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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    Form 10-K
[ X ]    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

                 For the Fiscal Year Ended December 31, 1997, or

[   ]   TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
        EXCHANGE ACT OF 1934

                 For the transition period from ______ to ______

                         Commission File Number: 0-28078

                                   FemRx, Inc.
             (Exact name of registrant as specified in its charter)

          Delaware                                    77-0389440 
          --------                                    ----------
(State or other jurisdiction of          (IRS Employer Identification No.)
incorporation or organization)

                    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 reguired
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  $7,623,000 as of March 16, 1998,  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 8,844,724 shares of Registrant's  Common Stock issued and outstanding
as of March 16, 1998.


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                       DOCUMENTS INCORPORATED BY REFERENCE

     The  Proxy   Statement  for  the   Registrant's   1998  Annual  Meeting  of
Stockholders  to be held on May 19, 1998, 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, Inc.  ("FemRx" or the "Company") is developing  surgical systems for
the diagnosis and treatment of gynecologic  disorders.  The Company's OPERA STAR
System,  is designed to perform a  procedure  the Company has named  Out-Patient
Endometrial  Resection/Ablation  ("0PERA"). 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 Specialized Tissue Aspirating  Resectoscope ("STAR") 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 September of 1997, the Company
introduced Diva, a proprietary laparoscopic morcellator,  designed to be used in
surgical  procedures  to assist in the  removal of large  tissue  masses such as
fibroids.

     The OPERA STAR System  consists of a disposable  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 Diva device is a disposable powered laparoscopic  morcellator used with
a reusable  motor drive unit.  The Diva device  enables a surgeon to quickly and
effectively remove large volumes of tissue,  using a minimally invasive approach
that reduces patient recovery time.

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     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


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therapeutic  approach,  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, urinary incontinence 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 9mm  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


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fluid used for  uterine  expansion  into the blood  vessels  within the  uterus.
Clinically  significant overload can cause pulmonary edema (fluid in the lungs),
and if salt-free  irrigation fluid is used, cerebral edema (brain swelling) and,
in isolated  cases,  death.  The safe limit for  salt-free  fluid  absorption is
believed to be between one and two liters for most  patients,  so the  procedure
must be stopped if the salt-free  fluid deficit  (defined as the volume of fluid
inflow minus fluid  outflow)  amount  exceeds  this level.  The use of slat-free
irrigation fluid 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. The water filled balloon has been recently
approved by the FDA, other 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  STAR  is a  proprietary  instrument  that  the  Company  has  designed
specifically to perform OPERA. The Company believes the OPERA STAR System offers


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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. 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 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.  When  electrocautery  current is applied,  the  electrode 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 electrode
cuts tissue  into chips that are  suctioned  into the  rotating  morcellator,  a
proprietary  assembly located  immediately under the electrode.  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.

     The STAR rsectoscope is designed to work in salt-free irrigation fluids. In
September  1997, the Company  introduces the OPERA STAR SL, which is designed to
be used in saline irrigation fluids.

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.


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Diva device

     The Diva device is a disposable powered laparoscopic  morcellator used with
a reusable motor drive unit. The Company believes the Diva device offers several
significant advantages over competing surgical devices. The Company designed the
product  to  build  on the  existing  skills  of  surgeons  trained  to  perform
laparoscopic myomectomy and laparoscopic  supracervical  hysterectomy.  The Diva
device  enables a surgeon to quickly and  effectively  extract  large volumes of
tissue,  allowing a surgeon to employ a minimally invasive approach that reduces
procedure and patient recovery time.

     The  Diva  device  consists  of a  disposable  15mm  diameter  laparoscopic
morcellator  and a reusable motor drive unit. The Diva device  includes a unique
tissue  stabilizing  sheath,  a blade  guard to  prevent  damage to the  cutting
mechanism during insertion and protects against inadvertent lateral cutting, and
a  morcellator  drive cable  connected to the motor drive unit.  The body of the
Diva  device  is  made  from  medical  grade  plastic  using  injection  molding
technology  while the circular  rotating blade is made of stainless  steel.  The
entire device is lightweight and designed for ease of manufacture and single-use
performance.

     The morcellator of the Diva device,  which is compatible with existing 15mm
trocar access devices is inserted into the abdomen through a trocar device.  The
surgeon, using graspers, will grab a tissue mass and pull the tissue through the
circular rotating blade. This process allows for the quick and effective removal
of large tissue masses.

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,  Diva device and the Flo-Stat System.  The
STAR and Diva device are  assembled in a controlled  environment  room,  and are
shipped to an outside vendor for sterilization.

     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  U.S.  Food  and  Drug  Administration  ("FDA")
clearance,  ISO 9001  certification,  and been  issued a license by the State of
California to  manufacture  and sell its OPERA STAR System,  Diva Device and Flo
Stat System.  The  Company's  manufacturing  facilities  are subject to periodic
inspection  by  regulatory   authorities   and  its   operations   undergo  Good
Manufacturing  Practices ("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


                                       9
<PAGE>

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,
the Company 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  constraints  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 successfully
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 six  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 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 OPERA as an 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


                                       10
<PAGE>

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 into international  markets could have a
material  adverse  effect on the  Company's  business,  financial  condition and
results of operations.

     The Company  products have not generated  significant  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 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, 1997, 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


                                       11
<PAGE>

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 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.

     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  will not be able to market  future  products in the U.S.
unless and until it obtains  clearance or approval from 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.



                                       12
<PAGE>

     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 the payor, or is experimental,
unnecessary or inappropriate.  Third-party  reimbursement  will also depend upon
decisions by the Health Care Financing  Administration ("HCFA") for Medicare, as
well  as  by  individual  Health  Maintenance  Organizations  ("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,  hot water balloon 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 radio
frequency 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


                                       13
<PAGE>

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. The Company competes with Johnson
and  Johnson  Inc.,   which  markets  hot  water  ballon   ablation  and  tissue
vaporization  devices,  and Conceptus,  Inc., who markets a disposable  resector
sheath.  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 BEI Medical Systems Co.,
U.S. Surgical Corp. and several private  companies.  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,  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 limited sales of the OPERA
STAR System, Diva device 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.


