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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549
                            ------------------------

                                   FORM 10-K

(MARK ONE)

<TABLE>
<S>   <C>
/X/   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934.
</TABLE>

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996

                                       OR

<TABLE>
<S>   <C>
/ /   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934
</TABLE>

              FOR THE TRANSITION PERIOD FROM          TO

                        COMMISSION FILE NUMBER: 0-28244
                            ------------------------

                              IMAGYN MEDICAL, INC.

             (Exact name of registrant as specified in its charter)

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<S>                                       <C>
               DELAWARE                                 77-0230712
   (State or other jurisdiction of                   (I.R.S. Employer
    incorporation or organization)                 Identification No.)

 27651 LA PAZ ROAD, LAGUNA NIGUEL, CA                     92677
   (Address of principal executive                      (Zip Code)
               offices)
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       Registrant's telephone number, including area code: (714) 362-2500
                            ------------------------

        Securities registered pursuant to Section 12(b) of the Act: None

          Securities registered pursuant to Section 12(g) of the Act:

                          Common Stock $0.01 par value

                        Preferred Share Purchase Rights

                                (Title of class)
                            ------------------------

    Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes /X/  No / /

    Indicate by check mark if disclosures 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 statements
incorporated by reference in part III of this Form 10-K or any amendment to this
Form 10-K.  /X/

    The aggregate value of voting stock held by non-affiliates of the Registrant
was approximately $40,877,000 as of February 28, 1997, based upon the average of
the high and low prices of the Registrant's Common Stock reported for such date
on the Nasdaq National Market. Shares of Common Stock held by each executive
officer and director and by each person who owns 10% or more of the outstanding
Common Stock have been excluded in that such persons may be deemed to be
affiliates. The determination of affiliate status is not necessarily a
conclusive determination for other purposes. As of February 28, 1997, the
Registrant had outstanding 7,988,133 shares of Common Stock.

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                             IMAGYN MEDICAL, INC.,
                                     INDEX

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<S>        <C>         <C>                                                                                    <C>
PART I......................................................................................................            1
           Item 1.     BUSINESS.............................................................................            1
                       The Female Reproductive System.......................................................            2
                       Pelvic Pain and Related Disorders....................................................            2
                       Uterine Disorders....................................................................            4
                       Infertility..........................................................................            5
                       Tubal Sterilization..................................................................            7
                       Advantages of Imagyn's Product Systems...............................................            8
                       Product Systems......................................................................            9
                       Marketing, Sales and Distribution....................................................           12
                       Strategic Marketing Alliances........................................................           14
                       Research and Development.............................................................           15
                       Manufacturing........................................................................           15
                       Patents, Trade Secrets and Licenses..................................................           16
                       Government Regulation................................................................           18
                       Third-Party Reimbursement............................................................           21
                       Competition..........................................................................           22
                       Product Liability and Insurance......................................................           23
                       Employees............................................................................           23
                       Additional Risk Factors..............................................................           23
           Item 2.     PROPERTIES...........................................................................           27
           Item 3.     LEGAL PROCEEDINGS....................................................................           27
           Item 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................           27

PART II.....................................................................................................           28
           Item 5.     Market for Registrant's Common Equity and Related Stockholder Matters................           28
           Item 6.     Selected Financial Data..............................................................           28
           Item 7.     Management's Discussion and Analysis of Financial Condition and Results of
                        Operations..........................................................................           29
           Item 8.     Financial Statements and Supplementary Data..........................................           34
           Item 9.     Changes in and Disagreements with Accountants on Accounting and Financial
                        Disclosure..........................................................................           52

PART III....................................................................................................           53
           Item 10.    Directors and Executive Officers of the Registrant...................................           53
           Item 11.    Executive Compensation...............................................................           56
           Item 12.    Security Ownership of Certain Beneficial Owners and Management.......................           62
           Item 13.    Certain Relationships and Related Transactions.......................................           64

PART IV.....................................................................................................           65
           Item 14.    Exhibits, Financial Statement Schedules, and Reports on Form 8-K.....................           65
</TABLE>
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                                     PART I

ITEM 1.  BUSINESS

    This Report on Form 10-K contains certain forward looking statements
regarding future events with respect to the Company. Actual events or results
may differ materially as a result of the factors described herein, including, in
particular, those factors described under "Additional Risk Factors" and in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

    Imagyn designs, develops and markets micro-invasive, cost-effective devices
for diagnosis and treatment of gynecological and reproductive disorders. The
Company's proprietary technology platform based on micro-optics and micro-access
devices provides physicians with the ability to automatically access and
visualize the abdominal cavity, the uterus and the fallopian tubes. Imagyn's
proprietary micro-optics enable physicians to visualize a patient's internal
anatomy with the resolution and light efficiency of larger, more invasive
devices commonly used today. Imagyn's proprietary, disposable micro-access
devices enable physicians to perform certain procedures outside the hospital
without the need for general anesthesia. The Company's principal product systems
based on these core technologies are the MicroLap microlaparoscopy system, the
MicroSpan microhysteroscopy system and the Ovation systems for infertility
indications. Compared to traditional procedures, the Company's product systems
facilitate earlier definitive diagnosis and treatment, significantly lower the
procedure cost associated with more invasive surgery and reduce patient
discomfort, recovery time and morbidity.

    Imagyn's diagnostic and operative micro-invasive product systems address a
broad continuum of gynecological and reproductive disorders affecting a large
number of women, including pelvic pain, uterine disorders and infertility, and
provide a less invasive procedure for tubal sterilization. Because of the high
incidence of these disorders and the popularity of tubal sterilization as a
contraceptive method, large markets exist for devices that treat such disorders
and that facilitate tubal sterilization. First, pelvic pain affects
approximately 6 million women in the United States and can be caused by a number
of serious conditions, including endometriosis, adhesions and pelvic
inflammatory disease. Second, uterine disorders affect approximately 25 million
women in the United States and may lead to significant complications including
uterine bleeding, acute pain and infertility. Third, infertility is an
increasingly common and often emotionally traumatic condition which affects
approximately 5 million women in the United States. Finally, tubal sterilization
is chosen as a permanent contraceptive method by approximately 800,000 women
annually in the United States. Despite the large size of these markets, there
can be no assurance that the Company's product systems will be accepted and will
compete effectively in any of these markets. Market acceptance of the Company's
product systems will be dependent upon, among other things, physicians'
determinations that the Company's product systems and the procedures in which
they are intended to be used are safe and effective alternatives to current
hospital-based procedures and demonstrate clinical utility, and can be used in a
cost-effective manner.

    The Company's product systems enable physicians to access and visualize all
of the organs of a woman's reproductive system outside the hospital without the
need for general anesthesia. The MicroLap system, which enables the physician to
access the abdominal cavity without the need for post-operative sutures,
includes a 2 millimeter-diameter microlaparoscope with resolution and light
efficiency characteristics which the Company believes are comparable to those of
standard 10 millimeter-diameter laparoscopes. The MicroSpan system incorporates
a new, high resolution microhysteroscope and a new uterine access device to
enable the physician to automatically access and visualize the interior of the
uterus. The MicroLap and MicroSpan systems enable physicians to access the
abdominal cavity and the uterus for treatment with the Company's microsurgical
instruments. The Ovation systems are designed to enable the physician to
automatically access, navigate and visualize the entire length of the fallopian
tubes. Imagyn's product systems are designed to offer significant advantages for
physicians, patients and health care payors. For physicians, Imagyn's systems
facilitate improved diagnosis and enhanced practice management. The Company
believes that the MicroLap and MicroSpan systems require limited training for
physicians familiar with standard laparoscopy and hysteroscopy techniques,
although more training will be required

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for use of the Ovation systems. For patients, Imagyn's systems reduce trauma and
the risk of complications and shorten recovery times as compared to traditional,
more invasive procedures. For payors, Imagyn's systems can reduce cost, provide
earlier, definitive diagnosis and increase patient satisfaction.

THE FEMALE REPRODUCTIVE SYSTEM

    The female reproductive system includes the uterus, the fallopian tubes and
the ovaries. The uterus is a pear-shaped organ connected to the fallopian tubes
and to the vagina. The interior wall of the uterus consists of a layer of soft,
spongy tissue called the endometrium. The base or neck of the uterus is called
the cervix, which serves as the point of exit and entry from the vagina to the
uterus. Under normal conditions, the cervix is virtually closed (less than one
millimeter in diameter), providing a natural barrier between the vagina and the
uterus. Because the cervix is extremely sensitive, especially to any dilation,
access through the cervix into the uterine cavity for diagnostic and operative
procedures can be difficult and extremely painful.

    On each side of the uterus is a fallopian tube, which extends outward toward
the ovaries. The junction of the uterus and each fallopian tube is called an
ostium. The fallopian tube is the channel through which the egg enters the
uterus during the monthly menstrual cycle. It is also the conduit for sperm to
reach the egg and is the site where fertilization occurs. Fallopian tubes are
long and narrow, contain many folds, and are fragile and delicate. The fallopian
tubes are lined with epithelial cells whose ciliary motion assists the sperm and
egg in their migration. Each fallopian tube is 7-14 centimeters long and only
1-3 millimeters in diameter. The fallopian tubes may become blocked or diseased,
preventing conception.

    Disorders of the female reproductive system include pelvic pain and related
disorders, uterine disorders and infertility.

PELVIC PAIN AND RELATED DISORDERS

    The prevalence of pelvic pain in women is widespread, with approximately 7
million outpatient gynecology visits annually in the United States related to
symptoms of pelvic pain. Pelvic pain can often be intense and persistent and can
severely impair a woman's health and lifestyle. It is often difficult to
accurately isolate the location and diagnose the cause of discomfort since many
women with pelvic pain may suffer from several disorders or multiple disease
sites. For example, scar tissue from infection or prior surgery may mask
endometrial lesions which may lead a physician to an inaccurate or incomplete
diagnosis. Pelvic pain, in both acute and chronic forms, can be caused by a
number of serious conditions including endometriosis, adhesions and pelvic
inflammatory disease.

    Endometriosis, a common cause of pelvic pain and also a significant factor
contributing to infertility, is a disorder in which abnormal growths of
endometrial tissue are present outside of the uterus. Endometrial lesions are
usually found on the reproductive organs and adjacent tissues in the pelvic
cavity. It is estimated that 5 million women suffer from endometriosis in the
United States. Endometriosis is one of the most common gynecological causes for
hospitalization of women of reproductive age.

    Scar tissue, or pelvic adhesions, which can form as a result of
endometriosis, infection, prior surgery, hemorrhage or tissue injury, is another
common cause of pelvic pain. Pelvic adhesions form in the healing process of
more than half of abdominal surgeries. Early intervention after surgery has been
demonstrated to reduce the risk of formation of dense, permanent adhesions.
Pelvic adhesions can also lead to serious long-term complications such as
infertility and intestinal obstruction. Post-operative adhesions may affect up
to 2 million women in the United States.

    Pelvic inflammatory disease, another common cause of pelvic pain, is a
genital tract infection that is often a complication of sexually transmitted
diseases. It can cause scarring of the fallopian tubes as the infection ascends
into the uterus and tubal structures. In its most serious form, it can lead to
infertility and ectopic (tubal) pregnancy, a life-threatening condition. It is
estimated that pelvic inflammatory disease affects more than 1 million women
each year in the United States.

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CURRENT DIAGNOSIS AND TREATMENT

    Diagnosis and identification of the cause or causes of pelvic pain is
difficult. Since there are currently no accurate non-invasive diagnostic tests
available, visual inspection of the abdomen and pelvic cavity by means of
laparoscopic surgery is the current method of choice for diagnosing pelvic pain.
In a traditional laparoscopic surgery procedure, the patient is typically placed
under general anesthesia. In order to create a space between the abdominal wall
and the internal organs to facilitate the insertion of instruments, the
patient's abdomen is insufflated, or inflated, with a significant quantity of
carbon dioxide gas delivered through a specialized needle, known as a Veress
needle. After the patient is properly insufflated, two to three punctures, each
of which can be up to 10 millimeters in diameter, are made with a sharp,
spike-like device called a trocar. A cannula, a hollow, sleeve-like device, is
then placed in the puncture opening. A laparoscope is placed into the abdomen
through one of the cannulas to enable the gynecologist to view the outer
surfaces of the patient's internal organs. Surgical instruments can be inserted
through cannulas placed at the other trocar puncture sites. Following the
procedure, the trocar sites must be closed with sutures and the patient may
require significant recovery time due to the effects of the puncture wounds, gas
insufflation and general anesthesia. Approximately 1 million laparoscopic
surgeries are performed annually by gynecologists in the United States.

    During a traditional laparoscopic surgery procedure, the physician examines
the internal abdominal organs in an attempt to locate abnormalities which may be
causing pelvic pain. The physician may also use surgical instruments inserted
into the abdomen to treat some abnormalities, such as by removing adhesions, or
to biopsy (remove a sample of) tissue for subsequent laboratory evaluation. The
administration of general anesthesia during the procedure complicates the
determination of the exact cause of pelvic pain because the anesthetized patient
is unable to provide any feedback to the physician.

THE IMAGYN MICROLAP SYSTEM FOR PELVIC PAIN

    Imagyn's proprietary MicroLap system is designed to enable the physician to
perform laparoscopic procedures outside the hospital. The MicroLap system
includes the proprietary MicroLap microlaparoscope, a specialized disposable
introducer for placement of the microlaparoscope into the abdomen and a broad
line of microsurgical instruments. The 2 millimeter-diameter MicroLap has
resolution and light efficiency characteristics which the Company believes are
comparable to those of standard 10 millimeter-diameter laparoscopes. The
MicroLap is attached to a light source and medical video camera, allowing the
physician to visually examine the interior of the pelvic cavity in a manner
similar to that of traditional laparoscopic procedures.

    In contrast to the traditional laparoscopic surgery procedure, the patient
in a microlaparoscopic procedure is not placed under general anesthesia.
Instead, sedation and local analgesic protocols are used to achieve a level of
sedation commonly termed "conscious sedation." An introducer is inserted into
the patient's abdomen, carrying the Veress needle and providing access to the
abdominal cavity. The patient's abdomen is then partially insufflated to permit
visualization and the insertion of instruments, but with a much smaller quantity
of carbon dioxide gas than is required in traditional laparoscopy. After the
patient is properly insufflated, the Veress needle is withdrawn and the
introducer is kept in place, providing access to the abdominal cavity without
the need for trocar punctures. The MicroLap is then inserted through the
introducer into the abdomen, allowing the physician to visually examine the
abdominal organs, in a manner similar to traditional laparoscopy. The small size
of the MicroLap requires only the very small puncture created by the introducer
to insert the MicroLap into the abdomen. Additional introducer sites may be
created for the insertion of microsurgical instruments. Sutures are not required
to close these small puncture sites, significantly reducing post-surgical
complications due to bleeding and pain at the puncture sites. This combination
of very small diameter puncture sites and the reduced requirement for gas
insufflation enables microlaparoscopic procedures to be performed using the
MicroLap system under conscious sedation rather than general anesthesia. Using
conscious sedation and the MicroLap system, physicians have been able to perform
a wide variety of diagnostic and operative procedures in a surgery

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center, office or clinic at a significantly reduced cost and with less patient
discomfort and a typical recovery time of approximately one day.

    Additionally, because microlaparoscopy does not require general anesthesia,
the MicroLap system has enabled the development of "conscious pain mapping," a
new diagnostic method for pinpointing the cause of pelvic pain which is
performed while the patient is awake. Through the use of microlaparoscopy and
regional anesthesia, the physician systematically probes the inside of the
woman's pelvis to identify the exact source and location of the pain with the
assistance of feedback from the patient. The Company believes that "conscious
pain mapping" procedures using the MicroLap will significantly improve the
diagnosis and treatment of pelvic pain.

    Studies indicate that diagnostic laparoscopy procedures performed using the
MicroLap system cost approximately $1,250, as compared to the approximately
$5,000 to $7,000 cost of a traditional hospital-based laparoscopic procedure
performed under general anesthesia.

UTERINE DISORDERS

    The uterus is prone to a number of common disorders including fibroids and
polyps, as well as endometrial cancer, each of which can lead to serious
complications including abnormal uterine bleeding, significant pain and
infertility. Women may experience one or more of these disorders at the same
time. Industry sources estimate that approximately 9% to 14% of menstruating
women experience abnormal uterine bleeding that prompts them to seek medical
attention at some time in their lives. In 1995, there were approximately 13
million visits to gynecologists for abnormal uterine bleeding in the United
States.

    Fibroids, or benign muscular tumors, are among the most common causes of
abnormal uterine bleeding. Fibroids usually grow during the reproductive years
and can produce a variety of problems including hemorrhage, pain and
infertility. Although not all of the approximately 15 million women in the
United States suffering from fibroids are symptomatic, it is estimated that 35%
to 50% of all women with fibroids have symptoms that are serious enough to lead
them to seek medical attention.

    Polyps, benign finger-like protrusions of tissue extending into the uterine
cavity, are also a common cause of abnormal uterine bleeding. Approximately 13
million women in the United States develop uterine polyps during their lifetime,
and approximately 25% of these women require medical attention.

    Endometrial cancer may also present initially as abnormal uterine bleeding,
particularly in women over the age of 50. Approximately 31,000 new cases of
endometrial cancer were reported in the United States in 1994. Early and
accurate diagnosis is critically important because endometrial cancer can often
be cured if detected and treated at an early stage; however, if undetected and
untreated, endometrial cancer can lead to serious complications or death.

