ADVANCED UROSCIENCE INC, 424A, 1997-11-20

ADVANCED UROSCIENCE INC
424A, 1997-11-20
ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS

Previous: RESIDENTIAL ASSET SECURITIES CORP, 8-K, 1997-11-20

Next: VYREX CORP, S-3, 1997-11-20

<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED NOVEMBER 18, 1997
FILED PURSUANT TO RULE 424(A)
FILE NUMBER 333-37583

2,500,000 SHARES

[LOGO]

COMMON STOCK

All of the shares of Common Stock offered hereby are being sold by Advanced
UroScience, Inc. Prior to this offering, there has been no public market for the
Common Stock. It is currently estimated that the initial public offering price
will be between $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's Common Stock has been approved for quotation on the Nasdaq
National Market under the symbol "AURO" pending the completion of this offering.
------------------------

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

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

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

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

(2) Before deducting estimated offering expenses of $400,000 payable by the
Company.

(3) The Company has granted the Underwriters an option, exercisable within 30
days of the date of this Prospectus, to purchase up to 375,000 additional
shares of Common Stock to cover over-allotments, if any. If this option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
------------------------

The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and are
subject to the right of the Underwriters to withdraw such offer and to reject
orders in whole or in part. It is expected that delivery of the shares of Common
Stock will be made on or about , 1997.

DAIN BOSWORTH INCORPORATED ADAMS, HARKNESS & HILL, INC.

THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE>
[LOGO]

<TABLE>
<S> <C> <C>
[SERIES OF ANATOMICAL
DEPICTIONS
DEMONSTRATING THE ACYST
INJECTION PROCEDURE]

Before treatment, an ACYST is injected to The
open bladder neck bulk the tissue at or injection
results in urine near the bladder neck. is
leakage. repeated
at
other
sites
until
the
bladder
neck
is
closed,
immediately
restoring
urinary
control.
</TABLE>

ACYST is currently undergoing human clinical trials under an investigational
device exemption granted by the U.S. Food and Drug Administration ("FDA"). ACYST
has not received marketing clearance from the FDA for sale in the U.S., and
there can be no assurance that such approval will be received. See
"Business--Government Regulations."

ACYST-TM- is a trademark of the Company. This Prospectus also includes trade
names and trademarks of companies other than Advanced UroScience, Inc.

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES, AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND THE NOTES THERETO APPEARING ELSEWHERE
IN THIS PROSPECTUS. EXCEPT AS OTHERWISE INDICATED, ALL INFORMATION IN THIS
PROSPECTUS (I) ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION
AND (II) REFLECTS THE AUTOMATIC CONVERSION OF ALL OUTSTANDING SHARES OF SERIES A
PREFERRED STOCK INTO 1,413,500 SHARES OF COMMON STOCK UPON COMPLETION OF THIS
OFFERING. SEE "UNDERWRITING" AND "DESCRIPTION OF SECURITIES."

THE COMPANY

Advanced UroScience, Inc. ("Advanced UroScience" or the "Company") has
developed ACYST, an injectable bulking agent designed to treat stress urinary
incontinence. Stress urinary incontinence is generally defined as the
involuntary loss of urine as a result of activities that increase
intra-abdominal pressure, such as coughing, laughing, exercising or simply
standing up. ACYST is a proprietary composition of pyrolytic carbon-coated
micro-beads suspended in a carrier gel. ACYST is designed to provide permanent
bulking around the urethra to close the bladder neck. The injection procedure
for ACYST is minimally invasive, can be accomplished in less than 30 minutes in
an outpatient setting and is designed to immediately restore the patient to
normal urinary continence. ACYST incorporates micro-beads that are designed to
be non-absorbable, non-migratory, biocompatible and intended to provide a
permanent solution, thereby minimizing the potential need for retreatment.

It is estimated that there are 13 million adults with urinary incontinence
in the U.S., of which approximately 85% are women. Approximately 9 million
adults with urinary incontinence suffer from stress urinary incontinence. The
Company believes that the majority of these people may benefit from treatment
with ACYST. Initially, the Company will seek U.S. Food and Drug Administration
("FDA") approval to market ACYST for the treatment of stress urinary
incontinence due to intrinsic sphincter deficiency, which the Company estimates
affects approximately 1.5 million adults. The Company intends to conduct future
human clinical trials to support expanded applications of ACYST in order to
address a larger segment of the population suffering from stress urinary
incontinence.

Through November 10, 1997, 79 patients had been treated with ACYST in the
Company's clinical studies. Most of these 79 patients experienced immediate
improvement in incontinence, suffered no post-treatment complications and were
able to return to normal activities within days. The Company is currently
conducting clinical trials at several U.S. locations under an investigational
device exemption ("IDE") granted by the FDA, and expects to use the data
gathered in its clinical trials to support an application for premarket approval
("PMA"), which the Company intends to file with the FDA in 1999. The Company is
also conducting human clinical trials outside of the U.S. and expects to receive
ISO 9001 certification and to meet the requirements for use of the CE mark in
1998, which will allow the Company to market its products in the European Union
("EU").

Advanced UroScience believes that ACYST offers significant advantages over
existing treatment options for sufferers of stress urinary incontinence. Unlike
adult diapers and other methods of managing the problem, ACYST is designed to
restore continence. ACYST is designed to provide results immediately after
injection, unlike behavioral therapy and pelvic muscle training exercises, which
can take several weeks or months before results are achieved and which require
ongoing therapy. Compared with traditional surgical treatments, the Company
believes the minimally invasive ACYST procedure is less traumatic to patients
and will be associated with significantly reduced costs. Because it is designed
to be biocompatible, non-migratory and non-absorbable, the Company believes
ACYST addresses significant issues posed by commercially available injectable
bulking agents.

The Company's objective is to be a leader in the development and marketing
of innovative products for the treatment of urinary incontinence and to expand
applications of its proprietary bulking technology to areas other than urology.
The Company's strategy is to (i) focus on obtaining regulatory approval for
ACYST in the U.S. and internationally, (ii) develop additional marketing and
sales capabilities,

3
<PAGE>
(iii) enhance its manufacturing capabilities, (iv) explore complementary
technologies and (v) expand applications of ACYST technology.

The Company was incorporated in Minnesota on July 27, 1994. Its executive
offices are located at 1290 Hammond Road, St. Paul, Minnesota 55110 and its
telephone number is (612) 653-8512.

RECENT DEVELOPMENTS

PROSPECTIVE STRATEGIC ALLIANCE

On November 7, 1997, the Company entered into a letter of intent with Boston
Scientific Corporation ("BSC") to grant BSC the exclusive right to market and
sell ACYST worldwide, except for in the U.S. The proposed alliance is subject to
the completion of definitive documents and the approval by senior management of
the Company and BSC. The terms of the proposed alliance include (i) a seven-year
term with an option for a five-year renewal based on mutual agreement, and BSC
will have the right to terminate the agreement with six months' advance notice,
(ii) the Company will receive a percent of BSC's average sales price for each
unit of ACYST sold, with minimum sales levels to be established based on mutual
agreement, (iii) upon execution of a definitive agreement, BSC will purchase
$500,000 of the Company's common stock at a market based price per share and
warrants to purchase an additional $500,000 of common stock at the same price,
(iv) the Company and BSC will collaborate on obtaining the required
international regulatory approvals and will share in the costs of mutually
agreed upon market studies in key countries, (v) BSC will have a 90 day first
right of negotiation for any other products that may be developed by the
Company, and a 90 day first right of negotiation for U.S. distribution rights of
ACYST in the event the Company decides to utilize a distributor in the U.S. and
(vi) the Company will indemnify BSC for certain liabilities it may incur as a
distributor of ACYST.

The Company believes that BSC, a worldwide developer, manufacturer and
marketer of minimally invasive medical devices, will provide for international
sales growth, while allowing the Company to focus on its primary goal of
obtaining regulatory approval from the FDA to market ACYST in the U.S. This
proposed alliance with BSC will also minimize the costs and reduce the
infrastructure associated with developing an extensive, international sales and
marketing network. However, no assurance can be given that the Company and BSC
will enter into a definitive agreement or that it will have the anticipated
effect on the Company stated herein.

4
<PAGE>
THE OFFERING

<TABLE>
<CAPTION>
<S> <C>
Common Stock offered.................................. 2,500,000 shares
Common Stock to be outstanding after the offering..... 7,626,720 shares (1)
Use of proceeds....................................... To fund ongoing and future human clinical trials,
research and development, international sales and
marketing, expansion of manufacturing capabilities, and
working capital and general corporate purposes.
Proposed Nasdaq National Market symbol................ AURO
</TABLE>

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

<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED PERIOD FROM
DECEMBER 31, SEPTEMBER 30, INCEPTION
-------------------- -------------------- (AUGUST 1, 1994) TO
1995 1996 1996 1997 SEPTEMBER 30, 1997
--------- --------- --------- --------- --------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (2):
Research and development expense....................... $ 353 $ 764 $ 485 $ 1,040 $ 2,190
General and administrative expense..................... 165 778 578 1,091 2,108
Net loss............................................... $ (524) $ (1,508) $ (1,035) $ (2,010) $ (4,152)
--------- --------- --------- --------- -------
--------- --------- --------- --------- -------
Net loss per share..................................... $ (0.12) $ (0.29) $ (0.20) $ (0.38)
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average number of common and common equivalent
shares outstanding................................... 4,486 5,224 5,184 5,347
</TABLE>

<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-------------------------
DECEMBER 31, AS ADJUSTED
1996 ACTUAL (3)
------------ --------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments..................... $ 354 $ 3,385 $ 28,560
Working capital....................................................... 88 3,412 28,587
Total assets.......................................................... 623 4,197 29,372
Total liabilities..................................................... 407 383 383
Deficit accumulated during the development stage...................... (2,411) (4,421) (4,421)
Total stockholders' equity............................................ 216 3,814 28,989
</TABLE>

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

(1) Does not include, as of the date of this Prospectus, (i) 920,880 shares of
Common Stock issuable upon exercise of outstanding options, (ii) 174,000
shares reserved for future grants of options under the Company's 1996 Stock
Option Plan and (iii) 620,000 shares issuable upon exercise of outstanding
warrants. See "Management--Stock Options" and "Description of Securities."

(2) The Company has generated no revenues to date.

(3) Adjusted to reflect the sale of the 2,500,000 shares of Common Stock offered
hereby (at an assumed Price to Public of $11.00 per share) and the
application of the estimated net proceeds therefrom. See "Use of Proceeds."

5
<PAGE>
RISK FACTORS

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. THIS
PROSPECTUS INCLUDES CERTAIN FORWARD-LOOKING STATEMENTS WHICH REFLECT THE
COMPANY'S PLANS, ESTIMATES AND BELIEFS. THE COMPANY'S ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES ARE DISCUSSED IN THE
FOLLOWING RISK FACTORS AND ELSEWHERE IN THIS PROSPECTUS. IN EVALUATING AN
INVESTMENT IN THE COMMON STOCK, PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER
THE FOLLOWING RISK FACTORS AND OTHER INFORMATION CONTAINED IN THIS PROSPECTUS.

NEED FOR FURTHER CLINICAL TESTING

ACYST, the Company's sole product, is a new product which has undergone only
a limited number of preclinical and clinical studies. As of November 10, 1997,
only 79 patients had been treated with ACYST in clinical trials and there does
not exist a statistically significant body of clinical data from which to draw
conclusions concerning the effectiveness and long-term outcomes associated with
ACYST. The Company cannot market ACYST in the U.S. unless and until substantial
human trials are successfully completed and premarket approval has been granted
by the FDA. The Company's ability to market ACYST internationally will require
similar approvals from appropriate regulatory bodies in foreign jurisdictions.
There can be no assurance that ACYST will prove to be safe and effective to the
satisfaction of the FDA or such other regulatory bodies upon completion of the
clinical trials. The Company initially will seek FDA approval to market ACYST
for the treatment of stress urinary incontinence due to intrinsic sphincter
deficiency, and will likely be required to conduct future clinical trials to
support additional filings with the FDA for approval of expanded applications of
ACYST. There can be no assurance that there will not be any delays in the
completion of clinical testing or that required regulatory approvals will be
obtained on a timely basis, if at all. Any delay or failure by the Company in
achieving acceptable clinical results, obtaining approvals for any necessary
future clinical trials or receiving regulatory approval for ACYST would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business-- Status of Clinical Trials" and
"Business--Government Regulations."

EXTENSIVE GOVERNMENTAL REGULATION; UNCERTAINTY OF OBTAINING REGULATORY APPROVAL

As a medical device company, Advanced UroScience is subject to extensive and
rigorous regulation by the FDA in the U.S. and by comparable agencies in foreign
countries. The FDA regulates the introduction of medical devices as well as
manufacturing, labeling, distribution, sale, marketing, advertising, promotion
and recordkeeping procedures for such products. The process of obtaining
marketing approval for new products and new applications for existing products
can be costly and time consuming, and there is no assurance that such approvals
will be granted or that FDA review will not involve delays that would adversely
affect the Company's ability to commercialize its products. The Company's ACYST
product will be subject to the lengthy and expensive PMA process and the Company
recently began the final phase of the clinical trials required to support its
PMA application. Due to the need for extensive clinical data to support a PMA
application, there can be no assurance regarding the timing of any such
application for ACYST or the review or approval of any such application by the
FDA, if at all. Even if regulatory approval to market ACYST is obtained from the
FDA, this approval may entail limitations on the indicated uses of the product
not anticipated by the Company. Failure to receive approval for a PMA
application for ACYST for uses currently contemplated by the Company, or any
delay in the timing of such filing or approval would have a material adverse
effect on the Company's business, financial condition and results of operations.

Even if marketing approval for ACYST is granted, such approval can be
withdrawn temporarily or permanently by the FDA due to failure to comply with
regulatory standards or the occurrence of unforeseen problems following initial
approval. The Company may be required to make further filings with the FDA under
certain circumstances, such as the addition of product claims or product
reformulation. The FDA could also limit or prevent the manufacture or
distribution of ACYST and has the power to

6
<PAGE>
require the recall of such product. FDA regulations depend heavily on
administrative interpretation, and there can be no assurance that future
interpretation made by the FDA or other regulatory bodies, with possible
retroactive effect, will not adversely affect the Company. The FDA and various
agencies inspect the Company and its facilities from time to time to determine
whether the Company is in compliance with regulations relating to medical device
manufacturing, including regulations concerning manufacturing, testing, quality
control and product labeling practices. A determination that the Company is in
material violation of such regulations could lead to the imposition of civil
penalties, including fines, product recalls, product seizures, or, in extreme
cases, criminal sanctions. In addition, there can be no assurance that the
government regulations will not change, and thereby prevent the Company from
temporarily or permanently marketing ACYST. The withdrawal by the FDA of its
marketing approval for ACYST, the recall of ACYST or similar regulatory action
would have a material adverse effect on the Company's business, financial
condition and results of operations.

The Company's business strategy currently includes establishing
international marketing and sales capabilities to begin commercial sales of
ACYST in foreign jurisdictions prior to receipt of FDA approval. International
regulatory bodies have established varying regulations regarding medical device
standards, packaging, testing, manufacturing, labeling and quality control,
among others. To introduce ACYST in the EU, the Company must comply with the
"essential requirements" set forth in the Medical Devices Directive ("MDD") of
the EU, which define the safety, design and manufacturing requirements for
medical products. Typically, a full quality assurance system complying with
international quality standards is required to conform with the MDD. Compliance
with these requirements will allow the Company to apply the CE mark to ACYST,
allowing free sale in the EU, subject only to limited regulation by member
countries. The Company recently underwent an audit of its quality system, which
is required to obtain ISO 9001 certification and approval to apply the CE mark.
Based upon the audit findings, the auditors recommended the Company for ISO 9001
certification and approval to apply the CE mark to ACYST upon implementing
corrective actions for minor non-conformities noted during the audit. The
Company has addressed these non-conformities and believes it will receive ISO
9001 certification and approval to apply the CE mark in 1998. However, there can
be no assurance that the Company will receive ISO 9001 certification or obtain
approval to apply the CE mark on a timely basis, if at all. Failure to obtain
the CE mark, address other international regulations or obtain other foreign
regulatory approvals would limit the Company's ability to sell ACYST
internationally, and would have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business--Government Regulations."

DEVELOPMENT STAGE COMPANY; HISTORY OF LOSSES AND ANTICIPATED FUTURE LOSSES

The Company is a development stage company that has been primarily engaged
in research, development and testing of ACYST since its inception in August
1994. The Company has experienced continued and significant operating losses
since inception and, as of September 30, 1997, had an accumulated deficit of
approximately $4.4 million. In addition, the development and commercialization
by the Company of ACYST and other new products, if any, will require substantial
additional product development, clinical, regulatory and other expenditures for
the foreseeable future. The Company expects its operating losses to increase
over the foreseeable future and there can be no assurance that the net proceeds
of this offering, together with the Company's existing capital resources and any
funds provided by future operations, will be sufficient to fund the Company's
needs, or that other sources of funding will be available. The Company's ability
to generate revenues from operations and achieve profitability is dependent upon
a number of factors, including satisfactory completion of the Company's human
clinical trials for ACYST, the timing and successful completion of the
regulatory approval process and the costs and the related timing of expansion of
marketing, sales and manufacturing activities. In addition, even if regulatory
approval is obtained, there can be no assurance that the Company will generate
revenues or achieve profitability in the future. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations,"
"Business--Status of Clinical Trials" and the Financial Statements.

7
<PAGE>
DEPENDENCE ON SINGLE PRODUCT

The Company's future success is entirely dependent on the successful
commercialization and market acceptance of ACYST, which has not been
demonstrated to be safe and effective and which has not been granted necessary
regulatory approval. Accordingly, any delay or failure by the Company in
demonstrating that ACYST is safe and effective, receiving required regulatory
approvals to market ACYST or commercializing ACYST successfully would have a
material adverse effect on the Company's business, financial condition and
results of operations.

UNCERTAINTY OF MARKET ACCEPTANCE

There can be no assurance that ACYST will achieve any significant degree of
market acceptance among physicians, health care payers or patients, even if the
safety and effectiveness of ACYST is established and the necessary regulatory
approvals are obtained. Acceptance of ACYST by physicians over other treatment
options, including other bulking agents, will depend upon the demonstration of
its safety and effectiveness in clinical trials, the relative performance of
ACYST compared to other market approved products, the ease of use and the
relative cost compared to other bulking agents and treatment alternatives.
Physicians may elect not to prescribe treatment using ACYST unless adequate
reimbursement from health care payers is available. Health care payer acceptance
of a treatment utilizing ACYST will require, among other things, evidence of the
cost effectiveness of this treatment as compared to other treatment options.
Cost effectiveness of bulking agents will be impacted by the need for additional
injections to maintain improved continence. There can be no assurance as to
whether or how frequently patients will require additional injections of ACYST
and whether any such additional injections would be effective or would have a
negative effect on physician, payer or patient acceptance. There can be no
assurance that ACYST will achieve market acceptance relative to the competing
products or treatment options for urinary incontinence. Failure of ACYST to
achieve significant market acceptance among physicians, health care payers and
patients would have a material adverse effect on the Company's business,
financial condition and results of operations.

DEPENDENCE ON PATENTS AND PROPRIETARY RIGHTS

The Company's success depends in part on its ability to obtain and maintain
patent protection for its products, to preserve its trade secrets and to operate
without infringing the proprietary rights of third parties. The Company has one
issued U.S. patent covering its ACYST technology and one pending U.S. patent
application and two corresponding Patent Cooperation Treaty applications. A
number of patents have been issued to others covering injectable bulking
materials. The validity and breadth of claims covered in medical technology
patents involve complex legal and factual questions and, therefore, may be
highly uncertain. There can be no assurance that any pending or future patent
applications will result in issued patents, that any current or future patents
will not be challenged or invalidated, that others will not claim rights in or
ownership of the patents and proprietary rights held by the Company, that the
rights granted under its patents will provide any competitive advantage to the
Company or that the Company's products and processes will not infringe the
proprietary rights of others. There can be no assurance that others will not
independently develop or otherwise acquire substantially equivalent techniques
or otherwise gain access to and disclose the Company's proprietary technology.
There can also be no assurance that the Company's trade secrets or
confidentiality agreements will provide meaningful protection for the Company's
unpatented proprietary information.

Beginning shortly after its inception, the Company received a series of
communications from Uroplasty Inc. ("Uroplasty"), a competing manufacturer of
medical devices and products, alleging that the Company's issued patent may be
invalid, informing the Company of certain patents held by Uroplasty covering
implant materials and alleging that the activities of certain of the Company's
officers are in violation of non-competition and non-disclosure agreements. The
Company has received an opinion of its patent counsel, Nawrocki Rooney &
Sivertson, P.A., that the Company's issued patent is valid and

8
<PAGE>
enforceable relative to any known prior art and that the Company's products do
not infringe any of the claims under any U.S. patents known to be held by
Uroplasty. The Company has reviewed with its general counsel the claims and
allegations regarding violations of non-competition and non-disclosure
agreements by the Company's officers, and believes them to be without merit.
Uroplasty has not brought any legal action in connection with its claims and
allegations. There can be no assurance, however, that Uroplasty or any other
third party will not pursue legal action with respect to these matters. Because
an opinion of counsel is not binding on any court and because of the complex
legal and factual questions involved in intellectual property litigation, there
can be no assurance that any such action would not be determined in a manner
adverse to the Company or its officers.