                                       14
<PAGE>

Employees

     As of March  10,  1998,  the  Company  had 69  employees,  including  14 in
research and development,  23 in manufacturing,  24 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.

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     34 President, Chief Executive Officer and Director
George M. Savage, M.D. 38 Senior Vice President, Research and Development
                          and Director
Edward W. Unkart       48 Vice President, Finance and Administration, Chief 
                          Financial Officer and Assistant Secretary
Jeffrey J. Christian   44 Vice President, Engineering
Marshall Tsuruda       51 Vice President, Operations
Jean La Douceur        48 Vice President, Product Assurance
D. Fred Herdman        49 Vice President, Sales and Marketing
Craig E. Dauchy        49 Secretary
Gail Gaumer Schulze(2) 46 Director
Kathleen D. LaPorte (2)36 Chairman of the Board of Directors
Philip M. Young (1)    58 Director
James W. McLane (1)    58 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.

                                       15
<PAGE>

     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 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.

     Jean La Douceur has served the Company as Vice President, Product Assurance
since  May  1997.  From  January  1994 to May 1997,  Ms.  La  Douceur  served as
President for Biovantage  Consulting,  Inc., a consulting firm for FDA regulated
industries.  Ms. La Douceur  received a B.S. in Biology from the  University  of
Wisconsin and received both a M.S. in  Microbiology  and an M.B.A.  from Rutgers
University.

     D. Fred  Herdman  has  served  the  Company  as Vice  President,  Sales and
Marketing  since May 1997.  From March 1995 to May 1997,  Mr.  Herdman served as
Executive  Director of  Marketing of Karl Storz  Endoscopy,  a  manufacturer  of
telescopes  and  endoscopic  instruments.  From December 1991 to March 1995, Mr.
Herdman  served as Vice  President  of Sales and  Marketing  of Marlow  Surgical
Technologies,  Inc., a manufacturer of laparoscopic and endoscopic products. Mr.
Herdman  received  a B.A.  in English  from  Muskingum  College  and a Master of
Education from Wright 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.

     Gail  Gaumer   Schulze   has  served  the  Company  as  a  director   since
October 1995.  From  July  1997 to the  present,  Ms.  Schulze  has been  Senior
Executive Vice President of Centeon,  L.L.C.,  a manufacturer of blood products.
From  1996 to July  1997  Ms.  Schulze  was  Corporate  Vice  President  of Cost
Management Service and Strategy for Allegiance Healthcare Corporation. From 1980
to 1996, Ms. Schulze held numerous  marketing,  product  development and general
management  positions with Baxter Healthcare  Corporation  including  President,
Renal Europe,  from 1991 to 1994.  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


                                       16
<PAGE>

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  CardioThoracic  Systems,  Inc.,  The  Immune  Response
Corporation,  Penederm  Inc.,  Vical  Inc.,  3Dfx  Interactive  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.

     James W. McLane has served the Company as a director  since  November 1996.
From May 1997 to the  present,  Mr.  McLane  has served as  President  and Chief
Operating  Officer of NovaCare,  Inc., a provider of healthcare  services.  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. Mr. McLane currently serves on the Board of Directors of Aliginis
Inc. 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  June 1998.  The Company  uses all of the facility and believes
that its existing facilities will be sufficient for its operations through 1998.
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

     No matters  were  submitted  to a vote of the  Company's  security  holders
during the fourth quarter of the fiscal year ended December 31, 1997.



                                       17
<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>

    1996:                                         High         Low
<S>                                              <C>          <C>   
    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

    1997:                                         High         Low
    First Quarter ended March 31, 1997           $ 4.50       $ 2.00
    Second Quarter ended June 30, 1997           $ 5.00       $ 1.50
    Third Quarter ended September 30, 1997       $ 4.3125     $ 2.625
    Fourth Quarter ended December 31, 1997       $ 3.4375     $ 2.375
</TABLE>

    As of March 16, 1998, the number of common stockholders of record was 103.

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.

Recent Sales of Unregistered Securities

         None

                                       18
<PAGE>

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".

Selected financial data is as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>

                                                  Years Ended December 31,
                                            -----------------------------------
                                             1997      1996      1995     1994
                                            ------    ------    ------   ------
<S>                                       <C>        <C>         <C>      <C>

Net sales                                 $  1,586   $    64    $  ---   $  ---
Net loss                                  $(12,135)  $(8,780)   $(3,174) $ (142)
Basic and diluted net loss per share (1)
  (pro forma in 1996 and 1995)            $  (1.44)  $ (1.19)   $ (0.68) $(4.30)
Shares used in computing basic and
 diluted net loss per share (pro forma
 in 1996 and 1995)                           8,448     7,363      4,646      33
Total assets                              $ 11,273   $22,040    $ 4,115     ---
Long-term obligations                     $    142   $   272    $   185  $  ---
</TABLE>


(1) See Note 1 to Financial Statements for information concerning calculation of
net loss per share.

                                       19
<PAGE>

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.  As a result  of  certain  factors,  including  those  set  forth
elsewhere in this Form 10-K,  the Company's  actual  results of  operations  may
differ   significantly  from  the  results  discussed  in  the   forward-looking
statements.  The following  discussion and analysis should be read in conjuction
with the Financial Statements of the Company and Notes there to included in this
Form 10-K.

Overview

     During 1997,  FemRx,  Inc.  ("FemRx" or the  "Company")  began sales of the
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  September  1997,  the Company  introduced  Diva, a
proprietary laparoscopic morcellator, designed to be used in surgical procedures
to assist in the removal of large tissue masses such as fibroids.

     The Company  markets its  products  through  its Center of  Excellence  and
National Providers of Excellence  programs which are partnerships  between FemRx
and  healthcare  providers  aimed  at  increasing  the  awareness  of the  OPERA
procedure  through jointly  sponsored  patient outreach and physician  training.
These programs  provide a hospital or surgical  center with an OPERA STAR System
and a Flo-Stat  System  which  allow  gynecologic  surgeons to perform the OPERA
procedure.  As part of these programs, the hospital or surgical center purchases
an initial  stocking order of disposable  resectoscopes.  The revenue from these
disposable resectoscopes is recognized over their estimated period of usage.

