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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
 
                             WASHINGTON, D.C. 20549
 
                            ------------------------
 
                                   FORM 10-K
                                ---------------
 
<TABLE>
<S>        <C>
/X/        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
           ACT OF 1934
 
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996, OR
 
/ /        TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
           EXCHANGE ACT OF 1934
 
           FOR THE TRANSITION PERIOD FROM TO .
</TABLE>
 
                        COMMISSION FILE NUMBER: 0-28078
 
                            ------------------------
 
                                  FEMRX, INC.
 
             (Exact name of registrant as specified in its charter)
 
                            ------------------------
 
<TABLE>
<S>                          <C>
         DELAWARE                      77-0389440
      (State or other         (IRS Employer Identification
      jurisdiction of                     No.)
     incorporation or
       organization)
</TABLE>
 
                   1221 INNSBRUCK DRIVE, SUNNYVALE, CA 94089
                    (Address of principal executive office)
 
       Registrant's telephone number, including area code: (408) 752-8580
                            ------------------------
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
 
                    Common Stock, $0.001 par value per share
 
                  Preferred Stock, $0.001 par value per share
                            ------------------------
 
    Indicate by check mark whether the registrant (1) has filed all reports
required by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. /X/ Yes    / / No
 
    Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of Registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
 
    The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $14,093,000 as of March 5, 1997, based upon the
closing price on the Nasdaq National Market reported for such date. Shares of
Common Stock held by each officer and director and by each person who owns 5% or
more of the outstanding Common Stock have been excluded in that such persons may
be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
 
    There were 8,699,254 shares of Registrant's Common Stock issued and
outstanding as of March 5, 1997.
 
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                      DOCUMENTS INCORPORATED BY REFERENCE
 
    The Proxy Statement for the Registrant's 1997 Annual Meeting of Stockholders
is incorporated by reference in Part III of this Form 10-K.
 
                             INTRODUCTORY STATEMENT
 
    Except for the historical information contained in this Annual Report on
Form 10-K, the matters discussed herein contain forward-looking statements that
are subject to certain risks and uncertainties that could cause the actual
results to differ materially from those projected. Factors that could cause
actual results to differ materially include, but are not limited to, the timing
of orders and shipments, the timely development of new products and market
acceptance of products, the impact of competitive products and pricing, the
Company's ability to further expand into international markets, public policy
relating to health care reform in the U.S. and other countries, approval of its
products by government agencies such as the United States Food and Drug
Administration ("FDA"), and other risks detailed below and included from time to
time in the Company's other Securities and Exchange Commission ("SEC") reports
and press releases, copies of which are available from the Company upon request.
The Company assumes no obligation to update any forward-looking statements
contained herein.
 
                                     PART I
 
ITEM 1. BUSINESS
 
OVERVIEW
 
    FemRx is developing surgical systems for the diagnosis and treatment of
gynecologic disorders. The Company's initial product, the OPERA STAR System, is
designed to perform a procedure the Company has named OPERA or Out-Patient
Endometrial Resection/Ablation. OPERA is a less invasive alternative to
hysterectomy for patients suffering from abnormal uterine bleeding. OPERA
consists of diagnosis by a gynecologic surgeon and the use of the Company's
OPERA STAR resectoscope under visual guidance to collect a pathology sample,
resect the endometrial lining together with any submucosal fibroids and
coagulate the entire uterine cavity. The Company has also developed a
proprietary fluid management system, called the Flo-Stat System, for use in
gynecologic procedures.
 
    The OPERA STAR System consists of a disposable Specialized Tissue Aspirating
Resectoscope ("STAR") and a reusable motor drive unit. The STAR enables a
gynecologic surgeon to cut, coagulate and aspirate tissue within the uterus
performing continuous surgery with one instrument without the frequent
interruption of clearing the operative field of tissue chips during a procedure
as is necessary with other surgical procedures. The Flo-Stat System is a
microprocessor-based fluid management system that consists of electronic scales
and a dedicated computer and display unit, that is designed to continuously
monitor the fluid used during a procedure. The Flo-Stat System allows the
physician to continuously track a patient's fluid deficit. The Company believes
that combining the use of the OPERA STAR System and Flo-Stat System will
increase physician confidence when performing OPERA, reduce operating times and
enable surgeons to offer more women an alternative to hysterectomy.
 
    The information required by this item is incorporated by reference from the
information under Item 7 of this Form 10-K "Management's Discussion and Analysis
of Financial Condition and Results of Operations".
 
    The information required by this item is incorporated by reference from the
information under Item 8 of this Form 10-K "Financial Statements and
Supplementary Data".
 
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BACKGROUND
 
THE FEMALE REPRODUCTIVE SYSTEM
 
    The female reproductive system consists of the uterus, ovaries and fallopian
tubes. The uterus is a highly vascular, muscular organ which lies below the
abdomen in the pelvis. Although the size and shape of a normal uterus can vary
significantly, the uterus is typically a pear shaped organ about 7 to 8 cm long
and 4 to 5 cm at its widest point. The uterus can grow to 11 times its weight
and many times its size during pregnancy. Within the uterus lies the cavity
where fetal development takes place during pregnancy. This cavity is lined by a
thin layer of sponge-like tissue called the endometrium or uterine lining. The
endometrium is filled with tiny blood vessels and can vary in depth from 1 mm to
over 10 mm. The thick muscular layer surrounding the endometrium is called the
myometrium. The bottom of the uterus is known as the cervix. The cervix is
richly supplied with nerves, making it the most sensitive portion of the uterus.
The cervix leads to the vagina, a muscular tube which leads to the exterior of
the body.
 
    Extending from each side near the top of the uterus are the fallopian tubes
which lead to the two ovaries. The ovaries' primary functions are to secrete
hormones, such as estrogen, and store the female reproductive cells, or ova. The
fallopian tubes transport the ova to the uterus for fertilization as part of the
monthly menstrual cycle.
 
    Normal menstruation is a 28-day cycle that repeats itself throughout a
woman's reproductive life. This cycle is controlled by the interaction between
pituitary and ovarian hormones and is associated with the release of an egg from
its ovary for possible fertilization. The ovaries secrete estrogen and a second
hormone, progesterone, which causes the endometrial lining to thicken, preparing
it to receive and nourish a fertilized egg. If an egg is fertilized, it implants
into the endometrium and is nourished by the rich endometrial blood supply. If
the egg is not fertilized, levels of estrogen and progesterone decrease, the
coil shaped arteries supplying the endometrium with blood constrict, and the
endometrial lining breaks down. The lining is then shed through the vagina
together with the unfertilized egg. The resulting bleeding usually lasts four to
seven days and is called menstruation. Normal blood loss during menstruation is
generally between 25 to 70 ml per menstrual cycle. Menstruation typically begins
between the ages of 11 and 14 years and ends between the ages of 45 and 55 with
the onset of menopause, when the ovaries become exhausted and can no longer
produce estrogen and progesterone. At that time, the menstrual cycle becomes
irregular and eventually ceases completely.
 
UTERINE DISORDERS
 
  OVERVIEW
 
    The uterus is subject to a number of disorders, many of which cause abnormal
uterine bleeding. Other uterine disorders primarily cause discomfort, pain or
pressure symptoms. For example, in some women the uterus prolapses (descends),
resulting in pelvic pain. Another common cause of pain is endometriosis, where
endometrial tissue grows outside of the uterus. The uterus can also become
infected by bacteria or other micro-organisms, resulting in pain and fever.
 
    Abnormal uterine bleeding includes disorders of the menstrual cycle, such as
unexpected bleeding, excessive bleeding (defined as total blood loss exceeding
80 ml per menstrual cycle), prolonged bleeding beyond seven days, or bleeding
more frequently than 21-day intervals. Abnormal bleeding is considered a symptom
of an anatomic irregularity or hormonal imbalance. This symptom can be caused by
systemic disease, although it is more commonly the result of disorders within
the uterus itself, such as fibroids and, more rarely, endometrial cancer.
Abnormal uterine bleeding can also be caused by other factors such as medication
side effects, miscarriage and retained tissue after birth. When no specific
cause for abnormal bleeding is found, the condition is termed dysfunctional
uterine bleeding or DUB.
 
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  FIBROIDS
 
    Fibroids, also known as leiomyomas or myomas, are non-cancerous growths
within the uterus that can cause pain and are often associated with abnormal
uterine bleeding. A uterus may have many fibroids and these growths, alone or in
combination, can become sizable, sometimes enlarging the uterus to many times
its normal size. Fibroid growth is stimulated by estrogen and typically subsides
after menopause when estrogen production decreases. However, many women take
estrogen replacement therapy during and after menopause to decrease bone loss,
heart disease and hot flashes. In these women, fibroids may continue to grow
even after menopause. Fibroids arise from the muscular layer of the uterus, the
myometrium. Although there are a variety of fibroids, many grow toward the inner
cavity of the uterus and are known as submucosal fibroids. Submucosal fibroids
can exert significant pressure on the endometrial lining and are often
associated with abnormal bleeding. Clinical studies have shown that fibroids are
the most common indication for hysterectomy.
 
  DYSFUNCTIONAL UTERINE BLEEDING
 
    DUB is the diagnosis when no other cause for abnormal bleeding, such as
fibroids or cancer, can be found. Patients diagnosed with DUB are typically
treated with drug therapy initially and commonly proceed to surgical
intervention.
 
  UTERINE CANCER
 
    Endometrial carcinoma is the most common uterine cancer and is often not
diagnosed until after a patient seeks treatment for abnormal uterine bleeding.
Appropriate diagnosis is critically important in detecting endometrial carcinoma
because, if found early, it can be treated before spreading outside of the
uterus.
 
CURRENT THERAPIES FOR UTERINE DISORDERS AND THEIR LIMITATIONS
 
    Various drug therapies and surgical approaches are available for most
uterine disorders. Treatment of abnormal uterine bleeding usually begins
conservatively with drug therapy and, if necessary, proceeds to more invasive
surgical methods. Current surgical therapies for abnormal uterine bleeding
include dilation and curettage ("D&C"), hysterectomy, myomectomy (fibroid
removal), endometrial resection (surgical removal of the endometrium) and
endometrial ablation (coagulation of the endometrium). The principal advantages
and disadvantages of these therapies are discussed below.
 
  DRUG THERAPY
 
    A variety of medications can be used to reduce menstrual bleeding but the
most effective are hormonal drugs such as oral contraceptives, progestins and,
for shorter-term therapy, gonadotropin releasing hormone agonists. Hormonal
drugs alter the normal menstrual cycle in order to reduce or eliminate monthly
bleeding. Unfortunately, symptomatic improvement generally persists only while
the patient continues drug therapy and many women experience acute side effects
such as hot flashes, nausea, weight gain, depression and mood swings. A more
significant concern is the risk of long-term side effects from hormonal drugs.
Depending upon the medication, the patient may be at increased risk for
cardiovascular disease or osteoporosis. For these reasons, many women are
reluctant to continue long-term drug therapy even if symptoms are relieved, and
therefore resort to surgical therapy.
 
  DILATION AND CURETTAGE
 
    D&C can be used for both the diagnosis of certain uterine disorders and as a
therapy for abnormal uterine bleeding. Retained tissue after miscarriage or
birth can usually be successfully removed with D&C. Other causes of abnormal
uterine bleeding, such as fibroids or DUB, are generally not effectively treated
since D&C can only scrape away a superficial layer of the endometrium. With this
therapeutic approach,
 
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the endometrium typically regenerates within weeks and symptoms such as abnormal
bleeding usually return and require further therapeutic intervention.
 
  HYSTERECTOMY
 
    Hysterectomy involves the surgical removal of the uterus and, in many cases,
the ovaries. This procedure is a frequent therapy for abnormal uterine bleeding.
With the exception of cesarian section, hysterectomy is the most common surgical
procedure in the U.S.
 
    Hysterectomy is a highly invasive procedure with a lengthy recovery period.
Acute complications of hysterectomy include fever, excessive bleeding requiring
blood transfusion and injury to the bowel or urinary tract. In addition,
potential long-term adverse effects include premature onset of menopause, an
increased risk of osteoporosis, coronary heart disease and psycho-sexual
dysfunction.
 
  MYOMECTOMY
 
    Abdominal myomectomy, the surgical removal of certain types of fibroids from
the outside of the uterus, is a fertility-sparing option for some symptomatic
fibroid patients. Generally, this procedure is not used to remove submucosal
fibroids, which are accessed more readily through the cervix. Myomectomy is
performed through either a large abdominal incision or, less invasively, through
several small laparoscopic incisions in the abdomen to access the outside of the
uterus. Fibroid removal requires a deep incision into the uterine muscle. The
fibroid is dissected from the surrounding muscle tissue using scissors and the
resulting uterine wound is closed with sutures. The extensive dissection
required for fibroid removal causes considerable blood loss. Myomectomy is a
major operation which results in a significant convalescence. Frequent
complications include adhesion (scar tissue) formation between the uterus and
surrounding structures, such as the intestines, that can cause chronic pelvic
pain.
 