Claims by competitors such as Uroplasty and other third parties that the
Company's products allegedly infringe the patent or other intellectual property
rights of others could have a material adverse effect on the Company. There has
been substantial litigation regarding patent and other intellectual property
rights in the medical device industry, and intellectual property litigation may
be used against the Company as a means of gaining a competitive advantage.
Intellectual property litigation is complex, time-consuming and expensive, and
the outcome of such litigation is difficult to predict. Any future litigation,
regardless of outcome, could result in substantial expense to the Company and
significant diversion of the efforts of the Company's technical and management
personnel. An adverse outcome in any litigation could subject the Company to
significant liabilities to third parties, require disputed rights to be licensed
from others, if licenses to such rights could be obtained, or require the
Company to cease making, using or selling certain products. There can be no
assurance that any licenses required under any patents or proprietary rights
would be made available on terms acceptable to the Company, if at all. In
addition to being costly, protracted litigation to defend or prosecute
intellectual property could result in the Company being unable to commercialize
ACYST on a timely basis or at all, and could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business--Patents and Proprietary Rights."

COMPETITION AND TECHNOLOGICAL DEVELOPMENTS

The medical condition that can be treated using ACYST also may be treated
using a variety of alternative products or techniques, including adult diapers
and absorbent pads, behavior therapy and pelvic muscle exercise, drugs, surgery,
implantable devices, other injectable bulking agents and other medical devices.
The companies that offer these alternative treatments have greater distribution
capabilities, substantially greater capital resources and larger marketing,
research and development staffs and facilities than the Company. There can be no
assurance that ACYST will be able to compete effectively with such alternative
products or techniques or with such competitors.

The Company competes in a market characterized by technological innovation,
extensive research efforts and significant competition. Improvements in existing
treatment options or developments of new treatment methods may have a material
adverse effect on the Company's ability to successfully commercialize ACYST and
any future products and may render such products noncompetitive or obsolete.
Other companies are currently engaged in the development of products and
innovative methods for treating stress urinary incontinence that are similar to,
or compete with, ACYST. Significant developments by any of these companies or
advances by medical researchers at universities, government research facilities
or private research laboratories could eliminate the market for ACYST or
otherwise render ACYST obsolete. See "Business--Competition."

LIMITED MARKETING AND SALES EXPERIENCE

To date, the Company has not sold any products and has only limited sales
and marketing personnel and capabilities. If the required regulatory approvals
are received, the Company expects to market and sell ACYST in the U.S. through
its own dedicated marketing staff and sales force and in international markets
through a network of independent distributors or a strategic alliance with a
medical device manufacturer or marketer. The Company's success will depend to a
significant extent upon its ability to recruit, train and

9
<PAGE>
retain a dedicated marketing staff and sales force capable of promoting ACYST in
the U.S. and to establish an international distribution channel for sales of
ACYST internationally. Significant additional expenditures, management resources
and time will be required for the Company to assemble a marketing staff and
sales force and establish foreign distribution capabilities. There can be no
assurance that the Company will be able to assemble domestic and international
marketing capabilities on a timely basis or at all, or that such marketing and
sales efforts will be successful. Failure by the Company to establish successful
domestic and foreign marketing and sales capabilities would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Marketing and Sales."

RISKS RELATED TO INTERNATIONAL SALES

The Company intends to sell ACYST and any future products to customers
outside of the U.S. International sales and operations entail a significant
number of inherent risks. International sales and operations may be limited or
disrupted by the imposition of government controls, political instability, trade
restrictions, changes in tariffs or difficulties in staffing and managing
international operations. Foreign regulatory agencies often establish product
standards different from those in the U.S. and any inability to meet these
standards could have an adverse effect on the Company's international business
and its financial condition and results of operations. Additionally, the
Company's business, financial condition and results of operations may be
adversely affected by fluctuations in currency exchange rates as well as
increases in duty rates. Further, the Company will need to obtain approvals from
foreign regulatory authorities prior to making sales of its products in foreign
jurisdictions. There can be no assurance that the Company will be able to obtain
such foreign regulatory approvals or to successfully commercialize ACYST or any
future product in any foreign market. See "Business--Marketing and Sales" and
"Business-- Government Regulations."

LIMITED MANUFACTURING EXPERIENCE

The Company has limited manufacturing experience and to date has not
produced ACYST or any other product in commercial quantities. The Company's
facilities and the facilities of any contract manufacturers will need to comply
with applicable regulations, including the FDA's current Good Manufacturing
Practices ("GMP") regulations, ISO 9001 and EN46001 certification requirements
and other regulations. Any failure to comply with applicable requirements and
regulations by the Company and any such contract manufacturers could delay or
prohibit manufacturing of ACYST, which could have a material adverse effect on
the Company's business, financial condition and results of operations. Further,
there can be no assurance that the Company will be able to make the transition
to commercial production of ACYST under applicable regulations at acceptable
costs. As the Company begins to manufacture ACYST in commercial quantities, the
Company will need to hire and train additional staff and purchase additional
manufacturing equipment, which may result in delays in meeting manufacturing
quality and quantity requirements. If the Company is unable to make the
transition to commercial production at acceptable costs, the Company's business,
financial condition and results of operations could be materially adversely
affected. See "Business--Manufacturing" and "Business--Government Regulations."

DEPENDENCE ON KEY SUPPLIERS

One of the primary raw materials and components for the manufacture of
ACYST, a material needed for the gel carrier, is available only from a single
source. The Company does not have an agreement with the supplier of this
material and is currently negotiating the terms and conditions of such an
agreement. Other primary raw materials and components for manufacturing of
ACYST, including pyrolytic carbon coating and micro-bead substrates, are
available only from a few suppliers. Interruptions in supplies of these
materials or any other raw materials or components, including pyrolytic carbon
coating and micro-bead substrates, may occur as a result of business risks
particular to such suppliers or the failure of the Company and any such supplier
to maintain satisfactory terms. Suppliers of the Company's raw materials

10
<PAGE>
and components may decide for reasons beyond the control of the Company, such as
concerns about potential medical product liability risk in general, to cease
supplying such materials for use in medical devices generally. In the event that
the Company is unable to obtain these key materials or components from its
current suppliers on acceptable terms, the Company could incur significant
delays and increased costs in replacing its current raw materials and components
with alternatives. These delays could be extended in certain situations where a
raw material or component substitution may require additional testing by the
Company and approval by the FDA and foreign regulatory authorities. Any
interruption in the supply of raw materials or components currently used by the
Company or the use of any alternatives could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business--Manufacturing."

UNCERTAINTY RELATING TO THIRD-PARTY REIMBURSEMENT

ACYST will be purchased by hospitals and other users, which bill various
third-party payers, such as government health programs, private health insurance
plans, managed care organizations and other similar programs, for the health
care products and services provided to their patients. Payers may deny
reimbursement if they determine that a product used in a procedure was not used
in accordance with established payer protocols regarding cost-efficient
treatment methods, was used for an unapproved indication or was not otherwise
covered. Third-party payers are increasingly challenging the prices charged for
medical products and services and, in some instances, have pressured medical
suppliers to lower their prices. In the U.S. and certain foreign countries,
third-party reimbursement is currently generally available for certain bulking
agents for urinary incontinence, but there is no uniform policy for such
reimbursement and no assurance that ACYST will receive the same level of
reimbursement, if any. The availability of third-party reimbursement for ACYST
or competitors' products and continuing efforts to reduce the costs of health
care by decreasing reimbursement rates may reduce the price received by the
Company for ACYST. Failure to receive sufficient reimbursement from health care
payers for procedures using ACYST or adverse changes in governmental and
third-party payers' policies toward reimbursement for such procedures would
materially adversely affect the Company's business, financial condition and
results of operations. See "Business--Third-Party Reimbursement."

RISK OF PRODUCT LIABILITY; NO ASSURANCE INSURANCE WILL BE ADEQUATE

The medical products industry is subject to substantial litigation. As a
manufacturer of a medical product injected into the body, the Company faces an
inherent business risk of exposure to product liability claims in the event that
the use of its product is alleged to have resulted in adverse effects to a
patient. The Company maintains product liability insurance with coverage limits
of $5.0 million per occurrence and $5.0 million in the aggregate annually. There
can be no assurance that these coverage limits are adequate to protect the
Company from any liabilities which it might incur in connection with the
clinical trials and commercialization of ACYST or any other product. Such
insurance is expensive and in the future may not be available on acceptable
terms, if at all. Furthermore, the Company does not expect to be able to obtain
insurance covering its costs and losses as a result of any recall of its
products due to alleged defects, whether such a recall is instituted by the
Company or required by a regulatory agency. A product liability claim, recall or
other claim with respect to uninsured liabilities or in excess of insured
liabilities could have a material adverse effect on the business, financial
condition and results of operations of the Company. See "Business--Product
Liability."

CONTROL BY EXECUTIVE OFFICERS AND DIRECTORS

The Company's executive officers and directors will beneficially own
approximately 50.7% of the issued and outstanding shares of Common Stock upon
completion of this offering. As a result of such ownership, these stockholders,
individually and as a group, may have the ability to influence the outcome of
stockholder votes, including votes relating to elections of directors,
amendments of the Company's Articles of Incorporation and Bylaws, and approvals
of certain mergers or other similar transactions. Such

11
<PAGE>
control could also have the effect of delaying or preventing a change in control
of the Company and could adversely affect the voting and other rights of the
other holders of Common Stock. See "Principal Stockholders."

DEPENDENCE ON KEY PERSONNEL

The Company is dependent upon a number of key management and technical
personnel. The Company's ability to obtain regulatory approvals and successfully
commercialize its products will depend in large part on the efforts of these
individuals. The Company's future success will also depend on its ability to
attract and retain highly skilled managerial, engineering, regulatory,
operations and marketing personnel, who are in great demand. The loss of the
services of one or more of these persons or the inability to hire qualified
personnel as needed could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management."

NO PRIOR PUBLIC MARKET; POSSIBLE STOCK PRICE VOLATILITY

Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market for the
Common Stock will develop or be sustained following this offering. The initial
public offering price will be determined through negotiations between the
Company and Dain Bosworth Incorporated and Adams, Harkness & Hill, Inc., as
representatives of the Underwriters (the "Representatives"). The initial public
offering price may bear no relationship to the price at which the Common Stock
will trade following this offering. There can be no assurance that future market
prices of the Common Stock will not be lower than the initial offering price.
See "Underwriting."

The market price of the Common Stock following the offering may be highly
volatile. Announcements of new products and services by the Company or its
competitors, technological innovations, disputes regarding patents or other
proprietary rights, regulatory developments and economic and other external
factors, as well as period-to-period fluctuations in the Company's financial
results, could cause the market price of the Common Stock to fluctuate
significantly. In addition, the stock market in general and, in particular the
market prices for medical technology companies, have historically experienced
significant volatility which has affected the market price of securities of many
companies and which has sometimes been unrelated to the operating performance of
such companies. Such volatility may adversely affect the market price of the
Common Stock.

POSSIBLE ADVERSE MARKET EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of Common Stock (including shares issued upon
the exercise of outstanding options and warrants) in the public market following
this offering could have an adverse effect on the price of the Common Stock.
Such sales may also make it more difficult for the Company to sell equity or
equity-related securities in the future at a time and price that the Company
would deem appropriate. Upon completion of this offering, the Company will have
7,626,720 shares of Common Stock issued and outstanding. The 2,500,000 shares
offered hereby will be freely tradable following this offering, except for any
shares purchased by an "affiliate" of the Company, which will be subject to the
limitations of Rule 144 promulgated under the Securities Act of 1933, as amended
("Rule 144"). All officers and directors and certain stockholders of the
Company, owning an aggregate of 4,436,000 shares, have entered into "lock-up"
agreements, agreeing not to sell, transfer or otherwise dispose of any shares of
Common Stock without the consent of the Representatives for a period of 180 days
after the date of this Prospectus. The Representatives may waive these
restrictions at any time in their discretion. Taking such restrictions into
account, in addition to the 2,500,000 shares of Common Stock offered hereby, (i)
approximately 384,720 shares will be eligible for immediate sale on the date of
this Prospectus in accordance with Rule 144; (ii) approximately 193,500
additional shares will be eligible for sale beginning in December 1997; (iii)
approximately 112,500 additional shares will become eligible for sale in the
public market beginning 90 days after the date of this Prospectus in accordance
with Rule 144; and (iv) approximately 4,436,000

12
<PAGE>
additional shares will be eligible for sale beginning 180 days after the date of
this Prospectus upon the expiration of the lock-up agreements, subject, in
certain cases, to volume and manner of sale limitations under Rule 144. As of
the date of this Prospectus, options to purchase an aggregate of 920,880 shares
of Common Stock are outstanding, with 736,000 of the shares issuable upon
exercise of such options subject to vesting requirements and lock-up agreements.
The remaining 184,880 shares issuable upon exercise of outstanding options will
become available for exercise and sale upon vesting and effectiveness of
Registration Statements on Form S-8, which the Company intends to file
immediately upon completion of this offering. Following the completion of this
offering, the holders of an aggregate of 1,413,500 shares will also be entitled
to registration rights with respect to such shares. See "Shares Eligible for
Future Sale."

MANAGEMENT DISCRETION IN THE USE OF PROCEEDS

While the Company expects that a portion of the proceeds of this offering
will be used for clinical trials, research and development activities and
expansion of marketing, sales and manufacturing capabilities, the majority of
the proceeds are expected to be used for working capital and other general
corporate purposes. Accordingly, the Company's management will have broad
discretion to allocate the proceeds of this offering and to determine the timing
of expenditures. See "Use of Proceeds."

ADVERSE EFFECT OF ANTI-TAKEOVER PROVISIONS; UNDESIGNATED STOCK

Upon closing of this offering, automatic conversion of the outstanding
Series A Preferred Stock and cancellation of unissued Series A and Series A1
Preferred Stock, there will be 1,586,500 shares of undesignated stock. The Board
of Directors of the Company will have the authority, without any action by the
stockholders, to fix the rights, preferences, privileges and restrictions,
including voting rights, of the undesignated shares and to issue such shares as
preferred stock from time to time. The rights of the holders of Common Stock
will be subject to, and may be adversely affected by, the rights of the holders
of any preferred stock that may be created and issued in the future. In
addition, as a Minnesota corporation, the Company is subject to certain
anti-takeover provisions of the Minnesota Business Corporation Act (the "MBCA").
Both the authority of the Board with regard to the undesignated stock and the
anti-takeover provisions of the MBCA could have the effect of delaying,
deferring or preventing a change in control of the Company, may discourage bids
for the Company's Common Stock at a premium over the then prevailing market
price of the Common Stock, and may adversely affect the market price of, and the
voting and other rights of the holders of, Common Stock. See "Description of
Securities."

IMMEDIATE AND SUBSTANTIAL DILUTION

Purchasers of the shares of Common Stock offered hereby will incur immediate
and substantial dilution of the net tangible book value of their purchased
shares. Investors may also experience additional dilution as a result of the
exercise of outstanding stock options and warrants, or the issuance by the
Company of additional equity securities. See "Dilution."

NO DIVIDENDS

The Company has never paid any cash dividends on its Common Stock and does
not anticipate paying such dividends for the foreseeable future. See "Dividend
Policy."

13
<PAGE>
USE OF PROCEEDS

The net proceeds to be received by the Company from the sale of the
2,500,000 shares of Common Stock offered hereby, after deducting estimated
underwriting discounts and commissions and offering expenses, are estimated to
be $25.2 million ($29.0 million if the Underwriters' over-allotment option is
exercised in full), assuming an initial public offering price of $11.00 per
share.

The Company currently intends to use approximately $5.0 million of the net
proceeds to fund ongoing and future human clinical trials for ACYST. An
additional estimated $3.0 million of the net proceeds is intended to fund
further research and development, primarily focused on additional applications
of the Company's proprietary injectable bulking agent. Further, the Company
plans to use approximately $2.0 million to support international sales and
marketing activities. Finally, an estimated $2.0 million will be used to expand
the Company's manufacturing capabilities for the production of commercial
quantities of ACYST, assuming regulatory approvals for the marketing of ACYST
are received. The balance of the net proceeds will be used for working capital
and general corporate purposes. A portion of the net proceeds may also be used
to acquire technologies, products or businesses that complement the Company's
current business. The Company does not currently have any agreements,
arrangements or understandings, and is not involved in any negotiations, with
respect to any such acquisitions, and no portion of the net proceeds has been
allocated for any specific acquisition.

The timing and amount of expenditures will vary depending upon numerous
factors, including progress of the Company's human clinical trials for ACYST,
the timing and successful completion of the regulatory approval process and the
costs and the related timing of expansion of marketing, sales and manufacturing
activities. The Company's management will have broad discretion to allocate the
proceeds of this offering and to determine the timing of expenditures. Pending
application of the net proceeds as described above, the Company intends to
invest in investment grade, interest-bearing securities.

DIVIDEND POLICY

The Company has never declared nor paid any cash dividends on its Common
Stock. The Company currently intends to retain any earnings for use in the
development and growth of its business and therefore does not anticipate paying
any cash dividends in the foreseeable future.

14
<PAGE>
CAPITALIZATION

The following table sets forth the capitalization of the Company as of
September 30, 1997 and as adjusted to reflect the receipt and application of the
net proceeds from the sale of 2,500,000 shares of Common Stock offered hereby at
an assumed initial public offering price of $11.00 per share.

<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Stockholders' equity:
Common Stock, no par value; 20,000,000 shares authorized; 5,126,720 shares issued and
outstanding; 7,626,720 shares issued and outstanding, as adjusted (1)................. $ 7,915 $ 33,090
Contributed capital..................................................................... 320 320
Deficit accumulated during the development stage........................................ (4,421) (4,421)
--------- -----------
Total stockholders' equity and capitalization......................................... $ 3,814 $ 28,989
--------- -----------
--------- -----------
</TABLE>

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

(1) Does not include (i) 900,880 of Common Stock shares issuable upon exercise
of outstanding options at a weighted average exercise price of $2.26 per
share, (ii) 194,000 shares reserved for future grants of options under the
Company's 1996 Stock Option Plan and (iii) 620,000 shares issuable upon
exercise of outstanding warrants at a weighted average exercise price of
$1.88 per share. See "Management-- Stock Options" and "Description of
Securities."

15
<PAGE>
DILUTION

The net tangible book value of the Company's Common Stock as of September
30, 1997 was $3.8 million or $0.74 per share. Net tangible book value represents
the tangible assets less total liabilities of the Company, and net tangible book
value per share was determined by dividing the net tangible book value of the
Company by the number of shares of Common Stock outstanding on September 30,
1997. See "Capitalization." Net tangible book value dilution per share
represents the difference between the initial public offering price per share
and the net tangible book value per share after this offering. Without taking
into account any changes in the Company's net tangible book value per share
after September 30, 1997, other than to give effect to the sale of the 2,500,000
shares offered hereby at an assumed initial public offering price of $11.00 per
share (after deduction of underwriting discounts and commissions and estimated
offering expenses), the net tangible book value of the Company at September 30,
1997 would have been $29.0 million or $3.80 per share. This represents an
immediate increase in net tangible book value to the existing stockholders of
$3.06 per share and an immediate net tangible book value dilution to purchasers
of the shares of $7.20 per share, as illustrated by the following table:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share...................... $ 11.00

Net tangible book value per share as of September 30, 1997......... $ 0.74

Increase per share attributable to new investors................... 3.06
---------

Net tangible book value per share after this offering................ 3.80
---------

Net tangible book value dilution per share to new investors.......... $ 7.20
---------
---------
</TABLE>

The following table summarizes as of September 30, 1997, the difference
between the existing stockholders and the purchasers of shares in this offering
(at an assumed offering price of $11.00 per share) with respect to the number of
shares purchased from the Company, the total consideration paid and the average
price paid per share. The table assumes that no shares are purchased in this
offering by existing stockholders. To the extent existing stockholders purchase
shares in this offering, their percentage ownership, total consideration and
average price per share will be greater than is shown.

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION (1) AVERAGE
--------------------- ------------------------ PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- --------- ------------- --------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders.................................. 5,126,720 67.2% $ 8,192,200 23.0% $ 1.60

New investors.......................................... 2,500,000 32.8 27,500,000 77.0% $ 11.00
---------- --------- ------------- ---------

Total.............................................. 7,626,720 100.0% $ 35,692,200 100.0%
---------- --------- ------------- ---------
---------- --------- ------------- ---------
</TABLE>

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

(1) Does not reflect any deductions for commissions or expenses paid or incurred
in connection with the issuance of such shares.

The foregoing tables and calculations exclude, as of September 30, 1997 (i)
900,880 shares of Common Stock issuable upon exercise of outstanding options at
a weighted average exercise price of $2.26 per share, (ii) 194,000 shares
reserved for future grants of options under the Company's 1996 Stock Option Plan
and (iii) 620,000 shares issuable upon exercise of outstanding warrants at a
weighted average exercise price of $1.88 per share. See "Management--Stock
Options," "Description of Securities" and Note 5 to the Financial Statements.

16
<PAGE>
SELECTED FINANCIAL DATA

The following selected financial data of the Company as of and for the
fiscal years ended December 31, 1995 and 1996 have been derived from, and are
qualified by reference to, the financial statements of the Company which have
been audited by McGladrey & Pullen, LLP, independent auditors, included
elsewhere in this Prospectus. The selected financial data as of and for the nine
months ended September 30, 1996 and 1997 and for the period from inception
(August 1, 1994) through September 30, 1997 have been derived from the Company's
unaudited financial statements included elsewhere in this Prospectus. The
unaudited financial statements reflect, in the opinion of management, all
adjustments of a normal recurring nature necessary for a fair presentation of
the Company's financial position as of such dates and its results of operations
for these periods. The results of operations for the nine months ended September
30, 1997 are not necessarily indicative of the results which may be expected for
the entire fiscal year ending December 31, 1997, or for any other subsequent
period. The selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Company's Financial Statements and related Notes and other
financial information included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED PERIOD FROM
DECEMBER 31, SEPTEMBER 30, INCEPTION
-------------------- -------------------- (AUGUST 1, 1994) TO
1995 1996 1996 1997 SEPTEMBER 30, 1997
--------- --------- --------- --------- --------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (1):
Research and development expense....................... $ 353 $ 764 $ 485 $ 1,040 $ 2,190
General and administrative expense..................... 165 778 578 1,091 2,108
Net loss............................................... $ (524) $ (1,508) $ (1,035) $ (2,010) $ (4,152)
--------- --------- --------- --------- -------
--------- --------- --------- --------- -------
Net loss per share..................................... $ (0.12) $ (0.29) $ (0.20) $ (0.38)
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average number of common and common equivalent
shares outstanding................................... 4,486 5,224 5,184 5,347
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------------- -------------
1995 1996 1997
--------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments............................. $ 475 $ 354 $ 3,385
Working capital............................................................... 415 88 3,412
Total assets.................................................................. 534 623 4,197
Total liabilities............................................................. 277 407 383
Deficit accumulated during the development stage.............................. (903) (2,411) (4,421)
Total stockholders' equity.................................................... 257 216 3,814
</TABLE>

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

(1) The Company has generated no revenues to date.