CURRENT DIAGNOSIS AND TREATMENT

    Definitive diagnosis of uterine disorders requires direct visual inspection
of the uterine cavity and tissue biopsy of suspicious areas. The standard
procedures for collecting an adequate biopsy sample of uterine tissue for
diagnosis are dilatation and curettage ("D&C") and hysteroscopy. D&C is a blind
procedure in which the physician dilates the cervix, places a surgical scraping
device, known as a curette, into the uterus and scrapes the uterine lining to
remove tissue for examination by a pathologist. Because D&C is performed without
visual guidance, it is difficult for the physician to sample the entire uterine
lining and, as a result, significant abnormalities may be missed. It is
estimated that, in most cases, approximately half of the uterine cavity is
actually sampled and as many as 30% of lesions may be missed. D&C is usually
performed in a hospital under intravenous sedation or general anesthesia. The
procedure can lead to a number of serious complications including hemorrhage,
infection and perforation and scarring of the uterus. An estimated 500,000
diagnostic D&C procedures are performed annually in the United States.

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    The need to visualize the uterus for accurate diagnosis of uterine disorders
led to the development of hysteroscopy. In traditional hysteroscopy, the
physician dilates the patient's cervix and inserts a device known as a
hysteroscope through the cervix into the uterus. The hysteroscope is attached to
a light source and camera allowing the physician to visually examine the uterine
lining. The physician can also introduce surgical instruments through the cervix
to selectively sample or remove suspicious lesions. Introducer sheaths used in
current hysteroscopy procedures, which accommodate both the hysteroscope and
surgical instruments, range in size from approximately 5 to 7 millimeters. The
cervical dilation necessitated by the diameter of these devices can result in
significant pain and discomfort for the patient. Hysteroscopy has historically
been performed in the hospital under general anesthesia. Industry sources
estimate that approximately 500,000 hysteroscopic procedures are performed
annually in the United States.

    Current treatments for uterine disorders include various drug therapies and
surgical approaches. Treatment of uterine bleeding usually begins with drug
therapy and, if necessary, proceeds to more invasive surgical methods. Current
surgical procedures for abnormal uterine bleeding include D&C, hysterectomy,
myomectomy (fibroid removal by open surgery), endometrial resection, and
endometrial ablation (coagulation of the endometrium).

THE IMAGYN MICROSPAN SYSTEM FOR UTERINE DISORDERS

    Imagyn's diagnostic and operative MicroSpan microhysteroscopy system is
designed specifically for use outside the hospital. The Company's new
proprietary uterine access device enables the physician to automatically access
the uterus without the need for cervical dilation. Once positioned, the
micro-access device, with its very low profile, will permit the simultaneous use
of the microhysteroscope and the Company's specialty diagnostic and operative
microsurgical instruments.

    Without the need for painful dilation of the cervix prior to insertion of
the device, the patient can remain comfortable with only local anesthesia.
Microhysteroscopy can be performed in a low-stress environment such as the
physician's office and the patient will typically require only a short
post-operative recovery period, in some cases as little as 30 minutes. Patients
can usually resume normal activities by the following day.

    For the physician, the MicroSpan system reduces the amount of time required
for procedures and provides the flexibility to perform both diagnostic and
operative procedures in the office. The MicroSpan system provides high
resolution and light efficiency comparable to traditional, large diameter
hysteroscopes. The design of the Company's proprietary micro-access device will
enable the physician to use surgical instruments of the same diameter used in
standard hysteroscopy procedures for effective tissue sampling and removal of
many uterine lesions including adhesions, polyps and small fibroids. The ability
to use such effective surgical instruments in conjunction with the
microhysteroscope will allow physicians to treat many uterine disorders with
accurate micro-invasive procedures, thus reducing the need for more invasive
surgical procedures.

    Industry sources estimate that the cost of a D&C procedure under general
anesthesia is approximately $2,400 to $3,000. The Company estimates that the
cost of a standard hysteroscopy procedure under general anesthesia is
approximately $2,600 to $3,500 and that an office-based microhysteroscopy
procedure will cost approximately $650 to $1,000.

INFERTILITY

    Infertility is one of the most common and emotionally traumatic of
reproductive disorders. Female infertility appears to be increasing because of
both the increase in diseases which damage the fallopian tubes and the
increasing tendency of women to defer childbearing until later in life when
fertility begins to decline naturally. In general, couples who have not
conceived after one year of unprotected intercourse are considered infertile. In
the United States, recent government data estimates that approximately 5 million
women of child-bearing age suffer from an impaired ability to have children.
Despite the limited

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availability of reimbursement for infertility diagnosis and assisted
reproductive procedures such as intrauterine insemination and in-vitro
fertilization, approximately $2 billion is spent on the treatment of infertility
annually in the United States.

    The causes of infertility can be complex and are often difficult to
identify. A recent study indicates that abnormalities of the fallopian tubes are
responsible for 30% to 50% of infertility cases. The fallopian tubes are the
sites where fertilization occurs and at least one fallopian tube must be open to
permit the passage of sperm to provide fertilization of the egg and enable the
fertilized egg to pass to the uterus. The fallopian tubes are very narrow and
tortuous, delicate and difficult to access. As a result, they do not lend
themselves to easy study and treatment. Current non-surgical techniques for
diagnosing and treating fallopian tube disorders often do not adequately or
accurately delineate the nature, extent and location of tubal pathology.

CURRENT DIAGNOSIS AND TREATMENT

    Currently, there are two diagnostic procedures utilized by physicians to
determine whether the fallopian tubes are patent (open) or occluded. The most
commonly performed diagnostic procedure is hysterosalpingography ("HSG"), which
involves the high-pressure injection of an x-ray contrast medium (or dye)
transcervically into the uterus to allow the physician to observe and evaluate
the flow of dye through the fallopian tubes under x-ray fluoroscopy. This
procedure is often painful, primarily due to the high-pressure injection
process, and is also highly inaccurate, with as many as 25% of HSG cases being
inaccurately classified as blocked (false positive). Nevertheless, due in part
to the absence of more accurate, non-invasive diagnostic techniques, over
200,000 HSGs are performed annually in the United States.

    Due to the frequent inaccuracy of HSG, in the event that an HSG indicates a
blockage of the fallopian tube, the physician will likely perform an additional
procedure, known as laparoscopic chromopertubation. This procedure is similar to
HSG, but involves the use of a laparoscope surgically positioned in the abdomen
to observe the flow of transcervically-injected dye through the fallopian tubes.
This procedure has a lower rate (12%) of false positive diagnoses of tubal
blockage, but involves the potential complications associated with the more
invasive laparoscopic surgical procedure. The Company estimates that there are
approximately 180,000 chromopertubations performed annually in the United
States.

    Although HSG and laparoscopic chromopertubation can provide some diagnostic
information regarding the patency of fallopian tubes, these procedures do not
provide any information regarding the health of the interior of the fallopian
tubes, which can be a significant factor contributing to infertility. Recently,
a procedure known as falloposcopy has been developed, in which a catheter device
containing a visualization scope is inserted through the cervix into the
fallopian tubes to enable the physician to visualize the interior of the
fallopian tube. One such system uses a guidewire-based catheter device in
conjunction with other procedures, such as laparoscopy, hysteroscopy or
ultrasound, to assist in guiding the catheter into and through the fallopian
tubes. Because falloposcopy enables the physician to visualize the interior of
the fallopian tube and assess its health, use of falloposcopy can enable
physicians to make more informed recommendations to patients regarding the next
course of action. Such courses of action could include tubal surgery, assisted
reproductive techniques such as in-vitro fertilization or further attempts at
natural conception.

    Several surgical approaches are currently used to address infertility. These
procedures include laparotomy, or open abdominal surgery, and laparoscopic
surgery. Both of these procedures are performed in the hospital under general
anesthesia and, as a result, involve several risks, including infection. In
addition, the recovery period is long, extending to many weeks for patients
undergoing laparotomy. Furthermore, the effectiveness of these procedures is
limited as pregnancy is achieved in only approximately 20% to 25% of surgical
cases. As a result of the invasiveness and limited efficacy of these procedures,
few such procedures are performed in the United States and there is no
well-accepted method for opening blocked fallopian tubes.

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    Consequently, rather than undergo tubal surgery, many patients attempt
in-vitro fertilization. In-vitro fertilization involves drug-induced
superovulation, harvesting of multiple eggs through an aspiration needle
inserted into the ovary and fertilization of the harvested eggs with semen in a
laboratory test-tube fertilization procedure. Embryos are then transferred into
the uterus using a catheter placed through the cervix. In-vitro fertilization is
costly, with a single harvest and transfer, known as a cycle, costing an average
of $7,800, and is generally not reimbursed by third-party payors. Furthermore,
many patients undergo multiple cycles. The drugs administered to induce
superovulation are powerful and can have significant side effects. Finally, the
success rates for in-vitro fertilization are low. However, notwithstanding the
cost, lack of reimbursement, need to administer powerful drugs and limited
efficacy, approximately 38,000 in-vitro fertilization procedures are performed
annually in the United States.

THE IMAGYN OVATION SYSTEMS

    Imagyn's Ovation falloposcopy system and Ovation tubal recanalization system
are designed to enable the physician to access, navigate and view the entire
length of the fallopian tube using a flexible catheter and small scope. Unlike
HSG and chromopertubation, the Ovation falloposcopy system enables the physician
to view and accurately evaluate the patency and overall health of the interior
of the fallopian tube. Due to the unique self-steering characteristics of the
Ovation falloposcopy and tubal recanalization systems, visual guidance with
hysteroscopy or ultrasound, which is required with other falloposcopy systems,
is not required nor is there the need for concurrent laparoscopic manipulation
of the fallopian tube. The Ovation falloposcopy system has been specifically
designed to facilitate fallopian tube diagnosis in the physician's office.

    The Ovation tubal recanalization system has been shown in a controlled,
multi-center clinical trial in Japan to unblock occluded fallopian tubes. The
Company has received approval from the Japanese Ministry of Health and Welfare
to market the Ovation tubal recanalization system for fallopian tube
recanalization.

    The Company has developed a modified version of the Ovation system for use
in intrauterine insemination ("IUI"), a procedure in which sperm are introduced
into the uterine cavity. The Ovation IUI system permits the traversal of the
cervix for the purpose of delivering sperm into the uterine cavity without
trauma to the delicate lining of the uterus in those cases in which the cervix
is very narrow and difficult to access.

TUBAL STERILIZATION

    Tubal ligation, a procedure for fallopian tube sterilization, involves
surgically cutting and cauterizing the fallopian tubes. Tubal ligation is chosen
as a permanent contraceptive method by approximately 800,000 women annually in
the United States.

CURRENT TUBAL LIGATION PROCEDURE

    Tubal ligation is most commonly performed in the hospital, under general
anesthesia, by means of traditional laparoscopic surgery in which surgical
devices are used to isolate and close the fallopian tube. Current tubal ligation
procedures require multiple large trocar punctures which must be sutured closed
at the conclusion of the procedure, gas insufflation to inflate the pelvic
cavity and general anesthesia. Patients are subjected to pain associated with
the trocar punctures and gas insufflation as well as the risks and possible
complications associated with general anesthesia.

THE IMAGYN MICROLAP SYSTEM FOR TUBAL STERILIZATION

    The MicroLap system enables physicians to visualize the performance of tubal
sterilization outside the hospital under conscious sedation, reducing procedure
time and cost, as well as recovery time and patient discomfort. A recently
published study has indicated that office-based tubal ligation can reduce the
cost of

                                       7
<PAGE>
the procedure to approximately $1,000, as compared to the approximately $6,000
to $8,000 cost of a hospital-based tubal ligation procedure.

ADVANTAGES OF IMAGYN'S PRODUCT SYSTEMS

    Imagyn's product systems enable the micro-invasive diagnosis and treatment
of a broad continuum of gynecological and reproductive disorders outside the
hospital, thereby reducing the cost, trauma and complications associated with
operating room procedures. Imagyn's product systems have been designed to meet
the needs of physicians, patients and payors.

ADDRESSING THE NEEDS OF PHYSICIANS

    -  IMPROVED DIAGNOSIS.--Imagyn's product systems provide physicians with the
necessary visualization and access to facilitate more accurate diagnosis of
gynecological and reproductive disorders. For example, the Ovation falloposcopy
system is designed to allow physicians to view and accurately evaluate the
patency and overall health of the interior of the fallopian tubes.

    -  MINIMAL TRAINING THRESHOLD.--Imagyn believes that the MicroLap and
MicroSpan product systems require only minimal training for physicians. For
example, physicians using the MicroLap will employ the same procedural
techniques as are used in traditional laparoscopy. Because falloposcopy is a
relatively new procedure, more training will be required for use of the Ovation
falloposcopy system.

    -  ENHANCED PRACTICE MANAGEMENT.--Imagyn's product systems are designed to
be used in the office and with reduced procedure time, resulting in increased
physicians' practice productivity. For example, the Company believes that the
procedure using the MicroLap system outside the hospital takes one-half to
one-third the time required for traditional diagnostic laparoscopy in an
operating room.

ADDRESSING THE NEEDS OF PATIENTS

    -  REDUCED TRAUMA.--Imagyn's small profile product systems reduce access
trauma, thereby reducing pain and the number and size of puncture wounds. For
example, due to the small size of the MicroLap, only very small punctures are
required to insert it into the abdomen and sutures are not required to close the
puncture sites.

    -  FEWER COMPLICATIONS.--Imagyn's product systems are designed to be used
without general anesthesia, enabling patients to avoid many of the risks and
complications associated with current invasive procedures. For example, the
small diameter of the MicroSpan system eliminates the need for dilation of the
cervix so the patient will remain comfortable with only local anesthesia,
thereby avoiding complications of general anesthesia such as allergic reaction,
pneumonia, nausea, and respiratory depression.

    -  FASTER RECOVERY.--Imagyn's product systems generally enable patients to
return to normal activities within a 24-hour period following a procedure. For
example, a patient undergoing a MicroLap procedure can generally resume normal
activities the next day, while several days of recuperation are often necessary
for women undergoing traditional laparoscopy.

ADDRESSING THE NEEDS OF PAYORS

    -  LOWER COST.--Imagyn's product systems can deliver significant cost
savings to all payors by moving procedures from the hospital to offices, clinics
and outpatient settings, eliminating the need for general anesthesia, and
reducing the potential for costly complications. For example, the MicroLap
system has been shown to reduce costs for diagnostic laparoscopy by as much as
80% when performed in a physician's office rather than a hospital.

                                       8
<PAGE>
    -  EARLIER, DEFINITIVE DIAGNOSIS.--Imagyn's product systems facilitate
earlier, definitive diagnosis, reducing the likelihood that costly diagnostic
procedures will need to be repeated and that unnecessary operative procedures
will be performed. For example, the MicroLap system can be used to perform
"conscious pain mapping" to accurately identify the sources of pelvic pain
thereby eliminating the need for further diagnostic or unnecessary operative
procedures or expensive drug therapies.

    -  HIGHER PATIENT SATISFACTION.--Imagyn's product systems provide
time-efficient and micro-invasive care. The Company believes that patients will
be drawn to those providers who can reduce recovery time and risk through the
adoption of micro-invasive procedures.

    The MicroLap system, the MicroSpan system and the Ovation system represent
new approaches for the diagnosis and treatment of gynecological and reproductive
disorders and for tubal sterilization. Market acceptance of the MicroLap system,
the MicroSpan system and the Ovation systems will be dependent upon, among other
things, physicians' determinations that the Company's product systems and the
procedures in which they are intended to be used are safe and effective
alternatives to current hospital-based procedures and demonstrate clinical
utility, and can be used in a cost-effective manner. In addition, due to the
small size of the Company's micro-access devices, the Company's product systems
are generally not appropriate for use in procedures which involve the removal of
substantial amounts of tissue or organs, such as the laparoscopic removal of the
gall bladder. In addition, procedures using the Company's product systems should
be avoided with patients who have a heightened risk of uncontrollable bleeding,
are pregnant, have advanced cardiovascular disease or are excessively obese.

PRODUCT SYSTEMS

      The following table summarizes the portfolio of Imagyn's current product
                                    systems:

<TABLE>
<CAPTION>
                                        REGULATORY STATUS              U.S. MARKETING STATUS           INT'L MARKETING STATUS
                                 -------------------------------  -------------------------------  -------------------------------
<S>                              <C>                              <C>                              <C>
MICROLAP SYSTEM
- Microlaparoscope               510(k) clearances received       Imagyn currently marketing       USSC currently marketing
- Disposable introducer                                           products                         products in selected markets
- Microsurgical instruments                                       USSC currently marketing
                                                                  products
MICROSPAN SYSTEM
- Microhysteroscope              510(k) clearances received       Limited product launch in        Imagyn anticipates launch in
- Disposable micro-access                                         Q4 1996                          selected European markets in Q1
  devices                                                                                          1997
- Microsurgical instruments
OVATION SYSTEMS
Falloposcopy
- Linear everting catheter       510(k) clearance application     Imagyn anticipates launch in     Direct and distributor sales
- Falloposcope                   submitted in September 1996;     Q2 1997                          in Europe and Australia
- Irrigation pump                510(k) clearance
                                 received in January 1997
Tubal Recanalization
- Linear everting catheter       Japanese approval received       Imagyn does not currently        Japanese market
- Falloposcope                                                    intend to market for this        introduction by Terumo in
- Irrigation pump                                                 indication in U.S.               1996
Intrauterine Insemination
- Linear everting catheter       510(k) clearance received        Imagyn anticipates launch in     Imagyn anticipates launch in
- Transfer catheter                                               1997                             1997
</TABLE>

                                       9
<PAGE>
MICROLAP SYSTEM

    The MicroLap system includes a proprietary microlaparoscope, the MicroLap,
disposable introducers (for placement of the MicroLap and microsurgical
instruments into the abdomen) and a broad line of microsurgical instruments for
use with the system. The MicroLap is a reusable laparoscope which, at slightly
less than 2 millimeters in diameter, is 80% smaller than conventional 10
millimeter-diameter laparoscopes. The Company's proprietary micro-optics
technology has enabled the development of small-diameter laparoscopes having
resolution and light efficiency characteristics which the Company believes are
comparable to those of conventional laparoscopes of much larger diameter. By
combining unique micro-lens design with fused image fiber bundle technology, the
Company has achieved up to five times the illumination and up to three times the
resolution of similar sized microlaparoscopes. Additionally, the Company's
optics design provides consistent and uniform edge-to-edge focus. Despite its
small size, the MicroLap is as durable as traditional rod or fixed lens
laparoscopes due to its fiber optic construction. The MicroLap is designed to be
utilized by physicians in a manner similar to larger laparoscopes. The MicroLap
is compatible with all existing medical video cameras and light sources and does
not require any additional specialized or ancillary equipment for its use.