  RESECTION OF THE ENDOMETRIAL LINING
 
    Hysteroscopic endometrial resection is a less traumatic treatment for
submucosal fibroids and abnormal uterine bleeding. In this procedure, the
gynecologic surgeon inserts a telescope-equipped cutting tool into the vagina
and across the cervix to look into the uterus and, depending on the diagnosis,
removes fibroids or the entire endometrial lining. Fertility may be maintained
if only a small portion of the endometrium is removed during fibroid resection.
Infertility generally results from complete removal of the endometrial lining.
The cutting tool generally used for this procedure is a modified urologic
resectoscope which is 8 to 9 mm in diameter and accommodates various tip
attachments that cut or coagulate tissue when electrocautery current (70 to 140
Watts) is supplied from an attached electro-surgical unit.
 
    Gynecologists first adopted the urologic resectoscope in the mid-1970s to
remove submucosal fibroids. This instrument was not originally designed for
gynecology, is difficult to use in the uterus and requires significant skill to
perform a gynecologic procedure. When a urologist cuts tissue inside the urethra
using the resectoscope, the resulting debris can be flushed out of the surgeon's
view into the stretchable, relatively avascular urinary bladder. When a
gynecologic surgeon cuts tissue inside the uterus using the resectoscope, the
resulting debris cannot be flushed out of the surgeon's view because the uterus
is relatively small and inflexible. To remove tissue, the surgeon must
periodically stop the operation, remove the resectoscope and evacuate tissue
debris using a curette or suction aspirator. Before surgery can resume, the
gynecologic surgeon must re-distend the uterus with fluid, clear away blood in
order to see the cavity, coagulate any bleeding vessels and re-establish proper
orientation. The repeated removal and insertion of the resectoscope may cause
additional cervical trauma and uterine bleeding.
 
    A significant concern during endometrial resection is fluid overload. In
this procedure, irrigation fluid continuously flows in and out of the uterus
through the resectoscope, distending (stretching) the uterine cavity and
clearing away the blood. Fluid overload is caused by excessive absorption of the
salt-free
 
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irrigation fluid used for uterine expansion into the blood vessels within the
uterus. Clinically significant overload can cause pulmonary edema (fluid in the
lungs), cerebral edema (brain swelling) and, in isolated cases, death. The safe
limit for fluid absorption is believed to be between one and two liters for most
patients, so the procedure must be stopped if the fluid deficit (defined as the
volume of fluid inflow minus fluid outflow) amount exceeds this level. This
requirement calls for careful monitoring of the fluid deficit and places a
constraint on operating time, limiting the size and number of fibroids that can
be treated using a modified urologic resectoscope.
 
  ABLATION OF THE ENDOMETRIAL LINING
 
    Hysteroscopic endometrial ablation is another technique for treating
abnormal uterine bleeding which does not involve removal of the uterus. In this
procedure, a gynecologic surgeon employs either electro-coagulation using a
rollerball electrode attached to the resectoscope or photo-coagulation using the
Nd:YAG laser to coagulate, or burn the endometrial lining of the uterus under
visual guidance. Available ablation tools usually burn the endometrial lining to
a depth of approximately 3 to 5 mm. In order to improve the chances of success,
most patients are treated with hormonal drugs to thin the endometrial lining
prior to surgery.
 
  EMERGING THERAPIES
 
    Several techniques are under development to address the disadvantages
associated with hysterectomy and other existing therapies. One approach is
directed at improving the tools available to gynecologic surgeons for treating
fibroids and abnormal uterine bleeding under visual guidance. Another approach
is to develop simple devices intended to permit clinicians with minimal training
to treat non-fibroid related abnormal uterine bleeding.
 
    Among the new tools under investigation is the modified urologic
resectoscope operating at high power levels (250 Watts) for vaporization, rather
than resection, of the endometrial lining. This technique may simplify the
treatment of submucosal fibroids. However, the clinical data with respect to the
application of these devices in gynecology are limited.
 
    Several attempts have been made to develop a simple procedure for ablating
the entire endometrial lining using radiation, steam, cryothermia, chemical
agents and radiofrequency energy. Recent approaches include using a balloon
filled with near-boiling fluid to coagulate the endometrium or using a
conductive balloon with surface electrodes to deliver coagulating amounts of
electrical energy to the endometrium. These methods are currently undergoing
clinical evaluation.
 
THE FEMRX SOLUTION
 
    The Company believes that the optimal procedure for treating dysfunctional
uterine bleeding and abnormal uterine bleeding caused by submucosal fibroids is
an advanced surgical technique which the Company has named OPERA. OPERA is a
less invasive alternative to hysterectomy. OPERA consists of diagnosis by a
gynecologic surgeon and the use of the Company's OPERA STAR resectoscope under
visual guidance to collect a pathology sample, resect the endometrial lining
together with any submucosal fibroids and coagulate the entire uterine cavity.
FemRx has developed products designed to make the OPERA procedure simpler for
gynecologic surgeons to perform so that this procedure may be an effective
alternative to hysterectomy for more patients with abnormal uterine bleeding.
 
  OPERA STAR SYSTEM
 
    The Company's Specialized Tissue Aspirating Resectoscope ("STAR") is a
proprietary instrument that the Company has designed specifically to perform
OPERA. The Company believes the OPERA STAR System offers several significant
advantages over competing surgical devices. The Company designed the product to
build on the existing skills of surgeons trained to perform endometrial
resection and ablation.
 
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The STAR is a versatile device which enables a gynecologic surgeon to cut,
coagulate and aspirate tissue from inside the uterus without the need to
repeatedly interrupt the procedure to clear the uterus of tissue chips.
 
    The OPERA STAR System consists of a disposable 9mm diameter resectoscope and
a reusable motor drive unit. The resectoscope includes a detachable sheath, a
proprietary loop electrode that can be used for cutting and coagulating, a
rotating morcellator for tissue evacuation, a morcellator drive cable connected
to the motor drive unit and an electro-surgical cable for connection to any
standard electro-surgical power unit. The body of the STAR is made from medical
grade plastic using injection molding technology while the tissue morcellator
and loop electrode are machined from metal. The entire device is lightweight and
designed for ease of manufacture and single-use performance.
 
    The sheath of the STAR, which is inserted across the cervix, provides for
inflow of the uterine expansion fluid and also accommodates most standard 4mm
diameter reusable telescopes. The telescope attaches to a standard camera and
light source, providing for visualization of the inside of the uterus on a video
monitor. The proprietary loop electrode consists of rotatable cylinders attached
to a wire. When electrocautery current is applied, the loop can be swept along
the uterine cavity to coagulate the endometrial lining or pressed down to cut
into the endometrium or a fibroid. The surgeon typically elects to either cut or
coagulate by selecting the electro-surgical unit foot petal that corresponds to
the desired power (70 to 300 Watts) and waveform. The loop electrode cuts tissue
into chips that are suctioned into the rotating morcellator, a proprietary
assembly located immediately under the loop. The morcellator consists of two
concentric tubes, the inner one rotating to provide a slicing action. Suctioned
tissue is sliced into small fragments and transported from the morcellator to a
trap where it is collected for pathologic review.
 
  FLO-STAT SYSTEM
 
    The Flo-Stat System is a proprietary microprocessor-based system designed to
accurately and continuously report the amount of irrigation fluid infused into
the patient, the amount recovered from the patient and the difference, or fluid
deficit. The Company believes that the Flo-Stat System is the first automatic
fluid reporting system that allows the physician to track fluid deficit
automatically without interrupting the procedure whenever changing fluid inflow
bags or outflow canisters.
 
    During hysteroscopic procedures, nurses are responsible for ensuring that
fluid inflow bags are full and outflow canisters are emptied, thereby
maintaining the continuous fluid flow required to keep the operative field clear
of blood. Without a Flo-Stat System, manual fluid deficit calculations are
usually made by the nurse every few minutes.
 
    The Flo-Stat System operates by weighing fluid inflow and outflow containers
using electronic scales. Weight data is transmitted to a dedicated computer and
display unit. The sensed change in weight over time is converted into a change
in volume and the cumulative amount is displayed on the front panel. If the
fluid deficit exceeds a physician-determined limit, an audible and visual alarm
is activated. A battery is provided for uninterrupted system operation in the
event of a power failure. Following a procedure, fluid deficit data may be
uploaded to a computer for research or documentation purposes.
 
    The Flo-Stat System is designed to be operated by nursing staff with minimal
attention required. The system automatically detects fluid container changes
allowing for proper fluid management and continuous surgery.
 
MANUFACTURING
 
    The Company manufactures its products at its facility in Sunnyvale,
California. The Company's manufacturing operations consist of in-house assembly
facilities for the OPERA STAR System and the Flo-Stat System. The STAR is
assembled in a controlled environment room, and is shipped to an outside vendor
for sterilization.
 
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    Raw materials and certain sub assemblies are purchased from various
qualified vendors. Most of these components are standard commercial items, some
are manufactured to the Company's specifications. Many components, including
those manufactured to the Company's specifications, and the sterilization
services are currently purchased from single vendors. None of the Company's
vendors are legally obligated to continue to supply the Company nor is the
Company legally obligated to buy from a particular vendor. The Company has
qualified alternative vendors that could supply most of the Company's needed
components and sterilization services but also believes that for certain of
these components and for the sterilization services there are relatively few
alternative sources of supply. Any supply interruption from vendors, or failure
to establish replacement vendors, could have a material adverse effect on the
Company's business, financial condition and results of operations.
 
    The Company has received FDA clearance, ISO 9001 certification, and been
issued a license by the State of California to manufacture and sell its OPERA
STAR System and Flo Stat System. The Company's manufacturing facilities are
subject to periodic inspection by regulatory authorities and its operations
undergo GMP compliance inspections conducted by the FDA and equivalent
inspections conducted by state officials. The Company is required to operate in
conformance with GMP requirements in order to produce products for sale in the
U.S., and in compliance with ISO 9001 standards in order to produce products for
sale in Europe. Any failure by the Company to comply with GMP or ISO 9001
standards may result in the Company being required to take corrective actions,
such as modification of its policies and procedures. In addition, the Company
may be required to cease all or part of its operations for some period of time
until it can demonstrate that appropriate steps have been taken to comply with
GMP regulations and 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 be found in compliance with GMP or ISO 9001
standards in future audits by regulatory authorities or that the Company will
not experience difficulties in the course of developing its manufacturing
capability.
 
    The Company has limited experience manufacturing its products in the volumes
that will be necessary for the Company to achieve significant commercial sales,
and there can be no assurance that reliable, high-volume manufacturing can be
established or maintained at commercially reasonable costs. In addition, it will
need to manufacture its products in compliance with regulatory requirements. If
the Company experiences significant demand for its products, the Company will
have to expend capital resources and develop manufacturing expertise to
establish large-scale manufacturing capabilities. If the Company is unable to
develop large-scale manufacturing capabilities, or establish contract
manufacturing for its products, the Company's competitive position and financial
condition could be materially adversely affected. As the Company seeks to
increase production volumes, if required, it may experience lower than
anticipated yields or production contraints as a result of changes in its
manufacturing processes which could result in shipment delays as well as
increased manufacturing costs. These manufacturing difficulties could have a
material adverse effect on the Company's business, financial condition and
results of operations.
 
MARKETING AND SALES
 
    The market for the Company's products is fragmented and consists of
physicians, hospitals, surgery centers, and clinics. In order to market its
products, the Company will need to convince the medical community, principally
leading gynecologic surgeons, that the OPERA STAR System is a desirable
alternative to current procedures, such as hysterectomy, and other emerging
therapies. The Company estimates that of the approximately 33,000 gynecologists
in the U.S., approximately 7,000 are skilled at using hysteroscopes to look into
the body for diagnostic and therapeutic procedures. In order to reach these
gynecologic surgeons, the Company has hired eight territory managers who will
market directly to gynecologic surgeons who perform hysteroscopy. The Company
expects to enter into alliances with distributors or other companies with
marketing and sales expertise in international markets. There can be no
assurance that establishing such a marketing staff or sales force will be
cost-effective, or that the
 
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Company's direct sales and marketing efforts will be successful, or that its
distributors or collaborative partners will be successful in marketing, selling
or gaining market acceptance for the Company's products.
 
    The Company intends to familiarize gynecologic surgeons with OPERA through
the sponsorship of specialized seminars and conferences. Physician-led training
using the OPERA STAR System will be conducted at regional locations by surgeons
skilled in using the OPERA STAR System. In addition, the Company will seek to
establish partnerships with leading health care payors and providers to expand
the reach of its training programs to gynecologic surgeons. The Company also
intends to educate women about the OPERA alternative to hysterectomy through a
variety of media including advertising, magazine articles, television and video
presentations.
 
    The Company believes that market acceptance of its products will depend, in
part, on the Company's ability to provide evidence to the medical community of
the safety, efficacy and cost-effectiveness of its products and the procedures
in which these products are intended to be used. Even though the Company
believes that an OPERA procedure performed using its products may be less costly
than a hysterectomy, the level of surgical training and skill required may be
higher. The Company's OPERA STAR System is designed for use by a gynecologic
surgeon trained in the OPERA procedure. Market acceptance of the Company's
products will require a willingness on the part of gynecologic surgeons to be
trained to perform OPERA using the Company's products. Market acceptance may be
limited because some physicians and payors, recognizing that the removal of the
uterus in a hysterectomy precludes the potential reoccurrence of uterine
disorders, will be reluctant to substitute the OPERA procedure, which allows the
patient to retain her uterus. The Company believes that most gynecologists view
hysterectomy as an appropriate therapy to treat a variety of uterine disorders.
As a result, the Company believes that recommendations and endorsements of its
products by influential physicians will be essential for market acceptance of
its products. No assurances can be made that the Company will receive such
recommendations or endorsements.
 