     The Company  commenced  commercial  shipments  of its OPERA STAR System and
Flo-Stat System in October 1996. The Company commenced  commercial  shipments of
the Diva in  September  1997.  The Company  currently  sells its products in the
United States to physicians,  hospitals and surgical centers.  Sales in the U.S.
are  currently  made  through a small  direct  sales force and are  conducted on
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, 1997, had an accumulated  deficit of approximately $24.4
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,  commercial  manufacturing,
marketing and sales  activities.  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


                                       20
<PAGE>


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, 1997, 1996, and 1995.

     Net Sales  increased to  $1,586,000  in 1997 from  $64,000 in 1996.  No net
sales were  recorded in any prior  periods.  The increase in 1997 as compared to
1996 was  attributable  to the  Company's  completion  of its first full year of
commercial sales.

     Cost of goods sold  increased to  $3,096,000 in 1997 from $668,000 in 1996.
No cost of goods sold were recorded in any prior periods.  The increased amounts
in 1997 were  primarily  attributable  to the Company's  first  complete year of
manufacturing operations and sales.

     Research and  development  expenses  decreased to  $3,369,000  in 1997 from
$4,551,000  in  1996,  primarily  due to  costs  associated  with  manufacturing
development  costs incurred in 1996.  Research and development  expenses,  which
include  clinical,  regulatory,  and prior to October 1, 1996,  costs related to
manufacturing  development  increased to $4,551,000  in 1996 from  $2,409,000 in
1995. The increased amounts were primarily attributable to costs associated with
clinical trials,  additional  product research,  prototype  development,  patent
preparation  and filing,  manufacturing  facility  preparation,  and increase of
regulatory, research, clinical, engineering and manufacturing personnel.

     Selling,  general and administrative  expenses,  increased to $8,007,000 in
1997 from  $4,577,000 in 1996 and from $936,000 in 1995.  The increased  amounts
were  primarily  attributable  to the  expansion  of  the  Company's  sales  and
marketing personnel, and increased sales and marketing activity.

     Interest income  decreased to $797,000 in 1997 from $1,003,000 in 1996. The
decrease  was  due to  the  Company's  lower  average  balances  in  cash,  cash
equivalents and short term investments.  Interest income increased to $1,003,000
in 1996 and from $194,000 in 1995. 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 in March
and April 1996.

     Interest  expense  decreased  to  $46,000  in 1997  from  $51,000  in 1996.
Interest  expense  decreased  due to  interest  payments  on  lower  outstanding
balances on an equipment lease line.  Interest  expense  increased to $51,000 in
1996 from $23,000 in 1995.  Interest expense  increased due to interest payments
on higher  outstanding  balances on an equipment lease line  established  during
1995.

     At  December  31,  1997,   the  Company  had  federal  net  operating  loss
carryforwards  of  approximately  $22,000,000.  The federal net  operating  loss
carryforwards  will expire, if not utilized,  at various dates beginning in 2010
through  2012.  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, 1997 the Company
had cash, cash equivalents and short term investments of $8,391,000.

     Cash used in the Company's operations increased to $10,819,000 in 1997 from
$7,614,000 in 1996 and from  $2,264,000 in 1995. This cash was used primarily to
fund increasing  levels of research and  development of the Company's  products,


                                       21
<PAGE>

clinical and regulatory activities,  manufacturing operations,  establishment of
the  Company's  sales  and  marketing  organization,  and  increased  sales  and
marketing activity.

     Capital expenditures decreased to $577,000 in 1997 from $1,193,000 in 1996.
The decreased level of capital  expenditures during 1997 was attributable to the
Company's  decreased  need for new molds and tooling  required in the  Company's
manufacturing  processes.  Capital expenditures  increased to $1,193,000 in 1996
and from $638,000 in 1995. The increased  level of capital  expenditures  during
1996 was due primarily to the Company's increased operations throughout the year
and the  acquisition  of molds and tooling for  manufacturing  of the  Company's
products.

     Since  its  incorporation  in  November  1994,  the  Company  has  incurred
significant  cumulative losses totaling  approximately $24.4 million and expects
to incur additional losses for the next several years. The Company believes that
its existing  cash will be sufficient  to finance its capital  requirements  and
operations  through at least June 1998.  The Company's  current  operating  plan
shows that the Company will require  substantial  additional capital to fund its
operations,  continue research and development programs and market its products.
To date,  the Company has financed  its  operations  with the net proceeds  from
private  placements  and public  offerings of its equity  securities and capital
equipment lease financing.  The Company plans to seek additional funding through
public or private financing or other arrangements with third parties.  There can
be no assurance that additional  funding will be available on acceptable  terms,
if at all.

Impact of Year 2000

     The Company has  developed a plan to modify its  information  technology to
recognize  the year 2000.  The Company  expects the project to be  completed  by
early  1999 and does not  expect  the  costs to be  significant.  This  estimate
includes internal costs but excludes the costs to upgrade and replace systems in
the normal course of business. The project is not expected to have a significant
effect  on  operations.  As of  December  31,  1997  none of this  cost has been
expensed.  There can be no assurance  that all the third  parties with which the
Company  conducts  business will address the year 2000 issue in a timely fashion
if at all. Any significant  compliance problems of the Company's suppliers,  its
service  organizations,  or its bankers could have a material  adverse effect on
the Company's business, financial condition, and results of operations.

Additional Factors That May Affect Future Results

Dependence on OPERA STAR System, Diva device and Flo-Stat System

     The OPERA STAR System,  Diva device and Flo-Stat  System are  currently the
Company's only products.  The Company  expects that the OPERA STAR System,  Diva
device  and the  Flo-Stat  System  will  account  for  substantially  all of the
Company's  revenues  for the  foreseeable  future.  Even  though  the OPERA STAR
System,  Diva device 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, Diva device,  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,  Diva device and Flo-Stat System would
have a material adverse effect on the Company's  business,  financial  condition
and results of operations.