    Imagyn's disposable introducers facilitate atraumatic insertion and secure
placement of the MicroLap and microsurgical instruments through the abdominal
wall. The introducer is designed to be placed through the abdominal wall in a
single step with a standard Veress needle and without the need for a trocar or a
separate puncture site for insufflation. The introducer's anchoring system
prevents inadvertent withdrawal during the procedure and allows the introducer
to be pulled up tightly against the interior wall of the abdomen, thereby
providing maximum working area in the abdomen. The introducer incorporates a
side port for gas insufflation and a one-way check valve to prevent gas leakage.
Typically, several introducers are used during a microlaparoscopy procedure, one
for the MicroLap and others to permit the insertion of microsurgical
instruments.

    The Company has also designed a broad line of stainless steel, reusable
microsurgical instruments, all of which are 2 millimeters in diameter and
compatible with the MicroLap introducer. The Company's current line of
microsurgical instruments includes several graspers and scissors, a biopsy punch
for tissue sampling, irrigation and aspiration cannulae, palpation probes and
monopolar electrocautery probes for the cauterization and removal of small
endometrial lesions and adhesions.

CLINICAL AND REGULATORY STATUS.

    The Company has received 510(k) marketing clearances for the MicroLap
microlaparoscope, MicroLap introducer and a variety of microsurgical instruments
for general laparoscopic procedures. USSC, which has exclusive distribution
rights in international markets (excluding China and India), has responsibility
for individual regulatory approvals in those markets.

MICROSPAN SYSTEM

    The MicroSpan system is comprised of a microhysteroscope, a proprietary
disposable micro-access device and a line of microsurgical instruments. Because
the microhysteroscope utilizes the proprietary micro-optic technology used in
the MicroLap, it is significantly smaller than current rod, or fixed, lens
hysteroscopes. The disposable micro-access device provides simultaneous
transcervical access to the uterus for both the microhysteroscope and
microsurgical instruments without the need for the cervical dilation required by
currently available hysteroscopy systems. Imagyn has also designed a line of
reusable hysteroscopic microsurgical instruments to be used with the MicroSpan
system. These instruments include several graspers and scissors, a biopsy punch
for tissue sampling, palpation probes and monopolar electrocautery probes for
the cauterization and removal of small fibroids, polyps and adhesions. The
MicroSpan system is compatible with all existing medical video cameras and light
sources and does not require any additional specialized or ancillary equipment
for its use.

                                       10
<PAGE>
CLINICAL AND REGULATORY STATUS.

    The Company has received 510(k) marketing clearances for the MicroSpan
microhysteroscope and microhysteroscopic micro-access devices. The Company plans
to seek regulatory approval in those countries outside the United States in
which it intends to sell these products. There can be no assurance as to when or
whether such approvals will be received.

OVATION SYSTEMS

    Imagyn has developed the Ovation falloposcopy system for falloposcopy, the
Ovation tubal recanalization system for tubal recanalization and the Ovation IUI
system for intrauterine insemination. The Ovation falloposcopy and tubal
recanalization systems consist of a proprietary 0.5 millimeter diameter,
flexible falloposcope, a proprietary catheter, and a specially designed
irrigation pump. The linear everting catheter is designed to enable the
physician to access, navigate and view the entire length of the fallopian tube
and incorporates three elements: an inner delivery catheter, an outer catheter
and an everting balloon membrane. A sliding mandrel straightens and stiffens the
catheter tip for placement through a non-dilated cervix and an integral
falloposcope controller provides one-finger control of the advancement and
withdrawal of the falloposcope. The linear everting catheter's curved ball tip
is designed to enable the catheter to atraumatically engage the tubal ostium,
facilitating unguided access to the fallopian tubes from within the uterus. The
combination of these elements in a single device, together with the linear
everting catheter's unique "unrolling" design, allows for complete fallopian
tube access and visualization without the need for concurrent laparoscopic
guidance or hysteroscopic placement through the cervix, and without the need for
ancillary devices, such as guidewires for accessing the fallopian tubes. The
Ovation falloposcopy and tubal recanalization systems are compatible with all
existing medical video cameras and light sources and does not require any
additional specialized or ancillary equipment for its use.

    After the catheter tip is placed through the cervix, the tip is rotated
toward either the right or left fallopian tube to engage the tubal ostium. Fluid
pressure is applied to the everting balloon membrane by means of an inflation
device and, in combination with the manual advancement of the inner delivery
catheter, propels the everting balloon membrane forward into the fallopian tube.
As the balloon membrane gently unrolls from the inside out, it carries the
falloposcope forward without exerting any shear force against the delicate
lining of the fallopian tube. In contrast to guidewire-based catheter access
systems, the linear everting catheter's unique unrolling mechanism enables it to
traverse the tortuous tubal anatomy without the need to push guidewires through
the fallopian tube or independently manipulate the fallopian tube with
laparoscopic or other ancillary assistance. Once the Ovation system is
positioned, it is designed to enable the physician is to view the entire length
of the fallopian tube as the catheter and falloposcope are withdrawn by
rerolling the catheter's everting balloon membrane.

    The Ovation IUI system is a modified catheter that incorporates the
Company's linear everting catheter technology for IUI, a procedure in which
sperm are introduced into the uterine cavity. The Ovation IUI system permits
traversal of the cervix in those cases in which the cervix is very narrow and
difficult to access without trauma to the delicate lining of the uterus.
Following placement of the Ovation IUI system through the cervix, the everting
balloon membrane is unrolled a pre-set distance into the uterus. A transfer or
delivery catheter containing sperm is placed through the central channel of the
catheter and the balloon membrane is slowly peeled back, exposing the tip of the
transfer catheter. The sperm are then expelled into the uterine cavity.

CLINICAL AND REGULATORY STATUS.

    In August 1995, the Ovation tubal recanalization system was approved for
marketing for tubal recanalization in Japan by the Japanese Ministry of Health
and Welfare, and an application for reimbursement approvals within the Japanese
health care system is pending. The Company has also received regulatory
clearances in Germany, the United Kingdom, Australia and several additional
international markets for the Ovation falloposcopy system. The Japanese approval
was based on a multi-center clinical

                                       11
<PAGE>
study involving women who had experienced over four years of infertility. Of the
60 patients in the study who had been diagnosed with bilateral tubal blockages
by HSG and laparoscopic chromopertubation or some other modality, 49 patients,
or 82%, had tubal patency demonstrated by falloposcopy and confirmed with an HSG
procedure two months after undergoing tubal recanalization with the Ovation
tubal recanalization system. Of the 55 patients in the Japanese clinical study
who were followed after tubal recanalization to determine pregnancy prognosis,
17 patients, or 31%, became pregnant during a period of up to two years
following the tubal recanalization procedure. This post-tubal recanalization
pregnancy rate compares with an approximately 20% pregnancy rate for in-vitro
fertilization in Japan.

    The Ovation falloposcopy and tubal recanalization systems have also
undergone clinical evaluation in Australia. The diagnostic information obtained
through falloposcopy of 200 infertility patients enabled physicians to make more
informed recommendations regarding subsequent courses of action. This resulted
in a change in clinical management in approximately 70% of cases, with many
patients being advised to again attempt natural conception. Of the 192 patients
followed after falloposcopy, 67 achieved pregnancy within two years, 42 of whom
achieved pregnancy naturally. As a result, unnecessary and costly assisted
reproductive procedures were avoided.

    In September 1996, the FDA advised the Company that its Ovation falloposcopy
system could be eligible for 510(k) clearance review. In September 1996, the
Company submitted a 510(k) clearance application to the FDA for its Ovation
falloposcopy system. On January 31, 1997, the Company received 510(k) marketing
clearance for its Ovation falloposcopy system.

    The Company received 510(k) clearance for the Ovation IUI system in May 1995
and is currently conducting market evaluation prior to commencement of
commercial sales and distribution of the Ovation IUI system for this
application.

MARKETING, SALES AND DISTRIBUTION

    The Company's marketing and distribution strategy consists of two key
elements: (i) focusing its direct sales and marketing resources on gynecology
group practices, surgery centers and infertility specialists and (ii)
establishing strategic marketing alliances with major medical products companies
to accelerate sales growth, increase geographic market coverage and access
particular markets and customers that can be more effectively addressed by the
sales organizations of these companies.

    There are approximately 33,000 practicing gynecologists in the United
States, approximately 33% of whom perform laparoscopic surgery, approximately
15% of whom are skilled in hysteroscopy and approximately 80% of whom provide
some type of infertility services to their patients. Imagyn intends to focus its
direct sales activities on the approximately 1,400 larger gynecology group
practices, the approximately 1,700 outpatient surgery centers and the
approximately 1,000 infertility specialists in the United States which the
Company believes represent the highest concentration of demand for the Company's
products. Gynecology practices consisting of five or more physicians typically
have a sufficient number of patients to support an office-based micro-surgery
practice. The Company believes outpatient surgery centers are seeking new
procedures that can be performed in their facilities. The Company believes
infertility specialists, most of whom are associated with the approximately 300
infertility centers in the United States, are seeking new approaches to diagnose
and address infertility problems.

    Imagyn plans to build a specialized regional sales force in the United
States to market its products directly to gynecology group practices, surgery
centers and infertility specialists. The Company intends to hire approximately
15 sales personnel, consisting of both field sales personnel and regional
managers, in the United States during the next 12 months. At December 31, 1996,
the Company's direct field sales force consisted of ten employees. The Company's
direct sales force will also provide training in the applications for and the
use of its products, as well as financial models of clinical practice designed
to demonstrate to payors and physicians the cost advantages of using the
Company's products.

                                       12
<PAGE>
    In January 1997, Imagyn entered into an exclusive provider agreement with
Medical Alliance, Inc. ("MAI") under which MAI will use the MicroSpan
microhysteroscopy system in its physician office mobile surgical business. MAI
provides temporary surgical facilities for use in conjunction with physicians'
offices in 46 states, thereby providing the Company with expanded access to the
physician office market. Under the terms of the exclusive provider agreement,
the Company's MicroSpan system will be the system of choice for
microhysteroscopy procedures under these managed care contracts.

    In addition to selling directly to physicians and administrators in these
target markets, Imagyn plans to develop relationships with opinion leaders in
these markets by sponsoring workshops and conferences to promote the discussion
of clinical issues and treatments. The Company also plans to generate acceptance
of its products by establishing training programs at leading medical
institutions, such as its training centers for the use of its MicroLap system at
Yale University Medical School and Baylor College of Medicine.

    The Company intends to focus a substantial portion of its sales and
marketing efforts on facilitating the acceptance and adoption of its
procedure-specific systems by third-party payor organizations. Imagyn plans to
take advantage of current trends in managed health care, under which the
traditional fee-for-service system is being replaced by integrated health care
delivery systems, preferred provider organizations ("PPOs") and health
maintenance organizations ("HMOs"), by improving patient care, reducing trauma
and facilitating the movement of procedures that have historically been
performed in the hospital to physicians' offices, clinics and outpatient surgery
centers.

    The Company also intends to sponsor patient education programs and increase
women's awareness of the benefits of the Company's micro-invasive product
systems.

    Internationally, the Company currently markets the Ovation systems in the
United Kingdom, Germany and Australia through a limited number of direct sales
personnel who are assisted by agents. The Ovation systems are marketed by
distributors in Italy, Austria and Spain. The distribution agreements with
distributors of the Ovation systems grant the distributors the exclusive right
to sell the Ovation systems within defined territories in exchange for covenants
prohibiting them from marketing medical devices that compete directly with these
products. The distributors purchase the products from the Company at a discount
from list price in transactions denominated in United States dollars. The
end-user prices are determined by the distributors and vary from country to
country.

    In 1996, the Company entered into an agreement with Medlink Europe BV, a
Dutch company, whereby Medlink has been appointed to serve as the Company's
master distributor for its MicroSpan products in Europe. Under the agreement,
Medlink Europe will purchase products directly from the Company and contract
with subdistributors for the sale of the Company's products to end users in
selected European countries.

    The Company has only limited experience marketing and selling its products,
and does not have experience marketing and selling its products in commercial
quantities. Establishing marketing and sales capability sufficient to support
sales in commercial quantities will require significant resources and will be
time-consuming, and there can be no assurance that the Company will be able to
recruit and retain qualified marketing personnel, direct sales personnel or
contract sales representatives in a timely manner or that future sales and
marketing efforts of the Company will be successful. There can be no assurance
that the Company will be successful in establishing marketing, sales and
distribution channels in the United States or internationally. The failure to
establish and maintain effective distribution channels for the Company's
products, or to retain qualified sales personnel to support commercial sales of
the Company's products, would have a material adverse effect on the Company's
business, financial condition and results of operations.

                                       13
<PAGE>
STRATEGIC MARKETING ALLIANCES

UNITED STATES SURGICAL CORPORATION

    In October 1995, the Company entered into an agreement with United States
Surgical Corporation ("USSC") pursuant to which USSC was granted exclusive
international marketing rights for the Company's MicroLap system in all
international markets (excluding China and India). USSC was also granted, on a
co-exclusive basis with the Company, marketing rights to the MicroLap system in
the United States. Under the terms of the agreement, Imagyn will manufacture
private label products for USSC for sale and distribution in the United States
and international markets. USSC is required to obtain appropriate international
product registrations and regulatory approvals in those markets in which USSC
plans to distribute the MicroLap system, except that the Company is required, at
its expense, to obtain a CE mark for the system. USSC is also responsible for
all sales and marketing expenses in connection with the sale of MicroLap
systems. Furthermore, USSC is subject to minimum annual purchase requirements.
The Company's agreement with USSC may be terminated by USSC upon six months
notice at any time after October 23, 1997. Imagyn may terminate the agreement at
any time if USSC introduces products which compete with the MicroLap
microlaparoscope.

    USSC has a substantial sales force that markets products primarily for use
in hospital-based surgical procedures. Because most laparoscopy procedures are
currently performed in a hospital, the Company believes that the ability to
expose physicians to the MicroLap system in a hospital setting will accelerate
the adoption of the MicroLap system by physicians and will facilitate the
movement of microlaparoscopy procedures out of the hospital. Therefore, the
Company believes that the efforts of its direct sales organization, which will
be focused on gynecology group practices, surgery centers and infertility
specialists, will be complementary to the sales and marketing efforts of USSC.

TERUMO CORPORATION

    In August 1995, Terumo Corporation ("Terumo") obtained Japanese regulatory
approval for use of the Ovation tubal recanalization system pursuant to an
agreement between the Company and Terumo for the distribution and licensed
manufacture of the Ovation systems in Japan. Under the agreement, Terumo, a
Japan-based multinational hospital products supplier, has been granted sales and
distribution rights for the Ovation systems in Japan. Under the agreement,
Terumo is responsible for obtaining Japanese regulatory and reimbursement
approvals as well as for the cost of all sales and marketing activities for
these products in Japan. Terumo has applied to the Japanese Ministry of Health
and Welfare for reimbursement approval of the Ovation tubal recanalization
system in Japan. Through August 1997, Terumo may purchase products, denominated
in United States dollars, from Imagyn at a discount from United States list
price and resell the products to hospitals, clinics and physicians. The end-user
price is determined solely at the discretion of Terumo. At the end of this two
year period, Imagyn is obligated to transfer the manufacturing know-how
necessary to permit Terumo to manufacture the Ovation catheters and
falloposcopes for sale in Japan. Terumo is required to pay Imagyn royalties on
the sales of these products until such time as the Japanese patents covering
these products expire. Terumo may, at its option, continue to purchase other
ancillary products from Imagyn that are used in connection with the Ovation
systems. In August 1996, the Company's agreement with Terumo was amended to
grant Terumo with additional distribution rights for the Ovation system in
certain Asian markets.

    The Company is dependent upon USSC and Terumo for marketing, sales and
distribution of the products covered by their respective agreements in their
respective territories. The Company is dependent upon Terumo for regulatory and
reimbursement approvals in Japan, and, although Terumo has obtained approval of
the linear everting system for tubal recanalization, there can be no assurance
that Terumo will comply with the conditions of such approval or that Terumo will
be able to obtain reimbursement approvals in Japan. The Company is dependent
upon USSC to obtain appropriate international product registrations and
regulatory approvals in those markets in which USSC plans to distribute the
MicroLap

                                       14
<PAGE>
system, except that Imagyn is obligated, at its expense, to obtain a CE mark, an
international symbol of adherence to quality assurance standards and compliance
with applicable European Union Medical Device Directives, for the MicroLap
system. The Company is dependent upon Terumo and USSC to support reimbursement
approval for their respective products in their respective territories. In the
event that USSC and Terumo are unable to obtain necessary regulatory approvals
for their respective products in their respective territories, fail to devote
sufficient resources to promote the Company's products, or fail to support
reimbursement approvals, sales of the products covered by the agreements with
USSC and Terumo could be materially and adversely affected, which in turn would
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company has also agreed to indemnify USSC and
Terumo against claims of infringement of intellectual property rights.
Furthermore, the Company's rights to terminate the agreements with USSC and
Terumo are limited, and, accordingly, the Company may be unable to establish
alternative marketing or distribution arrangements if the agreements with USSC
and Terumo are not successful. The failure or loss of strategic alliances with
USSC and Terumo, or the Company's inability to enter into future necessary
strategic alliances, would have a material adverse effect on the Company's
business, financial condition and results of operations.