    International regulatory requirements vary by region, and compliance with
such regulations may be costly and time-consuming. Accordingly, the
distribution, pricing and marketing structure to be established by the Company
may vary from country to country. In Europe, the Company intends to establish a
network of distributors to market and distribute its OPERA STAR System. In
Japan, the Company intends to collaborate with one marketing partner to assist
with regulatory requirements and to market and distribute its OPERA STAR System.
The Company has not yet obtained international regulatory approvals and no
assurance can be given that the Company will obtain any necessary international
regulatory approvals, that the Company will establish a network of distributors
to sell the OPERA STAR System in Europe, that the Company will secure a
marketing partner to sell its OPERA STAR System in Japan or that any
international distributors or marketing partners will commit the necessary
resources to sell the OPERA STAR System in international markets. Failure of the
Company to market and sell its products could have a material adverse effect on
the Company's business, financial condition and results of operations.
 
    The Company's products have generated limited sales to date. There can be no
assurance that any of the Company's existing or future products will gain any
significant degree of market acceptance among physicians, patients, hospitals
and healthcare payors. Failure to gain market acceptance would have a material
adverse effect on the Company's business, financial condition and results of
operations.
 
PATENTS AND PROPRIETARY RIGHTS
 
    The Company's success depends in part on its ability to obtain and maintain
patent protection for its products and processes, to preserve its trade secrets
and to operate without infringing the proprietary rights of third parties. The
Company's policy is to aggressively protect its proprietary position by, among
other things, filing U.S. and foreign patent applications to protect technology,
inventions and improvements that are important to the development of its
business. The Company's strategy includes extending
 
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<PAGE>
the patent protection of its technology by filing procedure-specific method
patents wherever possible for the use of the Company's products in new clinical
applications.
 
    As of December 31, 1996, the Company held two issued U.S. patents and had a
number of U.S. and international patent applications pending relating to the
Company's technology. The issued U.S. patents include both method and device
claims.
 
    The validity and breadth of claims covered in medical device technology
patents involve complex legal and factual questions and, therefore, may be
highly uncertain. No assurance can be given that any patents from pending patent
applications or from any future patent applications will be issued, that the
scope of any patent protection will exclude competitors or provide competitive
advantages to the Company, that any of the Company's patents will be held valid
if subsequently challenged or that others will not claim rights in or ownership
of the patents and other proprietary rights held by the Company. Furthermore,
there can be no assurance that others have not developed or will not develop
similar products, duplicate any of the Company's products or design around the
Company's patents. In addition, others may hold or receive patents or file
patent applications which contain claims having a scope that covers products
developed by the Company. In the event that any relevant claims of third-party
patents are upheld as valid and enforceable, the Company could be prevented from
practicing the subject matter claimed in such patents unless it obtained
licenses from the owners of each of such patents, or forced to redesign its
products or processes to avoid infringement. There can be no assurance that such
licenses would be available or, if available, would be on terms acceptable to
the Company or that the Company would be successful in any attempt to redesign
its products or processes to avoid infringement. There can be no assurance that
competitors, many of whom have substantial resources and have made substantial
investments in competing technologies, will not seek and obtain patents that
will prevent, limit or interfere with the Company's ability to make, use or sell
its products either in the U.S. or in international markets.
 
    The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights, and many companies in
the industry have employed intellectual property litigation to gain a
competitive advantage. There can be no assurance that the Company will not
become subject to patent infringement litigation or an interference proceeding
declared by the U.S. Patent and Trademark Office ("USPTO") to determine the
priority of inventions. The defense and prosecution of patent suits, USPTO
interference proceedings and related legal and administrative proceedings are
both costly and time consuming. Litigation may be necessary to enforce patents
issued to the Company, to protect the Company's trade secrets or know-how or to
determine the enforceability, scope and validity of the proprietary rights of
others. Any litigation or interference proceedings involving the Company will
result in substantial expense to the Company and significant diversion of effort
by the Company's technical and management personnel. An adverse determination in
a judicial or administrative proceeding or failure to obtain necessary licenses
could prevent the Company from manufacturing and selling its products, which
would have a material adverse effect on the Company's business, financial
condition and results of operations.
 
    In addition to patents, the Company relies on trade secrets and proprietary
know-how to compete, which it seeks to protect, in part, through appropriate
confidentiality and proprietary information agreements. There can be no
assurance that proprietary information or confidentiality agreements with
employees, consultants and others will not be breached, that the Company will
have adequate remedies for any breach, or that the Company's trade secrets will
not otherwise become known to or independently developed by competitors.
 
GOVERNMENT REGULATION
 
    Medical devices are subject to extensive regulation by governmental
authorities in the U.S. and in foreign countries. The FDA regulates the clinical
testing, manufacture, labeling, packaging, marketing, distribution and record
keeping for medical devices, in order to ensure that medical devices distributed
in
 
                                       10
<PAGE>
the U.S. are safe and effective for their intended use. Noncompliance with
applicable requirements can result in import detentions, fines, civil penalties,
injunctions, suspensions or losses of regulatory approvals, recall or seizure of
products, operating restrictions, refusal of the government to approve product
export applications or allow the Company to enter into supply contracts, and
criminal prosecution. Failure to obtain regulatory clearances and approvals, the
restriction, suspension or revocation of regulatory clearances and approvals, if
obtained, or any other failure to comply with regulatory requirements would have
a material adverse effect on the Company's business, financial condition and
results of operations.
 
    The Company will not be able to market future products in the U.S. unless
and until it obtains clearance or approval from the FDA.
 
    Any products manufactured or distributed by the Company pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
the FDA. The Company and any contract manufacturers will be required to adhere
to applicable FDA regulations regarding GMP and similar regulations in other
countries, which include testing, control, documentation, and reporting
requirements. The Company is required to register with the FDA as a device
manufacturer and maintain a manufacturing license from the State of California.
The GMP regulations require that the Company manufacture its products and
maintain its documents in a prescribed manner with respect to manufacturing,
testing and quality assurance and quality control activities. Ongoing compliance
with GMP and other applicable regulatory requirements will be monitored through
periodic inspections by state and federal agencies, including the FDA, and by
comparable agencies in other countries. The FDA also has proposed changes to the
GMP regulations that would, among other things, require design controls and
maintenance of service records, and which, if finalized, would likely increase
the cost of complying with GMP requirements.
 
    Labeling and promotion activities are also 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 and its products are also subject to a variety of state and local laws
and regulations in those states and localities where its products are or will be
marketed. 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.
 
    Export sales of devices that have not received marketing clearance or
approval generally are subject to FDA export requirements. In addition,
international sales of the Company's products will be subject to the regulatory
requirements of each country. The Company has not obtained any international
regulatory approvals permitting sales outside of the U.S. The regulatory review
process varies from country to country. The ISO 9000 series of standards for
quality have been developed to ensure that companies know the standards of
quality to which they must adhere to receive certification. The European Union
has promulgated rules which require that certain medical products receive by
mid-1998 the right to affix the CE mark, an international symbol of adherence to
quality assurance standards and compliance with the European Medical Device
Directive. ISO 9001 certification is one of the CE mark certification
requirements.
 
THIRD-PARTY REIMBURSEMENT
 
    In the U.S., hospitals, physicians and other health care providers that
purchase medical devices generally rely on third-party payors, principally
federal Medicare, state Medicaid and private health insurance plans, to
reimburse all or part of the cost of the procedure in which the medical device
is being used. Although reimbursement for endometrial resection and ablation
procedures has generally been available in the U.S., there can be no assurance
that this will continue to be the case or that reimbursement will be available
for procedures performed using the Company's products. Third-party payors may
deny reimbursement if they determine that a prescribed device has not received
appropriate regulatory clearances or approvals, is not used in accordance with
cost-effective treatment methods as determined by
 
                                       11
<PAGE>
the payor, or is experimental, unnecessary or inappropriate. Third-party
reimbursement will also depend upon decisions by HCFA for Medicare, as well as
by individual HMOs, private insurers and other payors. The Company expects to
price its disposable resectoscope at a premium over the prices currently charged
for the disposable components of competitive resectoscopes. In addition, certain
health care providers are moving toward a managed care system in which such
providers contract to provide comprehensive health care for a fixed cost per
person. Managed care providers are attempting to control the cost of health care
by authorizing fewer elective surgical procedures. The Company is unable to
predict what changes will be made in the reimbursement methods used by
third-party health care payors. Given the efforts to control and decrease health
care costs in recent years, there can be no assurance that any reimbursement
will be available or adequate.
 
COMPETITION
 
    At present, the Company considers its primary competition to be current
therapies for the treatment of excessive menstrual bleeding, including drug
therapy, D&C, surgical endometrial ablation and hysterectomy. The Company will
also compete against other non-surgical techniques under development for the
treatment of excessive menstrual bleeding, including other non-surgical
endometrial ablation techniques which employ RF energy or freezing techniques
("cryoablation").
 
    The Company expects the current high levels of competition and technological
change to increase. The Company competes with providers of modified urologic
resectoscopes, electrosurgical instruments, laser instruments, thermal systems
and other manual devices. Many of these competitors have significantly greater
financial, manufacturing, marketing, distribution and technical resources than
the Company. There can be no assurance that the Company can effectively compete
against such competitors. In addition, there can be no assurance that these or
other companies will not succeed in developing technologies and products that
are more effective than the Company's or that would render the Company's
technology or products obsolete or uncompetitive.
 
    In particular, the Company faces competition from Circon-Cabot Corp., which
markets a resectoscope used in intra-uterine surgery and a fluid management
system. Several companies including Circon-Cabot Corp., Olympus America, Inc.,
Karl Storz Instrument Co. and Richard Wolf Medical Instruments Corp., each have
a large share of the market for resectoscopes. These companies offer broad
product lines, have substantially greater resources and name recognition than
the Company and frequently offer significant discounts and bundled products as
competitive tactics. Moreover, the OPERA STAR System is not currently compatible
with all telescopes utilized in gynecologic surgery and therefore may require
surgeons using incompatible telescopes to acquire a different telescope in order
to use the OPERA STAR System. In addition, there are a number of other companies
developing devices to treat fibroids and abnormal uterine bleeding. These
include Gynecare, Inc., BEI Medical Systems Co., Pfizer and several private
companies, including Envision Surgical System, Inc. The Company believes that
Gynecare, Inc. and Pfizer have begun clinical trials on devices used to treat
DUB and these devices, if marketed, would compete with the OPERA STAR System. In
addition to Circon-Cabot Corp., other companies such as Aquintel, Inc. market
competing fluid management systems. The Company also faces potential competition
from medical device or pharmaceutical manufacturers that currently market or may
be developing other medical devices or drugs, such as hormonal therapies, for
the treatment of uterine disorders. There can be no assurance that these
companies will not succeed in developing technologies and products that are more
effective than any which have been or are being developed by the Company or that
would render the Company's technologies or products obsolete or not competitive.
Furthermore, competitors may have, or acquire, proprietary technology that could
be used to limit the Company's ability to compete. The inability of the Company
to successfully compete could have a material adverse effect on the Company's
business, financial condition and results of operations.
 
    The Company believes that the primary competitive factors in the market for
endometrial resection and ablation devices are safety, efficacy, ease of use,
cost per procedure, availability of reimbursement,
 
                                       12
<PAGE>
availability of training, patent position, price, sales and marketing capability
and reputation. There can be no assurance that the Company's products can
compete effectively or that new instruments that perform more favorably will not
be introduced.
 
PRODUCT LIABILITY AND INSURANCE
 
    The development, manufacture and sale of medical devices entail significant
risk of product liability claims and device failure claims. The Company has
conducted only limited clinical trials and has had insignificant sales for the
OPERA STAR System and Flo-Stat System and does not yet have, and will not have
for a number of years, sufficient clinical data to allow the Company to measure
the risk of such claims with respect to its products. The Company faces an
inherent business risk of financial exposure to product liability claims in the
event that the use of its products results in personal injury. The Company also
faces the possibility that defects in the design or manufacture of the Company's
products might necessitate a product recall. Although the Company has not
experienced any claims to date, there can be no assurance that the Company will
not experience losses due to product liability claims or recalls in the future.
The Company currently maintains product liability insurance with coverage limits
of $3,000,000 per occurrence and $3,000,000 in the aggregate and there can be no
assurance that the coverage limits of the Company's insurance policies will be
adequate. Such insurance is expensive, difficult to obtain and may not be
available in the future on acceptable terms, or at all. Any claims against the
Company, regardless of their merit or eventual outcome, could have a material
adverse effect upon the Company's business, financial condition and results of
operations.
 
EMPLOYEES
 
    As of March 12, 1997, the Company had 56 employees, including 13 in research
and development, 20 in manufacturing, 15 in sales and marketing and 8 in
administration. The Company believes it maintains competitive compensation,
benefits, equity participation and work environment policies to assist in
attracting and retaining qualified personnel. The Company believes that the
success of its business will depend, in part, on its ability to attract and
retain qualified personnel. The Company believes its relationship with its
employees is good.
 