                                       22
<PAGE>


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 and Diva device have been used to treat a limited number of patients
and no  published  reports  regarding  the use of the OPERA STAR System and Diva
device 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 or procedures  using the Diva device.  If the Company is not able to
demonstrate  long-term success with the OPERA STAR System or Diva device, 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's  Diva device is designed for use by a gynecologic  surgeon in
laparoscopic  procedures.  Market  acceptance  of the  Company's  products  will
require  a  willingness  on  the  part  of   gynecologic   surgeons  to  perform
laparoscopic morcellation using the Company's products. 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 prices its disposable  resectoscope
at a premium over the prices currently charged for the disposable  components of
competitive  resectoscopes.  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,  Diva  device and  Flo-Stat  System,  1997
represented  the  first  full  year of  commercial  production  and sales of the
Company's  products,  accordingly  it 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 achieving  significant  sales volumes of the
OPERA STAR System,  the Diva device and Flo-Stat System or any other products of
the Company.  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.


                                       23
<PAGE>

Failure to make such a  transition  successfully  would have a material  adverse
effect on the Company's business, financial condition and results of operations.

Need for Additional Capital

     The Company's  current  operating  plan shows that the Company will require
substantial  additional  capital to fund its operations,  continue  research and
development  programs  and  market  its  products.  The  Company  plans  to seek
additional  funding  through public or private  financing or other  arrangements
with third parties.  If additional funding is not available on acceptable terms,
the Company may be required to scale back its  operations,  including  research,
product  development,  and  marketing  and sales  activities.  Failure to obtain
additional  capital  would  have a  material  adverse  effect  on the  Company's
business, financial condition and results of operations.


Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

          Not Applicable

                                       24
<PAGE>

Item 8.  Financial Statements and Supplementary Data




                                       25
<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.  as of
December 31,   1997  and  1996,  and  the  related   statements  of  operations,
stockholders'  equity (net capital  deficiency),  and cash flows for each of the
three  years  ended  December 31,  1997.  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,
1997 and 1996,  and the results of its operations and its cash flows for each of
the three years ended December 31, 1997 in conformity  with  generally  accepted
accounting principles.

     As discussed in Note 1 to the financial statements, the Company's recurring
losses from operations raise  substantial doubt about its ability to continue as
a going concern. Management's plans as to these matters are described in Note 1.
The 1997 financial  statement do not include  adjustments that might result from
the outcome of this uncertainty.


                                                            ERNST & YOUNG LLP


Palo Alto, California
February 9, 1998

                                       26
<PAGE>


                                  FemRx, Inc.
                                 Balance Sheets
                                 (In thousands)

<TABLE>
<CAPTION>
                                     ASSETS                   December 31,    
                                                    ----------------------------
                                                        1997             1996
                                                    ------------     -----------
<S>                                                 <C>               <C>
Current Assets:
   Cash and cash equivalents                         $   3,091        $   2,250
   Short-term investments                                5,300           17,668
   Accounts receivable, net of allowance for
     doubtful accounts of $21 in 1997 and $1       
     1996                                                  693               60 
   Inventories                                             637              340
   Prepaid and other current assets                        173              256
                                                    ------------     -----------
        Total current assets                             9,894           20,574

Property and equipment, net                              1,139            1,429
Other assets                                               240               37
                                                    ------------     -----------
        Total assets                                 $  11,273         $ 22,040
                                                    ============     ===========

                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                  $     771         $    583
   Accrued compensation                                    547              696
   Other accrued liabilities                               504               65
   Deferred revenue                                        579              ---
   Current portion of capital lease obligations            163              141
                                                     -----------     -----------
       Total current liabilities                         2,564            1,485

Noncurrent portion of capital lease obligations            142              272

Commitments

Stockholders' equity:
   Preferred stock, $0.001 par value
     Authorized shares: 5,000,000
     Issued and outstanding shares: none in 1997
     and 1996                                              ---              ---
   Common stock, $0.001 par value
     Authorized shares: 40,000,000
     Issued and outstanding shares: 8,836,679 in
     1997 and 8,845,610 in 1996                         33,339           33,305
   Notes receivable from stockholders                      ---              (58)
   Deferred compensation                                  (369)            (696)
   Accumulated deficit                                 (24,403)         (12,268)
                                                      -----------     ----------
       Total stockholders' equity                        8,567           20,283
                                                      -----------     ----------

       Total liabilities and stockholders' equity      $11,273          $22,040
                                                      ===========     ==========
</TABLE>
         
                 See accompanying notes to financial statements




                                       27
<PAGE>

                                   FemRx, Inc.
                            Statements of Operations
                      (in thousands, except per share data)


<TABLE>
<CAPTION>
                                                       Years ended
                                                       December 31,
                                            ---------------------------------
                                               1997        1996        1995
                                            ---------   --------    ---------

<S>                                          <C>         <C>         <C>     
Net sales                                    $  1,586    $    64     $    ---

Costs and expenses:
     Cost of goods sold                         3,096        668          ---
     Research and development                   3,369      4,551        2,409
     Selling, general and administrative        8,007      4,577          936
                                            ---------   --------    ---------
Total costs and expenses                       14,472      9,796        3,345

Loss from operations                          (12,886)    (9,732)      (3,345)
                                                              
Interest income                                   797      1,003          194
Interest expense                                  (46)       (51)         (23)
                                            =========   ========    =========
Net loss                                     $(12,135)   $(8,780)    $ (3,174)
                                            =========   ========    =========

Basic and diluted net loss per share 
     (pro forma in 1996 and 1995)            $  (1.44)  $ (1.19)    $  (0.68)                                            
                                            =========   ========    =========

Shares used in computing basic and
     diluted net loss per share
     (pro forma in 1996 and 1995)              8,448      7,363        4,646
                                            =========   ========    =========


