in Exhibit 5.1).........................
23.3 -- Consent of Fleshner & Kim, patent counsel for the Company............
23.4 -- Consent of Kilpatrick & Stockton, patent counsel for the Company.....
23.5 -- Consent of Thorpe, North & Western, patent counsel for the Company...
23.6 -- Consent of Medical Device Consultants................................
24.1* -- Power of Attorney....................................................
27.1* -- Financial Data Schedule..............................................
</TABLE>

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

+ Confidential treatment requested for portions of these agreements.

* Previously filed.

<PAGE> 1
EXHIBIT 4.1

COMMON STOCK [LOGO] COMMON STOCK
[SYMBOL] [SYMBOL]

SPECTRX, INC.

SEE REVERSE FOR CERTAIN DEFINITIONS

INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
CUSIP 847635 10 9

This Certifies that

is the owner of

FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, $.001 PAR VALUE, OF

SPECTRX, INC., INC. transferable on the Books of the Corporation by the
holder hereof in person or by duly authorized attorney upon the surrender of
this Certificate properly endorsed. This certificate is not valid unless
countersigned and registered by the Transfer Agent and Registrar.

IN WITNESS WHEREOF, the Corporation has caused its corporate seal
to be hereto affixed and the Certificate to be signed by its duly authorized
officers of the Corporation.

Dated:

<TABLE>
<S> <C> <C>
/s/ Mark A. Samuels Countersigned and Registered:
- -----------------------------------------
PRESIDENT AND CHIEF EXECUTIVE OFFICER CORPORATE SUNTRUST BANK,
ATLANTA
SEAL Transfer Agent and Registrar

/s/ Thomas H. Muller, Jr. By:
- ----------------------------------------- -----------------------------
SECRETARY Authorized Signature

</TABLE>

<PAGE> 2

The Corporation is authorized to issue two classes of stock, Common
Stock and Preferred Stock. The Board of Directors of the Corporation has the
authority to fix the number of shares and the designation of any series of
Preferred Stock and to determine or alter the rights, preferences, privileges
and restrictions granted to or imposed upon any unissued series of Preferred
Stock.

A statement of the rights, preferences, privileges and restrictions
granted to or imposed upon the respective classes or series of shares and upon
the holders thereof as established, from time to time, by the Certificate of
Incororation of the Corporation and by any certificate of determination, the
number of shares constituting each class and series, and the designations
thereof, may be obtained by the holder hereof upon request and without charge
from the Corporation at its principal office.

The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations.

<TABLE>
<S> <C> <C>
TEN COM as tenants in common UNIF GIFT MIN _________________Custodian_____________________
ACT ________
TEN ENT as tenants by the entireties (Cust)
(Minor)
JT TEN as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act________________________________
in common (State)
UNIF TRF MIN ______________________ Custodian (until
ACT age_______)
(Cust)
__________________________under Uniform
Transfers
(Minor)
to Minors Act___________________________
(State)

</TABLE>

Additional abbreviations may also be used though not in the above list.

FOR VALUE RECEIVED______________________hereby sell, assign and transfer unto

PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
OF ASSIGNEE

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

________________________________________________________________________________
(PLEASE PRINT OR TYPE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)

________________________________________________________________________________

_________________________________________________________________________ Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint

_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.

Dated_______________________________

X
________________________________________________
X
________________________________________________

THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
NOTICE: CORRESPOND WITH THE NAME(S) AS WRITTEN UPON
THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE
WHATEVER.

Signature(s) Guaranteed:_______________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR

<PAGE> 3

INSTITUTION (BANKS, STOCKBROKERS SAVINGS AND LOAN
ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17AD-15.

<PAGE> 1
EXHIBIT 10.18C

SECOND AMENDMENT TO LICENSE AGREEMENT

This Second Amendment to License Agreement (the "Second Amendment") is
entered into as of the 26th day of March 1997, by and between Joseph R.
Lakowicz, Ph.D., an individual having an address of 10037 Fox Den Road, Ellicott
City, Maryland 21042 ("DR. LAKOWICZ") and SpectRx, Inc., a Delaware corporation
having its principal office at 6025A Unity Drive, Norcross, Georgia 30071
("SRX").