17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The Company is a development stage enterprise. Since its inception in August
1994, the Company has been engaged in the research, development and testing of
ACYST. The Company purchased the technology for ACYST from Brennen Medical,
Inc., whose principal stockholders are directors of the Company. The Company has
generated no revenues and has been unprofitable since inception. As of September
30, 1997, the Company had an accumulated deficit of $4.4 million and expects
that its operating losses will continue and increase due to significant
expenditures for clinical trials, regulatory matters, expansion of marketing and
sales activities and scale-up of commercial manufacturing capabilities. See
"Certain Transactions."

The Company's primary focus will continue to be FDA approval of ACYST for
commercialization in the U.S. Based upon the recently completed audit of the
Company's quality system, the Company believes that it will receive ISO 9001
certification and authority to apply the CE mark to ACYST in 1998, which will
allow it to market and distribute ACYST in the EU. Upon receiving such
authority, the Company plans to conduct market studies in Europe to gain product
acceptance and prepare for its anticipated international product launch in late
1998. The Company intends to market ACYST in Europe through a network of
independent distributors or a strategic alliance with a medical device
manufacturer or marketer. Upon receiving FDA approval, the Company plans to
market ACYST domestically through a direct sales force. The Company believes
that ACYST has both product and cost advantages which will provide for
attractive margins. In addition, as the Company expands its manufacturing
capabilities it will explore the potential for vertical integration in a further
attempt to increase its product margins and enhance productivity.

The discussion contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operations necessarily includes certain
forward-looking statements which reflect the Company's plans, estimates and
beliefs. The Company's actual results could differ materially from those
discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include those discussed in this Prospectus.

PLAN OF OPERATION

The Company has been granted an IDE by the FDA and has recently begun Phase
2 of the human clinical trials for ACYST. The Company plans to devote
substantially all of its efforts during the next 18 months to conducting these
clinical trials. Over the next 18 months, the Company also intends to begin its
initial sales efforts in Europe and other foreign markets and to further develop
its commercial manufacturing capabilities. The Company anticipates hiring
approximately 10 additional employees in sales and marketing, administration and
manufacturing. Expenditures related to manufacturing equipment are expected to
approximate $2.0 million. Research and development activities are anticipated to
include investigating and pursuing the development of other products to treat
urinary incontinence and other applications related to the Company's existing
technology. The Company believes that its existing cash resources and the
proceeds to be obtained from the offering will be sufficient to satisfy its cash
requirements for at least the next 18 months.

RESULTS OF OPERATIONS

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

Research and development expenses include costs associated with the
development and clinical testing of ACYST. Research and development expenses
were $1.0 million in the first nine months of 1997 and $485,000 for the same
period in 1996. The increase was primarily due to costs associated with human
clinical trials. Human clinical trial costs consist largely of payments to
investigators and product costs

18
<PAGE>
related to the clinical work. The Company anticipates that it will continue to
devote substantial resources for the foreseeable future to conducting clinical
trials and other regulatory matters.

General and administrative expenses were $1.1 million in the first nine
months of 1997 and $578,000 for the same period in 1996. The increase was
primarily due to higher compensation expenses of $387,000, as additional
personnel were hired to meet expanded operational needs, a $172,000 increase in
non-cash charges related to stock options granted and a $110,000 increase in
general operating costs to support increased activities. This increase was
partially offset by a $156,000 decrease in professional fees related to
financing efforts.

Interest expense was $0 for the first nine months of 1997 and $5,000 for the
same period in 1996. Interest expense relates to interest incurred on a note
payable to a related party. This note was paid in full in May 1996.

Interest income was $121,000 for the first nine months of 1997 and $32,000
for the same period in 1996. The increase between periods was due to a higher
average cash, cash equivalents and short-term investments balances, resulting
from proceeds received from sales of securities.

Net loss was $2.0 million for the first nine months of 1997 and $1.0 million
for the same period in 1996. As discussed herein, the increase was primarily due
to overall increases in research and development expenses and general and
administrative expenses required to support increased operating activities.

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

Research and development expenses were $764,000 in 1996 and $353,000 in
1995. The increase was due to higher levels of activity related to the
development of ACYST and human clinical trials. This increase included
additional compensation and travel costs of $211,000, increased clinical
investigator costs of $129,000 and higher levels of product development costs of
$47,000.

General and administrative expenses were $778,000 in 1996 and $165,000 in
1995. This increase was attributable to higher compensation of $202,000 due to
additional personnel, $203,000 of costs related to a financing in 1996 which was
not completed due to unfavorable market conditions, with the remaining due to
higher operational costs resulting from increased levels of activity.

Interest expense was $5,000 in 1996 and $16,000 in 1995. Interest expense
relates to interest incurred on a note payable to a related party. This note was
paid in full in May 1996.

Interest income was $39,000 in 1996 and $10,000 in 1995. The increase
between periods resulted from higher average cash and cash equivalent balances
as a result of net proceeds from sales of Common Stock.

Net loss was $1.5 million in 1996 and $524,000 in 1995. As discussed herein,
the increase was primarily due to increased personnel costs, financing costs and
increased operational activities in both general and administrative and research
and development expenses.

As a result of the net losses through 1996, the Company has net operating
loss ("NOL") carryforwards of $1.9 million at December 31, 1996, which will
expire at various dates through 2011. These NOL carryforwards may be subject to
certain annual limitations, resulting from additional sales of equity securities
and other changes in ownership. Such events could limit the eventual tax
utilization of these NOL carryforwards.

LIQUIDITY AND CAPITAL RESOURCES

Since its inception, the Company has funded its operations primarily through
the private sales of securities. Through September 30, 1997, the Company had
received $7.9 million in net proceeds through the private sales of securities.
For the period from inception (August 1, 1994) through September 30, 1997, the
Company had used cash of $3.8 million to fund operations, $457,000 to purchase
equipment, leasehold

19
<PAGE>
improvements and intangible assets, and $300,000 for principal payments to a
related party for a note payable under an asset purchase agreement. At September
30, 1997, the Company had cash, cash equivalents and short-term investments of
$3.4 million and working capital of $3.4 million. See "Certain Transactions."

The Company expects to continue to incur substantial expenses in support of
additional research and development activities, clinical trials, manufacturing
start up, establishment of a sales and marketing organization and ongoing
administrative activities. Although the Company believes that the net proceeds
from the offering and its existing cash will be adequate to meet its cash needs
for at least 18 months, there can be no assurance that the Company will not
require additional financing within such time frame. Further, there can be no
assurance that additional financing will be available at all or that, if
available, such financing would be obtainable on terms favorable to the Company.
See "Use of Proceeds."

INFLATION

Historically, inflation has not had a material impact on the Company. The
cost of the Company's product is influenced by the cost of raw materials and
labor. There can be no assurance that the Company will be able to pass on any
increased costs due to inflation to its customers in the future.

RECENTLY ISSUED ACCOUNTING STANDARDS

In October 1995, the FASB issued SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, which establishes a fair-value-based method for financial
accounting and reporting for stock-based employee compensation plans. However,
the new standard allows compensation to continue to be measured by using the
intrinsic value-based method of accounting prescribed by Accounting Principles
Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, but requires
expanded disclosures. SFAS No. 123 was effective in fiscal year 1996. The
Company has elected to continue to apply the intrinsic value-based method of
accounting for stock options.

The FASB has issued Statement No. 128 EARNINGS PER SHARE, which supersedes
APB Opinion No. 15. Statement No. 128 requires the presentation of earnings per
share by all entities that have common stock or potential common stock, such as
options, warrants and convertible securities, outstanding that trade in a public
market. Those entities that have only common stock outstanding are required to
present basic earnings per share amounts. All other entities are required to
present basic and diluted per share amounts. Diluted per share amounts assume
the conversion, exercise or issuance of all potential common stock instruments
unless the effect is to reduce a loss or increase the income per common share
from continuing operations. All entities required to present per share amounts
must initially apply Statement No. 128 for annual and interim periods ending
after December 15, 1997. Earlier application is not permitted. The Adoption of
Statement No. 128 would have had no effect on reported loss per share.

20
<PAGE>
BUSINESS

GENERAL

Advanced UroScience has developed ACYST, an injectable bulking agent
designed to treat stress urinary incontinence. Stress urinary incontinence is
generally defined as the involuntary loss of urine as a result of activities
that increase intra-abdominal pressure, such as coughing, laughing, exercising
or simply standing up. ACYST is a proprietary composition of pyrolytic
carbon-coated micro-beads suspended in a carrier gel. ACYST is designed to
provide permanent bulking around the urethra to close the bladder neck. The
injection procedure for ACYST is minimally invasive, can be accomplished in less
than 30 minutes in an outpatient setting and is designed to immediately restore
the patient to normal urinary continence. ACYST incorporates micro-beads that
are designed to be non-absorbable, non-migratory, biocompatible and intended to
provide a permanent solution, thereby minimizing the potential need for
retreatment.

It is estimated that there are 13 million adults with urinary incontinence
in the U.S., of which approximately 85% are women. Approximately 9 million
adults with urinary incontinence suffer from stress urinary incontinence. The
Company believes that the majority of these people may benefit from treatment
with ACYST. Initially, the Company will seek FDA approval to market ACYST for
the treatment of stress urinary incontinence due to intrinsic sphincter
deficiency, which the Company estimates affects approximately 1.5 million
adults. The Company intends to conduct future human clinical trials to support
expanded applications of ACYST in order to address a larger segment of the
population suffering from stress urinary incontinence.

Through November 10, 1997, 79 patients had been treated with ACYST in the
Company's clinical studies. Most of the 79 patients experienced immediate
improvement in incontinence, suffered no post-treatment complications and were
able to return to normal activities within days. The Company is currently
conducting clinical trials at several U.S. locations under an IDE granted by the
FDA, and expects to use the data gathered in its clinical trials to support an
application for PMA, which the Company intends to file with the FDA in 1999. The
Company is also conducting human clinical trials outside of the U.S. and expects
to receive ISO 9001 certification and to meet the requirements for use of the CE
mark in 1998, which will allow the Company to market its products in the EU.

URINARY INCONTINENCE

There are significant economic and social costs associated with urinary
incontinence. According to a 1996 publication from the U.S. Department of Health
and Human Services, direct costs associated with urinary incontinence in the
U.S. alone were estimated to exceed $15 billion annually. The perceived stigma
associated with urinary system dysfunction discourages sufferers from seeking
treatment and hinders public awareness of the widespread incidence of urinary
incontinence. For the patients who are affected, the problems can be tremendous.
Consequences of urinary incontinence can include depression, discomfort and
embarrassment about appearance and odor. As a result, patients suffering from
urinary incontinence may withdraw from social interaction with others, including
friends and family.

In the normal urinary tract, continence, or appropriate storage and release
of urine, is maintained by a complex interplay of anatomic structures, as
depicted by the diagram below. The primary structures

21
<PAGE>
responsible for controlling continence are the bladder neck and the urinary
sphincter. The urinary sphincter is a muscle at the base of the bladder which
surrounds the bladder neck and urethra and aids the bladder in maintaining
continence. In a normal system, the bladder neck and urinary sphincter work in a
coordinated fashion to act as a valve. As the bladder fills and relaxes, the
urinary sphincter contracts to prevent urination. During urination, the urinary
sphincter relaxes as the bladder contracts to evacuate urine through the bladder
neck and urethra. In normal continence, the urinary sphincter also tightens to
prevent loss of urine when the bladder is subject to intra-abdominal pressure. A
malfunction in any part of the urinary tract can result in urinary incontinence.
A broad range of conditions and disorders are believed to cause urinary
incontinence, including birth defects, child birth, injuries to the pelvic
region or to the spinal cord, neurological diseases and degenerative changes
associated with aging.

[ANATOMICAL DEPICTION OF THE URINARY TRACT]
BLADDER
BLADDER NECK
URETHRA MUCOSAL LINING
URINARY SPHINCTER

TYPES OF URINARY INCONTINENCE

The four major types of urinary incontinence are stress, urge, mixed and
overflow urinary incontinence.

- Stress urinary incontinence is the involuntary loss of urine during
coughing, laughing, sneezing, jogging or any other physical activity which
causes a sufficient increase in intra-abdominal pressure. Stress urinary
incontinence is the most common type of urinary incontinence, accounting
for over half of all cases of urinary incontinence in the U.S. This
condition varies in severity from those people who leak urine as a result
of certain sudden movements or physical activities to those who leak urine
simply upon standing up. It is generally believed that stress urinary
incontinence is caused by one of two conditions or a combination of them:
(i) hypermobility, a lack of anatomic stability caused primarily by the
weakening of the tissue around the bladder neck, which results in the
abnormal movement of the bladder neck and urethra in response to
sufficient intra-abdominal pressure or exertion; or (ii) intrinsic
sphincter deficiency, the inability of the urinary sphincter to contract
and sufficiently close the bladder neck.

- Urge urinary incontinence is the involuntary loss of urine due to unwanted
bladder contractions which are associated with a strong, uncontrollable
desire to urinate, often referred to as urgency. Causes of urge urinary
incontinence include an overactive bladder muscle, neurologic
abnormalities, such as those caused by a stroke, and urethral instability
or abnormal relaxation patterns.

- Mixed urinary incontinence is a mixture of stress and urge urinary
incontinence.

- Overflow urinary incontinence is the incomplete emptying of the bladder
due to an obstruction or to the inability to produce sufficient bladder
contractions.

URINARY INCONTINENCE MARKET

The Agency for Health Care Policy and Research, an affiliate of the U.S.
Department of Health and Human Services, reports that there are approximately 13
million adults with urinary incontinence in the

22
<PAGE>
U.S., although exact figures are difficult to obtain as a result of the believed
under-reporting due to the stigma associated with the condition. Although
urinary incontinence is most prevalent in the elderly, it is also common among
women under the age of 60. Of the estimated 13 million adults with urinary
incontinence in the U.S., approximately 85% are women. It is expected that
urinary incontinence will continue to be a significant health care problem in
the adult female, elderly and institutionalized populations and individuals
suffering from the condition will increase in number as the population continues
to age.

Approximately 9 million adults with urinary incontinence suffer from stress
urinary incontinence. The Company believes that the majority of these people may
benefit from treatment with ACYST. Initially, the Company will seek FDA approval
to market ACYST for the treatment of stress urinary incontinence due to
intrinsic sphincter deficiency, which the Company estimates affects
approximately 1.5 million adults. The Company intends to conduct future human
clinical trials to support expanded applications of ACYST in order to address a
larger segment of the population suffering from stress urinary incontinence.

CURRENT TREATMENTS AND THEIR LIMITATIONS

Urinary incontinence is currently treated in a variety of ways. The Company
believes that the majority of patients are managed with techniques that treat
the symptoms of urinary incontinence, but do not restore urinary continence.
Most curative approaches to the treatment of urinary incontinence require
significant surgical intervention.

MANAGEMENT OF URINARY INCONTINENCE

DIAPERS AND ABSORBENT PADS. Most cases of urinary incontinence are managed
through the use of adult diapers or absorbent pads. The cost of these diapers
and pads can be substantial and is usually not covered by medical insurance,
creating a continuous financial burden for the patient. This management
technique requires frequent changing of diapers and pads to control odor and can
be an embarrassment to the patient. Industry sources suggest retail sales of
adult diapers and absorbent pads exceed $1 billion annually.

VAGINAL AND URETHRAL INSERTS. Vaginal inserts are used to obstruct the
bladder neck and urethra by applying pressure through the neighboring vaginal
cavity. While often helpful, these devices are seldom completely effective in
preventing leakage, as it is difficult to fit a patient properly and apply
enough pressure to eliminate the leakage of urine without causing pain. Other
potential adverse side effects include vaginal discharge, tissue erosion and
discomfort. Urethral inserts, which have recently become available in the U.S.,
act as an expandable stopper to block the flow of urine when inserted in the
urethra. Potential adverse side effects include urinary tract infections, pain
and tissue reactions.

INDWELLING (FOLEY) CATHETERS. Variations of the indwelling, or Foley,
catheter are the main products used to manage urinary incontinence in a medical
environment. The Foley catheter is passed into the bladder through the urethra.
Once in place, the catheter is either clamped at the exit point from the body or
connected to an external urine collection bag. Aside from the physical and
emotional discomfort experienced by patients, the direct path from the exterior
to the bladder provides a conduit for bacteria, and often results in bladder
infections.

PHARMACEUTICALS. Drug treatment is used to manage multiple types of urinary
incontinence. These drugs tend to fall into one of two categories: those that
manage urge urinary incontinence by affecting the contraction of the muscle
tissue of the bladder and those that manage stress urinary incontinence by
either affecting contraction of the muscle tissue of the bladder neck or
improving the quality of the mucosal lining of the bladder neck and urethra.
Drugs seldom cure stress urinary incontinence and the potential side effects
include urinary retention, nausea, dizziness, blurred vision and the possibility
of unwanted interactions with other drugs.

23
<PAGE>
BEHAVIORAL THERAPY AND PELVIC MUSCLE TRAINING EXERCISES. Behavioral therapy
and related techniques attempt to manage urinary incontinence through bladder
and habit training, pelvic muscle exercises (known as Kegel exercises),
biofeedback and electrical stimulation. These therapies and techniques first
teach the patient to be aware of the group of muscles in the perineal area and
to contract them in a way that builds muscle tone around the bladder neck.
Pelvic floor electrical stimulation devices can be used to augment other pelvic
muscle rehabilitation therapies. Adverse reactions are minimal but include pain
and discomfort. These treatments are time consuming, take several weeks or
months before results are evident, present uncertain outcomes and must be
adhered to regularly.

CURATIVE TREATMENT OF URINARY INCONTINENCE

SUSPENSION AND SLING PROCEDURES. Bladder neck suspension and sling
procedures involve surgical intervention to elevate and stabilize the urethra
and the bladder neck in order to treat stress urinary incontinence. In a bladder
neck suspension, the bladder neck and urethra are elevated to prevent urethral
and bladder neck prolapse (descent) during exertion. In a sling procedure,
either an autologous (patient tissue) or synthetic piece of material is placed
under the urethral-bladder junction, pulling it forward in a way that reinforces
and strengthens the sphincter. Surgeries of this nature are delicate and
complicated procedures in which the outcome depends on a number of factors,
including the degree of the pathology and the operating physician's experience.
Although attempts have been made to minimize the invasiveness of this procedure,
the trauma is often significant, recovery time can be lengthy and the cost of
the hospital-based major surgical procedure can be high.

ARTIFICIAL SPHINCTERS. Artificial sphincters are implantable, miniature,
hydraulic medical devices consisting of an inflatable cuff placed around the
urethra and the pump and tubing required to activate the cuff. Artificial
sphincter implantation currently requires a major inpatient surgical procedure
and hospitalization with associated discomfort, lengthy recovery period and high
expense. Initial complications that may arise are mainly associated with
post-operative infection or urethral or bladder injury during implantation.
Delayed complications include mechanical problems such as pump malfunctioning,
fluid leaks, tubing kinks and tissue atrophy.

BULKING AGENTS. Bulking agents are either biologically derived or synthetic
materials designed to be injected or implanted in or near the bladder neck to
increase tissue bulk. Bulking procedures are gaining acceptance as a method of
treating certain types of stress urinary incontinence. The 1996 Clinical
Practice Guidelines published by the U.S. Department of Health and Human
Services recommend periurethral bulking agents as first line treatment for men
with intrinsic sphincter deficiency and for women with intrinsic sphincter
deficiency who do not have co-existing hypermobility. However,
biologically-derived bulking agents may be absorbed by the body, requiring
retreatment, and synthetic bulking agents currently available have experienced
problems with migration and biocompatibility.

THE ADVANCED UROSCIENCE SOLUTION

Advanced UroScience has developed ACYST, an injectable bulking agent
designed to treat stress urinary incontinence. ACYST is a proprietary
composition of pyrolytic carbon-coated micro-beads suspended in a carrier gel.
ACYST is designed to provide permanent bulking around the urethra to close the
bladder opening. Consistent with newly established clinical practice guidelines,
the injection procedure for ACYST is minimally invasive, can be accomplished in
less than 30 minutes in an outpatient setting and is designed to immediately
restore the patient to normal urinary continence. The micro-beads are made of a
substrate material coated with pyrolytic carbon, giving them biocompatible
properties. The biocompatible nature of pyrolytic carbon coating has been
demonstrated through its extensive use in the heart valve industry since the
late 1960s. The synthetic nature and physical size of the solid micro-beads of
ACYST were selected by the Company to avoid absorption by the body, migration
from the injection site and the potential for chronic inflammatory tissue
response. The micro-bead size range chosen (greater than 250um) is at a minimum
more than three times the maximum particle size known to migrate in the body.