</TABLE>

                 See accompanying notes to financial statements


                                       28
<PAGE>

                                  FemRx, Inc.
           Statement of Stockholders' Equity (Net Capital Deficiency)
                  (In thousands, except number of shares)               
<TABLE>
<CAPTION>
                                                                                                                         Total     
                                                                                                                      Stockholders'
                                                                                 Notes                                  Equity
                                                                               Receivable                                (Net
                                       Preferred Stock        Common Stock       From       Deferred     Accumulated    Capital
                                  ---------------------  -------------------  
                                     Shares     Amount     Shares     Amount  Stockholders Compensation     Deficit    Deficiency)
                                  ----------  ---------  ---------  --------  ------------ ------------  ------------  -----------
<S>                               <C>          <C>        <C>        <C>        <C>           <C>           <C>          <C>       
Balances at December 31, 1994            ---  $     ---  1,323,182  $      8   $     (5)     $     ---     $    (314)   $    (311)
Proceeds from notes receivable                                                                                      
 from founders                           ---        ---        ---       ---          5            ---           ---            5
Issuance of Series A convertible
 preferred stock, less issuance  
 cost of $27                       6,154,898      6,128        ---       ---        ---            ---           ---        6,128
Issuance of common stock to
 employees, consultants and 
 directors for cash and notes
 receivable                              ---        ---    396,263        27         (4)           ---           ---           23
Renegotiation of vesting in
 founder stock in exchange for
 forgiveness of payable to
 related parties                         ---        ---        ---       242        ---            ---           ---          242
Deferred compensation related to
 grant of stock options to
 employees, consultants and
 directors                               ---        ---        ---     2,293        ---         (2,293)          ---          ---
Amortization of deferred                                                                                             
 compensation                            ---        ---        ---       ---        ---            624           ---          624
Net loss                                 ---        ---        ---       ---        ---            ---        (3,174)      (3,174)
                                 -----------  ---------  ---------  ---------------------- ------------  ------------  -----------
Balances at December 31, 1995      6,154,898      6,128  1,719,445     2,570         (4)        (1,669)       (3,488)       3,537
Issuance of common stock under
 stock option plans and employee
 stock purchase plan to
 employees, consultants, and
 directors net of repurchases            ---        ---     61,858        71          4            ---           ---           75
Issuance of common stock to an
 employee for cash and notes
 receivable                              ---        ---    112,500        76        (58)           ---           ---           18
Conversion of Series A convertible
 preferred stock in connection
 with initial public offering     (6,154,898)    (6,128) 3,846,807     6,128        ---            ---           ---          ---
Issuance of common stock in
 connection with initial public
 offering, net of issuance cost
 of $986                                 ---        ---  3,105,000    25,002        ---            ---           ---       25,002
Reversal of unearned deferred
 compensation related to
 employee terminations                   ---        ---        ---      (542)       ---            542           ---          ---
Amortization of deferred                                                                                            
 compensation                            ---        ---        ---       ---        ---            431           ---          431
Net loss                                 ---        ---        ---       ---        ---            ---        (8,780)      (8,780)
                                 -----------  ---------  ---------  ---------------------- -----------   ------------  ----------- 
Balances at December 31, 1996            ---        ---  8,845,610    33,305        (58)          (696)      (12,268)      20,283
Issuance of common stock under
 stock option plans and employee
 stock purchase plan to employees,
 consultants, anddirectors, net 
 of repurchases                          ---        ---     (8,931)      121         58            ---           ---          179
Reversal of unearned deferred
 compensation related to employee
 terminations                            ---        ---        ---       (87)       ---             87           ---          ---
Amortization of deferred
 compensation                            ---        ---        ---       ---        ---            240           ---          240
Net loss                                 ---        ---        ---       ---        ---            ---       (12,135)     (12,135)
                                 -----------  ---------  ---------  ---------------------- -----------   ------------  -----------
Balances at December 31, 1997            ---  $     ---  8,836,679  $  33,339  $    ---     $     (369)  $   (24,403)   $   8,567
                                 ===========  ========= ==========  ====================== ===========   ============  ===========
</TABLE>

                 See accompanying notes to financial statements


                                       29
<PAGE>


                                   FemRx, Inc.
                            Statements of Cash Flows
                Increase (decrease) in cash and cash equivalents
                                 (in thousands)

<TABLE>
<CAPTION>
                                                      Years Ended
                                                      December 31,
                                       -------------------------------------
                                            1997         1996        1995
                                       ------------  -----------  ----------
<S>                                      <C>          <C>          <C>
Cash flows from operating activities:
Net loss                                $  (12,135)   $  (8,780)   $ (3,174)
Adjustments to reconcile net loss to
net cash used by operating activities:
  Depreciation and amortization                763          352          50
  Amortization of deferred compensation        240          431         624
  Net loss on disposal of fixed assets         104          ---         ---
 Changes in assets and liabilities:
  Accounts receivable                         (633)         (60)        ---
  Inventories                                 (297)        (340)        ---
  Prepaid and other current assets              83         (241)        (15)
  Accounts payable                             188          434         133
  Accrued compensation                        (149)         598          98
  Deferred revenue                             579          ---         ---
  Payable to related parties                   ---          ---         (49)
  Other accrued liabilities                    439           (8)         69
                                       ------------  -----------   ---------
Net cash used in operating activities:     (10,818)      (7,614)     (2,264)
Cash flows from investing activities
  Capital expenditures                        (577)      (1,193)       (638)
  Other assets                                (203)          18         (55)
  Purchases of securities available 
   for sale                                (39,902)    (184,101)    (25,206)
  Proceeds from sales and maturities
   of securities available for sale         52,270      166,433      25,206
                                       ------------  -----------   ---------
Net cash provided by (used in) 
  investing activities                      11,588      (18,843)       (693)
Cash flows from financing activities:
  Proceeds from capital lease            
   financing                                   ---          240         273
  Payments of obligations under
   capital leases                             (108)         (85)        (15)
  Net proceeds from issuance of
   preferred stock                             ---          ---       6,128
  Net proceeds from issuance of common   
   stock                                       179       25,095          28
                                       ------------  -----------   ---------
Net cash provided by financing 
  activities                                    71       25,250       6,414
Net increase (decrease) in cash
  and cash equivalents                         841       (1,207)      3,457
Cash and cash equivalents at beginning   
  of period                                  2,250        3,457         ---
                                       ------------  -----------   ---------
Cash and cash equivalents at end of 
  period                                $    3,091        2,250       3,457
                                       ============  ===========   =========
Supplemental disclosure of cash flow
information:
  Interest paid                         $       46    $      51     $    23
                                       ============  ===========   =========
Supplemental schedule of noncash
investing and financing activities:
  Issuance of common stock in
  exchange for notes and 
  subscription receivable               $      ---    $     ---    $     80
                                       ============  ===========   =========
Acceleration of vesting in founders
  stock in exchange for forgiveness
  of payable to related parties         $      ---    $     ---    $    242
                                       ============  ===========   =========
</TABLE>

                 See accompanying notes to financial statements

                                       30
<PAGE>

                                   FemRx, Inc.
                          Notes to Financial Statements
                                December 31, 1997

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 the design development, manufacture,
and sale of unique  surgical  tools for less invasive  treatment of  gynecologic
disorders.  The Company markets its products to physicians,  hospitals,  clinics
and surgical centers in the United States.  The Company completed its first full
year of  commercial  sales to customers  in the United  States  during 1997.  In
preceding years the Company was in the development stage.