RESEARCH AND DEVELOPMENT

    Imagyn's research and development activities are performed in-house by a
group consisting of 12 engineers and technicians. The efforts of the research
and development group are supplemented by outside physician experts and
consultants. The Company also makes use of technical and engineering consultants
as required.

    In microlaparoscopy, the Company is developing new electrocautery and other
microsurgical instruments to broaden its MicroLap product line and the
applications for the MicroLap system. Enhancements under development for the
Company's microhysteroscopy technology include microhysteroscopic biopsy and
electrocautery devices. In addition, Imagyn is directing research and
development efforts toward enhancing its proprietary micro-access technology for
both microhysteroscopy and microlaparoscopy. The Company is also developing new
applications for its proprietary linear everting catheter technology as well as
a curved proboscis tip for the Ovation falloposcopy system that is designed to
improve visualization during falloposcopy.

    The product development process is time-consuming and costly, and there can
be no assurance that any new product development will be successfully completed,
that necessary regulatory clearances or approvals will be granted by the FDA or
international regulatory authorities on a timely basis, or at all, or that any
new products developed and introduced by the Company will receive market
acceptance. Failure by the Company to develop, obtain necessary regulatory
clearances or approvals for, or successfully market new products, could have a
material adverse effect on the Company's business, financial condition and
results of operations.

    The Company's research and development expenditures totaled approximately
$2.7 million, $1.8 million and $1.8 million in the years ended December 31,
1996, 1995 and 1994, respectively.

MANUFACTURING

    The Company manufactures its proprietary microlaparoscopes,
microhysteroscopes, falloposcopes, linear everting catheters and micro-access
devices in its clean room facilities in Laguna Niguel, California.

    Components are purchased from a variety of vendors, subjected to stringent
quality specifications and assembled by Imagyn's highly skilled manufacturing
technicians into finished products. Final assembly and packaging is currently
performed by the Company in-house and sterilization is performed by an outside
vendor. The manufacturing processes for microlaparoscopes, microhysteroscopes
and linear everting catheters are complex and require precision in producing,
assembling and testing components and finished

                                       15
<PAGE>
products. Many of the steps in the assembly process, such as grinding and
polishing lenses and optical fibers, are performed under a microscope, requiring
up to 80x magnification.

    The Company has limited manufacturing capacity and may be required to
increase both its in-house manufacturing capability and the size of its
manufacturing facilities. Although the Company expanded its manufacturing
facilities in 1996, there can be no assurance that such facilities will be
adequate or that the Company may be able to attract, train and retain the
required personnel, including personnel skilled in micro-optics assembly
processes. The Company may need to obtain alternative manufacturing facilities
or to establish contract manufacturing for its products. Delays associated with,
or inability to establish, such capacity could have a material adverse affect on
the Company's business, financial condition and results of operations.

    Certain of the components used in the Company's product systems, including
the optic image fiber used in the MicroLap, a similar version of which will also
be used in the MicroSpan and the medical video camera and light source used in
connection with the Ovation tubal recanalization system, are currently purchased
from single sources. Currently, the Company has a supply agreement with the
MicroLap image fiber supplier; however, there can be no assurance that such
supplier will be able to or will continue to supply image fibers to the Company
in the amounts and at the times needed by the Company or that other disruptions
in supply will not occur. The number of manufacturers capable of making such
optical image fibers is limited and, to date, the Company has not qualified
additional suppliers for such optical image fibers. The Company believes it can
qualify an additional source for such optical image fiber; however, there can be
no assurance as to when or whether the Company will be able to qualify such
supplier. The Company's prior supplier of Ovation medical video cameras and
light sources ceased manufacturing such products in late 1995 as a result of
financial difficulties, which resulted in a temporary inability of the Company
to supply such components to Terumo. As a result, the Company was unable to ship
Ovation medical video cameras and light sources to Terumo for a period of
approximately six months. Although the Company has qualified a replacement
supplier, there can be no assurance that future supply disruptions for such
components will not occur. The Company also uses a single vendor for
sterilization of its products, and disruptions in sterilization of finished
products could adversely affect the Company. Furthermore, there can be no
assurance that the Company will not encounter future component shortages or
other disruptions in supply of materials or services. Delays associated with any
future raw materials or component shortages could have a material adverse effect
on the Company's business, financial condition and results of operations,
particularly as the Company scales up its manufacturing activities.

    The Company's products are complex devices designed for use inside and
around the organs of the female reproductive system. To date, the Company has
only limited experience regarding the reliability of its products in the field.
Component failures, manufacturing errors or design defects could result in an
unsafe condition or injury to the patient. If any such failures or defects were
material, the Company could be required to undertake a market withdrawal or
recall of products. Even if regulatory approvals are obtained, there can be no
assurance that a market withdrawal or product recall will not occur. Costs of a
market withdrawal or product recall could be significant and could have a
material adverse effect on the Company's business, financial condition and
results of operations.

PATENTS, TRADE SECRETS AND LICENSES

    Imagyn's ability to compete effectively will depend in part on its ability
to develop and maintain proprietary aspects of its technology. Imagyn seeks to
protect its proprietary position aggressively by, among other things, filing
United States and foreign patent applications to protect technology, inventions
and improvements that are important to the development of its business.

    As of December 31, 1996, the Company held 13 issued United States patents
and 3 issued foreign patents and had 13 United States and 10 foreign patent
applications pending, covering various aspects of

                                       16
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the Company's product systems. The Company's issued United States patents cover
technology underlying the Ovation systems. The expiration dates of these patents
range from October 2011 to May 2014.

    In addition to its patents and patent applications, the Company holds a
license from Baxter Healthcare Corporation ("Baxter") and Thomas J. Fogarty,
M.D. ("Fogarty"), the inventor of the linear everting catheter, that grants
Imagyn the exclusive, perpetual, worldwide use of patented technology and
know-how related to the linear everting catheter technology in the fields of
obstetrics, gynecology, and infertility, in exchange for royalty payments. As of
December 31, 1996, Baxter and Fogarty held, and Imagyn has been granted the
exclusive license for, 11 issued United States patents and numerous issued
foreign patents and pending applications covering aspects of linear everting
catheter technology. The license agreement requires that Baxter maintain and
prosecute all patents and patent applications relating to the linear everting
catheter technology.

    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.

    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 United States 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 would
result in substantial expense to the Company and significant diversion of effort
by the Company's technical and management personnel. An adverse determination in
litigation or interference proceedings to which the Company may become a party
could subject the Company to significant liabilities to third parties or require
the Company to seek licenses from third parties. Although patent and
intellectual property disputes in the medical device area have often been
settled through licensing or similar arrangements, costs associated with such
arrangements may be substantial and could include ongoing royalties.
Furthermore, there can be no assurance that necessary licenses would be
available to the Company on satisfactory terms, if at all. Adverse
determinations 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. These agreements
generally provide that all confidential information developed or made known to
individuals by the Company during the course of the relationship with the
Company is to be kept confidential and not disclosed to third parties, except in
specific circumstances. The agreements also generally provide that all
inventions conceived by the individual in the course of rendering service to the
Company shall be the exclusive property of the Company. There can be no
assurance that proprietary information or confidentiality agreements with
employees, consultants and others will not be breached,

                                       17
<PAGE>
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

UNITED STATES

    The research, development, testing, manufacture, labeling, storage,
distribution and marketing of the Company's products are subject to extensive
and rigorous regulation by the FDA and, to varying degrees, by state and foreign
regulatory agencies. The Company's products are regulated in the United States
as medical devices by the FDA under the Federal Food, Drug, and Cosmetic Act
("FDC Act") and most require clearance or approval by the FDA prior to
commercialization. In addition, certain material changes or modifications to
medical devices also are subject to regulatory review and clearance or approval.
Under the FDC Act, the FDA regulates the research, clinical testing,
manufacturing, safety, labeling, storage, record keeping, distribution, sale and
promotion of medical devices in the United States. The testing for, preparation
of and subsequent review of applications by the FDA and foreign regulatory
authorities is expensive, lengthy and uncertain. The failure by the Company to
comply with FDA requirements could result in warning letters, fines,
injunctions, civil penalties, recall or seizure of products, total or partial
suspension of production, the government's refusal to grant, or withdrawal of,
premarket clearance or premarket approval for devices, and criminal prosecution.

    The FDA also has the authority to require clinical testing of certain
medical devices. If clinical testing of a device is required and if the device
presents a "significant risk," an Investigational Device Exemption ("IDE")
application must be approved prior to commencing clinical trials. The IDE
application must be supported by data, typically including the results of
laboratory and animal testing. If the IDE application is approved by the FDA,
clinical trials may begin at a specified number of investigational sites
involving a specified maximum number of patients, as approved by the FDA. The
clinical trials are required to be conducted under the auspices of an
Institutional Review Board ("IRB"). During the IDE study, the FDA has authority
to review, limit, or terminate the study at any time. Discontinuance of the
study could have a material adverse effect on the Company's business, financial
condition and results of operations.

    Before a new medical device may be introduced into the market in the United
States, the manufacturer or distributor generally must obtain marketing
clearance from the FDA through either a 510(k) premarket notification or a
premarket approval ("PMA") application. If the manufacturer or distributor can
establish, among other things, that a device is "substantially equivalent" in
that it has the same intended use and the same technological characteristics as
the predicate device or has different technological characteristics that do not
raise different questions of safety and efficacy than the predicate device, the
manufacturer or distributor may seek clearance to market the device by
submitting a 510(k) premarket notification. Following submission of the 510(k)
premarket notification, the manufacturer or distributor may not place the device
into commercial distribution unless and until a finding of substantial
equivalence is issued by the FDA. In response to a 510(k) premarket
notification, the FDA may declare that the device is substantially equivalent to
a predicate device and allow the proposed device to be marketed in the United
States. Alternatively, the FDA may require further information, including
clinical data, to make its determination regarding substantial equivalence, or
the FDA may determine that the proposed device is not substantially equivalent
to the predicate device, and require the manufacturer or distributor to submit a
PMA. An FDA request for additional information or a determination that the
device is not substantially equivalent would delay market introduction of the
products that are the subject of the 510(k) premarket notification.

    In September 1996, the FDA advised the Company that its Ovation falloposcopy
system could be eligible for 510(k) clearance review. In September 1996, the
Company submitted a 510(k) clearance application to the FDA for its Ovation
falloposcopy system. On January 31, 1997, the Company received 510(k) marketing
clearance for its Ovation falloposcopy system.

                                       18
<PAGE>
    As of December 31, 1996, the Company had received thirteen 510(k) clearances
for certain diagnostic and/or therapeutic indications of its microlaparoscopy,
microhysteroscopy and linear everting catheter intrauterine insemination product
systems.

    If the manufacturer or distributor cannot establish that a proposed device
is substantially equivalent to a legally marketed predicate device, the
manufacturer or distributor must seek premarket approval of the proposed device
through submission of a PMA application. A PMA application must be supported by
extensive data, including laboratory, preclinical and clinical trial data to
prove the safety and efficacy of the device, as well as extensive manufacturing
information. If the FDA determines, upon initial review, that a submitted PMA
application is sufficiently complete to permit substantive review, the FDA will
accept the PMA application for filing. FDA review of a PMA application generally
takes approximately two years or more from the date of acceptance for filing,
but review times vary depending upon FDA resources and workload demands and the
complexity of PMA submissions. There can be no assurance that the FDA will
review and approve the PMA in a timely manner, if at all. Failure to obtain PMA
approvals could have a material adverse effect on the Company's business,
financial condition and results of operations. Additionally, as one of the
conditions for approval, the FDA will inspect the manufacturing establishment at
which the subject device will be manufactured to determine whether the quality
control and manufacturing procedures conform to GMP regulations. If granted, the
PMA approval may include significant limitations on the indicated uses for which
the device may be marketed.

    There can be no assurance that the Company will be able to obtain necessary
510(k) clearances or PMA approvals to market new products in the United States
for their intended uses on a timely basis, if at all, and delays in receipt of
or failure to receive such approvals, the loss of previously received approvals,
or failure to comply with existing or future regulatory requirements could have
a material adverse effect on the Company's business, financial condition and
results of operations.

    The Company is also required to register with the FDA and with state
agencies such as the California Department of Health Services ("CDHS") as a
medical device manufacturer, and to list its products with the FDA.
Consequently, the Company's facilities will be inspected periodically by both
the FDA and CDHS to determine whether the Company manufactures its products in
compliance with FDA Good Manufacturing Practices ("GMP") and other applicable
regulations. In November 1995, the Company's facility was inspected by the FDA
for a routine GMP inspection. The FDA noted several observations, to which the
Company responded. The Company has received FDA confirmation of the adequacy of
its responses.

    The Company is also required, upon commercialization, to provide information
to the FDA concerning any death or serious injury that its medical devices may
have allegedly caused or contributed to, as well as any product malfunction that
would likely cause or contribute to death or serious injury if the malfunction
were to recur. Also, if safety or efficacy problems occur after the product
reaches the market, the FDA may take steps to prevent or limit further marketing
of the product. In addition, the FDA prohibits the marketing of approved devices
for uses other than those specifically cleared for marketing by the FDA. Failure
to comply with applicable FDA regulations can result in FDA warning letters, FDA
refusal to approve or clear products, revocation or withdrawal of approvals
previously granted, civil penalties, product seizures, injunctions, recalls,
operating restrictions and criminal prosecution and penalties. Consequently,
failure by the Company to comply with regulatory requirements could have a
material adverse effect on the Company's business, financial condition and
results of operations.

    The promotion of most products regulated by the FDA is subject to the
jurisdiction of the FDA, Federal Trade Commission and related state authorities.
The Company also is subject to various federal, state and local laws and
regulations relating to occupational safety, laboratory and manufacturing
practices, and the use, handling and disposal of hazardous or potentially
hazardous substances. There can be no assurance that the Company will not be
required to incur significant costs in the future to comply with such laws or
will be able to continue to comply with such laws and regulations, which are
subject to change.

                                       19
<PAGE>
FDA regulations regarding the research, development, testing, manufacture,
labeling, storage, distribution and marketing of the Company's products are
subject to change. The Company cannot predict what effect, if any, such changes
might have on its business, financial condition or results of operations.

INTERNATIONAL

    Sales of medical devices outside the United States are subject to foreign
regulatory requirements that vary widely from country to country. The time
required to obtain registrations or approvals required by foreign countries may
be longer or shorter than that required for FDA clearance or approval, and
requirements for licensing may differ significantly from FDA requirements. Some
countries have historically permitted human studies earlier in the product
development cycle than regulations in the United States permit. Other countries,
such as Japan, have requirements similar to those of the United States. This
disparity in the regulation of medical devices may result in slower product
clearance in certain countries than in others. Many countries in which the
Company operates or intends to operate either do not currently regulate medical
devices or have minimal device registration requirements; however, these
countries may develop more extensive regulations in the future that could
adversely affect the Company's ability to market its products.

    Pursuant to the Company's distributorship agreement with USSC, USSC is
required to obtain appropriate international regulatory registrations and
approvals in those markets in which USSC plans to distribute the Company's
MicroLap system, except that the Company is required to obtain a CE mark for the
system.

    In August 1995, following completion of a clinical trial, Terumo received
import approval from the Japanese Ministry of Health for the sale and
distribution of the Company's linear everting catheter system in Japan for use
in fallopian tube recanalization.

    The Company has received registrations and approvals to market its Ovation
systems in Australia, Austria, France, Germany, Italy, Singapore, South Korea,
Taiwan, the United Kingdom, Switzerland, Denmark and The Netherlands.

    All of the medical devices currently manufactured by the Company which are
distributed in the European Union ("EU") will be subject to the Medical Devices
Directive ("MDD") when the transition period for the MDD expires on June 13,
1998. To comply with the MDD, the Company will need to obtain the right to affix
the CE mark on its medical devices. The right to affix the CE mark must be
obtained from one of the organizations in the EU, known as "Notified Bodies,"
which are designated by individual member states as competent to grant to
companies the right to affix the CE mark on their medical devices. The CE mark
will show that the Company is entitled to market its medical devices in the EU
because they meet all the essential requirements of the MDD. The CE mark will
permit the Company's medical devices to circulate freely throughout the EU.
Without receipt of the right to affix the CE mark on its medical devices, the
Company's medical devices will not be able to be marketed anywhere in the EU.
The Company is currently in the process of taking the steps that will be
necessary to comply with the essential requirements of the MDD, but there can be
no assurance that by taking these steps, the Company will be granted the right
to affix the CE mark on any of its medical devices by a Notified Body.

    In the EU, some accessories to the Company's products, such as cameras,
pumps and light sources, are subject to the Electromagnetic Compatibility
Directive ("EMC Directive") or similar laws of EU member states. The transition
period for the EMC Directive expired on December 31, 1995. Due to the volume of
electrical and electronic devices of all types, including medical devices, which
must be tested in order to determine whether they comply with the EMC
Directive's requirements, many companies have not been able to complete their
testing and review obligations through the Notified Bodies that must confirm EMC
Directive compliance. In acknowledgment of industry delays, an informal
understanding has been reached between member states of the EU and EU Commission
officials that enforcement/ compliance actions relating to the EMC Directive
will similarly be delayed until January 1, 1997.

                                       20
<PAGE>
    Export sales of investigational PMA devices or devices not cleared for
commercial sale in the United States are subject to FDA export permit
requirements. In order to obtain an export permit, the exporter must provide the
FDA with documentation from the medical device regulatory authority of the
country in which the purchaser is located, stating that the sale of the device
is not a violation of that country's medical device laws. The Company has
received certain export approvals for the Ovation systems for Australia, The
Netherlands, Denmark, France, Italy, Norway, Sweden and Switzerland, and is
seeking export approvals for other countries. Recently proposed FDA regulations
would eliminate export approval requirements for export of investigational
devices that are the subjects of FDA-approved IDEs to certain countries that
have expressed approval of the importation of such devices. There can be no
assurance, however, that the final regulations will contain the same language as
the proposed regulations, and the final regulations may revise the proposed
regulations in such a way that could adversely affect the Company's existing or
future export operations.