                                       13
<PAGE>
EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
 
    The executive officers and directors of the Registrant are as follows:
 
<TABLE>
<CAPTION>
                      NAME                            AGE                              POSITION
------------------------------------------------      ---      ---------------------------------------------------------
<S>                                               <C>          <C>
Andrew M. Thompson..............................          33   President, Chief Executive Officer and Director
 
George M. Savage, M.D...........................          37   Senior Vice President, Research and Development and
                                                               Director
 
Edward W. Unkart................................          47   Vice President, Finance and Administration, Chief
                                                               Financial Officer and Assistant Secretary
 
Jeffrey J. Christian............................          43   Vice President, Engineering
 
Marshall Tsuruda................................          50   Vice President, Operations
 
Craig E. Dauchy.................................          48   Secretary
 
Richard M. Ferrari(1)...........................          43   Director
 
Gail Gaumer(2)..................................          45   Director
 
Kathleen D. LaPorte(2)..........................          35   Chairman of the Board of Directors
 
Philip M. Young(1)..............................          57   Director
 
James W. McLane(1)..............................          57   Director
</TABLE>
 
------------------------
 
(1) Member of Compensation Committee
 
(2) Member of Audit Committee
 
    ANDREW M. THOMPSON has served as President, Chief Executive Officer and a
director of the Company since its incorporation in November 1994. From May 1994
to November 1994, Mr. Thompson consulted in the medical device industry as a
partner of Savage-Thompson Management. From May 1991 to November 1994, he served
as Vice President, Finance of Medtronic CardioRhythm, a medical device company
focused on catheter ablation systems for electrophysiology, which he co-founded
in May 1991 and which was acquired by Medtronic, Inc. in May 1992. From June
1989 to May 1991, he consulted full-time in the medical industry as a partner of
Savage-Thompson Management. He received an M.A. in Production Engineering from
Corpus Christi College, Cambridge, an M.A. in Education and an M.B.A. from
Stanford University.
 
    GEORGE M. SAVAGE, M.D. has served as Senior Vice President, Research and
Development and a director of the Company since its incorporation in November
1994. From May 1994 to November 1994, Dr. Savage consulted in the medical device
industry as a partner of Savage-Thompson Management. From May 1991 to November
1994, he served as Vice President, Clinical and Regulatory Affairs of Medtronic
CardioRhythm, a medical device company focused on catheter ablation systems for
electrophysiology, which he co-founded in May 1991 and which was acquired by
Medtronic, Inc. in May 1992. From May 1991 to May 1992, Dr. Savage also served
CardioRhythm as a director. From June 1989 to May 1991, he consulted full-time
in the medical industry as a partner of Savage-Thompson Management. Dr. Savage
received a B.S. in Biomedical Engineering from Boston University, an M.D. from
Tufts University and an M.B.A. from Stanford University.
 
    EDWARD W. UNKART has served the Company as Vice President, Finance and
Administration, Chief Financial Officer and Assistant Secretary since October
1995. From June 1995 to October 1995, Mr. Unkart served as Vice President,
Finance and Administration, Chief Financial Officer and Secretary of Combinet,
Inc., a manufacturer of digital, remote network access devices for use in small
office/home office applications which was acquired by Cisco Systems, Inc. From
February 1989 to June 1995, Mr. Unkart served as Vice President, Finance and
Administration, Chief Financial Officer and Secretary of
 
                                       14
<PAGE>
Devices For Vascular Intervention, Inc., a manufacturer of disposable medical
devices used in treatment of cardiovascular disease, which is now part of
Guidant Corporation. He is a Certified Public Accountant and received both a
B.S. in Statistics and an M.B.A. from Stanford University.
 
    JEFFREY J. CHRISTIAN has served the Company as Vice President, Engineering
since April 1995. From August 1994 to April 1995, Mr. Christian served as an
engineering consultant for Phoenix Engineering, an engineering consulting firm.
From October 1990 to August 1994, Mr. Christian served as Vice President,
Research and Development of Unisurge, Inc., a medical device company. Mr.
Christian received a B.S. in Manufacturing Engineering and Technology from
Brigham Young University.
 
    MARSHALL TSURUDA has served the Company as Vice President, Operations since
April 1996. From October 1989 to March 1996, Mr. Tsuruda served as Director of
Manufacturing of Laserscope Surgical Systems, a manufacturer of surgical laser
systems and sterile disposable devices. Mr. Tsuruda received a B.A. in Liberal
Arts from Sacramento State University.
 
    CRAIG E. DAUCHY has served the Company as Secretary since its incorporation
in November 1994. From June 1975 to the present, Mr. Dauchy has been associated
with the law firm of Cooley Godward Castro Huddleson & Tatum and has been a
partner since January 1981. From April 1985, he has been a member of the firm's
management committee and is head of the firm's venture capital practice group.
Mr. Dauchy received a B.A. in History from Yale and a joint J.D./M.B.A. from
Stanford University.
 
    RICHARD M. FERRARI has served the Company as a director since October 1995.
From October 1995 to the present, Mr. Ferrari has served as President and Chief
Executive Officer of CardioThoracic Systems, Inc., a company that develops
products and systems for Minimally Invasive Direct Coronary Artery Bypasses
(MIDCAD-TM-). From January 1991 to October 1995, Mr. Ferrari served as President
and Chief Executive Officer of Cardiovascular Imaging Systems, Inc., a
manufacturer of imaging systems and devices used in interventional cardiology,
which was acquired by Boston Scientific Corporation in 1995. He received a B.S.
in Education from Ashland College, a degree in Nuclear Medicine Technology from
the Radiology Institute and an M.B.A. from the University of South Florida.
 
    GAIL GAUMER has served the Company as a director since October 1995. From
1980 to the present, Ms. Gaumer has held numerous marketing, product development
and general management positions with Baxter Healthcare Corporation including
President, Renal Europe, from 1991 to 1994. Ms. Gaumer is currently Corporate
Vice President of Cost Management Service and Strategy for Allegiance Healthcare
Corporation. Ms. Gaumer received a B.S. in Psychobiology from the University of
California, Santa Cruz, a N.I.H. Fellowship in Neurophysiology at the University
of Wisconsin and an M.B.A. from Stanford University.
 
    KATHLEEN D. LAPORTE has served the Company as a director since April 1995
and is currently the Chairman of the Board of Directors. From January 1993 to
the present, Ms. LaPorte has been affiliated with the Sprout Group, the venture
capital affiliate of Donaldson, Lufkin & Jenrette Inc., and has served as a
General Partner since December 1993. From August 1987 to January 1993, Ms.
LaPorte was a principal at Asset Management Company, a venture capital firm
focused on early stage health care and technology investments. Ms. LaPorte
currently serves on the Board of Directors of Lynx Therapeutics, Inc. and Onyx
Pharmaceuticals, Inc. She holds a B.S. in Biology from Yale University and an
M.B.A. from Stanford University.
 
    PHILIP M. YOUNG has served the Company as a director since April 1995. From
April 1990 to the present, Mr. Young has served as a General Partner of U.S.
Venture Partners, a venture capital firm. Mr. Young currently serves on the
Boards of Directors of Cardio Thoracic Systems, Inc., The Immune Response
Corporation, Penederm Inc., Vical Inc. and Zoran Corporation. He received a
B.M.E. from Cornell University, an M.S. from George Washington University, and
an M.B.A. from Harvard University where he was a Baker Scholar.
 
                                       15
<PAGE>
    JAMES W. MCLANE has served the Company as a director since November 1996.
From February 1991 to June, 1996, Mr. McLane served as Executive Vice President
of Aetna Life & Casualty Company and Chief Executive Officer of Aetna Health
Plans. Prior to that, he was a Senior Vice President and Division Executive of
Citicorp, Inc. He currently is working as a consultant and advisor to several
venture capital funds in the health care field. Mr. McLane currently serves on
the Board of Directors of Aliginis Inc., the Hartford Healthcare Corp and
Outward Bound USA. He holds a B.A. in History from Yale University and an M.B.A.
from Harvard Business School.
 
    Each officer serves at the pleasure of the Board of Directors. Each of the
Company's officers and directors, other than non-employee officers and
directors, devotes substantially his full-time to the affairs of the Company.
Non-employee officers and directors devote such time to the affairs of the
Company as is necessary to discharge their duties. There are no family
relationships among any of the directors, officers, or key employees of the
Company.
 
ITEM 2. FACILITIES
 
    The Company leases approximately 13,400 square feet in Sunnyvale,
California, which comprise the Company's administrative offices and
manufacturing and warehousing space. The Company's lease for this facility
extends through 1998. The Company uses approximately 90% of the facilities and
believes that its existing facilities will be sufficient for its operations
through 1997. The Company believes that it will be able to renew its lease or
obtain additional space if necessary.
 
ITEM 3. LEGAL PROCEEDINGS
 
    To the best of its knowledge the Company is not currently party to any legal
proceedings.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
    None
 
                                       16
<PAGE>
                                    PART II
 
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
 
    The Company's common stock is traded on the Nasdaq National Market under the
symbol FMRX since the effective date of the Company's Registration Statement on
Form S-1 on March 25, 1996. The price per share reflected in the table below
represents the range of high and low closing sale prices for the Company's
common stock as reported in the Nasdaq National Market for the quarters
indicated.
 
<TABLE>
<CAPTION>
                                                                               HIGH        LOW
                                                                             ---------  ---------
<S>                                                                          <C>        <C>
1996:
First Quarter ended March 31, 1996.........................................  $    9.75  $   9.375
Second Quarter ended June 30, 1996.........................................  $   17.00  $    9.00
Third Quarter ended September 30, 1996.....................................  $   11.00  $    6.50
Fourth Quarter ended December 31, 1996.....................................  $    8.50  $    4.00
</TABLE>
 
    As of March 5, 1997, the number of common stockholders of record was 69.
 
  DIVIDEND POLICY
 
    The Company has not declared or paid any dividend since its inception and
does not intend to pay any dividend in the foreseeable future. Future dividends,
if any, will be determined by the Board of Directors.
 
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
 
    The following table presents selected financial data of the Company. This
historical data should be read in conjuction with the attached Financial
Statements and the related notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing in Item 7
of this Form 10-K.
 
    Selected financial data is as follows (in thousands, except per share
amounts):
 
<TABLE>
<CAPTION>
                                                                                                       PERIOD FROM
                                                                                                        INCEPTION
                                                                               YEARS ENDED             (MARCH 23,
                                                                              DECEMBER 31,              1992) TO
                                                                     -------------------------------  DECEMBER 31,
                                                                       1996       1995       1994         1993
                                                                     ---------  ---------  ---------  -------------
<S>                                                                  <C>        <C>        <C>        <C>
Net Sales..........................................................  $      64  $  --      $  --        $  --
Net Loss...........................................................  $  (8,780) $  (3,174) $    (142)   $    (172)
Net Loss per share (1).............................................  $   (1.23) $   (0.52) $   (0.03)   $   (0.04)
Shares used in computing net loss per share........................      7,141      6,143      5,359        4,755
Total Assets.......................................................  $  22,040  $   4,115  $  --        $  --
Long-term obligations..............................................  $     272  $     185  $  --        $  --
</TABLE>
 
------------------------
 
(1) See Note 1 to Financial Statements for information concerning calculation of
    net loss per share.
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
  OF OPERATIONS
 
    This Form 10-K contains forward-looking statements that involve risks and
uncertainties. The Company's actual results of operations may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such difference include those noted in this Form 10-K
and in the Company's prospectus dated March 27, 1996 incorporated by reference.
 
                                       17
<PAGE>
OVERVIEW
 
    Since its inception, FemRx, Inc., (the "Company") has been engaged in the
research and development of its OPERA STAR System and related products. The
OPERA STAR System is an innovative surgical system for the diagnosis and
treatment of gynecologic disorders. OPERA stands for Out-Patient Endometrial
Resection/Ablation. OPERA is a less invasive alternative to hysterectomy for
patients suffering from abnormal uterine bleeding. OPERA consists of diagnosis
by a gynecologic surgeon and the use of the Company's OPERA STAR resectoscope
under visual guidance to collect a pathology sample, resect the endometrial
lining together with any submucosal fibroids and coagulate the entire uterine
cavity. The Company has also developed a proprietary fluid management system,
called the Flo-Stat System, for use in gynecologic procedures. In March 1996,
the Company obtained clearance from the FDA to market the OPERA STAR System in
the U.S. In May 1996, the Company obtained clearance from the FDA to market the
Flo-Stat System in the U.S.
 
    The Company's primary near-term commercial products, the OPERA STAR System
and the Flo-Stat System have generated limited sales to date. The Company
commenced commercial shipments of its OPERA STAR System and Flo-Stat System in
October 1996. The Company currently sells its products in the United States to
physicians and hospitals. Sales in the U.S. are currently made through a small
direct sales force and are conducted on open credit terms.
 
    Certain components of the Company's products are manufactured by contract
manufacturers. Additional manufacturing, final assembly and test is performed by
the Company at its location in Sunnyvale, California.
 
    The Company has experienced significant operating losses since inception
and, as of December 31, 1996, had an accumulated deficit of approximately $12.3
million. The Company expects to continue to generate substantial losses due to
increased operating expenditures primarily attributed to research and
development activities, including clinical trials, and establishing commercial
manufacturing, marketing and sales capabilities. The Company anticipates that
its research and development expenses will increase in the future to support
increased product development activities, including clinical trials, and that
its selling, general and administrative expenses will increase due to increased
marketing and sales activities. The Company expects that its results of
operations will fluctuate significantly from quarter to quarter due to a variety
of factors including the timing of such expenditures, timing in the receipt of
orders, the rate of acceptance of the Company's products in the marketplace,
introduction of new products by competitors of the Company, pricing of
competitive products and the cost and effect of promotional discounts and
marketing programs. The Company's gross margins, if any, will be depressed for
several quarters due to initial manufacturing and overhead costs allocated over
low production volumes. There can be no assurance that the Company will ever
achieve significant revenue or profitability.
 