Basis of Presentation

     Since  its  incorporation  in  November  1994,  the  Company  has  incurred
cumulative  losses  totaling  approximately  $24,400,000  and  expects  to incur
additional  losses for next several years. The Company's  current operating plan
shows that the Company will require  substantial  additional capital to fund its
operations, continue research and development programs, and market its products.
To date,  the Company has financed  its  operations  with the net proceeds  from
private  placements  and public  offerings of its equity  securities and capital
equipment lease financing.  The Company plans to seek additional funding through
public or private financing or other arrangements with third parities. There can
be no assurance that additional  funding will be available on acceptable  terms,
if at all. The accompanying financial statements have been prepared assuming the
Company will  continue as a going  concern,  and do not include any  adjustments
that might result from the outcome of this uncertainty.

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.

Recent Accounting Pronouncements

     In June 1997, the Financial Accounting Standards Board issued Statement No.
130,  "Reporting  Comprehensive  Income"  ("SFAS  130"),  and Statement No. 131,
"Disclosures  about  Segments of an Enterprise and Related  Information"  ("SFAS
131").  The Company is required to adopt these  Statements  beginning  in fiscal
1998.   SFAS  130   establishes  new  standards  for  reporting  and  displaying
comprehensive income and its components. SFAS 131 requires disclosure of certain
information  regarding  operating  segments,  products and services,  geographic
areas of operation and major customers. Adoption of these Statements is expected
to have no impact on the Company's financial position,  results of operations or
cash flows.

Revenue Recognition

     Revenue  from sales of  reusable  products,  and  reorders  for  disposable
products  is  generally  recognized  at the  time of  shipment  with  allowances
provided for estimated  returns.  When a customer  purchases an initial stocking
order of disposable products, the revenue from these products is recognized over
their estimated period of usage.



                                       31
<PAGE>

                                  FemRx, Inc.
                          Notes to Financial Statements
                                December 31, 1997

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  sells to a diverse  customer  base. No single  customer  accounts for a
significant  portion of the  Company's  net sales.  The Company does not require
collateral on sales with credit terms.

Net Loss Per Share

     Effective  December 31, 1997,  the Company  adopted  Statement of Financial
Accounting  Standards  No. 128  "Earnings  Per  Share"  ("SFAS  128").  SFAS 128
requires  the  presentation  of basic  earnings  (loss)  per share  and  diluted
earnings (loss) per share, if more dilutive, for all periods presented.

     In  accordance  with SFAS 128,  basic net loss per share has been  computed
using the weighted average number of shares of common stock  outstanding  during
the period.  The Company also adopted the  provisions of Securities and Exchange
Commission Staff Bulletin No. 98 which resulted in the removal of certain shares
which had been included in the calculation in the periods prior to the Company's
initial public  offering.  Diluted net loss per share has not been presented as,
given the Company's net loss position, the result would be anti-dilutive.

     Pro forma  basic  net loss per  share as  presented  in the  Statements  of
Operations for 1996 and 1995 has been computed as described above and also gives
effect to the conversion of the convertible  Preferred Stock that  automatically
converted upon completion of the Company's  initial public offering (using as-if
converted method) from the original date of issuance.

     A  reconciliation  of the shares used in the  calculation  of basic and pro
forma basic net loss per share follows (in  thousands,  except for net per share
information):
<TABLE>
<CAPTION>

                                          Years ended December 31,
                                ----------------------------------------------
                                     1997            1996            1995
                                ---------------  --------------  -------------

<S>                              <C>              <C>            <C>         
 Net loss                        $    (12,135)    $    (8,780)   $    (3,174)
                                ===============  ==============  =============

Basic
Weighted average shares of
 common stock outstanding                8,448           6,467            799
                                ===============  ==============  =============

Basic net loss per share           $    (1.44)     $    (1.36)    $    (3.97)
                                ===============  ==============  =============

Pro Forma Basic
Weighted average shares of
 common stock outstanding                               6,467            799
Adjustment to reflect the 
 effect of assumed conversion
 of preferred stock as of the
 date of issuance                                         896          3,847
Shares used in computing pro
 forma basic net loss per                        --------------  ------------
 share                                                  7,363          4,646
                                                 ==============  =============

Pro forma basic net loss per share                 $    (1.19)    $    (0.68)
                                                 ============== ==============

</TABLE>

                                       32
<PAGE>

                                   FemRx, Inc.
                          Notes to Financial Statements
                                December 31, 1997

     Had the Company been in a net income  position,  diluted earnings per share
would  have  been  presented  and  would  have  included,  the  shares  used  in
computation  of basic  net loss per  share as well as an  additional  1,871,284,
1,367,120,  and 1,099,892,  shares for the years ended December 31, 1997,  1996,
and 1995,  respectively,  relating to outstanding options and warrants (prior to
the application of the treasury stockmethod) and stock subject to repurchase not
included above.

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. Fair market
values were based on quoted  market  prices.  Realized  gains and losses for the
three years ended December 31, 1997 have been immaterial.