THIRD-PARTY REIMBURSEMENT

    In the United States, hospitals, physicians and other health care providers
that purchase medical devices, such as Imagyn's products, generally rely on
third-party payors, principally private health insurance plans and, to a lesser
extent, federal Medicare and state Medicaid, to reimburse all or part of the
cost of the procedure in which the medical device is being used.

    Reimbursement in the United States for procedures performed in hospitals,
ambulatory care centers or physicians' offices using the Company's
microlaparoscopy products is currently available from most third-party payors,
including most major private health care insurance plans and Medicaid, under
existing procedure codes. However, there is currently no specific reimbursement
code for office-based microlaparoscopy procedures. Third-party reimbursement for
the Company's products will be dependent upon decisions by individual health
maintenance organizations, private insurers and other payors. The Company
believes that procedures performed using Imagyn's MicroSpan system could be
reimbursed in the United States under existing procedure codes for diagnostic
and therapeutic hysteroscopy procedures. However, there can be no assurance that
such procedure codes will be available with respect to the Company's products or
that the reimbursement under these codes will be adequate. To the extent cost
containment measures imposed by third party payors adversely affect the hospital
and private practice markets, demand for and pricing of the Company's products
could be adversely affected as well.

    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. Imagyn is unable to predict what changes will be made in the
reimbursement methods utilized by third-party health care payors. Imagyn
anticipates that hospital administrators and physicians would justify the use of
its products by the attendant cost savings and clinical benefits that the
Company believes would be derived from the use of its products. However, there
can be no assurance that this will be the case. Furthermore, the Company could
be adversely affected by changes in reimbursement policies of government or
private health care payors, particularly to the extent any such changes affect
reimbursement for the procedure in which the Company's products are used.
Failure by physicians, hospitals and other users of the Company's products to
obtain sufficient reimbursement from health care payors for the procedure in
which the Company's products are used or adverse changes in government and
private third-party payors' policies toward reimbursement for such procedures
could have a material adverse effect on the Company's business, financial
condition and results of operations.

    Reimbursement systems in international markets vary significantly by country
and, within some countries, by region. Reimbursement approvals must be obtained
on a country-by-country basis. Many countries have government managed health
care systems that determine whether reimbursement will be granted for new
medical devices and procedures, as well as private insurance systems.
Broad-based foreign market acceptance of the Company's MicroLap, MicroSpan and
Ovation systems will depend in part on the availability and level of
reimbursement in the international markets targeted by the Company. The

                                       21
<PAGE>
Company's Ovation falloposcopy system has been approved for reimbursement in
Australia and Germany. Terumo recently applied to the Japanese Ministry of
Health and Welfare for reimbursement approval of the Ovation tubal
recanalization system in Japan. The process of obtaining reimbursement approvals
can be lengthy and unpredictable, and there can be no assurance that the Company
will obtain reimbursement approvals in Japan or in any other country within a
particular time, for a particular amount, or at all. Even if reimbursement
approval is obtained, due to the pressure of rising health care costs in many
countries, there can be no assurance that such approval will not be limited or
withdrawn at any time. Failure to obtain or maintain such approvals for some or
all of the Company's products could have a material adverse effect on the
Company's business, financial condition and results of operations.

    Physician adoption of the Company's products and physician advocacy of
reimbursement of procedures performed using them will be necessary in order to
obtain reimbursement from government and private payors for procedures performed
using Imagyn's products. The availability of reimbursement will depend on the
clinical efficacy and cost of the Company's products and systems. There can be
no assurance that reimbursement for the Company's products will be available in
the United States or in international markets under either government or private
reimbursement systems, or that physicians will support and advocate
reimbursement for use of the Company's systems for all uses intended by the
Company. Failure by physicians, hospitals and other users of the Company's
products to obtain sufficient reimbursement from health care payors or adverse
changes in government and private third-party payors' policies toward
reimbursement for procedures performed using the Company's products would have a
material adverse effect on the Company's business, financial condition and
results of operations.

COMPETITION

    The medical device industry and the market for treatment of gynecological
disorders and infertility, in particular, are intensely competitive and
characterized by rapidly evolving technology. Compared to traditional
laparoscopes and hysteroscopes, the Company believes that the principal
competitive factors are product performance, cost-effectiveness, degree of
invasiveness, patient recovery time and level of side effects. The Company's
proprietary micro-optics technology provides visualization and product
performance comparable to traditional laparoscopes and hysteroscopes, and when
used in combination with the Company's micro-access devices are less invasive
than products used in traditional laparoscopy and hysteroscopy procedures. As a
result, the Company's systems can be used without general anesthesia, thus
reducing patent recovery time and risk of complications. Imagyn believes that
less-invasive procedures performed with the Company's MicroLap and MicroSpan
systems will be substantially less traumatic and costly than more invasive,
traditional surgical procedures currently in widespread use.

    Competition in the market for micro-invasive diagnosis and treatment of
gynecological disorders is intense and is expected to increase. The Company
believes that the principal competitive factors in the markets for
microlaparoscopes and microhysteroscopes are quality of visualization, product
performance, durability and compatibility with capital equipment already owned
by the user. The Company believes that it competes favorably with respect to
each of these factors, particularly with regard to visualization and product
performance. A number of the Company's competitors are currently marketing
products for use in such less-invasive procedures. Olympus America, Inc., Origin
Medsystems, Inc., a subsidiary of Guidant Corporation, Medical Dynamics, Inc.,
Circon-Cabot Corp., and Karl Storz Instrument Co., are currently marketing
laparoscopes with diameters ranging from 1.2 millimeters to 3.0 millimeters.
Circon-Cabot Corp. currently markets a microhysteroscope.

    Competition in the market for falloposcopy and tubal recanalization is also
expected to increase. Conceptus, Inc. is currently pursuing FDA approval of a
guidewire-based falloposcopy system. The Company believes that the principal
competitive factors in this market will be product performance and

                                       22
<PAGE>
ability to perform procedures in a non-hospital setting without the concurrent
use of laparoscopy. The Company believes it competes favorably with respect to
each of these factors.

    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. Other companies may choose to enter these markets at a later
date and would represent competition for the Company. In addition, the Company
competes with other companies for sites to conduct clinical trials.

    Most of the Company's competitors have significantly greater financial,
technical, research, marketing, sales, distribution and other resources than the
Company. There can be no assurance that the Company's competitors will not
succeed in developing technologies and products that are more effective or less
costly 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,
or that such competitors will not succeed in obtaining regulatory approval for,
introducing or commercializing any such products prior to the Company. There can
be no assurance that the Company will be able to compete successfully or that
competition will not have a material adverse effect on the Company's business,
financial condition or results of operations.

PRODUCT LIABILITY AND INSURANCE

    The development, manufacture and sale of medical devices entail significant
risk of financial exposure to product liability claims. Although the Company has
not experienced any product liability claims to date, there can be no assurance
that the Company will be able to avoid significant product liability claims and
potential related adverse publicity. The Company maintains product liability
insurance with coverage limits of $25,000,000 per occurrence and an annual
maximum of $25,000,000, which the Company believes is comparable to that
maintained by other companies of similar size serving similar markets. However,
there can be no assurance that such coverage limits are adequate to protect the
Company from any liabilities it might incur in connection with the development,
manufacture and sale of its products. Product liability insurance is expensive
and in the future may not be available to the Company on acceptable terms, if at
all. A successful product liability claim or series of claims brought against
the Company in excess of its insurance coverage could have a material adverse
effect on the Company's business, financial condition and results of operations.

EMPLOYEES

    As of December 31, 1996, Imagyn had 87 full-time employees, 12 of whom were
engaged in research and development activities, eight in regulatory and quality
assurance, 42 in manufacturing, 17 in sales and marketing, and eight in finance
and administration. None of Imagyn's employees is covered by a collective
bargaining agreement, and the Company believes that it maintains good relations
with its employees.

ADDITIONAL RISK FACTORS

    UNCERTAINTY OF MARKET ACCEPTANCE.  Imagyn is substantially dependent upon
the success and market acceptance of its MicroLap microlaparoscopy system,
MicroSpan microhysteroscopy system and Ovation systems. The Company's MicroSpan
and Ovation systems have generated limited revenue to date and the Ovation
system has not been commercially introduced in the United States. The Company
believes that physicians will not use the Company's product systems unless they
determine that such product systems and the procedures in which they are
intended to be used are safe and effective alternatives to current
hospital-based procedures and demonstrate clinical utility, and can be used in a
cost-effective manner. 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 and health care payors, even if necessary
international and United States regulatory and reimbursement approvals are
obtained.

                                       23
<PAGE>
    The Company believes that market acceptance of the MicroLap system will
depend on the Company's and USSC's ability to provide evidence to the medical
community of the effectiveness of micro-invasive laparoscopic procedures and of
the benefits to patients, physicians and payors of such micro-invasive surgery
performed outside the hospital. Market acceptance will also be dependent upon
the durability and performance of the MicroLap. The Company believes that market
acceptance of its MicroSpan system will depend on the Company's ability to
demonstrate the utility of diagnostic and operative hysteroscopy. In particular,
market acceptance of diagnostic microhysteroscopy may be limited because some
physicians and payors view hysterectomy, the surgical removal of the uterus, as
the appropriate therapy for a variety of uterine disorders as a hysterectomy
precludes the recurrence of the uterine disorders it was performed to treat.
Such physicians or payors may be reluctant to perform or pay for diagnostic
microhysteroscopy to visualize the uterus if the ultimate treatment outcome is
likely to be a hysterectomy. In addition, several less-invasive alternatives to
operative hysteroscopy are either under development, in clinical trials or have
recently been introduced. Market acceptance of diagnostic use of the MicroSpan
system may also therefore be dependent upon acceptance of these less invasive
alternatives to hysterectomy. Market acceptance of the MicroLap and MicroSpan
systems will also be dependent upon the willingness of physicians to perform
laparoscopic and hysteroscopic procedures, which have traditionally been
performed in the hospital under general anesthesia, in an office or clinic. Such
market acceptance may also be dependent upon the ability of MicroLap
laparoscopes and MicroSpan microhysterscopes to be used with a broad variety of
sterilization methods. Addition of other sterilization methods to the MicroLap
microlaparoscope and MicroSpan Microhysteroscope labeling may require submission
of a new 510(k) clearance application to the FDA. Preferred sterilization
methods may differ among users of the Company's products with, for example,
physician's offices preferring different methods than hospitals or surgery
centers. The MicroLap microlaparoscope is not currently labeled for use with all
sterilization methods, and the Company is aware that certain users of its
products are using, and prefer to use, other sterilization methods. In addition,
physician acceptance of microlaparoscopy and microhysteroscopy may be affected
by the unwillingness of physicians to perform these procedures under conscious
sedation rather than under general anesthesia, availability in the physician's
office of necessary ancillary capital equipment such as medical video cameras
and light sources, and availability of a sufficiently large patient base to
support an office-based microsurgery practice.

    The Company believes that market acceptance of the Ovation systems will
depend on the Company's ability to demonstrate the utility of falloposcopy and
recanalization in diagnosing and managing infertility and generate an interest
on the part of physicians to be trained to perform such procedures using the
Company's Ovation systems. There can be no assurance that physicians and other
potential users of the Company's products will be willing to learn to perform
microlaparoscopy, microhysteroscopy or falloposcopy with the Company's products
or that the Company will be able to train such users to learn these techniques.
Market acceptance will also be dependent upon the availability of third-party
reimbursement for procedures performed using the Company's products.

    Because the success of each of the Company's product systems depends upon
acceptance by physicians and health care payors of such product systems and the
procedures in which they are intended to be used, the Company believes that
recommendations and endorsements by influential physicians will be essential for
market acceptance of the Company's products. There can be no assurance that any
such recommendations or endorsements will be obtained. Failure of the Company's
products to achieve significant market acceptance would have a material adverse
effect on the Company's business, financial condition and results of operations.

    HISTORY OF LOSSES AND EXPECTATION OF FUTURE LOSSES; FLUCTUATIONS IN
OPERATING RESULTS; LIMITED OPERATING HISTORY.  The Company has experienced
significant operating losses since inception and, as of December 31, 1996, had
an accumulated deficit of $25.0 million. The Company expects to incur
substantial additional losses due to increased operating expenditures primarily
attributable to the expansion of marketing, sales, manufacturing and research
and development activities. Results of operations may

                                       24
<PAGE>
fluctuate significantly from quarter to quarter and will depend upon numerous
factors, including the extent to which the Company's products gain market
acceptance, the timing and volume of orders from USSC, Terumo, other
international distributors and the Company's other customers, actions relating
to regulatory and reimbursement matters, introduction of alternative means for
microlaparoscopy, microhysteroscopy and fallopian tube visualization by
competitors of the Company, pricing of competitive products, the cost and effect
of promotional discounts and marketing programs in which the Company may be
required to engage and the absence of a backlog of orders. Results of operations
will also depend upon the amount of royalties payable under the license from
Baxter and Fogarty relating to the linear everting catheter technology used in
the Ovation systems. There can be no assurance that the Company will
successfully commercialize any of its current products or any future products or
achieve significant revenues or profitability. Profitability, if achieved, may
not be sustained.

    The Company has a limited history of commercial operations. Since its
inception in August 1989, the Company has been engaged primarily in research and
development of its Ovation systems, MicroLap microlaparoscopy system and
MicroSpan microhysteroscopy system. The Company has sustained substantial
operating losses since inception and there can be no assurance that the Company
will achieve or sustain profitability. To date, the Company has not generated
sufficient revenues to achieve profitability. The Company does not have
experience in manufacturing, marketing or selling its products in the quantities
that will be necessary for the Company to achieve significant product revenues
or profitability. There can be no assurance that any of the Company's products
will be successfully commercialized or that the Company will achieve significant
revenues. Whether the Company can successfully manage the transition to a
larger-scale commercial enterprise will depend upon a number of factors,
including the Company's ability to increase its commercial manufacturing
capability and establish marketing and sales capabilities and its ability to
develop additional distribution relationships in targeted international markets.
There can be no assurance that the Company will not experience future
difficulties related to the Company's transition to a larger-scale commercial
enterprise, which could have a material adverse effect on the Company's
business, financial condition and results of operations.

    RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS; POTENTIAL FUTURE CAPITAL
REQUIREMENTS.  The Company may make acquisitions in the future, and the Company
regularly evaluates such opportunities. Product and technology acquisitions
entail numerous risks, including difficulties in the assimilation of acquired
operations and products, diversion of management's attention to other business
concerns, amortization of acquired intangible assets and potential loss of key
employees of acquired companies. The Company has no experience in assimilating
acquired organizations and products into its operations. No assurance can be
given as to the ability of the Company to integrate successfully any operations,
personnel or products that might be acquired in the future, and the failure of
the Company to do so could have a material adverse effect on the Company's
business, financial condition and results of operations.

    The Company's capital requirements depend on numerous factors, including the
extent to which the Company's products gain market acceptance, actions relating
to regulatory and reimbursement matters, introduction of alternative means for
microlaparoscopy, microhysteroscopy and fallopian tube visualization by
competitors of the Company, pricing of competitive products, the cost and effect
of promotional discounts and marketing programs in which the Company may be
required to engage, the resources the Company devotes to marketing,
manufacturing and developing its products, and other factors. The timing and
amount of such capital requirements cannot accurately be predicted.
Consequently, although the Company believes that current cash resources,
together with cash generated from revenues, will provide adequate funding for
its capital requirements through 1998, there can be no assurance that the
Company will not require additional funding or that such additional funding, if
needed, will be available on terms satisfactory to the Company, or at all. Any
additional equity financing may be dilutive to stockholders, and debt financing,
if available, may involve restrictive covenants. Failure to raise capital when
needed could have a material adverse effect on the Company's business, financial
condition and results of operations.

                                       25
<PAGE>
    DEPENDENCE UPON INTERNATIONAL DISTRIBUTORS AND SALES; RISKS OF INTERNATIONAL
SALES.  Since inception, a significant amount of the Company's sales have been
outside the United States. USSC has distribution rights for the MicroLap system
in all international markets other than China and India and Terumo has
distribution rights for the Ovation systems in Japan. The Company has a limited
number of international distributors for its Ovation systems in certain
countries. The Company's international sales of these products in these
countries are dependent upon the marketing efforts of, and sales by, its
distributors. The Company relies on these distributors to assist it in obtaining
product registration and reimbursement approvals in certain international
markets. The Company has limited sell-through experience with certain of its
distributors and has in the past experienced situations in which distributors
placed initial stocking orders for quantities that were in excess of their end
user requirements. In addition, if a distributor were to fail to invest adequate
capital promoting the Company's products and training physicians in the proper
techniques for utilizing the Company's products, or were to experience financial
difficulty or cease operations, the Company would likely be unable to achieve
significant sales in the subject territory. Management of international
distributors can be time-consuming and can be complicated by dissimilarities
among international markets. Furthermore, the Company currently does not have
distributors in a number of international markets that it has targeted and
anticipates that it will need to establish additional international distribution
relationships. There can be no assurance that the Company will engage qualified
distributors in these markets in a timely manner, if at all, or that
distributors will adequately market the Company's products. The failure of
distributors to adequately promote the Company's products or the failure of the
Company to engage additional distributors would have a material adverse effect
on the Company's business, financial condition and results of operations.

    A number of risks are inherent in international operations and transactions.
International sales and operations may be limited or disrupted by the imposition
of government controls, changes in regulatory requirements or interpretations
thereof, export license requirements, political instability, trade restrictions,
changes in tariffs, financial instability of distributors, differences in
purchasing systems for medical products, and difficulties in staffing,
coordinating and managing international operations. Additionally, the Company's
business, financial condition and results of operations may be adversely
affected by fluctuations in international currency exchange rates as well as
constraints on the Company's ability to maintain or increase prices. There can
be no assurance that the Company will be able to successfully commercialize its
current or future products in any international market.