RESULTS OF OPERATIONS
 
  YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
 
    Net Sales were $64,000 for the year ended December 31, 1996, due to the
commercial release of the Company's products in October of 1996. No net sales
were recorded in any prior periods.
 
    Cost of goods sold was $668,000 for the year ended December 31, 1996,
primarily consisting of costs related to initial manufacturing.
 
    Research and development expenses, which include clinical, regulatory, and
prior to October 1, 1996, costs related to manufacturing start-up increased to
$4,551,000 for the year ended December 31, 1996 from $2,409,000 for the year
ended December 31, 1995, and from $65,000 for the year ended December 31, 1994.
The increased amounts were primarily attributable to costs associated with
clinical trials, additional
 
                                       18
<PAGE>
product research, prototype development, patent preparation and filing,
manufacturing facility preparation, and costs including the hiring of
regulatory, research, clinical, engineering and manufacturing personnel.
 
    Selling, general and administrative expenses, increased to $4,577,000 for
the year ended December 31, 1996 from $936,000 for the year ended December 31,
1995, and from $77,000 for the year ended December 31, 1994. The increased
amounts were primarily attributable to the establishment of the Company's sales
and marketing organization, increased sales activity, related supplies and
materials, and the costs related to the hiring of additional personnel.
 
    Interest income increased to $1,003,000 for the year ended December 31, 1996
from $194,000 for the year ended December 31, 1995. There was no interest income
for the year ended December 31, 1994. The increase was due to the Company's
higher average balances in cash, cash equivalents and short term investments
from the proceeds of the Company's initial public offering which were received
at the end of March 1996, and from the underwriters exercise of their option for
additional shares from which proceeds were received at the end of April 1996.
 
    Interest expense increased to $51,000 for the year ended December 31, 1996
from $23,000 for the year ended December 31, 1995. There was no interest expense
for the year ended December 31, 1994. Interest expense is due to interest
payments on higher outstanding balances on an equipment lease line established
during 1995.
 
    At December 31, 1996, the Company had federal net operating loss
carryforwards of approximately $10,500,000. The federal net operating loss
carryforwards will expire, if not utilized, at various dates beginning in 2010
and continuing through 2011. Utilization of the net operating losses may be
subject to a substantial annual limitation due to the change of ownership
provisions of the Internal Revenue Code of 1986, as amended. Accordingly, such
annual limitation may result in the expiration of net operating losses prior to
utilization.
 
LIQUIDITY AND CAPITAL RESOURCES
 
    In March and April 1996, the Company sold a total of 3,105,000 shares of
common stock at $9.00 per share through its initial public offering. The net
proceeds (after underwriting discounts and expenses) to the Company from the
initial public offering were $25,002,000. As of December 31, 1996 the Company
had cash, cash equivalents and short term investments of $19,918,000. The
Company also has a $750,000 leaseline of which $237,000 was available for
borrowing on December 31, 1996.
 
    Cash used in the Company's operations increased to $7,596,000 for the year
ended December 31, 1996 from $2,319,000 for the year ended December 31, 1995,
and from $3,000 for the year ended December 31, 1994. This cash was used
primarily to fund increasing levels of research and development of the Company's
products, clinical and regulatory activities, start-up of manufacturing
operations, establishment of the Company's sales and marketing organization,
increased sales activity, and the costs related to the hiring of additional
personnel.
 
    Capital expenditures increased to $1,193,000 for the year ended December 31,
1996 from $638,000 for the year ended December 31, 1995. There were no capital
expenditures for the year ended December 31, 1994. The increased level of
capital expenditures during 1996 was due primarily to the Company's increased
operations throughout the year and the start-up of its manufacturing operations.
The Company plans to finance its capital needs principally from the net proceeds
of its initial public offering and interest thereon.
 
    The Company believes that its existing cash will be sufficient to finance
its capital requirements through at least 1997. The Company's future liquidity
and capital requirements will depend on numerous factors, including the
resources necessary to develop, manufacture and market products and the cost of
obtaining and enforcing patents important to the Company's business. The Company
may be required to
 
                                       19
<PAGE>
raise additional funds through public or private financing, collaborative
relationships or other arrangements. There can be no assurance that such
additional funding, if needed, will be available on attractive terms to the
Company, or at all.
 
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
 
  DEPENDENCE ON OPERA STAR SYSTEM AND FLO-STAT SYSTEM
 
    The OPERA STAR System and Flo-Stat System are currently the Company's only
products. The Company expects that the OPERA STAR System, and to a lesser
extent, the Flo-Stat System, will account for substantially all of the Company's
revenues for the foreseeable future. Even though the OPERA STAR System and
Flo-Stat System have received FDA clearance, there can be no assurance that the
Company can successfully manufacture, market, or realize any significant
revenues from these products on a timely basis. The Company's products will
require further development and regulatory clearances or approvals before they
can be marketed internationally. There can be no assurance that the Company's
development and marketing efforts will be successful or that the OPERA STAR
System, Flo-Stat System or other potential products developed by the Company
will be capable of being manufactured in commercial quantities at acceptable
costs. Failure to manufacture in commercial quantities at acceptable cost the
OPERA STAR System and Flo-Stat System would have a material adverse effect on
the Company's business, financial condition and results of operations.
 
  UNCERTAINTY OF MARKET ACCEPTANCE
 
    The Company believes that market acceptance of the Company's products will
depend, in part, on the Company's ability to provide evidence to the medical
community of the safety, efficacy and cost-effectiveness of its products and the
procedures in which these products are intended to be used. To date, the OPERA
STAR System has only been used to treat a limited number of patients and no
published reports regarding the use of the OPERA STAR System exist to support
the Company's marketing effort. Furthermore, there is little long-term follow-up
data on patients who underwent OPERA using the OPERA STAR System. If the Company
is not able to demonstrate long-term success with the OPERA STAR System, market
acceptance would be materially adversely affected.
 
    The Company's OPERA STAR System is designed for use by a gynecologic surgeon
trained in the OPERA procedure. Market acceptance of the Company's products will
require a willingness on the part of gynecologic surgeons to be trained to
perform OPERA using the Company's products. Furthermore, market acceptance may
be limited because some physicians and payors, recognizing that the removal of
the uterus in a hysterectomy precludes the potential reoccurrence of uterine
disorders, will be reluctant to substitute the OPERA procedure (which allows the
patient to retain her uterus) for hysterectomy. The Company believes that most
gynecologists view hysterectomy as an appropriate therapy to treat a variety of
uterine disorders. As a result, the Company believes that recommendations and
endorsements of its products by influential physicians will be essential for
market acceptance of its products. No assurances can be made that the Company
will receive such recommendations or endorsements.
 
    The Company further believes that the ability of health care providers to
obtain adequate reimbursement for OPERA procedures using the OPERA STAR System
will be critical to market acceptance of the Company's products. There can be no
assurance that the cost of procedures in which the OPERA STAR System is used
will be adequately reimbursed by third-party payors under existing reimbursement
policies and codes. The Company has no experience in gaining reimbursement in
the U.S. or any foreign market. The Company expects to price its disposable
resectoscope at a premium over the prices currently charged for the disposable
components of competitive resectoscopes. Therefore, the Company anticipates that
it may have to offer substantial discounts on its OPERA STAR System motor drive
unit in order to stimulate demand for its products. The failure of the Company
to place sufficient quantities of its motor drive unit would have a material
adverse effect on its ability to sell the disposable STAR. Another factor that
may
 
                                       20
<PAGE>
limit the market acceptance of the Company's OPERA STAR System is that it is not
currently compatible with all telescopes utilized in gynecologic surgery and
therefore might require surgeons using incompatible telescopes to acquire a
different telescope in order to use the OPERA STAR System. Failure of the
Company's products to achieve market acceptance would have a material adverse
effect on the Company's business, financial condition and results of operations.
 
  LIMITED OPERATING EXPERIENCE
 
    The Company has a limited history of operations. Since its incorporation in
November 1994, the Company has focused primarily on research and product
development efforts, clinical trials and seeking regulatory clearance or
approval for the OPERA STAR System and Flo-Stat System. The Company has never
generated significant revenues, and has limited experience manufacturing in
commercial quantities, marketing or selling products. The Company has
experienced significant operating losses since inception and expects these
losses to continue for the next several years. There can be no assurance that
the Company will be successful in commercializing the OPERA STAR System and
Flo-Stat System. Whether the Company can successfully manage the transition to a
large-scale commercial enterprise will depend upon a number of factors,
including obtaining selected international regulatory and reimbursement
approvals for its existing or potential products, establishing its commercial
manufacturing capability, developing its U.S. marketing and selling
capabilities, and establishing a distribution network in international markets.
Failure to make such a transition successfully would have a material adverse
effect on the Company's business, financial condition and results of operations.
 
                                       21
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
                                       22
<PAGE>
                          REPORT OF ERNST & YOUNG LLP,
                              INDEPENDENT AUDITORS
 
The Board of Directors and Stockholders
FemRx, Inc.
 
    We have audited the accompanying balance sheets of FemRx, Inc. (a
development stage company) as of December 31, 1996 and 1995, and the related
statements of operations, stockholders' equity (net capital deficiency), and
cash flows for the three years ended December 31, 1996 and for the period from
inception (March 23, 1992) to December 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
 
    We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 FemRx, Inc. at December 31,
1996 and 1995, and the results of its operations and its cash flows for the
three years ended December 31, 1996 and for the period from inception (March 23,
1992) to December 31, 1996 in conformity with generally accepted accounting
principles.
 
                                          ERNST & YOUNG LLP
 
Palo Alto, California
January 10, 1997
 
                                       23
<PAGE>
                                  FEMRX, INC.
                         (A DEVELOPMENT STAGE COMPANY)
                                 BALANCE SHEETS
 
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                                                  DECEMBER 31,
                                                                                              ---------------------
                                                                                                 1996       1995
                                                                                              ----------  ---------
<S>                                                                                           <C>         <C>
                                                      ASSETS
Current Assets:
  Cash and cash equivalents.................................................................  $    2,250  $   3,457
  Short term investments....................................................................      17,668         --
  Accounts receivable, net of allowance for doubtful accounts of $1.........................          60         --
  Inventories...............................................................................         340         --
  Prepaid and other current assets..........................................................         256         15
                                                                                              ----------  ---------
    Total current assets....................................................................      20,574      3,472
Property and equipment, net.................................................................       1,429        588
Deposits and other assets...................................................................          37         55
                                                                                              ----------  ---------
    Total assets............................................................................  $   22,040  $   4,115
                                                                                              ----------  ---------
                                                                                              ----------  ---------
                                       LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................................................  $      583  $     149
  Accrued compensation......................................................................         696         98
  Other accrued liabilities.................................................................          65         73
  Current portion of capital lease obligations..............................................         141         73
                                                                                              ----------  ---------
    Total current liabilities...............................................................       1,485        393
Noncurrent portion of capital lease obligations.............................................         272        185
 
Commitments
Stockholders' equity:
  Preferred stock, $0.001 par value in 1996 and no par value in 1995
    Authorized shares: 5,000,000 in 1996 and 6,500,000 in 1995
    Issued and outstanding shares: none in 1996 and 6,154,898 in 1995.......................          --      6,128
  Common stock, $0.001 par value in 1996 and no par value in 1995
    Authorized shares: 40,000,000 in 1996 and 7,812,500 in 1995
    Issued and outstanding shares: 8,845,610 in 1996 and 1,719,445 in 1995..................      33,305      2,570
  Common stock subscribed...................................................................          --         76
  Stock subscription receivable.............................................................          --        (76)
  Notes receivable from stockholders........................................................         (58)        (4)
  Deferred compensation.....................................................................        (696)    (1,669)
  Deficit accumulated during the development stage..........................................     (12,268)    (3,488)
                                                                                              ----------  ---------
    Total stockholders' equity..............................................................      20,283      3,537
                                                                                              ----------  ---------
    Total liabilities and stockholders' equity..............................................  $   22,040  $   4,115
                                                                                              ----------  ---------
                                                                                              ----------  ---------
</TABLE>
 
                See accompanying notes to financial statements.
 
                                       24
<PAGE>
                                  FEMRX, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
                            STATEMENTS OF OPERATIONS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                                                        PERIOD FROM
                                                                                                         INCEPTION
                                                                                 YEARS ENDED             (MARCH 23,
                                                                                DECEMBER 31,              1992) TO
                                                                       -------------------------------  DECEMBER 31,
                                                                         1996       1995       1994         1996
                                                                       ---------  ---------  ---------  ------------
<S>                                                                    <C>        <C>        <C>        <C>
Net Sales............................................................  $      64  $      --  $      --   $       64
Costs and expenses:
  Cost of goods sold.................................................        668         --         --          668
  Research and development...........................................      4,551      2,409         65        7,148
  Selling, general and administrative................................      4,577        936         77        5,639
                                                                       ---------  ---------  ---------  ------------
Total costs and expenses.............................................      9,796      3,345        142       13,455
 
Loss from operations.................................................     (9,732)    (3,345)      (142)     (13,391)
 
Interest income......................................................      1,003        194         --        1,197
 
Interest expense.....................................................        (51)       (23)        --          (74)
                                                                       ---------  ---------  ---------  ------------
Net Loss.............................................................  $  (8,780) $  (3,174) $    (142)  $  (12,268)
                                                                       ---------  ---------  ---------  ------------
                                                                       ---------  ---------  ---------  ------------
Net loss per share...................................................  $   (1.23) $   (0.52)
                                                                       ---------  ---------
                                                                       ---------  ---------
Shares used in computing net loss per share..........................      7,141      6,143
                                                                       ---------  ---------
                                                                       ---------  ---------
</TABLE>
 
                See accompanying notes to financial statements.
 