24
<PAGE>
INTENDED BENEFITS OF ACYST

ACYST is believed to have several advantages over other management and
treatment options for urinary incontinence. Unlike adult diapers and other
methods of managing the problem, ACYST is designed to restore continence. ACYST
is designed to provide results immediately after injection, unlike behavioral
therapy and pelvic muscle training exercises, which can take several weeks or
months before results are achieved and which require ongoing therapy. Compared
with traditional surgical treatments, the Company believes the minimally
invasive ACYST procedure is less traumatic to patients and will be associated
with significantly reduced costs.

Further, the Company believes ACYST has several features that offer
significant advantages over other commercially available bulking agents:

BIOCOMPATIBLE. The pyrolytic carbon-coated micro-beads used in ACYST were
chosen for their demonstrated, long-term biocompatibility. Pyrolytic carbon
coating has been used by the heart valve industry since the late 1960s.
Additionally, the size of the ACYST micro-beads improves biocompatibility by
reducing the potential for chronic inflammatory tissue response. Chronic
inflammatory reactions in the urinary tract have been associated with the use of
bulking agents consisting of polytetrafluoroethylene ("PTFE") particles. Another
bulking agent uses silicone, which may be controversial in the U.S. due to the
unresolved issues relating to silicone gel breast implants.

NO ABSORPTION. Since the ACYST micro-beads are synthetic, they will not be
absorbed by the body, thus minimizing the potential need for retreatment. In
contrast, biologically-derived bulking agents may be absorbed by the body over
time. As a result, patients treated with this type of bulking agent typically
require additional costly treatments to maintain urinary continence.

NO MIGRATION. The size of the ACYST micro-beads was specifically chosen to
prevent them from migrating away from the injection site. Other known commercial
bulking agents use particles of PTFE that are generally in a size range of 1 to
100um or silicone which is reported to have approximately 25% of its injected
particles below 80um. These smaller particles have been associated with
migration in the body, which has raised questions of safety.

COST EFFECTIVE. The injection of ACYST entails a minimally-invasive
procedure in an outpatient setting and is designed to provide immediate
improvement in urinary continence following the procedure. The Company believes
that the combination of a minimally invasive procedure that produces immediate
results and minimizes need for retreatment should make ACYST a cost-effective
treatment option for the incontinent patient.

BUSINESS STRATEGY

FOCUS ON OBTAINING REGULATORY APPROVAL FOR ACYST. The Company's primary
focus is to obtain approval to market ACYST in the U.S. and internationally.
Initially, the Company will seek FDA approval to market ACYST for the treatment
of stress urinary incontinence due to intrinsic sphincter deficiency, which the
Company believes affect approximately 1.5 million people. Clinical
investigations have demonstrated that injectable bulking agents can be equally
effective in patients suffering from stress urinary incontinence due to urethral
hypermobility as well as due to intrinsic sphincter deficiency. The Company
intends to conduct future human clinical trials to support expanded applications
of ACYST in order to address a larger segment of the population suffering from
stress urinary incontinence.

DEVELOP ADDITIONAL MARKETING AND SALES CAPABILITIES. Initially, the Company
intends to market and sell ACYST internationally through a network of
independent distributors or a strategic alliance with a medical device
manufacturer or marketer. After receiving the requisite marketing approvals from
the

25
<PAGE>
FDA, the Company intends to sell ACYST in the U.S. through a direct sales force.
The Company intends to use a portion of the proceeds of this offering to conduct
international market studies, establish an international distribution channel
and hire additional marketing and sales personnel. In its sales and marketing
efforts, the Company intends to cultivate further strong relationships with its
clinical investigators and others in the medical community to accelerate the
market acceptance of ACYST.

ENHANCE MANUFACTURING CAPABILITIES. To date, the Company has used its
current facilities to produce limited quantities of ACYST for use in clinical
trials. To enhance its ability to produce ACYST in commercial quantities, the
Company intends to expand its manufacturing capacity by purchasing additional
equipment and upgrading its manufacturing facilities, to pursue the possibility
of vertically integrating aspects of its manufacturing process and to hire
additional personnel.

EXPLORE COMPLEMENTARY TECHNOLOGY. The Company believes that opportunities
exist for it to expand its product line, through acquisitions or internal
research and development efforts, with additional innovative products for the
treatment of urological disorders. The market for urology products is highly
fragmented and is expected to continue to grow due to the aging population. The
Company believes that many of the currently available treatments manage rather
than cure the disorders they address and as a result there are opportunities for
new products in the market.

EXPAND APPLICATIONS OF ACYST TECHNOLOGY. The Company believes that its
proprietary bulking technology may be applicable for the treatment of medical
disorders other than urinary incontinence. The Company intends to develop
additional products using this technology as the market opportunities for such
additional products arise. For example, the Company is in the early stages of
developing bulking products, based on ACYST technology, for the treatment of
gastric reflux and fecal incontinence.

INJECTION PROCEDURE

As illustrated below, ACYST is injected under the mucosal lining of the
urethra to add bulk to the tissue and close the opening in the urethra leading
from the bladder, thereby minimizing or eliminating involuntary urinary drainage
in patients who suffer from urinary incontinence. When ACYST is initially
injected, the carrier gel acts as a transport medium for the pyrolytic carbon
coated micro-beads. Over time, the body encapsulates the micro-beads with its
own collagen, which results in sustained bulking. ACYST is packaged in a sterile
syringe and is designed to be injected through the Company's specially designed
needle that is inserted down a cystoscope.

[SERIES OF ANATOMICAL DEPICTIONS DEMONSTRATING THE ACYST INJECTION PROCEDURE]

A CYTOSCOPE IS INSERTED INTO THE
URETHRA AND AN INJECTION NEEDLE
IS ADVANCED THROUGH THE WORKING
CHANNEL OF THE CYTOSCOPE.

THE NEEDLE TIP IS INSERTED UNDER
THE MUCOSAL LINING AND ACYST
IS INJECTED.

THE INJECTION IS REPEATED AT OTHER
SITES UNTIL THE BLADDER NECK IS
CLOSED.

26
<PAGE>
During the injection process, the physician views the bladder neck through a
cystoscope and advances the needle under the mucosal lining of the bladder neck.
The injection site is viewed while injecting the material to observe the
expansion of the mucosal lining which results in increased volume or bulk at the
bladder neck. Typically, a total of four to six one-milliliter syringes of ACYST
will be injected in three to four sites at the bladder neck until the increase
in bulk causes the sides of the bladder neck to close, allowing the patient to
regain control of urine flow. This procedure can be accomplished in less than 30
minutes in an outpatient setting, and is therefore consistent with newly
established clinical practice guidelines for the treatment of urinary
incontinence that call for minimally invasive therapies to be attempted first.
ACYST is intended to result in improved urinary continence immediately following
the injection procedure.

STATUS OF CLINICAL TRIALS

In May 1996, Advanced UroScience initiated clinical testing of ACYST under
an IDE approved by the FDA. In May 1997, the Company received FDA approval to
enroll up to 160 additional patients at up to 10 sites in Phase 2 clinical
studies. The Phase 2 clinical studies are designed to obtain data to support PMA
that must be obtained from the FDA before ACYST can be marketed in the U.S. This
study has been designed as a prospective, multi-center study with the patients
randomized to be treated with either ACYST or a bulking agent approved for
marketing in the U.S. The relative percentages of men and women to be enrolled
in Phase 2 approximates the prevalence of urinary incontinence in the U.S. adult
population. Phase 2 patients will be followed for at least one year after
treatment to assess the safety and effectiveness of ACYST.

The first of two primary endpoints of the Company's clinical trials measures
the change in the continence grade score of the patient from baseline to
post-treatment. The continence grades used for this study were defined by Stamey
in 1979 and are as follows:

<TABLE>
<S> <C>
Grade 0: The patient is continent (dry).

Grade 1: The patient will lose urine with sudden increases in abdominal
pressure, but never in bed at night.

Grade 2: The patient's incontinence worsens with lesser degrees of stress,
such as walking, standing erect from a sitting position or sitting
up in bed.

Grade 3: The patient has total incontinence and urine is lost without any
relation to physical activity or position.
</TABLE>

A decrease in the continence grade of one or more grades is considered a
success for purposes of evaluation.

The second primary endpoint of the Company's clinical trials measures the
urine loss of patients who undergo a prescribed set of activities which may
induce stress incontinence. The urine loss is quantified through the use of pads
which are worn by the patients, and then weighed at the completion of the
activities.

The Company's clinical studies conducted through November 10, 1997 indicate
that most of the 79 patients (49 treated in accordance with the U.S. IDE study
and 30 treated in feasibility research studies internationally) who were treated
with ACYST experienced immediate improvement in incontinence, suffered no
post-treatment complications and were able to return to normal activities within
days. Although there does not exist a statistically significant body of clinical
data from which to draw conclusions concerning the effectiveness and long-term
outcomes associated with ACYST: (i) of the 44 patients followed at six months,
30 showed improvement at one month (no patients were retreated) and 32 showed
improvement at six months (three patients were retreated) relative to their
pretreatment continence grades and (ii) of the 12 patients followed at one year,
nine showed improvement at one month (no patients were retreated) and 10 showed
improvement at one year (no patients were retreated) relative to their

27
<PAGE>
pretreatment continence grades. These initial clinical studies have demonstrated
better results in women than in men. Minor complications commonly associated
with cystoscope-based bulking procedures have been observed during the Company's
clinical trials. These complications, which include painful voiding,
frequency of voiding, retention and blood in the urine, were not of a serious
nature and subsided after a short period of time. The Company expects that one
or more of these minor and temporary complications will occur in a limited
number of future patients.

To introduce ACYST internationally, the Company must comply with a number of
foreign regulations. The Company is conducting human clinical trials outside of
the U.S. and expects to receive ISO 9001 certification and to meet the
requirements for use of the CE mark in 1998, which will allow the Company to
market its products in the EU. There can be no assurance, however, that the
Company will receive marketing approval from the FDA or authority to use the CE
mark on a timely basis, if at all. See "Business--Manufacturing" and
"Business--Government Regulations."

MARKETING AND SALES

The Company's marketing and sales strategy is aimed at increasing awareness
of ACYST within the medical community and the potential patient population in
addition to developing a strong sales capability. Since the majority of
sufferers of stress urinary incontinence are women, Advanced UroScience intends
to focus its sales and marketing effort on gynecologists, urologists,
uro-gynecologists and geriatrists. The Company's sales strategy is to first
establish ACYST internationally and then follow with domestic sales and
distribution upon receipt of FDA approval to market ACYST domestically.

ESTABLISH INTERNATIONAL MARKETING CAPABILITIES. The Company intends to
market ACYST internationally through a network of independent distributors or a
strategic alliance with a medical device manufacturer or marketer. The Company
will pursue such a network or strategic alliance where appropriate to accelerate
sales growth, increase geographic market coverage and more effectively access
particular markets and customers. The Company's initial target market for sale
of ACYST will be in Europe, with Asian and Latin American countries to follow.
The strategy for penetration in these markets will be to establish ACYST in
individual countries by working with key medical centers who use the product in
studies. The Company plans for these market studies to be reported on by key
opinion leaders at meetings and congresses, further setting the stage for
international market launch. Concurrently, the Company will work with local
reimbursement authorities to assure that maximum market potential can be
achieved.

DEVELOP DOMESTIC SALES ORGANIZATION. Following receipt of regulatory
approval from the FDA, the Company anticipates utilizing a direct sales force to
market ACYST in the U.S. The Company plans to begin building its direct sales
force prior to receipt of FDA premarket approval. This sales force will provide
training in the indications for and the use of ACYST, as well as financial
models that demonstrate the potential cost advantages of using ACYST to payers
and physicians.

CONDUCT EDUCATIONAL CAMPAIGN. The Company intends to capitalize on its
clinical investigation beyond merely gaining approval to market in the U.S. by
using its clinical data in presentations at key medical meetings and congresses,
as well as presenting such data for publication in professional journals.
Advanced UroScience will also maintain a presence at appropriate medical
conventions, meetings and seminars to inform physicians and other health care
professionals of the existence and applications for ACYST, providing information
and gaining sales leads. Finally, the Company's plans include a public relations
campaign, following receipt of U.S. regulatory approval, in which the public is
made aware that incontinence is a common problem and that help through treatment
using ACYST is available.

RESEARCH AND DEVELOPMENT

To date, the Company has been engaged primarily in the research, development
and clinical testing of ACYST. The Company believes that its future success is
dependent in part on its ability to develop new products. Therefore, management
has allocated a portion of the proceeds of this offering to continue the
requisite clinical trials of ACYST and to fund additional research and
development efforts.

28
<PAGE>
In addition to developing concepts for new products to treat urinary
incontinence, the Company intends to expand the use of ACYST technology for
other bulking applications outside of the urologic market. For example, the
Company is in the early stages of developing bulking products based on ACYST
technology for the treatment of gastric reflux and fecal incontinence.

PATENTS AND PROPRIETARY RIGHTS

The Company's success depends in part on its ability to obtain and maintain
patent protection for its products, to preserve its trade secrets and to operate
without infringing the proprietary rights of third parties. The Company seeks to
protect its technology by filing patent applications for patentable technologies
that it considers important to the development of its business, based on an
analysis of the cost of obtaining a patent, the likely scope of protection and
the relative benefits of patent protection compared to trade secret protection,
among other considerations. The Company currently holds one issued U.S. patent
covering its ACYST technology, two corresponding Patent Cooperation Treaty
applications and one pending U.S. patent application covering improvements to
such technology, involving the use of alternative substrates in an injectable
bulking composition. The claims of the Company's patent are directed to a
composition for soft tissue augmentation, consisting of pyrolytic carbon-coated
substrate materials suspended in a carrier gel. The Company also relies upon
trade secrets, know-how and continuing technological innovation to develop and
maintain its competitive position.

There can be no assurance that any of the Company's pending or future U.S.
or foreign patent applications will result in issued patents, or that any issued
patents will be of sufficient scope or strength to provide meaningful protection
of the Company's products. The coverage sought in a patent application can be
denied or significantly reduced before the patent is issued. In addition, there
can be no assurance that any current or future U.S. or foreign patents of the
Company will not be challenged or circumvented by competitors or others, or that
such patents will be found to be valid or sufficiently broad to protect the
Company's technology or provide the Company with any competitive advantage.
Should attempts be made to challenge, circumvent or invalidate the Company's
patents in the U.S. Patent and Trademark Office or courts of competent
jurisdiction, including administrative boards or tribunals, the Company may have
to participate in legal or quasi-legal proceedings therein, to maintain, defend
or enforce its rights in these patents. Any legal proceedings to maintain,
defend or enforce the Company's patent rights can be lengthy and costly, with no
guarantee of success.

The Company also relies heavily upon trade secrets and unprotected
proprietary technology. The Company seeks to maintain the confidentiality of
such information by requiring employees, consultants and other parties to sign
confidentiality agreements and by limiting access by parties outside the Company
to such information. There can be no assurance, however, that these measures
will prevent the unauthorized disclosure or use of this information or that
others will not be able to independently develop such information. Additionally,
there can be no assurance that any agreements regarding confidentiality and
non-disclosure will not be breached, or, in the event of any breach, that
adequate remedies would be available to the Company.

Beginning shortly after its inception, the Company received a series of
communications from Uroplasty, a competing manufacturer of medical devices and
products, alleging that the Company's issued patent may be invalid, informing
the Company of certain patents held by Uroplasty covering implant materials and
alleging that the activities of certain of the Company's officers are in
violation of non-competition and non-disclosure agreements. The Company has
received an opinion of its patent counsel, Nawrocki Rooney & Sivertson, P.A.,
that the Company's issued patent is valid and enforceable relative to any known
prior art and that the Company's products do not infringe any of the claims
under any U.S. patents known to be held by Uroplasty. The Company has reviewed
with its general counsel the claims and allegations regarding violations of
non-competition and non-disclosure agreements by the Company's officers, and
believes them to be without merit. Uroplasty has not brought any legal action in
connection with its claims and allegations. There can be no assurance, however,
that Uroplasty or any other third party will not pursue legal action with
respect to these matters. Because an opinion of counsel is not binding on

29
<PAGE>
any court, and, because of the complex legal and factual questions involved in
intellectual property litigation, there can be no assurance that any such action
would not be determined in a manner adverse to the Company or its officers.

COMPETITION

Competition in the urinary incontinence products market is intense. The
Company faces competition from existing manufacturers of management and curative
treatments for urinary incontinence, including competing manufacturers of
commercially available bulking agents, as well as from companies developing new
or improved treatment methods for urinary incontinence. The Company believes
that the principal competitive factors among treatment methods for urinary
incontinence include physician and patient acceptance of the method in managing
or curing incontinence, cost and the availability of third-party reimbursement,
marketing and sales capability and the existence of meaningful patent
protection. The Company's ability to compete in this market also will depend on
the consistency of its product quality and delivery and product pricing. Other
factors within and outside the Company's control include its product development
and innovation capabilities, its ability to obtain required regulatory
approvals, its ability to protect its proprietary technology, its manufacturing
and marketing capabilities and its ability to attract and retain skilled
employees.

Current major competitors who compete in this market include Kimberly-Clark
Corp. and Procter & Gamble Co. for adult diapers and absorbent pads; Empi, Inc.
and MedCare Technologies, Inc. with electrical pelvic floor stimulators and
behavioral treatments; Abbott Laboratories, Warners Wellcome and Hoechst Marion
Roussell for pharmaceutical treatments; C. R. Bard, Inc., Kendall Co., Mentor
Corp. and Baxter International for catheter/urine collection bag drainage
systems; and American Medical Systems, Inc., a division of Pfizer, Boston
Scientific Corporation, Influence, Inc. and Johnson & Johnson for sling
procedures and artificial sphincter implants. The Company believes that some of
its current competitors and others that do not have injectable bulking products
are also seeking to develop competing bulking agents.

In the bulking agent market, the Company competes with companies such as C.
R. Bard, Inc., Mentor Corp. and Uroplasty, Inc. that market biologically derived
agents or synthetic agents. Biologically-derived bulking agents may be absorbed
by the body over time. Patients treated with this type of bulking agent
typically return to urinary incontinence within months and require additional
treatments to maintain urinary control. The major product in this category is
made from a form of processed bovine collagen. Additionally, some practitioners
are harvesting the patient's own fat and re-injecting it at the bladder neck.
This procedure has the additional disadvantage of increasing the complexity and
invasiveness of the patient's procedure.

30
<PAGE>
The Company is aware of two synthetic bulking materials currently being used
for soft tissue augmentation in the urinary tract. The first of these is a
teflon paste that consists of particles of PTFE, glycerin and polysorbate. The
particles of PTFE are generally in a size range of 1 to 100um. The smaller
particles in this size range have been associated with migration in the body
which has raised questions of safety. Periurethral inflammatory reactions have
been associated with the use of PTFE particles as bulking agents.

Another synthetic product uses solid silicone particles. This product has
not been approved for marketing in the U.S. by the FDA. The use of silicone may
be controversial in the U.S. due to the unresolved issues relating to silicone
gel breast implants.

Many of the Company's competitors and potential competitors have
significantly greater financial, manufacturing, marketing, distribution and
technical resources and experience than the Company. In addition, many of the
Company's competitors offer broader product lines within the urology market,
which may give such competitors the ability to negotiate exclusive, long-term
supply contracts and to offer comprehensive pricing for their products. It is
possible that other large health care and consumer products companies may enter
this industry in the future. Furthermore, smaller companies, academic
institutions, governmental agencies and other public and private research
organizations will continue to conduct research, seek patent protection and
establish arrangements for commercializing products. Such products may compete
directly with any products which may be offered by the Company.

MANUFACTURING

The Company manufactures limited quantities of ACYST at its facilities from
components and raw materials obtained from outside suppliers. The Company
purchases the micro-beads from qualified suppliers and send them to an outside
vendor to be coated with pyrolytic carbon. The Company purchases the raw
materials for the carrier gel in bulk and formulates the carrier gel itself. The
portion of the manufacturing process performed by the Company involves mixing
the beads with the carrier gel and filling standard syringes with this mixture.
The filled syringes are packaged and sent to an outside vendor for sterilization
and returned to the Company for final inspection. As the Company expands its
manufacturing capabilities to enable it to produce commercial quantities of
ACYST, it will consider vertical integration, which may include bringing the
sterilization process or other manufacturing processes in-house.

One of the primary raw materials and components for the manufacture of
ACYST, the material needed for the gel carrier, is currently available to the
Company from a single source. Other primary raw materials and components for
manufacturing of ACYST, including pyrolytic carbon coating and micro-bead
substrates, are available only from a few suppliers. In the event that the
Company is unable to obtain these materials or other raw materials or components
from its current suppliers on acceptable terms and is required to replace its
current raw materials or components with alternatives, additional testing may be
required in order for ACYST to receive regulatory approval. The Company has no
supply agreements with any of its identified vendors. The Company is currently
negotiating the terms and conditions of an agreement with the supplier of the
material needed for the gel carrier.

Prior to commercial sale of ACYST in the U.S., the Company will be required
to demonstrate compliance of its manufacturing operations with current GMP,
which establish requirements for assuring quality by controlling components,
processes and document traceability and retention, among other things. The
Company's facilities will also be subject to unscheduled inspections by the FDA,
and certain requirements of state, local and federal governments must also be
complied with in the manufacture of the Company's products.

The Company recently underwent an audit of its quality system, which is
required to obtain ISO 9001 certification and approval to apply the CE mark to
ACYST. Based upon the audit findings, the auditors recommended the Company for
ISO 9001 certification and approval to apply the CE mark to ACYST upon
implementing corrective actions for minor non-conformities noted during the
audit. The Company has addressed these non-conformities and believes it will
receive ISO 9001 certification and approval to

31
<PAGE>
apply the CE mark in 1998. However, there can be no assurance that the Company
will receive ISO 9001 certification or obtain approval to apply the CE mark on a
timely basis, if at all.