    DEPENDENCE UPON KEY PERSONNEL.  The Company is dependent upon a number of
key management and technical personnel. The loss of the services of one or more
key employees could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company's success will also
depend on its ability to attract and retain additional highly qualified
management and technical personnel. The Company faces intense competition for
qualified personnel, many of whom are often subject to competing employment
offers, and there can be no assurance that the Company will be able to attract
and retain such personnel. Furthermore, the Company relies on the services of
several medical and scientific consultants, all of whom are employed on a
full-time basis by hospitals or academic or research institutions. Such
consultants are therefore not available to devote their full time or attention
to the Company's affairs.

    POSSIBLE VOLATILITY OF STOCK PRICE.  The stock market has from time to time
experienced significant price and volume fluctuations that are unrelated to the
operating performance of particular companies. These broad market fluctuations
may adversely affect the market price of the Company's Common Stock. In
addition, the market price of the shares of Common Stock is likely to be highly
volatile. Factors such as fluctuations in the Company's results of operations,
failure of such results of operations to meet the expectations of public market
analysts and investors, announcements of technological innovations or new
products by the Company or its competitors, FDA and international regulatory
actions, actions with respect to reimbursement matters, developments with
respect to patents or proprietary rights, public concern as to the safety of
products developed by the Company or others, changes in health care policy in

                                       26
<PAGE>
the United States and internationally, changes in stock market analyst
recommendations regarding the Company, other medical device companies or the
medical device industry generally, and general market conditions may have a
significant adverse effect on the market price of the Common Stock. In addition,
it is likely that during a future quarterly period, the Company's results of
operations will fail to meet the expectations of stock market analysts and
investors and, in such event, the Company's stock price could be materially and
adversely effected.

    SIGNIFICANT RESTRICTIONS ON CHANGE OF CONTROL.  The Company has adopted a
number of anti-takeover measures. The Company has adopted a Preferred Shares
Rights Agreement, sometimes referred to as a poison pill, designed to prevent
hostile takeovers not approved by the Board of Directors. In addition, the
Company is authorized to issue 5,000,000 shares of undesignated Preferred Stock.
Such shares of Preferred Stock may be issued by the Company without stockholder
approval upon such terms as the Company's board of directors may determine. The
issuance of Preferred Stock may have the effect of delaying, deferring or
preventing a change in control of the Company, may discourage bids for the
Company's Common Stock at a premium over the market price of the Common Stock
and may adversely affect the market price of and the voting and other rights of,
the holders of Common Stock. At present, the Company has no plans to issue any
of the Preferred Stock.

ITEM 2. PROPERTIES

    The Company currently leases approximately 26,000 square feet of facilities
in Laguna Niguel, California. These facilities comprise the Company's
administrative offices and manufacturing and warehouse operations. The leases
for these facilities extend through 1998. Imagyn believes that this space is
adequate for its current needs, and that it will be able to renew its leases and
obtain additional space if necessary.

ITEM 3. LEGAL PROCEEDINGS

    The Company is not party to any legal proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

    Not applicable.

                                       27
<PAGE>
                                    PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

    The Company's Common Stock is traded on the NASDAQ National Market (ticker
symbol IGYN). The number of record holders of the Company's Common Stock at
February 28, 1997 was 89. The Company has not paid any dividends since its
inception and does not intend to pay any dividends in the foreseeable future.

    The Company completed an initial public offering of 3,162,500 shares of
Common Stock in June 1996. Prior to the initial public offering, the Company's
Common Stock was not publicly traded.

    Quarterly high and low stock prices are as follows:

<TABLE>
<CAPTION>
                   QUARTER ENDED             HIGH       LOW
          --------------------------------  -------   -------
          <S>                               <C>       <C>
          June 30, 1996 (from May 30,
            1996)                           $17       $10 3/4
          September 30, 1996                 11 1/8     7
          December 31, 1996                  10 7/8     6 7/8
</TABLE>

ITEM 6.  SELECTED FINANCIAL DATA

                      SELECTED CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                          YEAR ENDED DECEMBER 31,
                                                           -----------------------------------------------------
                                                             1992       1993       1994       1995       1996
                                                           ---------  ---------  ---------  ---------  ---------
                                                                   (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                        <C>        <C>        <C>        <C>        <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales................................................  $   1,238  $   1,047  $   1,005  $   2,243  $   9,371
Cost of sales............................................        702      1,006      1,268      1,811      6,579
                                                           ---------  ---------  ---------  ---------  ---------
Gross profit (loss)......................................        536         41       (263)       432      2,792
Cost and expenses:
  Sales and marketing....................................      1,665      2,397      2,317      3,296      4,039
  Research and development...............................      1,917      1,917      1,797      1,811      2,708
  General and administrative.............................      1,360        904      1,108      1,253      2,277
                                                           ---------  ---------  ---------  ---------  ---------
    Total costs and expenses.............................      4,942      5,218      5,222      6,360      9,024
                                                           ---------  ---------  ---------  ---------  ---------
Other operating income...................................      1,000     --         --          3,500     --
                                                           ---------  ---------  ---------  ---------  ---------
    Loss from operations.................................     (3,406)    (5,177)    (5,485)    (2,428)    (6,232)
                                                           ---------  ---------  ---------  ---------  ---------
Interest income (expense), net...........................        178        337        175       (217)     1,826
                                                           ---------  ---------  ---------  ---------  ---------
Net loss.................................................  $  (3,228) $  (4,840) $  (5,311) $  (2,645) $  (4,408)
                                                           ---------  ---------  ---------  ---------  ---------
                                                           ---------  ---------  ---------  ---------  ---------
Net loss per share(1)....................................  $   (0.76) $   (1.16) $   (1.26) $   (0.59) $   (0.61)
                                                           ---------  ---------  ---------  ---------  ---------
                                                           ---------  ---------  ---------  ---------  ---------
Shares used in computing net loss per share(1)...........      4,233      4,240      4,263      4,573      7,196
                                                           ---------  ---------  ---------  ---------  ---------
                                                           ---------  ---------  ---------  ---------  ---------
</TABLE>

                                       28
<PAGE>

<TABLE>
<CAPTION>
                                                        AS OF DECEMBER 31,
                                          -----------------------------------------------
                                           1992      1993      1994      1995      1996
                                          -------  --------  --------  --------  --------
                                                          (IN THOUSANDS)
<S>                                       <C>      <C>       <C>       <C>       <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and cash
 investments............................  $12,859  $  7,269  $  2,021  $  9,340  $ 41,353
Working capital.........................   12,897     7,763     2,672    10,431    44,010
Total assets............................   14,287     9,388     4,174    12,024    51,956
Convertible redeemable preferred
 stock..................................   19,950    20,030    20,122     9,936     --
Accumulated deficit.....................   (7,527)  (12,447)  (17,838)  (20,543)  (24,951)
Stockholders' equity (deficit)..........   (7,524)  (12,525)  (17,912)      (97)   48,889
</TABLE>

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

(1) See Note 17 of Notes to Consolidated Financial Statements for information
    concerning the computation of net loss per share and pro forma net loss per
    share.

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

BACKGROUND

    Imagyn was formed in 1989 to advance the development of gynecological
applications of novel catheter technology licensed by the Company from Baxter
and Fogarty. In 1992, the Company commenced commercial shipments of its Ovation
systems, based on this technology, to international distributors for resale to
physicians and hospitals.

    In November 1992, the Company entered into an agreement with Terumo
Corporation ("Terumo") for the sale and licensed manufacture of the Ovation
systems in Japan. In connection with the granting of the distribution and
license rights under this agreement, Terumo paid the Company distribution and
license fees aggregating $2.1 million. Based on the Company's continuing
obligations under the agreement to transfer manufacturing know-how for the
Ovation systems to Terumo, the license fees of $1.0 million have been treated as
deferred income until such time as the Company completes the transfer of the
manufacturing know-how pursuant to the agreement. Upon completion of such
transfer, the Company will receive royalties on product sales by Terumo. During
1993 and 1994, Terumo conducted clinical trials in Japan for the purpose of
supporting regulatory and reimbursement approvals for the Ovation system. In
August 1996, the Company's agreement with Terumo was amended to grant Terumo
with additional distribution rights for the Ovation system in certain Asian
markets.

    In January 1994, the Company was notified by the FDA that its PMA
application for the Ovation falloposcopy system submitted to the FDA in May 1992
was deficient in certain respects, particularly with respect to the design of
the clinical study. The Company attempted to address the FDA's concerns by
providing a reevaluation of its clinical data; however, the FDA did not find
this analysis acceptable and, in September 1995, the Company withdrew this PMA
application. In September 1996, the FDA advised the Company that its Ovation
falloposcopy system could be eligible for 510(k) clearance review. In September
1996, the Company submitted a 510(k) clearance application to the FDA for its
Ovation falloposcopy system. On January 31, 1997, the Company received 510(k)
marketing clearance for its Ovation falloposcopy system.

    In August 1994, the Company commenced international commercial shipments of
its MicroLap microlaparoscopy system. By February 1995, the Company had received
three FDA 510(k) clearances for the MicroLap system, after which the Company
commenced marketing the system in the United States. The Company engaged the
services of non-stocking sales representative organizations to promote sales of
the MicroLap system.

    In August 1995, Terumo received Japanese regulatory approval for marketing
of the Ovation tubal recanalization system. Following this approval, Terumo
commenced planning for the 1996 commercial

                                       29
<PAGE>
introduction of the Ovation tubal recanalization system in Japan. Terumo has
applied for, but has not yet obtained, full Japanese reimbursement approval.

    In August 1995, Terumo received Japanese regulatory approval for marketing
the Ovation tubal recanalization system. Following this approval, Terumo
commenced planning for the 1996 commercial introduction of the Ovation tubal
recanalization system in Japan. Terumo has applied for, but has not yet
obtained, full Japanese reimbursement approval.

    In September 1995, the Company completed an equity recapitalization which
included a reverse 1-for-5 stock split of all outstanding stock, the conversion
of all Preferred Stock into Common Stock, and the sale of $9.9 million of new
Preferred Stock.

    In October 1995, the Company entered into a distribution agreement with
United States Surgical Corporation ("USSC") pursuant to which USSC was granted
exclusive international marketing rights for the MicroLap system in all
international markets (excluding China and India). USSC was also granted, on a
co-exclusive basis with the Company, marketing rights to the MicroLap system in
the United States. As a result of the agreement with USSC, the Company
terminated all of its domestic sales representative organizations and
international distributors for the MicroLap system and, in connection with these
terminations, the Company made certain payments to these distributors. Following
execution of the agreement with USSC, the Company increased its manufacturing
capacity to support USSC's introduction of the MicroLap system and, in January
1996, the Company completed training of certain USSC sales personnel and
commenced commercial shipments of the MicroLap system to USSC.

    In September 1996, the Company received 510(k) clearance from the FDA to
market its single use MicroSpan hysteroscope sheath in the United States.
Following receipt of the 510(k) clearance, the Company commenced the recruitment
of direct sales representatives and launched the MicroSpan microhysteroscopy
system in the United States on a limited basis in the fourth quarter of 1996.

    The Company manufactures the Ovation systems and certain of its MicroLap and
MicroSpan system products, including its proprietary microlaparoscope,
microhysteroscope and micro-access devices, at its manufacturing facilities. The
Company has limited manufacturing capacity and may be required to increase both
its in-house manufacturing capability and the size of its manufacturing
facilities. Although the Company expanded its manufacturing facilities in 1996,
there can be no assurance that such facilities will be adequate or that the
Company may be able to attract, train and retain the required personnel,
including personnel skilled in micro-optics assembly processes. The Company may
need to obtain alternative manufacturing facilities or to establish contract
manufacturing for its products. Delays associated with, or inability to
establish, such capacity could have a material adverse affect on the Company's
business, financial condition and results of operations. The Company currently
obtains certain components of its product systems from single source suppliers.
These components include the optic image fiber used in the MicroLap, a similar
version of which is also being used in the MicroSpan, and the medical video
camera and light source used in connection with the Ovation tubal recanalization
system. There can be no assurance that the Company will not encounter future
component shortages or other disruptions in supply of materials. Delays
associated with any future raw materials or component shortages could have a
material adverse effect on the Company's business, financial condition and
results of operations, particularly as the Company scales up its manufacturing
activities.

    Future revenues and results of operations may fluctuate significantly from
quarter to quarter and will depend upon, among other factors, the extent to
which the Company's products gain market acceptance, the timing and volume of
orders from USSC, Terumo, other international distributors and the Company's
other customers, actions relating to regulatory and reimbursement matters,
progress of clinical trials, introduction of alternative means for
microlaparoscopy, microhysteroscopy and fallopian tube visualization by
competitors of the Company, pricing of competitive products, the cost and effect
of promotional discounts and marketing programs in which the Company may be
required to engage and the absence of a backlog of orders. Results of operations
will also depend upon the amount of royalties payable under the

                                       30
<PAGE>
license from Baxter and Fogarty relating to the linear everting catheter
technology used in the Ovation systems. The Company has a limited history of
operations and has experienced significant operating losses since inception.
Operating losses are expected to continue for at least the next twelve months as
the Company continues to expend substantial resources to expand its marketing
and sales activities in the United States and fund research and development and
the introduction of new products.

RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

    NET SALES.  Net sales for the year ended December 31, 1996 increased to $9.4
million from $2.2 million for the year ended December 31, 1995. The increase was
primarily the result of the first full year of sales to USSC of the Company's
MicroLap system. In 1996, sales to USSC were approximately 90% of the Company's
total sales. In 1996, 6% of the Company's sales were to international customers;
in 1995, 72% of the Company's sales were to international customers. The
decrease in the percentage of the Company's sales to international customers is
primarily the result of the increase in United States sales and the termination
of the Company's international distributors for the MicroLap system. The Company
records all sales to USSC as domestic sales; however, sales of the Company's
products by USSC are expected to include sales to international customers made
through Autosuture, Inc., a subsidiary of USSC. Net sales for the year ended
December 31, 1995, increased to $2.2 million from $1.0 million for the year
ended December 31, 1994. The increase was primarily the result of the
commencement of sales in the United States in 1995 of the MicroLap system,
increase of sales of the MicroLap system in international markets and initial
sales of the Company's Ovation system to Terumo.

    COST OF SALES.  Cost of sales increased to $6.6 million for the year ended
December 31, 1996 from $1.8 million for the year ended December 31, 1995. The
increase was attributable to the increase in the volume of sales of the
Company's products. Cost of sales in 1996 also included non-recurring production
costs and inefficiencies associated with the rapid increase and expansion of
production operations at the Company's current manufacturing facilities. Cost of
sales for the year ended December 31, 1995 increased to $1.8 million from $1.3
million for the year ended December 31, 1994, primarily due to the increase in
the volume of sales of the Company's products.

    SALES AND MARKETING.  Sales and marketing expenses increased to $4.0 million
for the year ended December 31, 1996 from $3.3 million for the year ended
December 31, 1995. The increase was primarily due to sales and marketing
expenses associated with the introduction of the Company's MicroSpan products in
the United States, including expenses in connection with the recruitment of
direct sales personnel. Sales and marketing expenses increased to $3.3 million
for the year ended December 31, 1995 from $2.3 million for the year ended
December 31, 1994. The increase was primarily due to sales and marketing
expenses associated with the introduction of the Company's MicroLap products in
the United States, including expenses of $400,000 associated with the
termination of international distributors and United States sales
representatives for the MicroLap system in connection with the USSC agreement.

    RESEARCH AND DEVELOPMENT.  Research and development ("R& D") expenses, which
include clinical and regulatory expenses, increased to $2.7 million for the year
ended December 31, 1996 from $1.8 million for the year ended December 31, 1995.
This increase was attributable to increased expenditures for product development
and enhancements and costs associated with clinical trials of the Ovation
falloposcopy system in the United States. R &D expenses of $1.8 million for the
year ended December 31, 1995 were approximately equal to the $1.8 million for
the year ended December 31, 1994.

    GENERAL AND ADMINISTRATIVE.  General and administrative expenses increased
to $2.3 million for the year ended December 31, 1996 from $1.3 million for the
year ended December 31, 1995. The increase was primarily the result of the
amortization of non-cash deferred compensation charges associated with grants of
stock options to employees, the hiring of additional personnel and other ongoing
expenses associated

                                       31
<PAGE>
with the Company's public reporting requirements. General and administrative
expenses increased to $1.3 million for the year ended December 31, 1995 from
$1.1 million for the year ended December 31, 1994. This increase primarily
resulted from expenses associated with an increase in the level of the Company's
operations.

    OTHER OPERATING INCOME.  Other operating income of $3.5 million for the year
ended December 31, 1995 resulted from nonrecurring payments in connection with
various marketing rights for certain products. There was no such income for the
years ended December 31, 1996 and 1994.

    INTEREST INCOME (EXPENSE), NET.  Net interest income for the year ended
December 31, 1996 was $1.8 million, as compared to interest expense of $217,000
for the year ended December 31, 1995. This increase was attributable primarily
to interest earned on higher cash balances held by the Company during the year
ended December 31, 1996 and to a lesser extent to the retirement of bridge
financing notes in September 1995. Interest income was $175,000 for the year
ended December 31, 1994. There were no short term notes outstanding during the
year ended December 31, 1994.

INCOME TAXES

    The Company has not generated any taxable income to date and therefore has
not paid any federal income taxes since its inception. The Company accounts for
income taxes under Statement of Financial Accounting Standards No. 109 ("FAS
109"). Realization of deferred tax assets is dependent on future earnings, if
any, the timing and amount of which are uncertain. Accordingly, valuation
allowances, in amounts equal to the net deferred tax assets as of December 31,
1996 and 1995, have been established in each period to reflect these
uncertainties.