     The following table summarizes the amortized cost,  which  approximates the
fair market value of the Company's investments and their contractual  maturities
at December 31, (in thousands):
<TABLE>
<CAPTION>

                                                    1997              1996
<S>                                              <C>                 <C>       
    U.S. Government agencies                     $      4,628        $   12,076
    Corporate dept obligations                          3,504             7,472
                                                --------------    --------------
                                                  $     8,132        $   19,548
                                                ==============    ==============

    Included in cash and cash equivalents         $     2,832        $    1,880
    Included in short-term investments                  5,300            17,668
                                                --------------    --------------
                                                  $     8,132        $   19,548
                                                ==============    ==============

    Due within one year                            $    7,619        $   16,466
    Due after one year through two years                  513             3,082
                                                --------------    --------------
                                                    $   8,132        $   19,548
                                                ==============    ==============
</TABLE>

3. Inventories

     Inventories  are stated at lower of cost  (first-in,  first-out)  or market
(net realizable value).  The Company makes inventory  provisions for potentially
excess and obsolete  inventory based on forecast demand and scheduled  shipment.
However,  such  activity  may  be  subject  to  revisions,   cancellations,  and
rescheduling.   Inventories  at  December  31,  consist  of  the  following  (in
thousands):
<TABLE>
<CAPTION>

                                             1997            1996
                                             ----            ----
<S>                                         <C>             <C>  
      Raw materials                         $  50           $  46
      Work-in-process                         442             226
      Finished goods                          145              68
                                              ---             ---
             Total                          $ 637           $ 340
                                            =====           =====
                                       
</TABLE>


                                       33
<PAGE>

                                   FemRx, Inc.
                          Notes to Financial Statements
                                December 31, 1997

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,  in the  case of  leasehold
improvements,  over the term of 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>

                                                           1997           1996
                                                           ----           ----
<S>                                                      <C>             <C>   
       Furniture and equipment                           $ 1,556         $1,231
       Computer equipment                                    504            455
       Leasehold improvements                                155            145
                                                             ---            ---
                                                           2,215          1,831
       Less accumulated depreciation and amortization     (1,076)          (402)
                                                          ------           ---- 
       Total property and equipment, net                  $1,139         $1,429
                                                          ======         ======
</TABLE>

     Property and equipment at December 31,  1997 and 1996 includes assets under
capitalized  leases  of  $513,000.  Accumulated  depreciation  on  property  and
equipment  under   capitalized   leases  at  December  31,  1997  and  1996  was
approximately $353,000 and $182,000 respectively.

5. Commitments

     Future minimum lease  obligations as of December 31, 1997 on all leases are
as follows (in thousands):
<TABLE>
<CAPTION>
 
                                                       Capital      Operating
                                                        Lease         Leases
                                                        -----         ------
<S>                                                     <C>          <C>
  Years ending December 31:
           1998                                         $ 173        $  60
           1999                                           149            6
           2000                                            20            2
           ----                                           ---          ---
  Total minimum lease payments                            342        $  68
                                                                      ====
  Amounts representing interest                           (37)
                                                          --- 
  Present value of future lease payments                  305
  Current portion of capital lease obligations           (163)
                                                         ---- 
  Noncurrent portion of capital lease obligations       $ 142
                                                         ====
</TABLE>

     Rent expense under  noncancelable  operating leases, net of sublease income
of $21,000 in 1996,  and  $12,000  in 1995,  (none in 1997) for the years  ended
December 31, 1997,  1996,  and 1995 was  approximately  $126,000,  $81,000,  and
$66,000, respectively.

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.

                                       34
<PAGE>

                                   FemRx, Inc.
                          Notes to Financial Statements
                                December 31, 1997

     At December 31, 1997,  there were 2,123,660 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, 1997,  211,575 common shares issued remained  subject to repurchase
by the Company.

     In 1995 the Company  recorded  deferred  compensation  expense equal to 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.  This  compensation  expense  aggregates  to
$2,293,000,  which is being 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, 1997, 1996 and 1995 was
$240,000, $431,000, and $624,000 respectively. Additionally $87,000 and $542,000
of unvested deferred  compensation was reversed in 1997 and 1996,  respectively,
due to employee terminations.

     In  connection  with capital  lease  financing,  in June 1995,  the Company
issued a warrant to purchase  36,328 shares of common stock at an exercise price
of $1.60 per share for $100 in cash.  This warrant  expires seven years from the
date of issuance. The warrant was unexercised as of December 31, 1997.

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  1,955,625
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.

     In March 1997,  the board of directors  authorized  the Company to exchange
stock options granted under this plan to all employees, having an exercise price
greater than $4.50 for options  with an exercise  price of $2.56 (the fair value
of the  Company's  common  stock on  March  11,  1997,  when  the  exchange  was
effected).  Under the terms of this stock  option  repricing,  no portion of any
exchanged option


                                       35
<PAGE>

                                   FemRx, Inc.
                          Notes to Financial Statements
                                December 31, 1997

     was exercisable until September 11, 1997. Options representing the right to
purchase  384,750 shares of common stock were  exchanged.  The vesting period of
such exchanged options was unchanged from that of the original options.

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.

                                       36
<PAGE>

                                   FemRx, Inc.
                          Notes to Financial Statements
                                December 31, 1997

     Aggregate option activity under the plans is as follows:

<TABLE>
<CAPTION>
                                        Options Outstanding
                                     -------------------------
                         Shares                                     Weighted
                       available for    Number       Price per       average
                          grant       of shares       share       exercise 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 forfeited           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
Additional authorized      800,000          ---       ---               ---
Options granted         (1,349,000)   1,349,000   $2.00-$4.125        $2.77
Options exercised              ---      (36,904) $0.006-$2.9375       $0.74
Options forfeited          101,788     (101,788)  $0.16-$14.50        $4.12
Options cancelled          384,750     (384,750)  $4.50-$14.50        $9.70
                      =============  ===========
Balance at
December 31, 1997          423,578    1,623,381   $0.006-$14.50       $2.73
                      =============  ===========
</TABLE>

     The  weighted  average fair value of options  granted was $1.60,  $5.90 and
$3.21 in 1997, 1996 and 1995, respectively.