WHEREAS, DR. LAKOWICZ and SRX entered into a License Agreement (the
"Agreement") executed November 22, 1995, as amended by an Amendment of License
Agreement dated November 28, 1995;

WHEREAS, DR. LAKOWICZ and SRX desire to amend further the Agreement
pursuant to paragraph 12.7 of its terms;

NOW, THEREFORE, for and in consideration of $1.00 and other good and
valuable consideration and the covenants and agreements contained herein, the
parties hereto agree to amend the Agreement as follows:

A. By adding the following subparagraph (z) to paragraph 1.1:

(z) the patents, applications for patent, and invention
disclosures listed in the Appendix A attached hereto and incorporated
herein in its entirety by this reference, all patents which issue from
the applications and invention disclosures listed in Appendix A, and
all divisionals, continuations, reissues, extensions, and foreign
counterparts of these applications and patents, and all utility models,
design registrations or similar rights corresponding thereto.

B. By deleting paragraph 1.2 in its entirety and substituting
the following therefor:

1.2 "Licensed Technology" means the Licensed Patents and all
designs, technical information, know-how, knowledge, data,
specifications, test results and other information (including designs,
technical information, know-how, knowledge, data, specifications, test
results and other information previously disclosed to SRX) relating to
medical applications and to DNA Diagnostics (as hereinafter defined)
under the Licensed Patents.

-1-

<PAGE> 2

C. By deleting paragraph 1.6 in its entirety and substituting
the following therefor:

1.6 "Affiliate" means an entity of which SRX has at least
twenty (20) percent ownership, or an entity having at least twenty (20)
percent ownership of SRX; provided, however, that FluoRx, Inc. ("FRX")
shall at all times be an Affiliate of SRX.

D. By adding the following paragraph 1.10:

1.10 "Up-Front License Payment" means any payment actually
made to SRX or an Affiliate by a non-Affiliate sublicensee of Licensed
Technology in consideration of the grant of the sublicense and whose
value is not determined with reference to any manufacture, sale, or use
of any Licensed Product; the amount of any such Up-Front License
Payment shall exclude (a) any funds paid to SRX or an Affiliate by such
non-Affiliate sublicensee for development of the Licensed Technology,
provided such funds are actually used by SRX or an Affiliate for such
development or as reimbursement of funds previously used for such
development, and (b) any payment by such non-Affiliate sublicensee for
purchase of equity in SRX or any Affiliate, except to the extent such
payment exceeds the fair market value of such equity, such fair market
value for any publicly held company to be determined by reference to
the published share price of such company at the time specified in the
purchase agreement and for any privately held company to be not less
than the value of the equivalent shares for the then most recent equity
financing of such company.

E. By adding the following paragraph 1.11:

1.11 "DNA Diagnostics" means any diagnostic system that
involves genetic codes, including (but not limited to) diagnostic
systems that measure some property of material or tissue related to any
genetic code (such as DNA, RNA, etc.) or use some part of a genetic
code to measure some property of material or tissue.

F. By deleting paragraph 2.2 in its entirety and substituting
the following therefor:

2.2 Sublicenses. SRX and its Affiliates, at its or
their discretion, shall have the right to grant sublicenses under this
Agreement.

G. By deleting paragraph 3.3 in its entirety and substituting
the following therefor:

3.3 Calculation of Royalty Payments. For a particular
calendar quarter, the royalty payment due pursuant to paragraph 3.2
shall be the sum of (a) three (3)

-2-

<PAGE> 3

percent of the Net Sales of Licensed Products sold by SRX and its
Affiliates during such quarter in each country in the Licensed
Territory in which a patent of the Licensed Patents exists or a patent
application of the Licensed Patents is pending, and (b) one and
one-half (1-1/2) percent of the Net Sales of Licensed Products sold by
SRX and its Affiliates during such quarter in each country in the
Licensed Territory in which no patent of the Licensed Patents exists or
no application of the Licensed Patents is pending.

H. By deleting paragraph 3.7 in its entirety and substituting
the following therefor:

3.7 Royalties Paid by Sublicensees for Licensed Technology. If
SRX or an Affiliate sublicenses the right to sell licensed Products
pursuant to paragraph 2.2 to an entity other than an Affiliate, SRX
shall pay to DR. LAKOWICZ, at the appropriate time under paragraph 3.2
and in lieu of any royalties calculated under paragraph 3.3, ten (10)
percent of any Up-Front License Payment actually received by SRX or
such Affiliate from the non-Affiliate sublicensee and, for sales under
such sublicense of Licensed Products, fifty (50) percent of the
royalties actually received by SRX or such Affiliate from the
non-Affiliate sublicensee; provided, however, that if SRX or an
Affiliate makes a substantial effort to develop the Licensed
Technology, the amount of the royalties to be paid to DR. LAKOWICZ
shall not exceed three (3) percent of the Net Sales of Licensed
Products by the non-Affiliate sublicensee. For purposes of this
paragraph, "substantial effort" shall be satisfied by SRX or an
Affiliate engaging in any of the following: good-faith license
negotiations involving the Licensed Technology, extensive marketing of
the Licensed Technology, litigation involving use of the Licensed
Technology and intended to produce royalties or other monetary
consideration as a possible outcome; or performance or funding of
activities resulting in demonstrable progress in the evolution of the
Licensed Technology.