    At December 31, 1996, the Company had federal and state net operating loss
carryforwards of $16.5 million and $8.0 million, respectively, and federal and
state research and experimentation credit carryforwards of $387,000 and
$276,000, respectively, that will expire at various dates beginning in 1997
through 2010, if not utilized. Utilization of net operating loss and tax credit
carryforwards will be subject to a substantial annual limitation due to the
ownership change limitations of the Internal Revenue Code of 1986, as amended,
and similar state provisions. The annual limitation is likely to result in the
expiration of most of the Company's net operating loss and tax credit
carryforwards before full utilization as a result of the September 1995
recapitalization.

LIQUIDITY AND CAPITAL RESOURCES

    Since inception, the Company's expenses have significantly exceeded its net
sales, resulting in an accumulated deficit of $25.0 million as of December 31,
1996. The Company has funded its operations since inception primarily through
the private placement of equity securities, the net proceeds of the June 1996
initial public offering and other operating income. Through December 31, 1996,
the Company had raised $30.3 million from the private placement of equity
securities. Through December 31, 1996, the Company had received $5.6 million in
fees relating to two distribution agreements. In June 1996, the Company
completed an initial public offering of 3,162,500 shares of Common Stock raising
net proceeds of approximately $43 million.

    At December 31, 1996, the Company's principal source of liquidity consisted
of cash, cash equivalents and short-term investments of $41.4 million. Cash used
in the Company's operations was $5.6 million for the year ended December 31,
1996 and $2.2 and $5.1 million for the years ended December 31, 1995 and 1994
respectively. The Company's capital expenditures during the year ended December
31, 1996 were $1.3 million and $163,000 and $112,000 for the years ended
December 31, 1995 and 1994 respectively. The Company anticipates that capital
expenditures will increase in future periods due to expansion of manufacturing
operations and facilities. The Company intends to finance its capital needs
principally its existing capital resources. The Company has not sought to obtain
any credit facilities to provide additional working capital.

                                       32
<PAGE>
    Imagyn believes that existing capital resources will be sufficient to fund
its operations through 1998. However, the Company's future liquidity and capital
requirements will depend on numerous factors, including the extent to which the
Company's products gain market acceptance, actions relating to regulatory and
reimbursement matters, progress of clinical trials, introduction of alternative
means for microlaparoscopy, microhysteroscopy and fallopian tube visualization
by competitors of the Company, pricing of competitive products, the cost and
effect of promotional discounts and marketing programs in which the Company may
be required to engage and the resources that the Company devotes to marketing,
manufacturing and developing its products. The Company's capital requirements
will also depend on, among other things, the resources required to hire and
develop a direct sales force in the United States and the resources required to
expand manufacturing capacity and facilities requirements. Accordingly, there
can be no assurance that the Company will not require additional financing
within this time frame. There can be no assurance that additional funding, if
needed, will be available on terms satisfactory to the Company, or at all. Any
additional equity financing may be dilutive to stockholders, and debt financing,
if available, may involve restrictive covenants. Failure to raise capital when
needed could have a material adverse effect on the business, financial condition
and results of operations of the Company.

                                       33
<PAGE>
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                       REPORT OF INDEPENDENT ACCOUNTANTS

Board of Directors
Imagyn Medical, Inc.
Laguna Niguel, California

    We have audited the accompanying consolidated balance sheets of Imagyn
Medical, Inc. as of December 31, 1995 and 1996, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

    In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Imagyn Medical, Inc. as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.

Newport Beach, California
March 4, 1997

                                       34
<PAGE>
                              IMAGYN MEDICAL, INC.

                          CONSOLIDATED BALANCE SHEETS

                           DECEMBER 31, 1995 AND 1996

<TABLE>
<CAPTION>
                                                                                         1995            1996
                                                                                    --------------  --------------
<S>                                                                                 <C>             <C>
                                                     ASSETS:
Current assets:
  Cash and cash equivalents.......................................................  $    2,359,773  $   22,333,227
  Short-term cash investments.....................................................       6,980,454      19,019,813
  Restricted cash.................................................................         131,000        --
  Accounts receivable, net of allowance for doubtful accounts of $60,000 in 1995
    and 1996......................................................................         909,139       2,002,965
  Inventories.....................................................................       1,063,867       2,007,527
  Other current assets............................................................         172,760         713,461
                                                                                    --------------  --------------
      Total current assets........................................................      11,616,993      46,076,993
Long-term cash investments........................................................        --             4,358,478
Furniture, fixtures and equipment, net............................................         389,787       1,412,610
Other assets......................................................................          17,642         107,653
                                                                                    --------------  --------------
      Total assets................................................................  $   12,024,422  $   51,955,734
                                                                                    --------------  --------------
                                                                                    --------------  --------------

                                     LIABILITIES, REDEEMABLE PREFERRED STOCK
                                       AND STOCKHOLDERS' EQUITY (DEFICIT):
Current liabilities:
  Accounts payable................................................................  $      441,868  $    1,094,758
  Accrued salaries and benefits...................................................          83,158         386,101
  Accrued liabilities.............................................................         660,889         585,671
                                                                                    --------------  --------------
      Total current liabilities...................................................       1,185,915       2,066,530
Deferred income...................................................................       1,000,000       1,000,000
                                                                                    --------------  --------------
      Total liabilities...........................................................       2,185,915       3,066,530
                                                                                    --------------  --------------
Commitments and contingencies (Note 16)
Convertible redeemable preferred stock, 2,715,546 shares issued and outstanding in
  1995............................................................................       9,935,981        --
                                                                                    --------------  --------------
Stockholders' equity (deficit):
  Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued
    and outstanding...............................................................        --              --
  Common stock, $0.001 par value (in 1996 only), 50,000,000 shares authorized,
    1,995,361 and 7,934,995 shares issued and outstanding in 1995 and 1996,
    respectively..................................................................      21,395,137           7,935
Additional paid-in capital........................................................        --            74,655,334
Unearned compensation.............................................................        (753,640)       (702,148)
Amounts due from stockholders.....................................................        (195,900)       (120,900)
Accumulated deficit...............................................................     (20,543,071)    (24,951,017)
                                                                                    --------------  --------------
      Total stockholders' equity (deficit)........................................         (97,474)     48,889,204
                                                                                    --------------  --------------
      Total liabilities, redeemable preferred stock and stockholders' equity
        (deficit).................................................................  $   12,024,422  $   51,955,734
                                                                                    --------------  --------------
                                                                                    --------------  --------------
</TABLE>

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

                                       35
<PAGE>
                              IMAGYN MEDICAL, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS

              FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996

<TABLE>
<CAPTION>
                                             1994         1995         1996
                                          -----------  -----------  -----------
<S>                                       <C>          <C>          <C>
Net sales...............................  $ 1,004,742  $ 2,242,655  $ 9,370,822

Cost of sales...........................    1,267,968    1,810,849    6,578,746
                                          -----------  -----------  -----------

      Gross profit (loss)...............     (263,226)     431,806    2,792,076
                                          -----------  -----------  -----------

Sales and marketing expenses............    2,317,423    3,295,842    4,039,501

Research and development expenses.......    1,796,563    1,810,759    2,707,744

General and administrative expenses.....    1,107,418    1,252,820    2,277,228
                                          -----------  -----------  -----------

                                            5,221,404    6,359,421    9,024,473
                                          -----------  -----------  -----------

Other operating income..................      --         3,500,000      --
                                          -----------  -----------  -----------

      Loss from operations..............   (5,484,630)  (2,427,615)  (6,232,397)

Other income (expense), net:

    Interest and other income...........      175,063      174,114    1,826,051

    Interest expense....................         (234)    (391,086)     --
                                          -----------  -----------  -----------

      Other income (expense), net.......      174,829     (216,972)   1,826,051
                                          -----------  -----------  -----------

      Loss before provision for income
        taxes...........................   (5,309,801)  (2,644,587)  (4,406,346)

Provision for income taxes..............          800          800        1,600
                                          -----------  -----------  -----------

      Net loss..........................  $(5,310,601) $(2,645,387) $(4,407,946)
                                          -----------  -----------  -----------
                                          -----------  -----------  -----------

Net loss applicable to common
  stockholders..........................  $(5,390,601) $(2,705,387) $(4,407,946)
                                          -----------  -----------  -----------
                                          -----------  -----------  -----------

Net loss per common share and common
  equivalent share......................  $     (1.26) $     (0.59) $     (0.61)
                                          -----------  -----------  -----------
                                          -----------  -----------  -----------

Weighted average common shares and
  common equivalent shares
  outstanding...........................    4,263,000    4,573,000    7,196,000
                                          -----------  -----------  -----------
                                          -----------  -----------  -----------
</TABLE>

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

                                       36
<PAGE>
                              IMAGYN MEDICAL, INC.
           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
              FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996

<TABLE>
<CAPTION>
                                     COMMON STOCK        ADDITIONAL                    AMOUNTS                         TOTAL
                                -----------------------    PAID-IN      UNEARNED       DUE FROM     ACCUMULATED    STOCKHOLDERS'
                                 SHARES       AMOUNT       CAPITAL    COMPENSATION   STOCKHOLDERS     DEFICIT     EQUITY (DEFICIT)
                                ---------  ------------  -----------  ------------   ------------   ------------  ----------------
<S>                             <C>        <C>           <C>          <C>            <C>            <C>           <C>
Balances, January 1, 1994.....    303,313  $     45,517                               $(123,000)    $(12,447,083)   $  (12,524,566)
Common stock issued upon
  exercise of stock options...      4,062         3,416                                                                      3,416
Accretion of convertible
  redeemable preferred
  stock.......................                                                                           (80,000)          (80,000)
Amount due from stockholder
  from the sale of common
  stock.......................     45,903       170,000                                (170,000)                         --
Net loss for the year ended
  December 31, 1994...........                                                                        (5,310,601)       (5,310,601)
                                ---------  ------------                              ------------   ------------  ----------------
Balances, December 31, 1994...    353,278       218,933                                (293,000)     (17,837,684)      (17,911,751)

Common stock issued upon
  conversion of preferred
  stock (less costs of
  $90,730)....................  1,076,969    20,091,613                                                                 20,091,613
Common stock issued upon
  exercise of stock options...      1,576         2,953                                                                      2,953
Cancellation of common stock
  and amount due from
  stockholder.................    (45,903)     (170,000)                                170,000                          --
Amount due from stockholder
  from sale of common stock...    328,069        72,900                                 (72,900)                         --
Issuance of bridge financing
  warrants, subsequently
  exchanged for common
  stock.......................    281,034       331,618                                                                    331,618
Common stock issued for
  consulting services.........     338.00         1,250                                                                      1,250
Accretion of convertible
  redeemable preferred
  stock.......................                                                                           (60,000)          (60,000)
Unearned compensation related
  to stock options granted,
  net of cancellations of
  $14,557.....................                  845,870                ($845,870)                                        --
Compensation related to stock
  options vesting.............                                            92,230                                            92,230
Net loss for the year ended
  December 31, 1995...........                                                                        (2,645,387)       (2,645,387)
                                ---------  ------------               ------------   ------------   ------------  ----------------
Balances, December 31, 1995...  1,995,361    21,395,137                 (753,640)      (195,900)     (20,543,071)          (97,474)

Common stock issued upon
  exercise of stock options...     64,060        50,461                                                                     50,461
Common stock issued under the
  employee stock purchase
  plan........................      5,113        35,312                                                                     35,312
Unearned compensation related
  to stock options granted....                  299,043                 (299,043)                                        --
Compensation related to stock
  options vesting.............                                           350,535                                           350,535
Settlement of stockholder
  loan........................     (7,585)      (83,435)                                 75,000                             (8,435)
Issuance of common stock (less
  costs of $4,406,730)........  3,162,500    43,030,770                                                                 43,030,770
Conversion of convertible
  redeemable preferred stock
  into common stock...........  2,715,546     9,935,981                                                                  9,935,981
Reclassification of amounts to
  new common stock par
  value.......................              (74,655,334) $74,655,334                                                     --
Net loss for the year ended
  December 31, 1996...........                                                                        (4,407,946)       (4,407,946)
                                ---------  ------------  -----------  ------------   ------------   ------------  ----------------
Balances, December 31, 1996...  7,934,995  $      7,935  $74,655,334   $(702,148)     $(120,900)    $(24,951,017)   $   48,889,204
                                ---------  ------------  -----------  ------------   ------------   ------------  ----------------
                                ---------  ------------  -----------  ------------   ------------   ------------  ----------------
</TABLE>

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

                                       37
<PAGE>
                              IMAGYN MEDICAL, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

              FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996

<TABLE>
<CAPTION>
                                             1994         1995          1996
                                          -----------  -----------  ------------
<S>                                       <C>          <C>          <C>
Cash flows from operating activities:
  Net loss..............................  $(5,310,601) $(2,645,387) $ (4,407,946)
  Adjustments to reconcile net loss to
    net cash used by operating
    activities:
    Depreciation and amortization.......      188,610      210,180       237,023
    Loss on disposal of furniture,
      fixtures and equipment............      --            24,014         7,315
    Provision for doubtful accounts.....       60,000      --            --
    Noncash interest income on
      stockholder loan..................      --           --             (8,435)
    Noncash interest expense on bridge
      financing warrants................      --           331,618       --
    Common stock issued for consulting
      services..........................      --             1,250       --
    Compensation related to stock
      options vesting...................      --            92,230       350,535
    Increase in accounts receivable.....     (285,860)    (439,000)   (1,093,826)
    Decrease (increase) in
      inventories.......................       35,780      (67,410)     (943,660)
    Increase in other current assets....      (47,189)     (25,417)     (540,701)
    Decrease (increase) in other
      assets............................      127,413       58,837       (92,411)
    Increase (decrease) in accounts
      payable...........................      (43,901)     168,710       652,890
    Increase (decrease) in accrued
      salaries and benefits.............       48,950      (59,135)      302,943
    Increase (decrease) in other accrued
      liabilities.......................      150,301      113,343       (75,218)
                                          -----------  -----------  ------------
        Net cash used by operating
          activities....................   (5,076,497)  (2,236,167)   (5,611,491)
                                          -----------  -----------  ------------
Cash flows from investing activities:
    Cash proceeds from sale of
      furniture, fixtures and
      equipment.........................      --            875.00       --
    Purchase of furniture, fixtures and
      equipment.........................     (111,830)    (163,044)   (1,264,561)
    Purchase of short-term cash
      investments.......................      --        (6,980,454)  (12,039,359)
    Purchase of long-term cash
      investments.......................      --           --         (4,358,478)
    Loans to stockholders...............      (75,000)     --            --
    (Increase) decrease in restricted
      cash..............................                  (131,000)      131,000
                                          -----------  -----------  ------------
        Net cash used by investing
          activities....................     (186,830)  (7,273,623)  (17,531,398)
                                          -----------  -----------  ------------
Cash flows from financing activities:
    Proceeds from issuance of common
      stock.............................      --           --         47,472,612
    Proceeds from issuance of bridge
      financing.........................      --         2,056,586       --
    Proceeds from sale of convertible
      redeemable preferred stock........       12,339    7,879,395       --
    Costs of equity issuances...........      --           (90,730)   (4,406,730)
    Proceeds from exercise of stock
      options...........................        3,416        2,953        50,461
                                          -----------  -----------  ------------
        Net cash provided by financing
          activities....................       15,755    9,848,204    43,116,343
                                          -----------  -----------  ------------
        Net (decrease) increase in cash
          and cash equivalents..........   (5,247,572)     338,414    19,973,454
Cash and cash equivalents, beginning of
  year..................................    7,268,931    2,021,359     2,359,773
                                          -----------  -----------  ------------
Cash and cash equivalents, end of
  year..................................  $ 2,021,359  $ 2,359,773  $ 22,333,227
                                          -----------  -----------  ------------
                                          -----------  -----------  ------------
Supplemental Disclosure of Cash Flow
  Information:
  Cash paid during the year for:
    Income taxes........................  $       800  $       800  $      2,400
                                          -----------  -----------  ------------
                                          -----------  -----------  ------------
    Interest............................  $       234  $    60,568  $    --
                                          -----------  -----------  ------------
                                          -----------  -----------  ------------
Supplemental schedule of noncash
  investing and financing activities:
  Sale of 45,903 shares of common stock
    to an officer in exchange for a
    promissory note. Such shares and
    promissory note were canceled in
    1995................................  $  (170,000) $   170,000
  Sale of 328,069 shares of common stock
    to an officer in exchange for a
    promissory note.....................                    72,900
  Accretion of Series C convertible
    redeemable preferred stock against
    the accumulated deficit.............       80,000       60,000
  Exchange of Series A, B and C
    convertible redeemable preferred
    stock for common stock..............                20,182,343
  Conversion of bridge financing notes
    to new Series A preferred stock.....                 2,056,586
  Exchange of bridge financing warrants
    to common stock.....................                   331,618
  Common stock issued for consulting
    services............................                     1,250
  Unearned compensation related to stock
    options granted.....................                   845,870  $    299,043
  Settlement of loan to stockholder and
    related interest receivable in
    exchange for common stock...........                                  83,435
  Conversion of 2,715,546 shares of
    convertible redeemable preferred
    stock to shares of common stock on a
    one-for-one basis...................                               9,935,981
</TABLE>

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

                                       38
<PAGE>
                              IMAGYN MEDICAL, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        DECEMBER 31, 1994, 1995 AND 1996

1.  THE COMPANY:

    Imagyn Medical, Inc. (the "Company") was incorporated in 1989. The Company
designs, develops and markets micro-invasive, cost-effective devices for the
diagnosis and treatment of gynecological and reproductive disorders.

    Imagyn International, Inc. was organized as a wholly-owned subsidiary of the
Company in 1993. Imagyn International was created to facilitate the marketing,
sales and distribution of the Company's products in international markets.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

    PRINCIPLES OF CONSOLIDATION

    The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary. All significant intercompany
accounts and transactions have been eliminated in consolidation.