GOVERNMENT REGULATIONS

Government regulation in the U.S. and in foreign countries are significant
factors in the Company's business. Under the Federal Food, Drug and Cosmetic Act
(the "FDC Act") and regulations promulgated thereunder, manufacturers of medical
devices must comply with certain regulations governing the testing, manufacture,
packaging and marketing of medical devices. Under the FDC Act, as amended,
medical devices are classified by the FDA into one of three classes, depending
upon the degree of regulation the FDA deems necessary to assure the safety and
effectiveness of the devices. Class I devices are subject to only general
controls, while Class II devices must comply with certain specified performance
standards, in addition to the general controls. Class III medical devices
(consisting of life support/life sustaining, diagnostic or implanted devices)
generally must receive premarket approval by the FDA prior to their commercial
distribution in the U.S.

ACYST is considered a Class III device subject to premarket approval by the
FDA to ensure its safety and effectiveness. A PMA application must be filed and
must be supported by valid scientific evidence, including human clinical trial
data to demonstrate the safety and effectiveness of the device. The Company is
currently conducting Phase 2 clinical trials under an IDE granted by the FDA.
The PMA application must also contain the results of all relevant bench tests,
laboratory and animal studies, a complete description of the device and its
components, and a detailed description of the methods, facilities and controls
used to manufacture the device. In addition, the submission must include the
proposed labeling, advertising literature, and training methods (if required).
See "Business--Status of Clinical Trials."

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 may be significantly extended by the FDA asking for more
information or clarification of information already provided in the submission.
During the review period, an advisory committee, typically a panel of
clinicians, will likely be convened to review and evaluate the application and
provide recommendations to the FDA as to whether the device should be approved.
The FDA is not bound by the recommendations of the advisory panel. Toward the
end of the PMA review process, the FDA generally will conduct an inspection of
the manufacturer's facilities to ensure that the facilities are in compliance.
If the FDA's evaluations of both the PMA application and the manufacturing
facilities are favorable, the FDA will issue an approval letter, which usually
contains a number of conditions which must be met in order to secure final
approval of the PMA. The FDA may also determine that additional clinical trials
are necessary, in which case PMA approval may be significantly delayed while
additional clinical trials are conducted. The PMA process can be expensive,
uncertain and lengthy and a number of devices for which FDA approval has been
sought by other companies have never been approved for marketing.

Any devices manufactured or distributed by the Company pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
the FDA and certain state agencies. Manufacturers of medical devices for
marketing in the U.S. are required to adhere to FDA procedural and documentation
requirements with respect to device design, development, manufacturing, and
quality assurance activities. Manufacturers must also comply with Medical Device
Reporting requirements that require the manufacturer to report to the FDA any
incident in which its product may have caused or contributed to a death or
serious injury, or in which its product malfunctioned and, if the malfunction
were to recur, it would be likely to cause or contribute to death or serious
injury.

The Company is subject to routine inspection by the FDA. Although the
Company's facilities and manufacturing procedures are designed to comply with
FDA requirements, there can be no assurance that the FDA would find them in
compliance with all relevant aspects of the requirements. See "Business--
Manufacturing."

32
<PAGE>
Labeling and promotion 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 uses. The Company
is also subject to a variety of state laws and regulations in those states or
localities where its product 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 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.

Changes in existing requirements or adoption of new requirements or policies
could adversely affect the ability of the Company to comply with regulatory
requirements. Failure to comply with regulatory requirements 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 not be
required to incur significant costs to comply with laws and regulations in the
future or that laws or regulations will not have a material adverse effect upon
the Company's business, financial condition or results of operations.

To introduce ACYST in Europe, the Company must comply with the "essential
requirements" set forth in the MDD of the EU which define the safety, design and
manufacturing requirements for medical products. Typically, a full quality
assurance system complying with international quality standards is required to
conform with the MDD. Compliance with these requirements will allow the Company
to apply the CE mark to ACYST, allowing free sale in the EU, subject only to
certain member country national laws. The Company recently underwent an audit of
its quality system to determine compliance with ISO 9001, EN46001 standards and
the essential requirements of the MDD, and expects to be ISO certified in 1998.
See "Business--Manufacturing."

THIRD-PARTY REIMBURSEMENT

In the U.S. and certain foreign countries, third-party reimbursement is
currently generally available for certain bulking agents for urinary
incontinence. The Medicare reimbursement rate for commercially available
injectable bulking agents is currently at $310 per two and one-half milliliter
syringe. The Company believes that there are typically three to five syringes of
such bulking agents used during an injection procedure. However, there is no
uniform policy for such reimbursement and no assurance that ACYST will receive
the same level of reimbursement, if any. The availability of third-party
reimbursement for ACYST or competitors' products and continuing efforts to
reduce the costs of health care by decreasing reimbursement rates may reduce the
price received by the Company for ACYST.

PRODUCT LIABILITY

The medical products industry is subject to substantial litigation, and the
Company, as a manufacturer of a medical product to be used in the body, faces an
inherent business risk of exposure to product liability claims in the event that
the use of its products is alleged to have resulted in adverse effects to a
patient. The Company currently has product liability insurance that provides
coverage limits of $5.0 million per occurrence and $5.0 million in the aggregate
annually. There can be no assurance that the Company's existing insurance
coverage limits are adequate to protect the Company from any liabilities which
it might incur in connection with the clinical trials of ACYST or the initial
commercialization of ACYST. There can

33
<PAGE>
be no assurance that liability claims will not exceed coverage limits. Such
insurance is expensive and in the future may not be available on acceptable
terms, if at all. Furthermore, the Company does not expect to be able to obtain
insurance covering its costs and losses as a result of any recall of its
products due to alleged defects, whether such a recall is instituted by the
Company or required by a regulatory agency. A product liability claim, recall or
other claim with respect to uninsured liabilities or in excess of insured
liabilities could have a material adverse effect on the business, financial
condition and results of operations of the Company.

FACILITIES, EQUIPMENT AND PERSONNEL

Presently, the Company occupies approximately 7,700 square feet of office
and manufacturing space in a facility located in St. Paul, Minnesota. The
Company leases this space under a five-year lease agreement with a related
party, which began on August 1, 1997 and terminates on August 1, 2002. Lease
payments are made monthly at a rate of $5,200 per month in the first year with
rate increases of 2.5%, 3.0%, 3.5% and 4.0% in year two through year five of the
lease, respectively. The Company believes that these facilities are sufficient
for its current needs but will explore additional facilities as it develops
greater manufacturing capabilities. As of November 10, 1997, the Company had 15
full-time employees and one part-time employee. The Company is not a party to
any collective bargaining agreements and believes that its relations with its
employees are good. See "Certain Transactions."

34
<PAGE>
MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The directors and executive officers of the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------------- --- ---------------------------------------------------------
<S> <C> <C>
Timothy P. Lawin (1) 36 Chairman of the Board
Dean A. Klein 43 President and Chief Executive Officer
Thomas M. Jaeger 40 Vice President, Finance and Chief Financial Officer
Daniel A. White 45 Vice President, Sales and Marketing
Richard G. Holcomb, Ph.D. 48 Vice President, Regulatory Affairs
Bruce A. Lawin (2) 63 Director
Mark G. Nosbush (1)(2) 48 Director
Paul E. Colombo (2) 37 Director
James M. Knoblach (1) 40 Director
Harry E. Wells, III 56 Director
Jeffrey R. Tollefson 35 Director
</TABLE>

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

(1) Member of Compensation Committee

(2) Member of Audit Committee

TIMOTHY P. LAWIN is a founder of the Company and has served as Chairman of
the Board of Directors of the Company since July 1994. Since 1993, Mr. Lawin,
has served as Chief Executive Officer and Chairman of the Board of Brennen
Medical, Inc., a company specializing in wound care management. Mr. Lawin
devotes a majority of his time to his duties as Chairman of the Board of the
Company. From 1984 to 1993, Mr. Lawin was employed by Bioplasty, Inc., a medical
device manufacturer and distributor, serving in a variety of capacities,
including President from 1990 to 1993 and Chief Executive Officer from 1992 to
1993. From 1989 to 1991, Mr. Lawin also served as the Chairman of the Board for
Bio Manufacturing, Inc., which was a related manufacturing company of Bioplasty,
Inc. During a portion of his employment with Bioplasty, Inc., Mr. Lawin was a
director of Uroplasty, Inc., then a wholly-owned subsidiary of Bioplasty, Inc.
Mr. Lawin resigned from Bioplasty, Inc. in February 1993. In April 1993,
Bioplasty, Inc. filed a petition for bankruptcy with the U.S. Bankruptcy Court
for the District of Minnesota, resulting from litigation regarding its breast
implant product. Mr. Lawin's father is Mr. Bruce Lawin, a director of the
Company.

DEAN A. KLEIN has served as President and Chief Executive Officer of the
Company since August 1994. Mr. Klein was employed by Brennen Medical, Inc. as
President of its urology division from May to August 1994, at which time the
assets of the division were acquired by the Company. From 1991 to May 1994, Mr.
Klein was employed by Medical Care America as a General Manager of the Critical
Care America business units in Minneapolis, Minnesota and Omaha, Nebraska. From
1986 to 1991, Mr. Klein was employed in a variety of sales and management
positions with the Physicians Diagnostics Division of Baxter International and
its successor MediSense, Inc. Mr. Klein's career in the medical products
industry began in 1977 with Abbott Laboratories.

THOMAS M. JAEGER has served as Vice President, Finance and Chief Financial
Officer of the Company since May 1997. From May 1996 to May 1997, Mr. Jaeger
served as Director of Finance of the Company. From 1988 to May 1996, Mr. Jaeger
served as the Chief Financial Officer of Winsor Grain, Inc., a company involved
in the international export of agricultural commodities. From 1979 to 1988, he
was employed by Arthur Andersen LLP, serving as an audit manager from 1985 to
1988. Mr. Jaeger is a Certified Public Accountant.

35
<PAGE>
DANIEL A. WHITE has served as Vice President, Sales and Marketing of the
Company since May 1996 and as its General Manager from November 1994 to May
1996. From 1992 to July 1994, Mr. White served as Vice President of Sales and
Marketing for Uroplasty, Inc. where he established the international
distribution channel for that company's implantable urology product. Mr. White
served as Vice President of Sales and Marketing for Bioplasty, Inc. from
February 1991 to 1992. In April 1993, Bioplasty, Inc. filed a petition for
bankruptcy with the U.S. Bankruptcy Court for the District of Minnesota,
resulting from litigation regarding its breast implant product. From 1981 to
October 1990, Mr. White was employed by American Medical Systems, Inc., a
division of Pfizer, Inc. focused on the treatment of urologic dysfunctions,
including urinary incontinence, through implantable devices. Mr. White held a
number of positions at American Medical Systems, most recently serving as the
Director of Domestic Sales. Mr. White has over 15 years of experience with
companies producing implantable devices for the treatment of urological
disorders, beginning with his employment with C. R. Bard, Inc. in 1978.

RICHARD G. HOLCOMB, PH.D. has served as Vice President, Regulatory Affairs
of the Company since October 1997. From May 1996 to October 1997, Dr. Holcomb
served as Director of Regulatory Affairs. During the past 15 years, Dr. Holcomb
has consulted on clinical studies and regulatory matters for companies in the
medical industry such as Urologix, Inc., Guidant Corporation, American Medical
Systems, Inc., a division of Pfizer, Inc., and SCIMED Life Systems, Inc., a
subsidiary of Boston Scientific Corporation. Dr. Holcomb will continue to devote
a portion of his time as an independent consultant to other medical device
companies.

BRUCE A. LAWIN has served as a director of the Company since July 1994.
Since 1969, Mr. Lawin has served as President of The Specialty Mfg. Co., a
company that specializes in flow control products, plastic injection molding and
contract manufacturing. Mr. Lawin is a director and a stockholder of Brennen
Medical, Inc. Mr. Lawin's son, Mr. Timothy Lawin, is Chairman of the Board of
the Company.

MARK G. NOSBUSH has served as a director of the Company since February 1996.
Mr. Nosbush has served as Vice President of The Specialty Mfg. Co. since 1979.

PAUL E. COLOMBO has served as a director of the Company since February 1996.
In 1987, Mr. Colombo founded Chorus Corporation, a multi-national company that
specializes in the manufacture of semiconductor processing equipment, and has
served as its President since that time.

JAMES M. KNOBLACH has served as a director of the Company since February
1996. In 1995, Mr. Knoblach founded North Star Resources, an investment and
venture capital firm, and has served as its President since that time. Prior to
that time, Mr. Knoblach served as President of North Star Direct, a mail order
company, which he founded in 1987. From 1983 to 1985, Mr. Knoblach served as
Division Manager for Genetics International, Inc., the predecessor of MediSense,
Inc. Mr. Knoblach is a director of Harbinger Medical, Inc., a privately held
medical device company, and is also a Certified Public Accountant.

HARRY E. WELLS, III has served as a director of the Company since April
1996. Mr. Wells has been employed by Adams, Harkness & Hill, Inc., an investment
banking firm, since 1969. Mr. Wells has served as a Managing Director of Adams,
Harkness & Hill, Inc. in charge of Money Management since 1990 and served as a
Director of Research from 1981 to 1990. Mr. Wells has also served as the
Managing General Partner of the AH&H Partners Fund Limited Partnership since
1990. Mr. Wells is a Chartered Financial Analyst.

JEFFREY R. TOLLEFSON has served as a director of the Company since June
1997. Since 1995, Mr. Tollefson has served as Vice President of IAI Ventures,
Inc., the venture capital investment arm of Investment Advisers, Inc., a global
investment management firm. IAI Ventures, Inc. is the general partner of IAI
U.S. Venture Fund, L.P. and IAI U.S. Venture Fund II, L.P. Mr. Tollefson also
serves as the Vice President of Eagle Ventures, LLC and Eagle Ventures II, LLC.
From 1990 to 1995, Mr. Tollefson was the Vice President of FBL Financial Group,
an insurance holding company, and as such managed its private equity investment
portfolios.

36
<PAGE>
The Bylaws of the Company provide that the number of directors shall not
exceed eight, as determined by the Board or the stockholders. The Bylaws also
provide for the election of three classes of directors with terms staggered so
as to require the election of only one class of directors each year. Mr.
Tollefson was elected in 1997 to serve a three-year term as a director of the
Company pursuant to an agreement entered into in connection with the Company's
Series A Preferred Stock offering. Under such agreement, which terminates upon
completion of this offering, Messrs. Timothy Lawin, Bruce Lawin and Dean Klein,
as well as the other participants in such offering, agreed to vote their shares
in favor of up to two persons nominated by a majority of the holders of Series A
Preferred Stock.

The Board of Directors has established a Compensation Committee and an Audit
Committee. The Compensation Committee provides recommendations concerning
salaries and incentive compensation for employees of the Company and the Audit
Committee will review the results and scope of the audit and other services
provided by the Company's independent public accountants.

Directors serving in 1996 received a nonqualified stock option to purchase
12,000 shares of Common Stock. Directors also receive options under the
Company's 1996 Stock Option Plan (the "1996 Plan"), which provides for the
automatic grant of ten-year, non-qualified options to purchase 6,000 shares of
Common Stock to each non-employee director and five-year incentive stock options
to purchase 6,000 shares of Common Stock to each employee director, at the end
of each year of service. Directors do not receive any cash compensation for
attending meetings, other than reimbursement of expenses. Executive officers of
the Company are appointed by and serve at the discretion of the Board of
Directors.

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION

The following table sets forth certain information regarding compensation
earned or awarded to the Company's President and Chief Executive Officer and
each other executive officer of the Company who received annual salary and bonus
compensation in excess of $100,000 during the year ended December 31, 1996 (the
"Named Executive Officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------------
OTHER ANNUAL
SALARY BONUS COMPENSATION
NAME AND PRINCIPAL POSITION ($) ($) ($)(1)
- ---------------------------------------------------------------------------- ---------- --------- -------------
<S> <C> <C> <C>
Dean A. Klein, President and Chief Executive Officer........................ 124,000 -- 7,000
Daniel A. White, Vice President, Sales and Marketing........................ 88,000 20,000 5,000
</TABLE>

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

(1) Represents car allowance.

OPTION GRANTS AND YEAR-END OPTION VALUES

The Named Executive Officers did not exercise any options and were not
granted any options by the Company during the year ended December 31, 1996. The
following table sets forth certain information regarding the number and value of
exercisable and unexercisable options to purchase shares of Common Stock held as
of December 31, 1996 by the Named Executive Officers.

37
<PAGE>
YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-THE-
UNDERLYING UNEXERCISED OPTIONS MONEY OPTIONS AT 12/31/96
AT 12/31/96(#) ($)(1)
------------------------------ ------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------- ----------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C>
Dean A. Klein............................................. 270,000 -- 780,000 --
Daniel A. White........................................... 150,000 -- 438,000 --
</TABLE>

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

(1) Value of exercisable/unexercisable in-the-money options is equal to the
difference between the fair market value per share of Common Stock at
December 31, 1996 and the option exercise price per share multiplied by the
number of shares subject to options. The fair market value as of December
31, 1996 was $4.00 per share as determined by the Board of Directors.

EMPLOYMENT AGREEMENTS AND COMPENSATION PLANS

The Company does not currently have any employment agreements with its Named
Executive Officers. Effective July 1997, the Compensation Committee of the Board
established a management by objective compensation plan for the Chairman of the
Board and the Chief Executive Officer. Pursuant to this plan, these officers
each receive an annual base salary of $175,000 and $140,000, respectively, and
are eligible to receive a bonus based upon the accomplishment of certain
business objectives.

STOCK OPTIONS

In 1996, the Board of Directors and stockholders of the Company adopted the
1996 Plan in order to provide for the granting of stock purchase options to
employees, consultants, directors and officers of the Company. The 1996 Plan
permits the granting of incentive stock options meeting the requirements of
Section 422 of the Internal Revenue Code of 1986, as amended, and also
nonqualified stock options which do not meet the requirements of Section 422.
The Company has reserved 500,000 shares of its Common Stock for issuance upon
exercise of options granted under the 1996 Plan. As of the date of this
Prospectus, the Company has outstanding options to purchase 321,000 shares under
the 1996 Plan and 599,880 shares outside of the 1996 Plan.

CERTAIN TRANSACTIONS

On August 1, 1994, the Company acquired the ACYST product technology, patent
application for the Company's issued patent and certain relevant equipment from
Brennen Medical, Inc. ("Brennen"), a wound care company whose principal
stockholders, Timothy Lawin and Bruce Lawin, are majority stockholders of the
Company. The terms of the acquisition included an interest bearing note (8% per
annum) in the amount of $300,000 of which $100,000 was paid in 1994 and $200,000
was paid in 1996. Total interest paid in connection with this note was $24,000.
Because the Company and Brennen were under common control at the time of the
acquisition, the acquired assets were purchased for an amount equal to Brennen's
carrying cost of $18,125 for equipment and $12,500 for intangibles. The excess
purchase price of $269,375 was recorded by the Company as a charge directly to
deficit accumulated during the development stage.

On August 1, 1997, the Company entered into a five-year lease agreement with
Lawin Enterprises, LLC for the facilities presently occupied by the Company. The
lease covers approximately 7,700 square feet of office and manufacturing space
at a rate of $5,200 per month in the first year with rate increases of 2.5%,
3.0%, 3.5% and 4.0% in year two through year five of the lease, respectively.
The Company believes that this lease is on terms no less favorable to the
Company than those obtainable from an unrelated third party. Lawin Enterprises,
LLC is owned by Timothy Lawin, an executive officer, director and a principal
stockholder of the Company, and Bruce Lawin, a director and principal
stockholder of the Company. Prior

38
<PAGE>
to this time, the Company leased 2,700 square feet of office and manufacturing
space from Lawin Enterprises, LLC at the rate of $3,000 per month, pursuant to a
two-year lease.

Adams, Harkness & Hill, Inc., one of the Representatives, is the Advising
General Partner of AH&H Partners Fund Limited Partnership, which has purchased
shares of the Company's capital stock in private placements on the same terms as
other investors who purchased in such placements. In April 1996, the AH&H
Partners Fund Limited Partnership purchased 150,000 shares of Common Stock at a
purchase price of $3.33 per share, for an aggregate purchase price of $500,000.
In April 1997, the AH&H Partners Fund Limited Partnership purchased 125,000
shares of the Company's Series A Preferred Stock at a purchase price of $4.00
per share, for an aggregate purchase price of $500,000, and was granted
five-year warrants to purchase 31,250 shares of Common Stock at an exercise
price of $4.00 per share. For services provided to the Company in connection
with the April 1997 private placement, Adams, Harkness & Hill, Inc. was granted
five-year warrants to purchase 18,750 shares of Common Stock at an exercise
price of $4.80 per share, and received a fee of $219,620 and reimbursement of
certain expenses of $5,759. Harry E. Wells, III, a Managing Director of Adams,
Harkness & Hill, Inc., is the Managing General Partner of the AH&H Partners Fund
Limited Partnership. See "Management" and "Underwriting."

One of the directors of the Company, Jeffrey R. Tollefson, is a Vice
President of IAI Ventures, Inc. which serves as a general partner to several
venture capital limited partnerships, including IAI U.S. Venture Fund II, L.P.,
a principal stockholder of the Company. In the aggregate, this venture fund and
three others controlled by IAI Ventures, Inc. hold 875,000 shares of Common
Stock of the Company. Each of the foregoing funds participated in the Series A
Preferred Stock private placement conducted by the Company in April 1997. As
part of this offering, Messrs. Timothy Lawin, Bruce Lawin and Dean Klein, as
well as the other participants in such offering, agreed to vote their shares in
favor of up to two persons nominated by a majority of the holders of Series A
Preferred Stock. Mr. Tollefson was elected pursuant to such agreement at the
Company's annual stockholders meeting held in June 1997. Although this agreement
terminates upon the completion of this public offering, Mr. Tollefson's current
term as a Class A director does not expire until the year 2000 annual meeting of
stockholders.