I. By adding the following paragraph 3.8:

3.8 Additional Payment. In partial consideration of the
extension of the right and license granted in the Agreement to include
DNA Diagnostics technology, and regardless of any obligation to pay
royalties, SRX shall pay to DR. LAKOWICZ the sum of fifteen thousand
dollars (US$15,000) no later than ten (10) days after DR. LAKOWICZ
provides to SRX a legally binding release of all rights of the
University of Maryland to the Licensed Patents of paragraph 1.1 (z) and
to the Licensed Technology associated therewith, signed by an
authorized official of the University of Maryland, and a written
statement acknowledging that the warranties of paragraph 11.1 apply to
such Licensed Patents and Licensed Technology.

J. By deleting paragraph 10.2(c) in its entirety.

K. By deleting paragraph 12.13 in its entirety and substituting
the following therefor:

-3-

<PAGE> 4

12.13 Research Agreement. Until the amount paid to DR.
LAKOWICZ in any calendar year pursuant to Article 3 of this Agreement
exceeds two hundred fifty thousand dollars (US$250,000), SRX (either
itself or through an Affiliate) agrees to fund a research program under
the direction of DR. LAKOWICZ at the University of Maryland, a future
employer of DR. LAKOWICZ, or any other organization designated by DR.
LAKOWICZ, at a level not less than two hundred fifty thousand dollars
(US$250,000) per year. Notwithstanding the foregoing, for the second
year following the Effective Date (i.e., the year commencing November
22, 1996), DR. LAKOWICZ agrees that any funding requested by DR.
LAKOWICZ to be made by SRX (either itself or through an Affiliate)
pursuant to this paragraph shall not exceed one hundred thousand
dollars (US$100,000).

IN WITNESS WHEREOF, DR. LAKOWICZ has executed this Second Amendment and
SRX has caused this Second Amendment to be executed by its duly authorized
representative as of the day and year first above written.

JOSEPH R. LAKOWICZ, Ph.D.

/s/ Joseph R. Lakowicz
-------------------------------------------

SPECTRX, INC.

By: /s/ Mark A. Samuels
--------------------------------------
President and Chief Executive Officer

-4-

<PAGE> 1
EXHIBIT 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our
report (and to all references to our Firm) included in or made a part of this
Registration Statement.

/s/ Arthur Andersen LLP

Atlanta, Georgia
April 21, 1997

<PAGE> 1

EXHIBIT 23.3

CONSENT OF COUNSEL

We consent to the use of our name under the caption "Experts" in the
Prospectus, which constitutes part of the Registration Statement for the Common
Stock of SpectRx, Inc. on Form S-1.

FLESHNER & KIM

/s/ Mark Fleshner
- ----------------------------
Mark Fleshner

April 21, 1997

<PAGE> 1

EXHIBIT 23.4

CONSENT OF COUNSEL

We consent to the use of our name under the caption "Experts" in the
Prospectus, which constitutes part of the Registration Statement for the Common
Stock of SpectRx, Inc. on Form S-1.

KILPATRICK STOCKTON LLP

/s/ Dean W. Russell
- -----------------------------
Dean W. Russell

April 21, 1997

<PAGE> 1

EXHIBIT 23.5

CONSENT OF COUNSEL

We consent to the use of our name under the caption "Experts" in the
Prospectus, which constitutes part of the Registration Statement for the Common
Stock of SpectRx, Inc. on Form S-1.

THORPE NORTH & WESTERN

/s/ M. Wayne Western
- ----------------------------
M. Wayne Western

April 21, 1997

<PAGE> 1

EXHIBIT 23.6

CONSENT OF INDEPENDENT REGULATORY COUNSEL

We consent to the use of our name under the caption "Experts" in the
Prospectus, which constitutes part of the Registration Statement for the Common
Stock of SpectRx, Inc. on Form S-1.

MEDICAL DEVICE CONSULTANTS, INC.

/s/ James R. Veal
- ----------------------------
James R. Veal

April 21, 1997