                                       25
<PAGE>
                                  FEMRX, INC.
                         (A DEVELOPMENT STAGE COMPANY)
           STATEMENT OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
                                                  PREFERRED STOCK           COMMON STOCK           COMMON            STOCK
                                               ----------------------  ----------------------       STOCK        SUBSCRIPTION
                                                SHARES      AMOUNT      SHARES      AMOUNT       SUBSCRIBED       RECEIVABLE
                                               ---------  -----------  ---------  -----------  ---------------  ---------------
<S>                                            <C>        <C>          <C>        <C>          <C>              <C>
Net loss for the period from inception
  (March 23, 1992) to December 31, 1993......     --       $  --          --       $  --          $  --            $  --
Issuance of common stock to founders for cash
  and notes receivable.......................     --          --       1,323,182           8         --               --
Net loss.....................................     --          --          --          --             --               --
                                               ---------  -----------  ---------  -----------           ---              ---
Balances at December 31, 1994................     --          --       1,323,182           8         --               --
Proceeds from notes receivable from founders
  in January.................................     --          --          --          --             --               --
Issuance of Series A convertible preferred
  stock, in April and May to investors at
  $1.00 per share for cash less issuance cost
  of $27.....................................  6,154,898       6,128      --          --             --               --
Issuance of common stock in March to December
  at $0.006 - $0.672 per share to employees,
  consultants and directors for cash and
  notes receivable...........................     --          --         396,263          27         --               --
Renegotiation of vesting in founder stock in
  April in exchange for forgiveness of
  payable to related parties.................     --          --          --             242         --               --
Subscription of 112,500 shares of common
  stock to an employee in December at $0.672
  per share..................................     --          --          --          --                 76              (76)
Deferred compensation related to grant of
  stock options to employees, consultants and
  directors..................................     --          --          --           2,293         --               --
Amortization of deferred compensation........     --          --          --          --             --               --
Net loss.....................................     --          --          --          --             --               --
                                               ---------  -----------  ---------  -----------           ---              ---
Balances at December 31, 1995 (carried
  forward)...................................  6,154,898   $   6,128   1,719,445   $   2,570      $      76        $     (76)
 
<CAPTION>
                                                                                      DEFICIT         TOTAL
                                                     NOTES                          ACCUMULATED   STOCKHOLDERS'
                                                  RECEIVABLE                        DURING THE     EQUITY (NET
                                                     FROM            DEFERRED       DEVELOPMENT      CAPITAL
                                                 STOCKHOLDERS      COMPENSATION        STAGE       DEFICIENCY)
                                               -----------------  ---------------  -------------  -------------
<S>                                            <C>                <C>              <C>            <C>
Net loss for the period from inception
  (March 23, 1992) to December 31, 1993......      $  --             $  --           $    (172)     $    (172)
Issuance of common stock to founders for cash
  and notes receivable.......................             (5)           --              --                  3
Net loss.....................................         --                --                (142)          (142)
                                                          --
                                                                       -------     -------------  -------------
Balances at December 31, 1994................             (5)           --                (314)          (311)
Proceeds from notes receivable from founders
  in January.................................              5            --              --                  5
Issuance of Series A convertible preferred
  stock, in April and May to investors at
  $1.00 per share for cash less issuance cost
  of $27.....................................         --                --              --              6,128
Issuance of common stock in March to December
  at $0.006 - $0.672 per share to employees,
  consultants and directors for cash and
  notes receivable...........................             (4)           --              --                 23
Renegotiation of vesting in founder stock in
  April in exchange for forgiveness of
  payable to related parties.................         --                --              --                242
Subscription of 112,500 shares of common
  stock to an employee in December at $0.672
  per share..................................         --                --              --             --
Deferred compensation related to grant of
  stock options to employees, consultants and
  directors..................................         --                (2,293)         --             --
Amortization of deferred compensation........         --                   624          --                624
Net loss.....................................         --                --              (3,174)        (3,174)
                                                          --
                                                                       -------     -------------  -------------
Balances at December 31, 1995 (carried
  forward)...................................      $      (4)        $  (1,669)      $  (3,488)     $   3,537
</TABLE>
 
                                       26
<PAGE>
                                  FEMRX, INC.
                         (A DEVELOPMENT STAGE COMPANY)
           STATEMENT OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
                                                  PREFERRED STOCK           COMMON STOCK                           STOCK
                                               ----------------------  ----------------------  COMMON STOCK    SUBSCRIPTION
                                                SHARES      AMOUNT      SHARES      AMOUNT      SUBSCRIBED      RECEIVABLE
                                               ---------  -----------  ---------  -----------  -------------  ---------------
<S>                                            <C>        <C>          <C>        <C>          <C>            <C>
Balances at December 31, 1995 (brought
  forward)...................................  6,154,898   $   6,128   1,719,445   $   2,570     $      76       $     (76)
Issuance of common stock in February to
  December at $0.16 - $4.25 per share under
  stock option plans and employee stock
  purchase plan to employees, consultants,
  and directors, net of repurchases..........     --          --          61,858          71        --              --
Issuance of common stock in January to an
  employee for cash and notes receivable.....     --          --         112,500          76           (76)             76
Conversion of Series A convertible preferred
  stock in connection with initial public
  offering
  in March...................................  (6,154,898)     (6,128) 3,846,807       6,128        --              --
Issuance of common stock in March and April
  at $8.37 per share in connection with the
  initial public offering, net of issuance
  cost of $986...............................     --          --       3,105,000      25,002        --              --
Reversal of unearned deferred compensation
  related to employee terminations...........     --          --          --            (542)       --              --
Amortization of deferred compensation........     --          --          --          --            --              --
Net loss.....................................     --          --          --          --            --              --
                                               ---------  -----------  ---------  -----------        -----           -----
Balances at December 31, 1996................     --       $  --       8,845,610   $  33,305     $  --           $  --
                                               ---------  -----------  ---------  -----------        -----           -----
                                               ---------  -----------  ---------  -----------        -----           -----
 
<CAPTION>
                                                                                   DEFICIT
                                                                                 ACCUMULATED       TOTAL
                                                    NOTES                         DURING THE   STOCKHOLDERS'
                                               RECEIVABLE FROM     DEFERRED      DEVELOPMENT      CAPITAL
                                                STOCKHOLDERS     COMPENSATION       STAGE       DEFICIENCY)
                                               ---------------  ---------------  ------------  -------------
<S>                                            <C>              <C>              <C>           <C>
Balances at December 31, 1995 (brought
  forward)...................................     $      (4)       $  (1,669)     $   (3,488)    $   3,537
Issuance of common stock in February to
  December at $0.16 - $4.25 per share under
  stock option plans and employee stock
  purchase plan to employees, consultants,
  and directors, net of repurchases..........             4           --              --                75
Issuance of common stock in January to an
  employee for cash and notes receivable.....           (58)          --              --                18
Conversion of Series A convertible preferred
  stock in connection with initial public
  offering
  in March...................................        --               --              --            --
Issuance of common stock in March and April
  at $8.37 per share in connection with the
  initial public offering, net of issuance
  cost of $986...............................        --               --              --            25,002
Reversal of unearned deferred compensation
  related to employee terminations...........        --                  542          --            --
Amortization of deferred compensation........        --                  431          --               431
Net loss.....................................        --               --              (8,780)       (8,780)
                                                        ---          -------     ------------  -------------
Balances at December 31, 1996................     $     (58)       $    (696)     $  (12,268)    $  20,283
                                                        ---          -------     ------------  -------------
                                                        ---          -------     ------------  -------------
</TABLE>
 
                See accompanying notes to financial statements.
 
                                       27
<PAGE>
                                  FEMRX, INC.
                         (A DEVELOPMENT STAGE COMPANY)
                            STATEMENTS OF CASH FLOWS
                INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                                                       PERIOD FROM
                                                                                                        INCEPTION
                                                                                                        (MARCH 23,
                                                                        YEARS ENDED DECEMBER 31,         1992) TO
                                                                   ----------------------------------  DECEMBER 31,
                                                                      1996         1995       1994         1996
                                                                   -----------  ----------  ---------  ------------
<S>                                                                <C>          <C>         <C>        <C>
Cash flows from operating activities
Net loss.........................................................  $    (8,780) $   (3,174) $    (142)  $  (12,268)
Adjustments to reconcile net loss to net cash used by operating
  activities:
  Depreciation and amortization..................................          352          50         --          402
  Amortization of deferred compensation..........................          431         624         --        1,055
  Changes in assets and liabilities:
    Accounts Receivable..........................................          (60)         --         --          (60)
    Inventory....................................................         (340)         --         --         (340)
    Prepaid and other current assets.............................         (241)        (15)        --         (256)
    Deposits and other assets....................................           18         (55)        --          (37)
    Accounts payable.............................................          434         133         16          583
    Accrued compensation.........................................          598          98         --          696
    Payable to related parties...................................           --         (49)       119          242
    Other accrued liabilities....................................           (8)         69          4           65
                                                                   -----------  ----------  ---------  ------------
Net cash used in operating activities............................       (7,596)     (2,319)        (3)      (9,918)
Cash flows from investing activities
  Capital expenditures...........................................       (1,193)       (638)        --       (1,831)
  Purchases of securities available for sale.....................     (184,101)    (25,206)        --     (209,307)
  Proceeds from sales of securities available for sale...........      166,433      25,206         --      191,639
                                                                   -----------  ----------  ---------  ------------
Net cash used in investing activities............................      (18,861)       (638)        --      (19,499)
Cash flows from financing activities
  Proceeds from capital lease financing..........................          240         273         --          513
  Payments of obligations under capital leases...................          (85)        (15)        --         (100)
  Net proceeds from issuance of preferred stock..................           --       6,128         --        6,128
  Net proceeds from issuance of common stock.....................       25,095          28          3       25,126
                                                                   -----------  ----------  ---------  ------------
Net cash provided by financing activities........................       25,250       6,414          3       31,667
Net (decrease) increase in cash and cash equivalents.............       (1,207)      3,457         --        2,250
Cash and cash equivalents at beginning of period.................        3,457          --         --           --
                                                                   -----------  ----------  ---------  ------------
Cash and cash equivalents at end of period.......................  $     2,250  $    3,457  $      --   $    2,250
                                                                   -----------  ----------  ---------  ------------
                                                                   -----------  ----------  ---------  ------------
Supplemental disclosure of cash flow information
  Interest paid..................................................  $        51  $       23  $      --   $       74
                                                                   -----------  ----------  ---------  ------------
                                                                   -----------  ----------  ---------  ------------
Supplemental schedule of noncash investing and financing
  activities
  Issuance of common stock in exchange for notes and subscription
    receivable...................................................  $        --  $       80  $       5   $       85
                                                                   -----------  ----------  ---------  ------------
                                                                   -----------  ----------  ---------  ------------
  Acceleration of vesting in founders stock in exchange for
    forgiveness of payable to related parties....................  $        --  $      242  $      --   $      242
                                                                   -----------  ----------  ---------  ------------
                                                                   -----------  ----------  ---------  ------------
</TABLE>
 
                See accompanying notes to financial statements.
 
                                       28
<PAGE>
                                  FEMRX, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
                         NOTES TO FINANCIAL STATEMENTS
 
                               DECEMBER 31, 1996
 
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
    ORGANIZATION
 
    FemRx, Inc. (the "Company") was incorporated in the State of California on
November 21, 1994. The Company reincorporated in the State of Delaware on
January 16, 1996. The Company is engaged in research and development of unique
surgical tools for less invasive treatment of gynecologic disorders. Principal
activities to date have included obtaining financing, recruiting personnel,
securing operating facilities, conducting research and development, obtaining
various regulatory approvals, establishing a sales and marketing organization,
and the start up of manufacturing operations. The Company commenced limited
initial sales of its products to customers in the United States during the
fourth quarter of 1996. Accordingly, the Company is considered to be in the
development stage.
 
    USE OF ESTIMATES
 
    The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
 
    REVENUE RECOGNITION
 
    Revenue from sales of products is recognized at the time of shipment with
allowances provided for estimated returns.
 
    CONCENTRATION OF CREDIT RISK
 
    Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of marketable investments and accounts
receivable. The Company places its investments with high-credit-quality issuers
and, by policy, limits the amount of credit exposure to any one issuer. The
Company does not require collateral on sales with credit terms.
 