Upon formation of the Company, Timothy Lawin purchased 1,512,000 shares at
an aggregate purchase price of $70. Subsequently, Timothy Lawin transferred
756,000 to his wife, Lisa Lawin. In the December 1995 private placement by the
Company, Timothy Lawin purchased 7,500 units (each unit consisting of one share
and one warrant) and Brennen Medical, Inc. purchased 36,000 units at $1.67 per
unit. In the December 1994 private placement by the Company, Ms. Lawin purchased
120,000 shares at $.83 per share. In December 1995, Timothy Lawin received a
ten-year non-qualified stock option to purchase 30,000 shares at $1.67 per
share. In December 1996 and January 1997, Timothy Lawin transferred 50,000
shares to family members. In June 1997 and September 1997 Timothy Lawin received
five-year incentive stock options to purchase 6,000 and 50,000 shares of common
stock at $4.40 per share. The option granted for 6,000 shares vests immediately
and the option granted for 50,000 vests 30% after one year, an additional 30%
after two years and 40% after three years.

Upon formation of the Company, Dean Klein purchased 108,000 shares at an
aggregate purchase price of $5. In the December 1994 private placement by the
Company, Mr. Klein purchased 60,600 shares at $.83 per share. In the December
1995 private placement by the Company, Mr. Klein purchased 7,500 units at $1.67
per unit. In August 1994, Mr. Klein received a ten-year non-qualified stock
option to purchase 240,000 shares at $1.04 per share. In December 1995, Mr.
Klein received a ten-year non-qualified stock option to purchase 30,000 shares
at $1.67 per share. In December 1996 and January 1997, Dean Klein transferred
60,000 shares to his spouse and 13,600 to other family members. In September
1997, Dean Klein received a five-year incentive stock option to purchase 50,000
shares of common stock at $4.00 per share. This option vests 30% after one year,
an additional 30% after two and years and 40% after three years.

Upon formation of the Company, Bruce Lawin purchased 540,000 shares at an
aggregate purchase price of $25. In December 1994 and May 1995, Bruce Lawin
transferred an aggregate of 108,000 shares to

39
<PAGE>
his son, Timothy Lawin, 108,000 shares to his daughter-in-law, Lisa Lawin, and
108,000 shares to a trust for the benefit of his granddaughter, Elizabeth Lawin.
In the December 1994 private placement by the Company, Bruce Lawin purchased
120,000 shares at $.83 per share. In the December 1995 private placement by the
Company, Bruce Lawin purchased 30,000 units at $1.67 per unit. In December 1995,
Bruce Lawin received a ten-year non-qualified stock option to purchase 12,000
shares at $1.67 per share. In June 1997, Bruce Lawin received a ten-year
nonqualified stock option to purchase 6,000 shares of common stock at $4.00 per
share.

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

40
<PAGE>
PRINCIPAL STOCKHOLDERS

The following table sets forth as of November 10, 1997, and as adjusted to
reflect the sale of the shares offered hereby, certain information regarding
beneficial ownership of the Company's Common Stock by (i) each person known by
the Company to be the beneficial owner of more than 5% of the outstanding Common
Stock, (ii) each director of the Company, (iii) the Named Executive Officers and
(iv) all executive officers and directors of the Company as a group.

<TABLE>
<CAPTION>
PERCENTAGE OF
OUTSTANDING SHARES
NUMBER OF SHARES ------------------------
BENEFICIALLY OWNED BEFORE AFTER
NAME OF BENEFICIAL OWNER (1) OFFERING OFFERING
- ------------------------------------------------------------------------- -------------------- ----------- -----------
<S> <C> <C> <C>
Timothy P. Lawin (2)(3).................................................. 1,979,000 38.0% 25.7%
Dean A. Klein (2)(4)..................................................... 430,000 8.0 5.4
Daniel A. White (2)(5)................................................... 151,250 2.9 1.9
Bruce A. Lawin (6)(7).................................................... 414,000 8.0 5.4
Mark G. Nosbush (8)...................................................... 33,000 * *
Paul E. Colombo (7)(9)................................................... 198,000 3.8 2.6
James M. Knoblach (10)................................................... 178,000 3.4 2.3
Harry E. Wells, III (11)................................................. 343,000 6.6 4.5
Jeffrey R. Tollefson (12)................................................ 875,000 17.1 11.5
Lisa Lawin (13).......................................................... 1,979,000 38.0 25.7
Investment Advisers, Inc. (14)........................................... 824,807 16.1 10.8
Marcellus P. Knoblach (15)............................................... 415,000 7.8 5.3
Adams, Harkness & Hill, Inc. (16)........................................ 325,000 6.3 4.2
All executive officers and directors as a group (11 persons)(17)......... 4,691,250 78.9% 55.5%
</TABLE>

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

* Less than one percent.

(1) Shares not outstanding but deemed beneficially owned by virtue of the right
of a person or a member of a group to acquire them as of November 10, 1997
or within 60 days of such date are treated as outstanding only when
determining the percent of the class owned by such individual and when
determining the percent owned by the group. For purposes of calculating the
percent of class owned after this offering, it was assumed that the
officers, directors and principal stockholders will not be purchasing
shares in this offering. Unless otherwise indicated, each person named or
included in the group has sole voting and investment power with respect to
the shares of Common Stock set forth opposite his name.

(2) The address of the executive officers is 1290 Hammond Road, St. Paul, MN
55110.

(3) Includes 43,500 shares which may be purchased by Mr. Lawin upon the
exercise of options and warrants. Also includes 934,000 shares held by Lisa
Lawin (Mr. Timothy Lawin's wife), 108,000 shares held by Mr. Timothy
Lawin's daughter, 36,000 shares held by Brennen Medical, Inc. (a
corporation controlled by Mr. Timothy Lawin) and 36,000 shares which may be
purchased upon exercise of a warrant held by Brennen Medical, Inc. Mr. and
Ms. Lawin share voting and investment power over the shares held by them.

(4) Includes 277,500 shares which may be purchased by Mr. Klein upon the
exercise of options and warrants and 50,000 shares held by Mr. Klein's
wife.

(5) Includes 150,000 shares which may be purchased by Mr. White upon the
exercise of options.

(6) Mr. Bruce Lawin's address is 5858 Centerville Road, St. Paul, MN 55110.

(7) Includes 48,000 shares which may be purchased upon the exercise of options
and warrants.

(8) Includes 25,500 shares which may be purchased by Mr. Nosbush upon the
exercise of options and warrants. Mr. Nosbush's address is 5858 Centerville
Road, St. Paul, MN 55110.

41
<PAGE>
(9) Mr. Colombo's address is 1290 Hammond Road, St. Paul, MN 55110.

(10) Includes 78,000 shares which may be purchased by Mr. Knoblach upon the
exercise of options. Also includes 100,000 shares held by Mr. Knoblach as
Trustee for the James M. Knoblach Revocable Trust. Mr. Knoblach's address
is c/o North Star Publishing, 1240 Eleventh Street North, Sauk Rapids, MN
56379.

(11) Includes 18,000 shares which may be purchased by Mr. Wells upon the
exercise of options. Also includes 275,000 shares and warrants to purchase
31,250 shares held by AH&H Partners Fund Limited Partnership and warrants
to purchase 18,750 shares held by Adams, Harkness & Hill, Inc. Mr. Wells,
is a Managing Director of Adams, Harkness & Hill, Inc., and the Managing
General Partner of the AH&H Partners Fund Limited Partnership. His address
is 60 State Street, 12th Floor, Boston, MA 02109.

(12) Includes 25,639 shares held by Eagle Ventures, LLC, 24,554 shares held by
Eagle Ventures II, LLC, 161,861 shares held by IAI U.S. Venture Fund L.P.
and 662,946 shares held by IAI U.S. Venture Fund II, L.P. Mr. Tollefson is
a Vice President of IAI Ventures, Inc., the general partner of IAI U.S.
Venture Fund L.P. and IAI U.S. Venture Fund II, L.P., and the Vice
President and a member of Eagle Ventures, LLC and Eagle Ventures II, LLC.
Mr. Tollefson's address is 3800 First Bank Place, Minneapolis, Minnesota
55402.

(13) Includes 821,500 shares held by Timothy P. Lawin (Ms. Lawin's husband),
108,000 shares held by their daughter, 36,000 shares held by Brennen
Medical, Inc. (a corporation controlled by Mr. Timothy Lawin), 36,000
shares which may be purchased upon exercise of a warrant held by Brennen
Medical, Inc. and 43,500 shares which may be purchased upon the exercise of
options and warrants held by Mr. Timothy Lawin. Mr. and Ms. Lawin share
voting and investment power over the shares held by them. Ms. Lawin's
address is c/o Advanced UroScience, Inc., 1290 Hammond Road, St. Paul, Mn
55110.

(14) Includes 662,946 shares held by IAI U.S. Venture Fund II, L.P. and 161,861
shares held by IAI U.S. Venture Fund, L.P. IAI Ventures, Inc. is a
wholly-owned subsidiary of Investment Advisers, Inc. and the general
partner of each of such funds. The address of IAI Ventures, Inc. is 3800
First Bank Place, Minneapolis, Minnesota 55402. Does not include shares
held by Eagle Ventures, LLC or Eagle Ventures II, LLC, the members of which
are certain persons affiliated with Investment Advisers, Inc..

(15) Includes 180,000 shares which may be purchased by the Marcellus P. Knoblach
Revocable Trust upon the exercise of a warrant. Also includes 25,000 shares
held by the Vivian J. Knoblach Revocable Trust. Marcellus and Vivian
Knoblach are husband and wife. Mr. Marcellus P. Knoblach's address is 3807
E. Amberwood Drive, Phoenix, AZ 85044.

(16) Includes 18,750 shares which may be purchased upon the exercise of a
warrant held by Adams, Harkness & Hill, Inc. Also includes 275,000 shares
and warrants to purchase 31,250 shares held by the AH&H Partners Fund
Limited Partnership. Adams, Harkness & Hill, Inc. is the Advising General
Partner of the AH&H Partners Fund Limited Partnership. The address of
Adams, Harkness & Hill, Inc. is 60 State Street, 12th Floor, Boston,
Massachusetts 02109.

(17) Includes 822,500 shares which may be purchased upon the exercise of options
and warrants.

42
<PAGE>
DESCRIPTION OF SECURITIES

The authorized capital stock of the Company currently consists of 23,000,000
shares of capital stock, no par value, of which 20,000,000 shares are Common
Stock, 1,500,000 shares are Series A Preferred Stock and 1,500,000 shares are
Series A1 Preferred Stock. Upon closing of this offering, automatic conversion
of the outstanding shares of Series A Preferred Stock into Common Stock, and
cancellation of the Company's Series A and Series A1 Preferred Stock, the
Company's authorized capital will consist of 20,000,000 shares of Common Stock,
no par value, and 1,586,500 shares of undesignated stock. The Company has
approximately 70 shareholders of record of its capital stock.

COMMON STOCK

The Company has 5,126,720 shares of Common Stock issued and outstanding,
assuming conversion of outstanding shares of Series A Preferred Stock. The
holders of Common Stock are entitled to one vote per share on all matters which
shareholders may vote on at all meetings of shareholders. Subject to the rights
of any future series of preferred stock that may be designated, the holders of
the Common Stock have equal ratable rights to dividends from funds legally
available therefor, when, as and if declared by the Board of Directors of the
Company and are entitled to share ratably in all the assets of the Company
available for distribution to holders of the Common Stock upon liquidation,
dissolution or winding up of the affairs of the Company. There are no
redemption, sinking fund, conversion or preemptive rights with respect to the
shares of Common Stock. All outstanding shares of the Common Stock are fully
paid and nonassessable, and the shares of Common Stock to be issued upon
completion of this offering will be fully paid and nonassessable.

The holders of the Common Stock do not have cumulative voting rights.
Subject to the rights of any future series of preferred stock, the holders of
more than 50 percent of such outstanding shares voting for the election of
directors can elect all of the directors of the Company to be elected, if they
so choose. In such event, the holders of the remaining shares will not be able
to elect any of the Company's directors.

SERIES A AND SERIES A1 PREFERRED STOCK

The Company has 1,413,500 shares of Series A Preferred Stock issued and
outstanding. Upon the closing of this offering, each outstanding share of Series
A Preferred Stock will be converted automatically into one share of Common
Stock. There are no shares of Series A1 Preferred Stock issued or outstanding.

Upon closing of this offering, the shares of Series A Preferred Stock
converted into shares of Common Stock will be canceled and cannot be reissued,
and no shares of preferred stock will be outstanding at such time. The Company
will take the necessary steps to cancel the designation of the remaining 86,500
unissued shares of Series A Preferred Stock and 1,500,000 unissued shares of
Series A1 Preferred Stock, at which time these shares will become undesignated.
The Board of Directors will have the authority, without action by the
stockholders, to designate and issue any of such undesignated shares in one or
more series of preferred stock and to fix the rights, preferences, privileges
and restrictions, including voting rights, of each series, any or all of which
may be greater than the rights of the Common Stock.

It is not possible to state the actual effect of the issuance of any shares
of preferred stock upon the rights of holders of the Common Stock until the
Board of Directors determines the specific rights of the holders of such
preferred stock. However, the effects might include, among other things,
restricting dividends on the Common Stock, diluting the voting power of the
Common Stock, impairing the liquidation rights of the Common Stock and delaying
or preventing a change in control of the Company without further action by the
shareholders. The Company has no present plans to issue any shares of preferred
stock.

43
<PAGE>
WARRANTS

The Company currently has outstanding warrants to purchase an aggregate of
620,000 shares of Common Stock. This includes five-year warrants, to purchase an
aggregate of 570,000 shares of Common Stock at an exercise price of $1.67 per
share, that were issued to stockholders in connection with private sales of
units (each unit consisting of one share and one warrant) in November 1995
through February 1996. In April 1997, (i) the AH&H Partners Fund Limited
Partnership was granted five-year warrants to purchase 31,250 shares of Common
Stock at an exercise price of $4.00 per share and (ii) Adams, Harkness & Hill,
Inc. was granted five-year warrants to purchase 18,750 shares of Common Stock at
an exercise price of $4.80 per share.

REGISTRATION RIGHTS

Pursuant to an Investor's Rights Agreement among the Company and holders of
Series A Preferred Stock, dated April 4, 1997, such investors have certain
registration rights with respect to the shares of Common Stock issuable upon
conversion of their shares of Series A Preferred Stock, including shares to be
issued upon conversion of the outstanding Series A Preferred Stock upon
completion of this offering. Under the terms of the Investors' Rights Agreement,
if the Company proposes to register any of its securities under the Securities
Act for its own account or for the account of others, the holders are entitled
to receive notice thereof and request inclusion of their conversion shares
therein, subject to any limitation by the underwriters of any such offering on
the number of shares included in such registration. In addition, such persons
also have the right to request, under certain circumstances, that the Company
register the sale of their conversion stock by filing a registration statement
under the Securities Act. The Company is required to use its best efforts to
effect all such registrations, subject to certain conditions and limitations.
Such persons do not have registration rights under the Investors' Rights
Agreement with respect to this offering.

MINNESOTA BUSINESS CORPORATION ACT

Certain provisions of Minnesota law described below could have an
anti-takeover effect. These provisions are intended to provide management
flexibility and to enhance the likelihood of continuity and stability in the
composition of the Company's Board of Directors and in the policies formulated
by the Board and to discourage an unsolicited takeover of the Company, if the
Board determines that such a takeover is not in the best interests of the
Company and its stockholders. However, these provisions could have the effect of
discouraging certain attempts to acquire the Company which could deprive the
Company's stockholders of opportunities to sell their shares of Common Stock at
prices higher than prevailing market prices.

Section 302A.671 of the Minnesota Statutes applies, with certain exceptions,
to any acquisition of voting stock of the Company (from a person other than the
Company, and other than in connection with certain mergers and exchanges to
which the Company is a party) resulting in the beneficial ownership of 20
percent or more of the voting stock then outstanding. Section 302A.671 requires
approval of any such acquisitions by a majority vote of the stockholders of the
Company prior to its consummation. In general, shares acquired in the absence of
such approval are denied voting rights and are redeemable at their then fair
market value by the Company within 30 days after the acquiring person has failed
to give a timely information statement to the Company or the date the
stockholders voted not to grant voting rights to the acquiring person's shares.

Section 302A.673 of the Minnesota Statutes generally prohibits any business
combination by the Company, or any subsidiary of the Company, with any
stockholder which purchases 10 percent or more of the Company's voting shares
(an "interested stockholder") within four years following such interested
stockholder's share acquisition date, unless the business combination is
approved by a committee of all of

44
<PAGE>
the disinterested members of the Board of Directors of the Company serving
before the interested stockholder's share acquisition date.

CERTAIN LIMITED LIABILITY AND INDEMNIFICATION PROVISIONS

The Company's Restated Articles limit the personal liability of its
directors. Specifically, directors of the Company will not be personally liable
to the Company or its shareholders for monetary damages for any breach of their
fiduciary duty as directors, except to the extent that the elimination or
limitation of liability is not permitted under Section 302A.527 of the Minnesota
Business Corporation Act, as amended. This provision will generally not limit
liability under state or federal securities law.

Section 302A.521 of the MBCA provides that a Minnesota business corporation
shall indemnify any director, officer, employee or agent of the corporation made
or threatened to be made a party to a proceeding, by reason of the former or
present official capacity (as defined) of the person, against judgments,
penalties, fines, settlements and reasonable expenses incurred by the person in
connection with the proceeding if certain statutory standards are met.
"Proceeding" means a threatened, pending or completed civil, criminal,
administrative, arbitration or investigative proceeding, including one by or in
the right of the corporation. Section 302A.521 contains detailed terms regarding
such right of indemnification and reference is made thereto for a complete
statement of such indemnification rights.

Bylaw 37 of the Company's Amended and Restated Bylaws provides that each
director, officer and employee of the Company shall be indemnified by the
Company in accordance with, and to the fullest extent permissible by, applicable
law.

In addition, each of the Company's directors has entered into an indemnity
agreement that provides that the Company will indemnify directors against any
costs and expenses, judgments, settlements and fines incurred in connection with
any claim involving a director by reason of his position as a director; provided
that the director meets certain standards of conduct for claims that (i) have
been successfully defended or (ii) a majority of impartial directors or an
independent counsel has determined that, with respect to the conduct giving rise
to such claim, the director acted in good faith. No indemnification may be made,
however, for claims in which the director has been adjudicated in a final
judgment to be liable to the Company except to the extent that the court finds
indemnification to be proper.

The Company maintains an insurance policy covering director and officer
liability.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or controlling persons of the Company
pursuant to the foregoing provisions, the Company 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.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar with respect to the Company's Common Stock
is Norwest Bank Minnesota, N.A.

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no public market for the Common
Stock. Future sales of substantial amounts of Common Stock in the open market
may adversely affect the market price of the Common Stock offered hereby and the
ability of the Company to raise equity capital in the future.

Upon consummation of the offering, the Company will have outstanding an
aggregate of 7,626,720 shares of Common Stock (assuming no exercise of the
Underwriters' over-allotment option). Of the aggregate number of outstanding
shares of Common Stock, the 2,500,000 shares of Common Stock sold in this
offering will be freely tradable without restriction or further registration
under the Securities

45
<PAGE>
Act, unless purchased by an "affiliate" of the Company, as that term is defined
by Rule 144 promulgated under the Securities Act (an "Affiliate"), whose sales
would be subject to certain volume limitations and other restrictions described
below. The remaining 5,126,720 shares of Common Stock originally issued and sold
by the Company in private transactions in reliance upon exemptions from the
Securities Act held by stockholders upon the consummation of this offering will
be "restricted securities" as that term is defined in Rule 144 under the
Securities Act, and may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rule 144, 144(k) or 701 or
otherwise.

All officers and directors and certain stockholders of the Company, owning
an aggregate of 4,436,000 shares, have entered into "lock-up" agreements,
agreeing not to, directly or indirectly, sell, assign, transfer, encumber, offer
to sell, grant any option for the sale of, or otherwise dispose of, any shares
of Common Stock without the consent of the Representatives for a period of 180
days after the date of this Prospectus. The Representatives may waive these
restrictions at any time in their discretion. Taking such restrictions into
account, in addition to the 2,500,000 shares of Common Stock offered hereby, (i)
approximately 384,720 shares will be eligible for immediate sale on the date of
this Prospectus in accordance with Rule 144; (ii) approximately 193,500
additional shares will become eligible for sale in the public market beginning
in December 1997; (iii) approximately 112,500 additional shares will become
eligible for sale in the public market beginning 90 days after the date of this
Prospectus in accordance with Rule 144; and (iv) approximately 4,436,000
additional shares will be eligible for sale beginning 180 days after the date of
this Prospectus upon the expiration of the lock-up agreements, subject, in the
case of Affiliates, to volume and manner of sale limitations under Rule 144.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who beneficially owns shares last acquired
privately from the Company or an Affiliate at least one year previously is
entitled to sell, in "brokers' transactions" or to market makers, within any
three-month period commencing 90 days after the date of this Prospectus, a
number of shares that does not exceed the greater of (i) 1% of the then
outstanding shares of Common Stock (approximately 76,300 shares immediately
after the offering); or (ii) the average weekly trading volume in the Common
Stock during the four calendar weeks preceding the required filing of a Form 144
with respect to such sale. Sales under Rule 144 are generally subject to the
availability of current public information about the Company. Under Rule 144(k),
a person who is not deemed to have been an Affiliate of the Company at any time
during the 90 days preceding a sale, and who beneficially owns shares last
acquired from the Company or an Affiliate at least two years previously, is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Unless
otherwise restricted, "144(k) shares" may therefore be sold immediately upon the
consummation of this Offering.