     The options  outstanding  at December  31, 1997 have been  segregated  into
ranges for additional disclosure is as follows:

<TABLE>
<CAPTION>

                       Options Outstanding               Options Exercisable
               ------------------------------------  ---------------------------
                              Weighted-                 Options    
                 Options       average                 currently
               outstanding    remaining   Weighted    exercisable     Weighted
 Range of          at        contractual   average        at           average 
 exercise      December 31,      life     exercise    December 31,    exercise    
  Prices          1997       (in years)    price          1997          price
------------ ------------   -----------  ----------  -------------  ------------
<S>           <C>            <C>            <C>         <C>            <C>          
$0.006-$0.67     241,772        7.71        $0.20       153,027         $0.23  
$ 2.00-$2.94   1,056,776        8.62        $2.61       277,019         $2.64
$ 3.00-$4.88     245,458        9.54        $3.68        31,590         $3.78
$7.97-$14.50      79,375        7.55        $9.12        42,552         $9.02
             ------------                            ----------
               1,623,381        8.57        $2.73       504,188         $2.51
             ============                            ==========
</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

                                       37
<PAGE>

                                   FemRx, Inc.
                          Notes to Financial Statements
                                December 31, 1997

     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, 1997, 109,627 shares of common stock had
been issued under this plan.

Pro Forma Information

     As of December 31,  1997,  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 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  and  1997   options   and   purchases   with  the   following
weighted-average  assumptions  for 1995, 1996 and 1997  respectively:  risk-free
interest rate of between 5.4% and 6.8%,  between 5.1% and 6.6%; and between 5.8%
and 6.7%, volatility factor of the expected market price of the Company's common
stock of .75 for 1996 and 1997  (none in 1995 as the  minimum  value  method was
used), an expected life of the options of between 6 months and 4 years for 1995,
1996 and 1997 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.


                                       38
<PAGE>

                                   FemRx, Inc.
                          Notes to Financial Statements
                                December 31, 1997

     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,
                              ----------------------------------------
                                 1997          1996          1995
                              ------------  ------------  ------------

   <S>                        <C>            <C>           <C>   
   Net loss
     As Reported              $  (12,135)    $  (8,780)    $   (3,174)
     Pro Forma                $  (13,437)    $  (9,253)    $   (3,181)

   Net loss per share
     As Reported              $    (1.44)    $   (1.19)    $   (0.68)
     Pro Forma                $    (1.59)    $   (1.26)    $   (0.68)
</TABLE>

8.  Income Taxes

     As of December 31, 1997, the Company had net operating  loss  carryforwards
of approximately  $22,000,000 for federal income tax purposes. The net operating
loss  carryforwards will expire at various dates beginning in 2010 through 2012,
if not utilized.

     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
(in thousands):
<TABLE>
<CAPTION>

                                                            December 31,
                                                    ----------------------------
                                                        1997            1996
                                                    --------------  ------------
<S>                                                  <C>             <C>  
  Deferred tax assets:
     Net operating loss carryforwards                     $ 8,300       $ 3,900
     Research and development credits                         400           100
     Capitalized research and development expenses            500           100
     Other, net                                               200           ---
                                                    --------------  ------------
  Total deferred tax assets                                 9,400         4,100

  Valuation allowance                                      (9,400)       (4,100)
                                                    --------------  ------------
  Net deferred tax assets                                 $   ---       $   ---
                                                    ==============  ============
</TABLE>

     Due to the lack of earnings history of the Company,  the total net deferred
tax  asset  has been  fully  offset  by a  valuation  allowance.  The  valuation
allowance  increased by $3,200,000 and $900,000 for the years ended December 31,
1996 and 1995 respectively.

                                       39
<PAGE>

Item 9.  Changes  in  and  Disagreements  with  Accountants  on  Accounting  and
         Financial Disclosure
    
         Not Applicable


                                       40
<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 19, 1998 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.


                                       41
<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, 1997 and 1996

          Statements of Operations Years ended December 31, 1997, 1996, and 1995

          Statements of  Stockholders'  Equity (Net Capital  Deficiency)  Years
          ended December 31, 1997, 1996, and 1995

          Statements of Cash Flows Years ended December 31, 1997, 1996, and 1995

          Notes to Financial Statements

     (2) Financial Statement Schedules

         Schedule II Valuation and Allowance Accounts. (See page 45 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.

</TABLE>
                                       42
<PAGE>

<TABLE>
<CAPTION>

Exhibit
Number                                Description
------                                -----------
<S>        <C>                               
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.
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.
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
27.1       Financial Data Schedule December 31, 1997.
27.2       Restated Financial Data Schedule December 31, 1996.
</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.



                                       43
<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 25th day of March, 1998.

                     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 25, 1998
   ------------------  and Director (Principal Executive Officer)
   Andrew M. Thompson  

/s/Edward W. Unkart    Vice President,Finance and Administration, March 25, 1998
   ----------------    Chief Financial Officer and Assistant 
   Edward W. Unkart    Secretary(Principal Financial and     
                       Accounting Officer)                   
                       

/s/George M. Savage    Senior Vice President, Research and        March 25, 1998
   ----------------    Development and Director
George M. Savage, M.D. 

/s/Gail Gaumer Schulze Director                                   March 25, 1998
   -------------------
   Gail Gaumer Schulze

/s/Kathleen D. LaPorte Director                                   March 25, 1998
   -------------------
   Kathleen D. LaPorte

/s/Philip M. Young     Director                                   March 25, 1998
   ---------------
   Philip M. Young

/s/James W. McLane     Director                                   March 25, 1998
   ---------------
   James W. McLane
</TABLE>




                                       44
<PAGE>


                                   Schedule II

                                   FemRx, Inc.
                        Valuation and Qualifying Accounts
                                 (in thousands)
                                December 31, 1997

<TABLE>
<CAPTION>
                                      Balance at   Costs             Balance at
                                     Beginning of   and    Deductions  End of
Description                             Period    Expenses Write-Offs  Period
-----------                             ------    -------- ---------- --------
<S>                                     <C>       <C>       <C>        <C>
Year Ended December 31, 1995
Allowance for Doubtful accounts        $   ---    $   ---    $   ---   $  ---

Year Ended December 31, 1996
Allowance for Doubtful accounts        $   ---    $     1    $   ---   $    1

Year Ended December 31, 1997
Allowance for Doubtful accounts        $     1    $    20    $   ---   $   21



Year Ended December 31, 1995
Reserve for excess/obsolete inventory  $   ---    $  ---     $   ---   $  ---

Year Ended December 31, 1996
Reserve for excess/obsolete inventory  $   ---    $  229     $    99   $  130

Year Ended December 31, 1997
Reserve for excess/obsolete inventory  $   130    $  512     $   376   $  266
</TABLE>


                                       45
<PAGE>