    NET LOSS PER SHARE
 
    Net loss per share is computed using the weighted average number of common
shares outstanding. Common equivalent shares from stock options and warrants are
excluded from the computation as their effect is antidilutive, except that,
pursuant to the Securities and Exchange Commission ("SEC") Staff Accounting
Bulletins, common and common equivalent shares (stock options, preferred stock
and preferred stock warrants) issued during the 12-month period prior to the
initial filing of the Company's initial public offering at prices below the
initial public offering price have been included in the calculation as if they
were outstanding for all periods presented (using the treasury stock method for
stock options and the if-converted method for convertible preferred stock).
 
    Shares used in computing net loss per share are the same as for the pro
forma net loss per share calculation since all preferred stock and preferred
stock warrants were included in the shares used for historical net loss per
share in accordance with Staff Accounting Bulletin Topic 4D.
 
                                       29
<PAGE>
                                  FEMRX, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 31, 1996
 
2. CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS
 
    Cash and cash equivalents consist of cash deposited with banks and money
market instruments with original maturities of 90 days or less. All short-term
investments, are classified as available-for-sale, are carried at amortized
cost, which approximates fair market value, and consist of high quality debt
securities with original maturities between 90 days and two years with no
significant unrealized gains or losses. Realized gains and losses for the three
years ended December 31, 1996 and for the period from inception (March 23, 1992)
to December 31, 1996 have been immaterial.
 
    The following table details the Company's investments and their contractual
maturities at December 31, 1996:
 
<TABLE>
<CAPTION>
                                                                                AMORTIZED COST
                                                                                --------------
<S>                                                                             <C>
U.S. Government agencies......................................................    $   12,076
Corporate Issues..............................................................         7,472
                                                                                     -------
                                                                                  $   19,548
                                                                                     -------
                                                                                     -------
 
Included in cash and cash equivalents.........................................    $    1,881
Included in short-term investments............................................        17,667
                                                                                     -------
                                                                                  $   19,548
                                                                                     -------
                                                                                     -------
 
Due within one year...........................................................    $   16,466
Due after one year through two years..........................................         3,082
                                                                                     -------
                                                                                  $   19,548
                                                                                     -------
                                                                                     -------
</TABLE>
 
3. INVENTORIES
 
    Inventories are stated at lower of cost (first-in, first-out) or market.
Inventories at December 31, consist of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                                                  1996       1995
                                                                                ---------  ---------
<S>                                                                             <C>        <C>
Raw materials.................................................................  $      46  $      --
Work-in-process...............................................................        226         --
Finished goods................................................................         68         --
                                                                                ---------  ---------
  Total.......................................................................  $     340  $      --
                                                                                ---------  ---------
                                                                                ---------  ---------
</TABLE>
 
4. PROPERTY AND EQUIPMENT
 
    The Company records property and equipment at cost and calculates
depreciation using the straight-line method over the estimated useful lives of
the assets, ranging from one to five years, or over the term of
 
                                       30
<PAGE>
                                  FEMRX, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 31, 1996
 
4. PROPERTY AND EQUIPMENT (CONTINUED)
the lease, if shorter. Furniture and equipment leased under capital leases is
amortized over the useful lives of the assets. Property and equipment at
December 31, consist of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                                                 1996       1995
                                                                               ---------  ---------
<S>                                                                            <C>        <C>
Furniture and equipment......................................................  $   1,231  $     419
Computer equipment...........................................................        455        111
Leasehold improvements.......................................................        145        108
                                                                               ---------  ---------
                                                                                   1,831        638
Less accumulated depreciation and amortization...............................       (402)       (50)
                                                                               ---------  ---------
Total property and equipment, net............................................  $   1,429  $     588
                                                                               ---------  ---------
                                                                               ---------  ---------
</TABLE>
 
    Property and equipment at December 31, 1996 and 1995 includes assets under
capitalized leases of $513,000 and $273,000 respectively. Accumulated
depreciation on property and equipment under capitalized leases at December 31,
1996 and 1995 was approximately $182,000 and $25,000 respectively.
 
5. COMMITMENTS
 
    The Company has a $750,000 capital lease line to finance property and
equipment of which $237,000 was unused at December 31, 1996.
 
    Future minimum lease obligations as of December 31, 1996 on all leases are
as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                                             CAPITAL     OPERATING
                                                                              LEASE       LEASES
                                                                           -----------  -----------
<S>                                                                        <C>          <C>
Years ending December 31:
  1997...................................................................   $     150    $     111
  1998...................................................................         173           60
  1999...................................................................         149            6
  2000...................................................................          20            2
                                                                                -----        -----
Total minimum lease payments.............................................         492    $     179
                                                                                             -----
                                                                                             -----
Amounts representing interest............................................         (79)
                                                                                -----
Present value of future lease payments...................................         413
Current portion of capital lease obligations.............................        (141)
                                                                                -----
Noncurrent portion of capital lease obligations..........................   $     272
                                                                                -----
                                                                                -----
</TABLE>
 
    Rent expense under noncancelable operating leases, net of sublease income of
$21,000 in 1996, $12,000 in 1995 and $33,000 for the period from inception
(March 23, 1992) to December 31, 1996 (no sublease income for the year ended
December 31, 1994), for the years ended December 31, 1996, 1995, 1994 and for
the period from inception (March 23, 1992) through December 31, 1996 was
approximately $81,000, $66,000, $11,000, and $166,000 respectively.
 
                                       31
<PAGE>
                                  FEMRX, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 31, 1996
 
6. STOCKHOLDERS' EQUITY
 
    COMMON STOCK
 
    In March and April 1996, the Company sold a total of 3,105,000 shares of
common stock at $9.00 per share through its initial public offering. The net
proceeds (after underwriters' discounts and expenses) totaled approximately
$25,002,000. In connection with the offering, all convertible preferred stock
was converted into 3,846,807 shares of common stock of the Company.
 
    At December 31, 1996, there were 1,461,865 shares of common stock reserved
for current and future issuances under the 1995 Stock Option Plan, the 1996
Non-Employee Directors' Stock Option Plan, the Employee Stock Purchase Plan and
exercise of warrants.
 
    In 1995, sales of common stock to the Company's founders as well as to
advisors and employees were executed under stock purchase agreements and enable
the Company to repurchase unvested shares at their original issuance price.
Shares are released from the repurchase option over approximately four years,
pursuant to a formula determined by the Company's Board of Directors. At
December 31, 1996, 532,969 common shares issued remained subject to repurchase
by the Company.
 
7. STOCK OPTION PLANS AND STOCK PURCHASE PLAN
 
    1995 STOCK OPTION PLAN
 
    The 1995 Stock Option Plan (the "Plan"), as amended, was adopted in April
1995. The options granted under this Plan may be either incentive stock options
or nonstatutory stock options. The Company has authorized 1,155,625 shares of
common stock for issuance under the Plan. Options granted under this Plan expire
no later than ten years from the date of grant. For incentive stock options, the
option price shall be at least 100% of the fair market value on the date of
grant, and no less than 85% of the fair market value for nonqualified stock
options. If, at the time the Company grants an option, the optionee directly or
by attribution owns stock possessing more than 10% of the total combined voting
power of all classes of stock of the Company, the option price shall be at least
110% of the fair market value and shall not be exercisable more than five years
after the date of grant.
 
    Options generally vest over a period of four years from the date of grant,
with one-eighth vesting after six months and the remainder vesting ratably over
the following 42 months. Subject to Board of Directors approval, options under
the plan are immediately exercisable and are subject to repurchase provisions if
exercised before being vested.
 
    Sales of common stock to the Company's founders as well as to advisors and
employees were executed under stock purchase agreements and enable the Company
to repurchase unvested shares at their original issuance price. Shares are
released from this repurchase option over approximately four years, pursuant to
a formula determined by the Company's Board of Directors. At December 31, 1996,
532,969 common shares issued remained subject to repurchase by the Company.
 
    In 1995 the Company recorded deferred compensation expense for the
difference between the exercise price and the deemed fair value for financial
statement presentation purposes of the Company's common stock, as determined by
the Board of Directors, for common stock issued, common stock subscribed and
common stock options granted in 1995. Such shares and options were granted at
prices ranging from $0.006 to $0.672 per share with a deemed fair value ranging
from $0.16 to $6.56 per share.
 
                                       32
<PAGE>
                                  FEMRX, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 31, 1996
 
7. STOCK OPTION PLANS AND STOCK PURCHASE PLAN (CONTINUED)
This compensation expense aggregates to a maximum of $2,293,000, which will be
amortized over the corresponding vesting period of each respective share
purchase or option, generally four years. Amortization of deferred compensation
for the years ended December 31, 1996, 1995 and for the period from inception
(March 23, 1992) to December 31 1996 was $431,000, $624,000 and $1,055,000
respectively. Additionally $542,000 of unvested deferred compensation was
reversed in 1996 due to employee terminations.
 
    1996 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
 
    In January 1996, the Company adopted the 1996 Non-Employee Directors' Stock
Option Plan (the "Directors' Plan") to provide for the automatic grant of
options to purchase shares of common stock to non-employee directors of the
Company. The Company has authorized 200,000 shares of common stock for issuance
under the plan.
 
    Pursuant to the terms of the Directors' Plan, each person who is a director
of the Company on the date of the Company's initial public offering, or is
initially elected as a director of the Company and who is not otherwise an
employee or consultant of the Company (a "Non-Employee Director") will
automatically be granted on the date of the initial public offering or the date
of his or her election to the Board an option to purchase 20,000 shares of
common stock (the "Initial Grant"). On the date of each anniversary of the
Initial Grant (the "Anniversary"), each person who is then a Non-Employee
Director of the Company will automatically be granted an option to purchase
5,000 shares of common stock (an "Anniversary Grant").
 
    The Initial Grant under the Directors' Plan will generally vest at the rate
of 1/48th of the shares monthly, though the vesting of such options accelerates
upon certain events such as a change of control. Anniversary Grants under the
Directors' Plan will vest entirely on, but not before, the first annual
anniversary of the Anniversary Grant. The exercise price of options granted
under the Directors' Plan must equal or exceed the fair market value of the
common stock on the date of grant. No option granted under the Directors' Plan
may be exercised after the expiration of ten years from the date it was granted.
Options granted under the Directors' Plan are generally non-transferable. The
Directors' Plan will terminate at the discretion of the Board, subject to the
limitation that no such action may adversely affect any outstanding rights to
purchase common stock.
 
    In the event of a merger, dissolution, consolidation, certain reverse
mergers or certain acquisitions, options outstanding under the Directors' Plan
will automatically become fully vested and will terminate if not exercised prior
to such event.
 
                                       33
<PAGE>
                                  FEMRX, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 31, 1996
 
7. STOCK OPTION PLANS AND STOCK PURCHASE PLAN (CONTINUED)
 
    Aggregate option activity under the plans is as follows:
 
<TABLE>
<CAPTION>
                                                           OPTIONS OUTSTANDING
                                                 ---------------------------------------    WEIGHTED
                                                   SHARES                                    AVERAGE
                                                  AVAILABLE   NUMBER OF                     EXERCISE
                                                  FOR GRANT    SHARES    PRICE PER SHARE      PRICE
                                                 -----------  ---------  ---------------  -------------
<S>                                              <C>          <C>        <C>              <C>
Shares authorized..............................   1,155,625
Options granted................................    (371,967)    371,967  $0.006-$0.672      $    0.26
                                                 -----------  ---------  ---------------       ------
Balance at December 31, 1995...................     783,658     371,967  $0.006-$0.672      $    0.26
Additional authorized..........................     200,000
Options granted................................    (559,000)    559,000  $4.50-$14.50       $    9.80
Options exercised..............................          --     (71,762) $0.16-$0.672       $    0.54
Options cancelled..............................      61,382     (61,382) $0.16-$14.50       $   10.70
                                                 -----------  ---------  ---------------       ------
Balance at December 31, 1996...................     486,040     797,823  $0.006-$14.50      $    6.11
                                                 -----------  ---------  ---------------       ------
                                                 -----------  ---------  ---------------       ------
</TABLE>
 
    The weighted average fair value of options granted was $5.90 and $3.21 in
1996 and 1995 respectively.
 
    The options outstanding at December 31, 1996 have been segregated into
ranges for additional disclosure is as follows:
 
<TABLE>
<CAPTION>
                                                                    OPTIONS EXERCISABLE
                                                                ---------------------------
                                    OPTIONS OUTSTANDING                          OPTIONS
                              --------------------------------                  CURRENTLY
                                 OPTIONS         WEIGHTED-        WEIGHTED     EXERCISABLE
                               OUTSTANDING   AVERAGE REMAINING     AVERAGE     AT DECEMBER      WEIGHTED
                               AT DECEMBER   CONTRACTUAL LIFE     EXERCISE         31,           AVERAGE
RANGE OF EXERCISE PRICES        31, 1996        (IN YEARS)          PRICE          1996      EXERCISE PRICE
----------------------------  -------------  -----------------  -------------  ------------  ---------------
<S>                           <C>            <C>                <C>            <C>           <C>
$0.006-$0.672...............      288,198             8.69        $    0.19        122,030      $    0.25
$4.50-$4.875................       60,000             9.88        $    4.84          1,915      $    4.88
$7.97-$14.50................      449,625             9.25        $   10.08         59,741      $    9.84
                              -------------                                    ------------
                                  797,823             9.10        $    6.11        183,686      $    3.42
                              -------------                                    ------------
                              -------------                                    ------------
</TABLE>
 
    1996 EMPLOYEE STOCK PURCHASE PLAN
 
    In January 1996, the Company adopted the 1996 Employee Stock Purchase Plan.
The Company's Employee Stock Purchase Plan is administered by the Board of
Directors, and the Company has authorized for sale under the plan 150,000 shares
of common stock. Employees who own less than 5% of the total outstanding common
stock of the Company are eligible to participate in the plan, which provides for
the option to purchase a defined number of shares at 85% of the lower of the
fair market value of the stock at the commencement date of each offering period
or the relevant purchase date. At December 31, 1996, 8,326 shares of common
stock had been issued under this plan.
 