Any employee, officer or director of or consultant to the Company who
purchased his or her shares pursuant to a written compensatory plan or contract
is entitled to rely on the resale provisions of Rule 701, which permits
non-Affiliates to sell their Rule 701 shares without complying with the public
information, holding period, volume limitation or notice provisions of Rule 144
and which permits Affiliates to sell their Rule 701 shares without complying
with the Rule 144 holding period restrictions, in each case commencing 90 days
after the date of this Prospectus.

The Company intends to file Registration Statements on Form S-8 under the
Securities Act to register shares of Common Stock reserved for issuance upon
exercise of stock options, thus permitting the resale of such shares by
non-Affiliates in the public market without restrictions under the Securities
Act and by Affiliates subject to volume and manner of sale limitations under
Rule 144. Such Registration Statements are expected to become effective shortly
after the date of this Prospectus. As of the date of this Prospectus, options to
purchase 920,880 shares of Common Stock were outstanding, with 736,000 of the
shares issuable upon exercise of such options subject to vesting requirements
and lock-up agreements. The remaining 184,880 shares issuable upon exercise of
such options will become available for exercise and sale upon vesting and
effectiveness of such Registration Statements on Form S-8.

46
<PAGE>
REGISTRATION RIGHTS

In connection with their acquisition of securities of the Company,
stockholders who will hold an aggregate of 1,413,500 shares of Common Stock upon
completion of this offering (and the automatic conversion of their Series A
Preferred Stock into Common Stock) entered into an Investors' Rights Agreement
with the Company under which the stockholders have the right to have their
shares of Common Stock included in future registration statements filed by the
Company under the Securities Act. In addition, beginning six months from the
effective date of the offering covered by this Prospectus, upon the request of
stockholders holding fifty percent of the securities covered under the
Investors' Rights Agreement, the Company is required to file a registration
statement with the Commission covering these securities. In addition, these
stockholders also have demand registration rights at such time as the Company is
eligible to use a Registration Statement Form S-3, requiring the Company to file
a registration statement on such Form upon the request of stockholders holding
twenty-five percent of the securities covered under the Investors' Rights
Agreement. Such stockholders do not have registration rights under the
Investors' Rights Agreement with respect to this offering. See "Description of
Securities."

47
<PAGE>
UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, for which Dain Bosworth Incorporated and Adams,
Harkness & Hill, Inc. are acting as the Representatives, have severally agreed
to purchase from the Company an aggregate of 2,500,000 shares of Common Stock at
the Price to Public less the Underwriting Discounts and Commissions set forth on
the cover page of this Prospectus, in the amounts set forth below opposite their
respective names.

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Dain Bosworth Incorporated.......................................................
Adams, Harkness & Hill, Inc......................................................

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

The Underwriting Agreement provides that the Underwriters' obligations are
subject to certain conditions precedent and that the Underwriters are committed
to purchase all shares of Common Stock offered hereby (other than those covered
by the over-allotment option described below) if the Underwriters purchase any
shares. The Representatives have advised the Company that the several
Underwriters may offer the shares of Common Stock directly to the public at the
Price to Public set forth on the cover page of this Prospectus and to certain
dealers at the Price to Public less a concession not exceeding $ per
share. The Underwriters may allow, and such dealers may reallow, a concession
not exceeding $ per share to other dealers. After the initial public
offering, the Representatives may change the offering price and other selling
terms.

The Company has granted the Underwriters an option, exercisable for 30 days
after the date of this Prospectus, to purchase up to an aggregate of 375,000
additional shares of Common Stock at the same per share price as the initial
shares to be purchased by the Underwriters. The Underwriters may purchase these
shares solely to cover over-allotments, if any, in connection with the sale of
Common Stock offered hereby. If the Underwriters exercise the over-allotment
option, the Underwriters will be obligated, subject to certain conditions, to
purchase additional shares in approximately the same proportion as those in the
table above.

This offering is being conducted in accordance with Rule 2720 ("Rule 2720")
of the National Association of Securities Dealers, Inc. ("NASD") which provides
that, among other things, when a NASD member participates in an offering of
equity securities of a company with which such member is affiliated or has a
"conflict of interest" (as defined in Rule 2720), the initial public offering
price may be no higher than that recommended by a "qualified independent
underwriter" (a "QIU"). A QIU must (i) be a NASD member experienced in the
securities or investment banking business; (ii) not be an affiliate of the
issuer of the securities; and (iii) agree to undertake the responsibilities and
liabilities of an underwriter under the Securities Act. In accordance with this
requirement, Dain Bosworth Incorporated is serving as a QIU in this offering.
The initial public offering price of the Common Stock offered hereby will not be
higher than Dain Bosworth Incorporated's recommended initial public offering
price. Dain Bosworth Incorporated has performed due diligence investigations and
reviewed and participated in the preparation of this Prospectus and the
Registration Statement of which this Prospectus forms a part. Dain Bosworth
Incorporated will receive no additional compensation in its capacity as QIU in
connection with this offering.

48
<PAGE>
The Underwriting Agreement provides that the Company and the Underwriters
will indemnify each other against certain liabilities, including liabilities
under the Securities Act.

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

The Company, its officers, directors and certain of its current
stockholders, holding an aggregate of 4,436,000 shares of Common Stock, have
agreed not to directly or indirectly, sell, assign, transfer, encumber, offer to
sell, grant any option for the sale of or otherwise dispose of any shares of
Common Stock for a period of 180 days after the date of this Prospectus without
the prior written consent of the Representatives.

In order to facilitate the offering of Common Stock, the Underwriters may
engage in transactions that stabilize, maintain or otherwise affect the price of
Common Stock. Specifically, the Underwriters may over-allot Common Stock in
connection with the offering, creating a short position in Common Stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of Common Stock, the Underwriters may bid for, and purchase, shares of
Common Stock in the open market. The Underwriters may also reclaim selling
concessions allowed to an underwriter or a dealer for distributing Common Stock
in the offering, if the Underwriters repurchase previously distributed Common
Stock in transactions to cover their short positions, in stabilization
transactions or otherwise. Finally, the Underwriters may bid for, and purchase,
shares of Common Stock in market making transactions and impose penalty bids.
These activities may stabilize or maintain the market price of Common Stock
above market level that may otherwise prevail. The Underwriters are not required
to engage in these activities, and may end any of these activities at any time.

Prior to this offering, there has been no public market for Common Stock.
The initial public offering price for the Common Stock will be determined by
negotiation between the Company and the Representatives. In determining the
initial price to public, the Company and the Representatives will consider,
among other things, the history of and prospects for the industry in which the
Company competes, the qualifications of the Company's management, the present
state of the Company's development, the results of operations of the Company in
recent periods, the prospects for growth of the Company's revenues and earnings,
the current state of the U.S. economy, the general condition of the securities
markets at the time of this offering and the market prices for other publicly
traded companies that are comparable to the Company. There can be no assurance,
however, that the prices at which Common Stock will sell in the public market
after this offering will not be lower than the Price to Public.

Adams, Harkness & Hill, Inc., one of the Representatives, is the Advising
General Partner of AH&H Partners Fund Limited Partnership, which has purchased
shares of the Company's capital stock in private placements on the same terms as
other investors who purchased in such placements. In April 1996, the AH&H
Partners Fund Limited Partnership purchased 150,000 shares of Common Stock at a
purchase price of $3.33 per share, for an aggregate purchase price of $500,000.
In April 1997, the AH&H Partners Fund Limited Partnership purchased 125,000
shares of the Company's Series A Preferred Stock at a purchase price of $4.00
per share, for an aggregate purchase price of $500,000, and was granted
five-year warrants to purchase 31,250 shares of Common Stock at an exercise
price of $4.00 per share. For services provided to the Company in connection
with the April 1997 placement, Adams, Harkness & Hill, Inc. was granted
five-year warrants to purchase 18,750 shares of Common Stock at an exercise
price of $4.80 per share, and received a fee of $219,620 and reimbursement of
certain expenses of $5,759. Harry E. Wells, III, a Managing Director of Adams,
Harkness & Hill, Inc., is the Managing General Partner of the AH&H Partners Fund
Limited Partnership. See "Management" and "Certain Transactions."

49
<PAGE>
LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Fredrikson & Byron, P.A., Minneapolis, Minnesota Certain legal
matters for the Underwriters will be passed upon by Oppenheimer Wolff &
Donnelly, Minneapolis, Minnesota.

EXPERTS

The audited financial statements of the Company included in this Prospectus
and the Registration Statement have been audited by McGladrey & Pullen, LLP,
independent accountants, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report and upon the
authority of such firm as experts in accounting and auditing.

The statements in this Prospectus under the captions "Risk
Factors--Dependence on Patents and Proprietary Rights" and "Business--Patents
and Proprietary Rights" have been reviewed and approved by Nawrocki, Rooney &
Sivertson, P.A., patent counsel to the Company, as experts on such matters, and
are included herein in reliance upon that review and approval.

AVAILABLE INFORMATION

The Company has filed with the Commission a Registration Statement under the
Securities Act with respect to the Common Stock offered hereby. This Prospectus
does not contain all of the information set forth in the Registration Statement
and exhibits and schedules thereto. For further information with respect to the
Company and the Common Stock offered hereby, reference is made to such
Registration Statement and exhibits and schedules filed therewith. Although all
material terms and provisions of any material contract or other document filed
are referred to in this Prospectus and described herein, such descriptions are
not necessarily complete, and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. The Registration Statement and exhibits and schedules may be
inspected without charge and copied at the principal office of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, or at one of the Commission's
regional offices: 500 West Madison, Suite 1400, Chicago, Illinois 60661-2511 and
7 World Trade Center, 13th Floor, New York, New York, 10048. Copies of all or
any part of such material may be obtained upon payment of the prescribed fees
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.
Washington, D.C. The Commission maintains a World Wide Website at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission, including the Company.

Prior to this offering, the Company has not been subject to the reporting
requirements of the Securities Exchange Act of 1934. After completion of this
offering, the Company intends to comply with such requirements, including
distributing to its stockholders an annual report containing audited financial
statements.

50
<PAGE>
ADVANCED UROSCIENCE, INC.

FINANCIAL STATEMENTS

INDEX

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

Balance Sheets as of December 31, 1995 and 1996 and September 30, 1997 (unaudited)......................... F-3

Statements of Operations for the Years Ended December 31, 1995 and 1996, Nine Months Ended September 30,
1996 and 1997 (unaudited) and the Period from August 1, 1994 (Date of Inception) to September 30, 1997
(unaudited).............................................................................................. F-4

Statements of Stockholders' Equity for the Period from August 1, 1994 (Date of Inception) to December 31,
1994, Years Ended December 31, 1995 and 1996, Nine Months Ended September 30, 1997 (unaudited)........... F-5

Statements of Cash Flows for the Years Ended December 31, 1995 and 1996, Nine Months Ended September 30,
1996 and 1997 (unaudited) and Period from August 1, 1994 (Date of Inception) to September 30, 1997
(unaudited).............................................................................................. F-6

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

F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT

To the Board of Directors
Advanced UroScience, Inc.
St. Paul, Minnesota

We have audited the accompanying balance sheets of Advanced UroScience, Inc.
(A Development Stage Company) as of December 31, 1995 and 1996, and the related
statements of operations and cash flows for the years ended December 31, 1995
and 1996, and the statements of stockholders' equity for the period since
inception (August 1, 1994) through 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 Advanced UroScience, Inc. as
of December 31, 1995 and 1996, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.

MCGLADREY & PULLEN, LLP

Minneapolis, Minnesota
March 25, 1997, except for Note 4, as to which
the date is April 29, 1997

F-2
<PAGE>
ADVANCED UROSCIENCE, INC.
(A DEVELOPMENT STAGE COMPANY)

BALANCE SHEETS

DECEMBER 31, 1995 AND 1996 AND SEPTEMBER 30, 1997

<TABLE>
<CAPTION>
1997
1995 1996 -------------
------------ ------------ (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents............................................ $ 474,749 $ 354,216 $ 1,971,300
Short-term investments............................................... -- -- 1,413,768
Inventories.......................................................... 13,589 126,121 243,588
Other current assets................................................. 4,260 15,018 165,452
------------ ------------ -------------
TOTAL CURRENT ASSETS............................................... 492,598 495,355 3,794,108
Equipment and Leasehold Improvements, less accumulated depreciation,
1995 $6,839; 1996 $25,620; 1997 $63,976.............................. 18,364 100,479 368,701
Intangible Assets, less accumulated amortization 1995 $7,087; 1996
$13,665; 1997 $20,165................................................ 23,484 27,369 33,823
------------ ------------ -------------
TOTAL ASSETS....................................................... $ 534,446 $ 623,203 $ 4,196,632
------------ ------------ -------------
------------ ------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable..................................................... $ 43,558 $ 131,328 $ 125,091
Accrued expenses..................................................... 33,805 276,134 257,361
------------ ------------ -------------
TOTAL CURRENT LIABILITIES.......................................... 77,363 407,462 382,452
------------ ------------ -------------
Related Party Long-Term Debt (Note 2).................................. 200,000 -- --
------------ ------------ -------------
Commitments and Contingencies (Notes 3 and 7)..........................
Stockholders' Equity (Notes 2, 3, 4, and 5)
Common stock, no par value; 20,000,000 shares authorized; issued and
outstanding: 1995 3,170,220 shares; 1996 3,713,220 shares; 1997
5,126,720 shares................................................... 1,109,812 2,527,312 7,915,202
Contributed capital.................................................. 50,000 99,000 320,000
Deficit accumulated during the development stage..................... (902,729) (2,410,571) (4,421,022)
------------ ------------ -------------
257,083 215,741 3,814,180
------------ ------------ -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......................... $ 534,446 $ 623,203 $ 4,196,632
------------ ------------ -------------
------------ ------------ -------------
</TABLE>

See Notes to Financial Statements.

F-3
<PAGE>
ADVANCED UROSCIENCE, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 1995 AND 1996, THE NINE MONTHS ENDED SEPTEMBER 30, 1996
AND 1997,
AND THE PERIOD FROM AUGUST 1, 1994 (DATE OF INCEPTION) TO SEPTEMBER 30, 1997

<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 1, 1994
NINE MONTHS ENDED SEPTEMBER (DATE OF
YEARS ENDED DECEMBER 31 30 INCEPTION) TO
---------------------------- ---------------------------- SEPTEMBER 30,
1995 1996 1996 1997 1997
------------- ------------- ------------- ------------- -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Expenses:
Research and development........ $ 353,334 $ 763,796 $ 485,178 $ 1,039,722 $ 2,190,356
General and administrative (Note
3)............................ 164,771 778,227 577,523 1,091,267 2,107,970
Interest expense to related
party (Note 2)................ 16,000 4,667 4,667 -- 24,000
------------- ------------- ------------- ------------- -----------------
534,105 1,546,690 1,067,368 2,130,989 4,322,326

Interest income................... 9,661 38,848 31,949 120,538 170,679
------------- ------------- ------------- ------------- -----------------

NET LOSS...................... $ (524,444) $ (1,507,842) $ (1,035,419) $ (2,010,451) $ (4,151,647)
------------- ------------- ------------- ------------- -----------------
------------- ------------- ------------- ------------- -----------------

Net loss per share................ $ (0.12) $ (0.29) $ (0.20) $ (0.38)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------

Weighted-average number of common
and common equivalents shares
outstanding..................... 4,485,694 5,224,309 5,183,517 5,346,684
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>

See Notes to Financial Statements.

F-4
<PAGE>
ADVANCED UROSCIENCE, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF STOCKHOLDERS' EQUITY

PERIOD FROM AUGUST 1, 1994 (DATE OF INCEPTION) TO SEPTEMBER 30, 1997

<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK DURING THE TOTAL
----------------------- CONTRIBUTED DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT CAPITAL STAGE EQUITY
---------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, August 1, 1994 (date of inception).......... -- $ -- $ -- $ -- $ --
Initial sale of common stock in August 1994........ 2,160,000 100 -- -- 100
Acquisition of assets from Brennen Medical (Note
2)............................................... -- -- -- (269,375) (269,375)
Capital contribution from Brennen (Note 3)......... -- -- 50,000 -- 50,000
Private placement issuance of common stock in
November and December, net of stock issuance
costs of $9,200.................................. 651,600 533,800 -- -- 533,800
Net loss........................................... -- -- -- (108,910) (108,910)
---------- ----------- ----------- ------------ ------------
Balance, December 31, 1994........................... 2,811,600 533,900 50,000 (378,285) 205,615
Private placement issuance of common stock in
February......................................... 24,000 20,000 -- -- 20,000
Private placement issuance of common stock in
November and December, net of stock issuance
costs of $1,713.................................. 334,500 555,787 -- -- 555,787
Exercise of common stock options................... 120 125 -- -- 125
Net loss........................................... -- -- -- (524,444) (524,444)
---------- ----------- ----------- ------------ ------------
Balance, December 31, 1995........................... 3,170,220 1,109,812 50,000 (902,729) 257,083
Private placement issuance of common stock in
January and February............................. 235,500 392,500 -- -- 392,500
Private placement issuance of common stock in April
and May.......................................... 307,500 1,025,000 -- -- 1,025,000
Compensation element of common stock options issued
(Note 5)......................................... -- -- 49,000 -- 49,000
Net loss........................................... -- -- -- (1,507,842) (1,507,842)
---------- ----------- ----------- ------------ ------------
Balance, December 31, 1996........................... 3,713,220 2,527,312 99,000 (2,410,571) 215,741
Private placement issuance of Series A Preferred
Stock in April 1997, and assumed conversion to
common stock, net of offering costs of $266,110
(Note 4)......................................... 1,413,500 5,387,890 -- -- 5,387,890
Compensation element of common stock options issued
(unaudited) (Note 5)............................. -- -- 221,000 -- 221,000
Net loss (unaudited)............................... -- -- -- (2,010,451) (2,010,451)
---------- ----------- ----------- ------------ ------------
Balance, September 30, 1997 (unaudited).............. 5,126,720 $ 7,915,202 $ 320,000 $ (4,421,022) $3,814,180
---------- ----------- ----------- ------------ ------------
---------- ----------- ----------- ------------ ------------
</TABLE>

See Notes to Financial Statements.

F-5
<PAGE>
ADVANCED UROSCIENCE, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 1995 AND 1996, THE NINE MONTHS ENDED SEPTEMBER 30, 1996
AND 1997, AND THE PERIOD FROM AUGUST 1, 1994 (DATE OF INCEPTION) TO SEPTEMBER
30, 1997

<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED PERIOD FROM AUGUST
DECEMBER 31 SEPTEMBER 30 1, 1994 (DATE OF
---------------------- ------------------------ INCEPTION) TO
1995 1996 1996 1997 SEPTEMBER 30, 1997
--------- ----------- ----------- ----------- ------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities
Net loss......................................... $(524,444) $(1,507,842) $(1,035,419) $(2,010,451) $ (4,151,647)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation................................... 5,635 18,781 9,333 39,300 64,920
Amortization................................... 5,317 6,578 4,934 6,500 20,165
Noncash expenses (Notes 3 and 5)............... -- 49,000 49,000 221,000 320,000
Changes in assets and liabilities:
Inventories.................................. (13,589) (112,532) (99,644) (117,467) (243,588)
Other current assets......................... 14,870 (10,758) (20,123) (150,434) (165,452)
Accounts payable............................. 8,191 87,770 58,705 (6,237) 125,091
Accrued expenses............................. 21,243 242,329 158,332 (18,773) 257,361
--------- ----------- ----------- ----------- ------------------
NET CASH USED IN OPERATING ACTIVITIES...... (482,777) (1,226,674) (874,882) (2,036,562) (3,773,150)
--------- ----------- ----------- ----------- ------------------
Cash Flows From Investing Activities
Purchase of short-term investments............... -- -- -- (1,513,768) (1,513,768)
Proceeds upon maturity of short-term
investments.................................... -- -- -- 100,000 100,000
Purchase of equipment............................ (7,078) (100,896) (90,560) (307,522) (415,496)
Purchase of intangible assets.................... (7,641) (10,463) (10,036) (12,954) (41,488)
--------- ----------- ----------- ----------- ------------------
NET CASH USED IN INVESTING ACTIVITIES...... (14,719) (111,359) (100,596) (1,734,244) (1,870,752)
--------- ----------- ----------- ----------- ------------------
Cash Flows From Financing Activities
Net proceeds from issuance of common stock....... 619,412 1,417,500 1,417,500 -- 2,527,312
Net proceeds from issuance of Series A Preferred
Stock.......................................... -- -- -- 5,387,890 5,387,890
Payments on note payable to related party........ -- (200,000) (200,000) -- (300,000)
--------- ----------- ----------- ----------- ------------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES............................... 619,412 1,217,500 1,217,500 5,387,890 7,615,202
--------- ----------- ----------- ----------- ------------------

INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.............................. 121,916 (120,533) 242,022 1,617,084 1,971,300

Cash and Cash Equivalents
Beginning........................................ 352,833 474,749 474,749 354,216 --
--------- ----------- ----------- ----------- ------------------
Ending........................................... $ 474,749 $ 354,216 $ 716,771 $ 1,971,300 $ 1,971,300
--------- ----------- ----------- ----------- ------------------
--------- ----------- ----------- ----------- ------------------
Supplemental Disclosures of Cash Flow Information
Cash payments for interest....................... $ 18,166 $ 5,834 $ 5,834 $ -- $ 24,000
--------- ----------- ----------- ----------- ------------------
--------- ----------- ----------- ----------- ------------------
Supplemental Schedule of Noncash Investing and
Financing Activities
Acquisition of assets of Brennen Medical (Note
2):
Cash purchase price............................ $ -- $ -- $ -- $ -- $ --
--------- ----------- ----------- ----------- ------------------
--------- ----------- ----------- ----------- ------------------
Carrying value of equipment acquired........... $ -- $ -- $ -- $ -- $ 18,125
Carrying value of intangibles acquired......... -- -- -- -- 12,500
Issuance of note payable....................... -- -- -- -- (300,000)
Distribution to Brennen Medical's
stockholders................................. -- -- -- -- 269,375
--------- ----------- ----------- ----------- ------------------
$ -- $ -- $ -- $ -- $ --
--------- ----------- ----------- ----------- ------------------
--------- ----------- ----------- ----------- ------------------
</TABLE>

See Notes to Financial Statements.