    PRO FORMA INFORMATION
 
    As of December 31, 1996, the Company has three stock-based compensation
plans, which are described above. The Company has elected to follow APB 25 and
related interpretations in accounting for
 
                                       34
<PAGE>
                                  FEMRX, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 31, 1996
 
7. STOCK OPTION PLANS AND STOCK PURCHASE PLAN (CONTINUED)
its employee stock options and stock purchases because, as discussed below, the
alternative fair value accounting provided for under SFAS 123 requires use of
option valuation models that were not developed for use in valuing employee
stock options and employee stock purchase plans. Under APB 25, because the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of the grant, no compensation expense is
recognized.
 
    Pro forma information regarding net loss and net loss per share is required
by SFAS 123, and has been determined as if the Company had accounted for its
employee stock purchase plan and employee stock options granted subsequent to
December 31, 1994 under the fair value method of SFAS 123. The fair value for
these options and purchases was estimated at the date of grant using the minimum
value method for 1995 options and purchases and a Black-Scholes options pricing
model for 1996 options and purchases with the following weighted-average
assumptions for 1995 and 1996, respectively: risk-free interest rate of between
5.4% and 6.8% and between 5.1% and 6.6%; volatility factor of the expected
market price of the Company's common stock of .75 for 1996; an expected life of
the options of between 2 and 4 years for both years and a dividend yield of
zero.
 
    The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options and employee stock purchase plan
have characteristics significantly different from those traded options, and
because changes in the subjective input assumptions can materially affect the
value estimate, in management's opinion the existing models do not necessarily
provide a reliable single measure of the value of the Company's employee stock
options and the employee stock purchase plan.
 
    For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to pro forma net loss over the options' vesting period. The
Company's historical and pro forma information follows (in thousands, except for
net per share information):
 
<TABLE>
<CAPTION>
                                                                               YEARS ENDED
                                                                               DECEMBER 31,
                                                                           --------------------
                                                                             1996       1995
                                                                           ---------  ---------
<S>                                                                        <C>        <C>
Net loss
  As Reported............................................................  $  (8,780) $  (3,174)
  Pro Forma..............................................................  $  (9,253) $  (3,181)
 
Net loss per share
  As Reported............................................................  $   (1.23) $   (0.52)
  Pro Forma..............................................................  $   (1.30) $   (0.52)
</TABLE>
 
8. INCOME TAXES
 
    As of December 31, 1996, the Company had net operating loss carryforwards of
approximately $10,500,000 for federal income tax purposes. The net operating
loss carryforwards will expire in 2010 and 2011, if not utilized.
 
                                       35
<PAGE>
                                  FEMRX, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 31, 1996
 
8. INCOME TAXES (CONTINUED)
    Utilization of the net operating losses may be subject to a substantial
annual limitation due to the ownership change limitations provided by the
Internal Revenue Code of 1986. The annual limitation may result in the
expiration of net operating losses and credits prior to utilization.
 
    Significant components of the Company's deferred tax assets are as follows:
 
<TABLE>
<CAPTION>
                                                                                 DECEMBER 31,
                                                                             --------------------
                                                                               1996       1995
                                                                             ---------  ---------
<S>                                                                          <C>        <C>
Deferred tax assets (in thousands):
  Net operating loss carryforwards.........................................  $   3,900  $     800
  Research and development credits.........................................        100         --
  Capitalized research and development expenses............................        100        100
                                                                             ---------  ---------
Total deferred tax assets..................................................      4,100        900
Valuation allowance........................................................     (4,100)      (900)
                                                                             ---------  ---------
Net deferred tax assets....................................................  $      --  $      --
                                                                             ---------  ---------
                                                                             ---------  ---------
</TABLE>
 
    The valuation allowance increased by $900,000 for the year ended December
31, 1995. (None for the year ended December 31, 1994.)
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
  FINANCIAL DISCLOSURE
 
    Not Applicable
 
                                       36
<PAGE>
                                    PART III
 
    Certain information required by Part III is incorporated by reference from
the Registrant's definitive proxy statement (the "Proxy Statement") for its
annual meeting of shareholders to be held May 12, 1997, which Proxy Statement
will be filed within 120 days after the end of its fiscal year pursuant to
Regulation 14A, and the information included therein is incorporated herein by
reference.
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
    The information required by this item as to the company's executive officers
and directors is set forth in Item 1 - Business--"Executive Officers and
Directors of the Registrant" in this form 10-K.
 
ITEM 11. EXECUTIVE COMPENSATION
 
    The information required by this item is incorporated by reference from the
information under the caption "Executive Compensation" in the Registrant's Proxy
Statement.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
    The information required by this item is incorporated by reference from the
information under the caption "Security Ownership of Certain Beneficial Owners
and Management" in the Registrant's Proxy Statement.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
    The information required by this item is incorporated by reference from the
information under the caption "Certain Relationships and Related Transactions"
in the Registrant's Proxy Statement.
 
                                       37
<PAGE>
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
 
    (a) The following documents are filed as part of this Report:
 
        (1) Financial Statements and Report of Ernst & Young LLP, Independent
    Auditors
 
           Balance Sheets at December 31, 1996 and 1995
 
           Statements of Operations Years ended December 31, 1996, 1995, 1994
           and Period from Inception (March 23, 1992) to December 31, 1993
 
           Statements of Stockholders' Equity (Net Capital Deficiency) ended
           December 31, 1996, 1995, 1994 and Period from Inception (March 23,
           1992) to December 31, 1996
 
           Statements of Cash Flows Years ended December 31, 1996, 1995, 1994
           and Period from Inception (March 23, 1992) to December 31, 1996
 
           Notes to Financial Statements
 
        (2) Financial Statement Schedules
 
           Schedule II Valuation and Allowance Accounts. (See page 41 of this
       report)
 
           Schedules not listed above have been omitted because the information
           required to be set forth therein is not applicable or is shown in the
           financial statements or notes thereto.
 
        (3) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
 
<TABLE>
<CAPTION>
 EXHIBIT
  NUMBER    DESCRIPTION
----------  ------------------------------------------------------------------------------------------------------
<S>         <C>
 2.1(1)     Form of Agreement and Plan of Merger between FemRx, a California Corporation ("FemRx California") and
            FemRx Merger Corporation, a Delaware corporation ("FemRx Delaware").
 
 3.1.1(1)   Amended and Restated Articles of Incorporation of FemRx California.
 
 3.1.2(1)   Bylaws of FemRx California.
 
 3.2.1(1)   Form of Certificate of Incorporation of FemRx Delaware, to be effective upon the completion of the
            offering.
 
 3.2.2(1)   Form of Bylaws of FemRx Delaware, to be effective upon completion of the offering.
 
 4.1(1)     Reference is made to Exhibits 3.1 through 3.2.
 
 4.2(1)     Specimen stock certificate.
 
10.1(1)     Form of Indemnity Agreement to be entered into between the Registrant and each of its directors and
            officers.
 
10.2(1)     The Registrant's 1995 Stock Option Plan (the "1995 plan").
 
10.3(1)     Form of the Registrant's Incentive Stock Option under the 1995 Plan.
 
10.4(1)     Form of the Registrant's Nonstatutory Stock Option under the 1995 Plan.
 
10.5(1)     Form of the Registrant's 1996 Non-Employee Directors' Stock Option Plan (the "Directors' Plan").
 
10.6(1)     Form of the Registrant's Nonstatutory Stock Option under the Directors' Plan.
 
10.7(1)     Form of the Registrant's 1996 Employee Stock Purchase Plan.
 
10.8(1)     Form of the Registrant's Employee Stock Purchase Plan Offering Document.
</TABLE>
 
                                       38
<PAGE>
<TABLE>
<CAPTION>
 EXHIBIT
  NUMBER    DESCRIPTION
----------  ------------------------------------------------------------------------------------------------------
<S>         <C>
10.9(1)     Master Equipment Lease Agreement between the Registrant and Lighthouse Capital Partners, L.P. dated
            June 30, 1995.
 
10.10(1)    Sublease Agreement between the Registrant and OCE - USA, Inc. dated March 22, 1995 and related
            Standard Industrial Lease - Multi-Tenant between Daniel Sloan and OCE-Bruning, Inc. dated December 7,
            1992.
 
10.11(1)    Investors' Rights Agreement dated April 12, 1995 between the Registrant and certain of its
            stockholders.
 
11.1        Statement of computation of net loss per share.
 
13.0(2)     Annual Report to Stockholders.
 
23.1        Consent of Ernst & Young LLP., Independent Auditors.
 
23.2(1)     Consent of Cooley Godward Castro Huddleson & Tatum. Reference is made to Exhibit 5.1.
 
24.1.1      Power of Attorney
 
27.0        Financial Data Schedule
</TABLE>
 
------------------------
 
    (1) Incorporated by reference to identically numbered exhibits filed in
       response to Item 16(a), "Exhibits," of the Registrant's Registration
       Statement on Form S-1, as amended (File No. 333-1080), which became
       effective on March 25, 1996.
 
    (2) To be filed when complete.
 
    (b) Reports on Form 8-K
 
       No Form 8-K's were filed on behalf on the Company.
 
                                       39
<PAGE>
                                   SIGNATURES
 
    Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized in the City of Sunnyvale, State of
California, on the 21st day of March, 1997.
 
                                          FEMRX, INC.
 
                                          By:       /s/ ANDREW M. THOMPSON
                                             -----------------------------------
 
                                                     Andrew M. Thompson
 
                                                President and Chief Executive
                                                           Officer
                                                (PRINCIPAL EXECUTIVE OFFICER)
 
                               POWER OF ATTORNEY
 
    KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Andrew M. Thompson, Edward W. Unkart and George
M. Savage jointly and severally, his or her attorney-in-fact, each with the
power of substitution, for him in any and all capacities, to sign any amendments
to this Report on Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his substitute or substitutes may do or cause to be done
by virtue hereof.
 
    Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
the dates indicated.
 
<TABLE>
<CAPTION>
                    SIGNATURES                                        TITLE                         DATE
---------------------------------------------------  ---------------------------------------  -----------------
<C>                                                  <S>                                      <C>
              /s/ ANDREW M. THOMPSON                 President and Chief Executive Officer    March 21, 1997
     ----------------------------------------          and Director
                Andrew M. Thompson                     (PRINCIPAL EXECUTIVE OFFICER)
 
               /s/ EDWARD W. UNKART*                 Vice President, Finance and              March 21, 1997
     ----------------------------------------          Administration, Chief Financial
                 Edward W. Unkart                      Officer and Assistant Secretary
                                                       (PRINCIPAL FINANCIAL AND ACCOUNTING
                                                       OFFICER)
 
                   /s/ GEORGE M. SAVAGE*             Senior Vice President, Research and      March 21, 1997
     ----------------------------------------          Development and Director
              George M. Savage, M.D.
 
              /s/ RICHARD M. FERRARI*                Director                                 March 21, 1997
     ----------------------------------------
                Richard M. Ferrari
 
                 /s/ GAIL GAUMER*                    Director                                 March 21, 1997
     ----------------------------------------
                    Gail Gaumer
 
             /s/ KATHLEEN D. LAPORTE*                Director                                 March 21, 1997
     ----------------------------------------
                Kathleen D. LaPorte
</TABLE>
 
                                       40
<PAGE>
<TABLE>
<CAPTION>
                    SIGNATURES                                        TITLE                         DATE
---------------------------------------------------  ---------------------------------------  -----------------
<C>                                                  <S>                                      <C>
               /s/ PHILIP M. YOUNG*                  Director                                 March 21, 1997
     ----------------------------------------
                  Philip M. Young
 
               /s/ JAMES W. MCLANE*                  Director                                 March 21, 1997
     ----------------------------------------
                  James W. McLane
 
*By:      /s/ ANDREW M. THOMPSON
    ----------------------------------------
            Andrew M. Thompson
              (ATTORNEY-IN-FACT)
</TABLE>
 
                                       41
<PAGE>
                                  SCHEDULE II
                                  FEMRX, INC.
                         (A DEVELOPMENT STAGE COMPANY)
                       VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)
                               DECEMBER 31, 1996
 
<TABLE>
<CAPTION>
                                                                   BALANCE AT                              BALANCE AT
                                                                  BEGINNING OF    COSTS AND   DEDUCTIONS     END OF
DESCRIPTION                                                          PERIOD       EXPENSES    WRITE-OFFS     PERIOD
----------------------------------------------------------------  -------------  -----------  -----------  -----------
<S>                                                               <C>            <C>          <C>          <C>
Year Ended December 31, 1994
  Allowance for Doubtful accounts...............................    $      --     $      --    $      --    $      --
Year Ended December 31, 1995
  Allowance for Doubtful accounts...............................    $      --     $      --    $      --    $      --
Year Ended December 31, 1996
  Allowance for Doubtful accounts...............................    $      --     $       1    $      --    $       1
</TABLE>
 
                                       42