F-6
<PAGE>
ADVANCED UROSCIENCE, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS

NOTE 1. NATURE OF BUSINESS, DEVELOPMENT STAGE RISKS, AND SIGNIFICANT ACCOUNTING
POLICIES

NATURE OF BUSINESS AND DEVELOPMENT STAGE RISKS: Advanced UroScience, Inc.
(the Company) was incorporated on July 27, 1994, and has developed ACYST, an
injectable bulking agent used to treat stress urinary incontinence. The
technology for the Company's ACYST product was purchased from Brennen Medical,
Inc. (Brennen), a related company (see Note 2).

The Company is in the development stage and has yet to obtain regulatory
approval for its product. The Company will be required to obtain regulatory
approval from the Food and Drug Administration (FDA) prior to selling the
product within the United States. Foreign regulatory approval must also be
obtained prior to selling the product internationally. The Company is currently
conducting clinical trials of their product. In order to obtain regulatory
approval, the Company must satisfactorily complete clinical trials which will
result in significant costs to the Company. There is no assurance that
regulatory approval will be obtained and, if obtained, that a market will
develop for the Company's product. Additionally, substantial time may pass
before significant revenue may be realized by the Company. In addition to the
proceeds from the private placement of preferred stock received subsequent to
year end (see Note 4), the Company may need to raise additional capital before
profitability is achieved.

A summary of the Company's significant accounting policies follows:

CASH AND CASH EQUIVALENTS: For purposes of reporting cash flows, the
Company considers all unrestricted cash and Treasury bills, commercial paper,
and money market funds with an original maturity of three months or less to be
cash equivalents.

CONCENTRATIONS OF RISK: The Company maintains deposits at banks which, at
times, exceed federally insured limits and in money market accounts which are
not federally insured. The Company has not experienced any losses in such
accounts.

One of the primary raw materials and components for the manufacture of
ACYST, a material needed for the carrier gel, is available only from a single
source. The Company does not have an agreement with the supplier of this
material and is currently negotiating the terms and conditions of such an
agreement. In the event that the Company is unable to maintain this single
source of supply or is required to replace any of its current raw materials or
components with alternatives, additional testing may be required in order to
receive regulatory approval. Any interruption in the supply of raw materials or
components currently used by the Company or the use of any alternatives could
adversely affect the Company's operations.

SHORT-TERM INVESTMENTS: The Company follows the provisions of FASB
Statement No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY
SECURITIES. Statement No. 115 requires that management determine the appropriate
classification of securities at the date individual securities are acquired, and
that the appropriateness of such classification be reassessed at each balance
sheet date.

The Company's short-term investments consist of U.S. government, mortgage
backed, and corporate debt securities. These securities are classified as
held-to-maturity as the Company has the positive intent and ability to hold to
maturity. The securities mature during 1997. These securities are stated at fair
value, which approximates cost at September 30, 1997.

INVENTORIES: Inventories are stated at the lower of cost (first-in,
first-out method) or market and consist primarily of raw materials for use in
research and development activities.

F-7
<PAGE>
ADVANCED UROSCIENCE, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 1. NATURE OF BUSINESS, DEVELOPMENT STAGE RISKS, AND SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
EQUIPMENT AND LEASEHOLD IMPROVEMENTS: Depreciation of equipment is computed
over estimated useful lives of five to seven years using accelerated methods.
Leasehold improvements are depreciated using the straight-line method over the
life of the lease.

INTANGIBLE ASSETS: Intangible assets, consisting of organizational costs
and patents, are amortized using the straight-line basis over five years.

LONG-LIVED ASSETS: The Company reviews its long-lived assets periodically
to determine potential impairment by comparing the carrying value of the
long-lived assets with the estimated future net undiscounted cash flows expected
to result from the use of the assets, including cash flows from disposition.
Should the sum of the expected future net cash flows be less than the carrying
value, the Company would recognize an impairment loss at that date. An
impairment loss would be measured by comparing the amount by which the carrying
value exceeds the fair value (estimated discounted future cash flows) of the
long-lived assets. To date, management has determined that no impairment of
long-lived assets exists.

INCOME TAXES: Deferred taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary differences and
operating loss carryforwards and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences between
the reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.

LOSS PER SHARE: Loss per share is based upon the weighted-average number of
common and common equivalent shares outstanding during each period. Pursuant to
Securities and Exchange Commission Staff Accounting Bulletin No. 83, common
stock issued and stock options and warrants granted with exercise prices below
the assumed initial public offering price during the 12-month period preceding
the date of the initial filing of the registration statement have been included
in the calculation as if they were outstanding for all periods presented.

The FASB has issued Statement No. 128, EARNINGS PER SHARE, which supersedes
APB Opinion No. 15. Statement No. 128 requires the presentation of earnings per
share by all entities that have common stock or potential common stock, such as
options, warrants, and convertible securities, outstanding that trade in a
public market. Those entities that have only common stock outstanding are
required to present basic earnings per-share amounts. All other entities are
required to present basic and diluted per-share amounts. Diluted per-share
amounts assume the conversion, exercise, or issuance of all potential common
stock instruments unless the effect is to reduce a loss or increase the income
per common share from continuing operations. All entities required to present
per-share amounts must initially apply Statement No. 128 for annual and interim
periods ending after December 15, 1997. Earlier application is not permitted.

The adoption of Statement No. 128 would have had no effect on reported loss
per share.

RESEARCH AND DEVELOPMENT COSTS: Expenditures for research and development
are charged to operations as incurred.

F-8
<PAGE>
ADVANCED UROSCIENCE, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 1. NATURE OF BUSINESS, DEVELOPMENT STAGE RISKS, AND SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS: The following methods and assumptions
were used to estimate the fair value of each class of financial instruments:

CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS: The carrying amount
approximates fair value because of the short maturities of these
instruments.

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

INTERIM FINANCIAL INFORMATION (UNAUDITED): The financial statements and
notes related thereto as of September 30, 1997, and for the nine months ended
September 30, 1996 and 1997, and the period from August 1, 1994 (date of
inception), to September 30, 1997, are unaudited, but in the opinion of
management include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the financial position and
results of operations. The operating results for the interim periods are not
indicative of the operating results to be expected for a full year or for other
interim periods. Not all disclosures required by generally accepted accounting
principles necessary for a complete presentation have been included.

NOTE 2. ASSET PURCHASE FROM RELATED PARTY

On August 1, 1994, the Company purchased certain assets of Brennen relating
to a product to treat urinary incontinence (as discussed in Note 1) for
$300,000. The interest rate on the note was 8 percent per annum with interest
payable monthly. Interest expense of $16,000 and $4,667 was incurred under this
note agreement for 1995 and 1996, respectively. The note was secured by
substantially all the assets of the Company. $100,000 was repaid on the note in
December 1994, with the balance repaid in 1996.

The approximate total value of the assets purchased was as follows:

<TABLE>
<S> <C>
Equipment.......................................................... $ 18,125
Intangibles........................................................ 12,500
---------
Total assets purchased......................................... $ 30,625
---------
---------
</TABLE>

Because the Company and Brennen were under common control, the Company, for
accounting purposes, is precluded from recording the acquired assets at any
amount other than Brennen's carrying cost. Accordingly, the excess purchase
price of $269,375 has been treated as a distribution to Brennen's stockholders
and is recorded as a charge directly to deficit accumulated during the
development stage.

NOTE 3. RELATED-PARTY TRANSACTIONS

CONTRIBUTED CAPITAL: During the period from August 1, 1994, to November 1,
1994, Brennen agreed to pay, on the Company's behalf, certain operating expenses
(primarily salary, rent, and certain administrative expenses) amounting to
$50,000. As those expenses were incurred by the Company and paid by Brennen, the
Company expensed those amounts and recorded a credit in the same amount to
contributed capital.

F-9
<PAGE>
ADVANCED UROSCIENCE, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 3. RELATED-PARTY TRANSACTIONS (CONTINUED)
OPERATING LEASE: Through April 1996, the Company subleased its office and
research facility from Brennen on a monthly basis. In May 1996, the Company
signed a two-year lease directly with the landlord (also a related party) for
$36,000 annually. As of August 1, 1997 the two year lease was cancelled and a
new five-year lease was entered into with the landlord. Monthly lease payments
will be approximately $5,200 with scheduled rate increases over the lease term.
Related party rent expense was $17,000 and $32,000 for the nine months ended
September 30, 1996 and 1997, and $6,000 and $26,000 in 1995 and 1996,
respectively.

As of September 30, 1997, the approximate future lease commitments for years
ended December 31, are as follows:

<TABLE>
<S> <C>
1997............................................................... $ 16,000
1998............................................................... 63,000
1999............................................................... 65,000
2000............................................................... 67,000
2001............................................................... 69,000
Thereafter......................................................... 41,000
</TABLE>

NOTE 4. REDEEMABLE PREFERRED STOCK

In April 1997, the Company completed a private placement transaction by
selling 1,413,500 shares of Series A Preferred Stock at $4.00 per share for
gross proceeds of $5,654,000 before offering costs and commissions of
approximately $265,000. In conjunction with the transaction, the selling agent
was granted five-year warrants to purchase a total of 50,000 shares of common
stock at exercise prices ranging from $4.00 to $4.80 per share.

The Series A Preferred Stock has an initial stated value and liquidation
preference of $4.00 per share, plus a 30 percent annual rate of return to a
maximum of $4.80 per share. The Series A Preferred Stock is voting, has no
dividend preferences, and is convertible at any time into common stock on a
one-for-one basis, subject to certain adjustments as defined by the agreement.
Each share of Preferred Stock is automatically converted into shares of common
stock upon the consummation of a qualified public offering as defined in the
agreement and the number of authorized shares are reduced accordingly. In
addition, the holders of Series A Preferred Stock can demand redemption of the
shares at any time after March 28, 2005, at the higher of (i) the original issue
price ($4.00) or (ii) fair market value as determined by an independent
appraisal.

These financial statements assume all of the outstanding shares of Series A
Preferred Stock have been converted into 1,413,500 shares of common stock due to
the automatic conversion requirement upon completion of an initial public
offering (see Note 8). These converted shares will be canceled and cannot be
reissued. The Company will take the necessary steps to cancel the designation of
the remaining unissued 86,500 shares of Series A Preferred Stock. Also in
conjuction with the April 1997 placement, the Board of Directors authorized
1,500,000 shares of Series A1 Preferred Stock. Upon completion of the offering,
the Company will also take the necessary steps to cancel this designation.
Therefore, there will be 1,586,500 shares of undesignated capital stock.

F-10
<PAGE>
ADVANCED UROSCIENCE, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 5. STOCKHOLDERS' EQUITY

PRIVATE PLACEMENTS OF COMMON STOCK: During 1995, the Company had a private
placement which resulted in the issuance of a total of 334,500 shares of common
stock, with net proceeds of approximately $556,000. Under the 1995 Private
Placement Agreement, each investor was also granted one warrant for each share
of common stock purchased. Each warrant allows the investor to purchase one
additional share of common stock at $1.67 per share.

In February 1996, the Company completed its 1995 private placement by
selling an additional 235,500 shares of common stock, resulting in proceeds of
$392,500. In connection with these sales of common stock, warrants to purchase
an additional 235,500 shares of common stock were granted at an exercise price
of $1.67 per share.

In May 1996, the Company completed a private placement with the sale of
307,500 shares of common stock for proceeds of $1,025,000.

Warrants to purchase a total of 570,000 shares of common stock are
exercisable and outstanding at December 31, 1996. These warrants expire during
fiscal 2000 and 2001.

STOCK OPTIONS: The Company granted nonqualified options to purchase 600,000
shares of common stock to certain employees, directors, and other individuals.
Also, in June 1996, the Board of Directors adopted, and the shareholders
subsequently approved, the 1996 Stock Option Plan. The Company has reserved
500,000 shares of its common stock for issuance upon exercise of options under
the plan. As of December 31, 1996, no options were granted under the plan.
Through September 30, 1997, 306,000 options were granted under the plan.

The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION.
Under APB Opinion No. 25, the Company recorded compensation expense of $49,000
in 1996, and $221,000 for the nine months ended September 30, 1997 for option
grants. Had compensation cost for the Company's stock option grants been
determined based on the fair value at the grant date for awards in 1995 and 1996
and the nine months ended September 30, 1997, consistent with the provisions of
SFAS No. 123, the Company's net loss and net loss per share would have been
increased to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
DECEMBER 31
-------------------------- SEPTEMBER 30,
1995 1996 1997
----------- ------------- -------------
<S> <C> <C> <C>
Net loss, as reported.............................. $ (524,444) $ (1,507,842) $(2,010,451)
Net loss, pro forma................................ (597,487) (1,556,650) (2,010,907)
Net loss per share, as reported.................... (0.12) (0.29) (0.38)
Net loss per share, pro forma...................... (0.13) (0.30) (0.38)
</TABLE>

The above pro forma effects on net loss and net loss per share are not
likely to be representative of the effects on reported net income (loss) for
future years because options vest over several years and additional awards
generally are made each year.

F-11
<PAGE>
ADVANCED UROSCIENCE, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 5. STOCKHOLDERS' EQUITY (CONTINUED)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1995 and 1996 and the nine months ended September
30, 1997:

<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Expected dividend yield.............................................. $ -- $ -- $ --
Risk-free interest rate.............................................. 5.80% 6.25% 5.99%
Expected life of options (years)..................................... 5 4 2
</TABLE>

A summary of outstanding stock options follows:

<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE
----------- -----------------
<S> <C> <C>
Balance, August 1, 1994 (date of inception)..................... -- $ --
Options granted............................................... 300,000 1.00
----------- -----
Balance, December 31, 1994...................................... 300,000 1.00
Options granted............................................... 210,000 1.38
Options exercised............................................. (120) 1.04
----------- -----
Balance, December 31, 1995...................................... 509,880 1.16
Options granted............................................... 90,000 2.44
----------- -----
Balance, December 31, 1996...................................... 599,880 1.35
Options granted (unaudited)................................... 306,000 4.07
Options forfeited (unaudited)................................. (5,000) 4.00
----------- -----
Balance, September 30, 1997 (unaudited)......................... 900,880 $ 2.26
----------- -----
----------- -----
</TABLE>

The weighted-average fair value of options granted during 1995, 1996, and
the nine months ended September 30, 1997, was $0.35, $1.09, and $3.55,
respectively.

The following table summarizes information about stock options outstanding
and exercisable as of September 30, 1997:

OPTIONS OUTSTANDING AND EXERCISABLE (UNAUDITED)

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------
WEIGHTED- OPTIONS EXERCISABLE
AVERAGE ------------------------
REMAINING WEIGHTED- WEIGHTED-
NUMBER OF CONTRACTUAL AVERAGE NUMBER AVERAGE
OPTIONS LIFE EXERCISE OF OPTIONS EXERCISE
RANGE OF EXERCISE PRICE OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE
- ------------------------------- ----------- --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$0.83 - $1.04.................. 395,880 6.8 $ 1.01 395,880 $ 1.01
$1.67.......................... 162,000 8.2 1.67 162,000 1.67
$3.33.......................... 42,000 8.6 3.33 42,000 3.33
$4.00 - $4.40.................. 301,000 4.7 4.07 51,000 4.05
----------- ----- ----------- -----
900,880 $ 2.26 650,880 $ 1.56
----------- ----- ----------- -----
----------- ----- ----------- -----
</TABLE>

F-12
<PAGE>
ADVANCED UROSCIENCE, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS

NOTE 6. INCOME TAXES

The components of deferred taxes at December 31, 1995 and 1996, are as
follows:

<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Net operating loss carryforwards.................................... $ 220,000 $ 660,000
Tax credits......................................................... 11,000 36,000
Amortization of Brennen asset purchase (1).......................... 85,000 79,000
Accrued expenses and other.......................................... -- 101,000
Valuation allowance................................................. (316,000) (876,000)
----------- -----------
$ -- $ --
----------- -----------
----------- -----------
</TABLE>

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

(1) As discussed in Note 2, the excess purchase price related to the Brennen
asset purchase was recorded as a distribution for financial reporting
purposes. For tax purposes, the amount is amortized over a 15-year period.
Accordingly, at inception, the Company recorded a valuation allowance of
$95,000 on this deferred tax asset.

At December 31, 1996, the Company recorded a valuation allowance of $876,000
on the deferred tax assets to reduce the total to an amount that management
believes will ultimately be realized. Realization of deferred tax assets is
dependent upon sufficient future taxable income during the period that
deductible temporary differences and carryforwards are expected to be available
to reduce taxable income.

The Company's income tax benefit differed from the statutory federal rate as
follows:

<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1995 1996
----------- -----------
<S> <C> <C>
Statutory rate applied to loss before tax........................... $ (184,000) $ (528,000)
Tax benefits not utilized........................................... 184,000 528,000
----------- -----------
$ -- $ --
----------- -----------
----------- -----------
</TABLE>

At December 31, 1996, the Company had net operating loss carryforwards of
approximately $1,885,000 expiring as follows:

<TABLE>
<CAPTION>
EXPIRATION DATE AMOUNT
- -------------------------------------------------------------------------------- ------------
<S> <C>
2009............................................................................ $ 116,000
2010............................................................................ 511,000
2011............................................................................ 1,258,000
</TABLE>

The utilization of the net operating losses in the future may be subject to
certain annual limitations resulting from future stock offerings.

NOTE 7. COMMITMENTS AND CONTINGENCIES

401(K) PLAN: During 1996, the Company adopted a 401(k) plan covering all
employees who meet the requirements set forth in the plan. Under the plan, the
employees may make voluntary contributions up to 15 percent of their
compensation, and the Company, at its discretion, may match a percentage of the
employee contributions. The Company's contribution to the plan was approximately
$5,800 in 1996.

F-13
<PAGE>
ADVANCED UROSCIENCE, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
PATENTS: Beginning shortly after its inception, the Company received a
series of communications from a competitor in which such competitor has alleged
that the Company's issued patent may be invalid, informed the Company of certain
patents held by such competitor covering implant materials and alleged that the
activities of certain of the Company's officers were in violation of
non-competition and non-disclosure agreements. Such competitor has not yet
brought any legal action in connection with any of these claims and allegations.
The Company has received an opinion from its patent counsel that its issued
patent is valid and enforceable relative to known prior art and that the
Company's products do not infringe any of the claims under any U.S. patents
known to be held by such competitor. Further, the Company has reviewed, with its
general counsel, the claims and allegations relating to the activities of
certain officers of the Company and believe them to be without merit. If legal
action is brought, the Company intends to vigorously defend against any such
action.

NOTE 8. SUBSEQUENT EVENT (UNAUDITED)

INITIAL PUBLIC OFFERING: In October 1997, the Company filed a registration
statement for an underwritten public offering of up to 2,500,000 shares of
common stock at a price based on market conditions at the time of effectiveness.
The Company will grant the underwriters of such offering an option, exercisable
within 30 days of the prospectus date, to purchase up to 375,000 additional
shares to cover overallotments, if any. The Company plans to use the proceeds to
fund ongoing and future human clinical trials, research and development,
international sales and marketing activities, expansion of manufacturing
capabilities, and for working capital and general corporate purposes.

F-14
<PAGE>

ACYST

- AN INJECTABLE BULKING AGENT DESIGNED TO BE....

- BIOCOMPATIBLE
- The pyrolytic carbon-coated micro-beads used in ACYST were
chosen for their demonstrated long-term biocompatibility

- NON-ABSORBABLE
- The ACYST micro-beads are synthetic and will not be absorbed
by the body, thus minimizing the need for retreatment

- NON-MIGRATORY
- The size of the ACYST micro-beads was specifically chosen
to prevent them from migrating away from the injection site

- COST EFFECTIVE
- The injection of ACYST entails a minimally-invasive
procedure in an outpatient setting

[Photograph of syringe of ACYST and needle]

[LOGO]

ACYST is currently undergoing human clinical trials under an investigational
device exemption granted by the U.S. Food and Drug Administration ("FDA").
ACYST has not received marketing clearance from the FDA for sale in the U.S.,
and there can be no assurance that such approval will be received. See
"Business--Government Regulations."

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

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
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 ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY FROM, ANY PERSON IN ANY JURISDICTION IN WHICH IT
IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREBY SHALL, UNDER ANY CIRCUMSTANCE, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF 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................................ 14
Dividend Policy................................ 14
Capitalization................................. 15
Dilution....................................... 16
Selected Financial Data........................ 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 18
Business....................................... 21
Management..................................... 35
Certain Transactions........................... 38
Principal Stockholders......................... 41
Description of Securities...................... 43
Shares Eligible for Future Sale................ 45
Underwriting................................... 48
Legal Matters.................................. 50
Experts........................................ 50
Available Information.......................... 50
Index to Financial Statements.................. F-1
</TABLE>

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

UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.

2,500,000 SHARES

[LOGO]

COMMON STOCK

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

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

DAIN BOSWORTH INCORPORATED

ADAMS, HARKNESS & HILL, INC.

, 1997

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