    REVENUE RECOGNITION

    Sales and related cost of goods sold are recognized when goods are shipped
to customers. The majority of the Company's customers are distributors which
sell goods to third-party end-users. The Company is not contractually obligated
to repurchase any inventory from their distributors. The Company records a
warranty accrual at the time of sale for estimated claims.

    RESEARCH AND DEVELOPMENT COSTS

    Research and development costs are expensed as incurred.

    CASH AND CASH EQUIVALENTS

    Cash and cash equivalents consist of cash in banks, certificates of deposit,
and short-term investments with acquired maturities of three months or less. The
carrying amount of cash and cash equivalents approximates market value.

    RESTRICTED CASH

    In 1995, the Company collateralized a letter of credit in the amount of
$117,187 with a certificate of deposit for $131,000. The certificate of deposit
had an interest rate of 4.5% and a maturity date of June 30, 1996, and is
therefore classified as a current asset on the accompanying consolidated balance
sheet at December 31, 1995.

    SHORT-TERM AND LONG-TERM CASH INVESTMENTS

    The short-term and long-term cash investments are managed by outside
brokerage firms and consist primarily of commercial paper, certificates of
deposit, and short-term bond instruments and are held to maturity. Short-term
cash investments have acquired maturities of one year or less, while long-term
cash investments have maturities of greater than one year. The carrying amount
of short-term and long-term cash investments is the cost plus interest earned as
of December 31, 1996, which approximates market value.

                                       39
<PAGE>
                              IMAGYN MEDICAL, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        DECEMBER 31, 1994, 1995 AND 1996

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
    INVENTORIES

    Inventories are stated at the lower of cost or market, cost being determined
on the first-in, first-out (FIFO) basis.

    FURNITURE, FIXTURES AND EQUIPMENT

    Furniture, fixtures and equipment are stated at cost and depreciated using
the straight-line method over the estimated useful lives of the assets which
range from three to five years. Leasehold improvements are amortized on a
straight-line basis over the lesser of the term of the related lease or its
estimated useful life.

    Repairs and maintenance are expensed as incurred while renewals or
betterments are capitalized. Upon the sale or retirement of furniture, fixtures
and equipment, the accounts are relieved of the cost and the related accumulated
depreciation and amortization, and any resulting gain or loss is included in
operations.

    INCOME TAXES

    The Company follows Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," which requires the recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end based on enacted tax laws and
statutory rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the amount expected to be realized. The
provision for income taxes represents the tax payable for the period and the
change during the period in deferred tax assets and liabilities.

    STOCK-BASED COMPENSATION

    The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for
Stock-Based Compensation." SFAS No. 123 defines a fair value based method of
accounting for an employee stock option. Fair value of the stock option is
determined considering factors such as the exercise price, the expected life of
the option, the current price of the underlying stock and its volatility,
expected dividends on the stock, and the risk-free interest rate for the
expected term of the option. Under the fair value based method, compensation
cost is measured at the grant date based on the fair value of the award and is
recognized over the service period. Pro forma disclosures for entities that
elect to continue to measure compensation cost under the intrinsic method
provided by Accounting Principles Board Opinion No. 25 must include the effects
of all awards granted in fiscal years that begin after December 15, 1994.

    ESTIMATES

    The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the

                                       40
<PAGE>
                              IMAGYN MEDICAL, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        DECEMBER 31, 1994, 1995 AND 1996

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.

3.  RECAPITALIZATION:

    On September 8, 1995, the Company completed an equity recapitalization (the
"Recapitalization"). The following events occurred as part of the
Recapitalization: (i) the conversion of all outstanding shares of Series A,
Series B and Series C preferred stock on a 1-for-1 basis into shares of common
stock, (ii) a reverse 1-for-5 split of all then outstanding common stock and
common stock options, (iii) the issuance of 2,153,484 shares of new Series A
preferred stock at $3.66 per share for cash of $7,879,395, (iv) the conversion
of outstanding bridge financing notes of $2,056,586 into 562,062 shares of new
Series A preferred stock, (v) conversion of bridge financing warrants into
281,034 shares of common stock, and (vi) amendments to the stock option plans.

    Prior to the completion of the Recapitalization, the Company obtained
$2,056,586 in bridge note financing. Interest at the rate of prime plus 1%, and
totaling $59,468, was paid in cash. In addition, the Company granted a warrant
to purchase a share of the new Series A preferred stock for $3.66 per share, for
each two shares of new Series A preferred stock received after conversion of the
bridge financing notes, or total warrants to acquire 281,034 shares of new
Series A preferred stock (the "bridge financing warrants"). These bridge
financing warrants were later exchanged for 281,034 shares of common stock for
no additional consideration in the Recapitalization. The Company recognized a
one-time non-cash charge of $331,618 to interest expense in connection with this
transaction, with such amount representing the then fair market value, as
determined by an independent third-party valuation, of such shares.

    All share and per share amounts have been adjusted to give retroactive
effect to the reverse stock split for all periods presented.

4.  INITIAL PUBLIC OFFERING:

    In June 1996, the Company completed an initial public offering (the "IPO")
of 3,162,500 shares of its common stock at $15.00 per share for proceeds, net of
offering expenses of $4,406,730, of $43,030,770. In connection with the IPO, all
then outstanding shares of convertible redeemable preferred stock were
automatically converted into 2,715,546 shares of common stock.

    In conjunction with the IPO, the Board of Directors and stockholders
approved a 1-for-1.4814 reverse stock split of all outstanding common stock,
preferred stock and common stock options. All share and per share amounts have
been adjusted to give retroactive effect to the reverse stock split for all
periods presented.

5.  RELATED PARTY TRANSACTIONS:

    During 1994, the Company sold 45,903 shares of common stock to an officer of
the Company in exchange for a $170,000 recourse promissory note. These shares
were returned to the Company and the promissory note was canceled in August 1995
as part of the Company's Recapitalization. On October 31, 1995, the Company sold
328,069 shares of common stock to the same officer in exchange for a $72,900
recourse promissory note. The promissory note bears interest at 6.31% per annum
with all principal and interest due on October 30, 2000. The promissory note is
collateralized by the related shares of common stock. The Company has an option
to repurchase the shares at $0.222 per share. The repurchase option,

                                       41
<PAGE>
                              IMAGYN MEDICAL, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        DECEMBER 31, 1994, 1995 AND 1996

5.  RELATED PARTY TRANSACTIONS: (CONTINUED)
which matches the vesting terms of the shares, expired with respect to 35% of
the shares on September 7, 1996 and, for the remaining shares, on a monthly pro
rata basis through September 7, 1998.

    The Company has a License Agreement with two of its stockholders relating to
patents, patent applications and other know-how on certain medical equipment
technology. Royalties pursuant to the License Agreement are payable for a period
of ten years following the date of the first commercial sale or the expiration
date of the last applicable patent, whichever occurs later. For the years ended
December 31, 1994, 1995 and 1996, total royalty expense under this agreement was
$18,703, $28,315 and $21,039, respectively.

    During 1993, the Company loaned two stockholders $75,000 and $48,000,
respectively. The loans bear interest at 4.92% and 5%, respectively, and have
five-year terms. The loans are collateralized by shares of the Company's common
stock. In March 1996, the $75,000 loan and related $8,435 interest receivable
were settled in full with the exchange of 7,585 shares of the Company's common
stock valued at its then fair market value.

    During 1992, the Company entered into a License, Manufacturing and
Distribution Agreement (the "Agreement") with Terumo Corporation ("Terumo"), a
stockholder, granting Terumo the right to manufacture and distribute the
Company's products in Japan. Under the terms of the Agreement, Terumo was
required to pay the Company $1.1 million, nonrefundable, for the right to
distribute the Company's products in Japan and $1 million as a license fee for
the right to manufacture certain of the Company's products for sale in Japan.
The Agreement also requires Terumo to pay royalties to the Company upon sales of
products manufactured by Terumo under the terms of the Agreement. The Company is
required to provide manufacturing know-how, training and documentation to Terumo
for the purpose of establishing manufacturing capability relating to such
products within two years after Japanese government approval of the product,
which was obtained in August 1995. In the event the Company does not meet its
obligation for the transfer of manufacturing know-how, the license fee is
subject to refund with interest at 10%. Based on the Company's continuing
obligations under the license portion of the Agreement, the Company has deferred
income recognition of the $1 million license fee.

6.  CASH AND CASH EQUIVALENTS:

    Cash and cash equivalents at December 31 consisted of the following:

<TABLE>
<CAPTION>
                                                                       1995          1996
                                                                   ------------  -------------
<S>                                                                <C>           <C>
Cash.............................................................  $    189,664  $   4,749,972
Cash equivalents.................................................     2,170,109     17,583,255
                                                                   ------------  -------------
                                                                   $  2,359,773  $  22,333,227
                                                                   ------------  -------------
                                                                   ------------  -------------
</TABLE>

    The cash equivalents are managed by an outside brokerage firm and consist
primarily of money market funds, commercial paper and short-term bond
instruments with initial maturities of 90 days or less.

                                       42
<PAGE>
                              IMAGYN MEDICAL, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        DECEMBER 31, 1994, 1995 AND 1996

7.  INVENTORIES:

    Inventories at December 31 consisted of the following:

<TABLE>
<CAPTION>
                                                                        1995          1996
                                                                    ------------  ------------
<S>                                                                 <C>           <C>
Raw material......................................................  $    372,730  $  1,141,427
Work-in-process...................................................       248,097       352,903
Finished goods....................................................       443,040       513,197
                                                                    ------------  ------------
                                                                    $  1,063,867  $  2,007,527
                                                                    ------------  ------------
                                                                    ------------  ------------
</TABLE>

8.  FURNITURE, FIXTURES AND EQUIPMENT:

    Furniture, fixtures and equipment at December 31 consisted of the following:

<TABLE>
<CAPTION>
                                                                        1995          1996
                                                                    ------------  ------------
<S>                                                                 <C>           <C>
Equipment.........................................................  $    859,603  $  1,511,667
Furniture and fixtures............................................       133,451       674,469
Leasehold improvements............................................        77,929       132,239
                                                                    ------------  ------------
                                                                       1,070,983     2,318,375
Accumulated depreciation and amortization.........................      (681,196)     (905,765)
                                                                    ------------  ------------
                                                                    $    389,787  $  1,412,610
                                                                    ------------  ------------
                                                                    ------------  ------------
</TABLE>

9.  ACCRUED LIABILITIES:

    Accrued liabilities at December 31 consisted of the following:

<TABLE>
<CAPTION>
                                                                           1995        1996
                                                                        ----------  ----------
<S>                                                                     <C>         <C>
Warranty expenses.....................................................  $  204,348  $  440,210
Distributor termination expenses......................................     325,000      68,307
Foreign branch assessments............................................      30,000      35,000
Other.................................................................     101,541      42,154
                                                                        ----------  ----------
                                                                        $  660,889  $  585,671
                                                                        ----------  ----------
                                                                        ----------  ----------
</TABLE>

                                       43
<PAGE>
                              IMAGYN MEDICAL, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        DECEMBER 31, 1994, 1995 AND 1996

10.  INCOME TAXES:

    The following table presents the current and deferred income tax provision
for federal and state income taxes:

<TABLE>
<CAPTION>
                                                                          YEARS ENDED DECEMBER 31,
                                                                       -------------------------------
                                                                         1994       1995       1996
                                                                       ---------  ---------  ---------
<S>                                                                    <C>        <C>        <C>
Current:
  Federal............................................................  $  --      $  --      $  --
  State..............................................................        800        800      1,600
                                                                       ---------  ---------  ---------
                                                                             800        800      1,600
Deferred:
  Federal............................................................     --         --         --
  State..............................................................     --         --         --
                                                                       ---------  ---------  ---------
                                                                       $     800  $     800  $   1,600
                                                                       ---------  ---------  ---------
                                                                       ---------  ---------  ---------
</TABLE>

    The tax effects of temporary differences which give rise to the deferred tax
provision (benefit) for the years ended December 31, consist of:

<TABLE>
<CAPTION>
                                                       1994           1995           1996
                                                   -------------  -------------  -------------
<S>                                                <C>            <C>            <C>
Property and equipment...........................  $    --        $     (26,920) $     (20,524)
Accrued liabilities..............................        (40,132)        21,978       (107,217)
Capitalized costs................................       (169,225)       301,985         21,588
Accounts receivable allowance....................        (25,980)      --             --
Inventory reserve................................       (248,326)      (119,075)       213,963
Stock options....................................       --              (39,936)        39,936
Income tax credit carryforwards..................       (154,133)      (100,002)        64,767
Net operating loss carryforwards.................     (1,419,836)    (1,202,514)    (1,609,854)
Other............................................         (1,185)           858       --
                                                   -------------  -------------  -------------
                                                      (2,058,817)    (1,163,626)    (1,397,341)
Valuation allowance..............................      2,058,817      1,163,626      1,397,341
                                                   -------------  -------------  -------------
                                                   $    --        $    --        $    --
                                                   -------------  -------------  -------------
                                                   -------------  -------------  -------------
</TABLE>

    The provision (benefit) for income taxes differs from the amount that would
result from applying the federal statutory rate as follows:

<TABLE>
<CAPTION>
                                                       YEARS ENDED DECEMBER 31,
                                                    ------------------------------
                                                      1994       1995       1996
                                                    --------   --------   --------
<S>                                                 <C>        <C>        <C>
Statutory regular federal income tax rate.........     (34.0)%    (34.0)%    (34.0)%
Change in valuation allowance.....................      35.2       36.1       32.0
Other.............................................      (1.2)      (2.1)       2.0
                                                    --------   --------   --------
Effective tax rate................................       0.0%       0.0%       0.0%
                                                    --------   --------   --------
                                                    --------   --------   --------
</TABLE>

                                       44
<PAGE>
                              IMAGYN MEDICAL, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        DECEMBER 31, 1994, 1995 AND 1996

10.  INCOME TAXES: (CONTINUED)
    The components of the deferred tax assets at December 31 are as follows:

<TABLE>
<CAPTION>
                                                                      1995           1996
                                                                  -------------  -------------
<S>                                                               <C>            <C>
Deferred revenue................................................  $     433,000  $     433,000
Capitalized costs...............................................      1,799,936      1,778,348
Property and equipment..........................................         92,513        113,037
Accrued liabilities.............................................        119,883        227,100
Accounts receivable allowance...................................         25,980         25,980
Inventory reserve...............................................        367,401        153,438
Stock options...................................................         39,936       --
Income tax credit carryforwards.................................        804,927        740,160
Net operating loss carryforwards................................      4,756,867      6,366,721
                                                                  -------------  -------------
                                                                      8,440,443      9,837,784
Valuation allowance.............................................     (8,440,443)    (9,837,784)
                                                                  -------------  -------------
Net deferred tax assets.........................................  $    --        $    --
                                                                  -------------  -------------
                                                                  -------------  -------------
</TABLE>

    At December 31, 1996, the Company had net operating loss carryforwards for
federal and state purposes of approximately $16,531,000 and $8,023,000,
respectively. The net operating loss carryforwards begin expiring in 2005 and
1997, respectively. The Company also has research and experimentation credit
carryforwards for federal and state purposes of approximately $387,000 and
$276,000, respectively. The research and experimentation credits begin to expire
in 2005 for federal purposes and carry forward indefinitely for state purposes.
The Company has federal foreign tax credits of $25,000 which expire in 1998. The
utilization of net operating loss and tax credit carryforwards will be subject
to a substantial annual limitation due to the ownership change limitations under
the provisions of Internal Revenue Code Section 382 and similar state
provisions. The annual limitation is likely to result in the expiration of most
of the Company's net operating loss and tax credit carryforwards before full
utilization.

11.  CONVERTIBLE REDEEMABLE PREFERRED STOCK:

    In June 1996, concurrent with the IPO (Note 4), all 2,715,546 shares of
Series A convertible redeemable preferred stock were converted into common stock
on a one-for-one basis.

12.  1990 INCENTIVE STOCK OPTION PLAN:

    The Company had a 1990 Incentive Stock Option Plan (the "1990 Option Plan")
under which options were granted, at the then estimated fair market value of the
Company's common stock as determined by the Board of Directors. The 1990 Option
Plan was terminated during the Recapitalization and outstanding options, except
for the options to acquire 40,833 shares of common stock which were exercised in
1996, were canceled. Certain of the canceled options were replaced with new
options under the 1995 Stock Plan (the "1995 Stock Plan").

                                       45
<PAGE>
                              IMAGYN MEDICAL, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        DECEMBER 31, 1994, 1995 AND 1996

12.  1990 INCENTIVE STOCK OPTION PLAN: (CONTINUED)
    A summary of the option activity under the 1990 Option Plan is as follows:

<TABLE>
<CAPTION>
                                                                  SHARES UNDER   OPTION PRICE
                                                                    OPTIONS        PER SHARE
                                                                 --------------  -------------
<S>                                                              <C>             <C>
Outstanding at January 1, 1994.................................       112,530     $0.37-$3.70

Granted........................................................        53,316        $3.70
Exercised......................................................        (4,062)    $0.37-$3.70
Canceled.......................................................       (19,484)    $0.37-$3.70
                                                                 --------------  -------------

Outstanding at December 31, 1994...............................       142,300     $0.37-$3.70

Granted........................................................        29,635        $0.74
Exercised......................................................        (1,914)    $0.37-$0.44
Canceled.......................................................      (129,188)    $0.37-$3.70
                                                                 --------------  -------------

Outstanding at December 31, 1995...............................        40,833        $1.11

Exercised......................................................       (40,833)       $1.11
                                                                 --------------  -------------

Outstanding at December 31, 1996...............................        --             --
                                                                 --------------  -------------
                                                                 --------------  -------------
</TABLE>

13.  1995 STOCK PLAN:

    The Company has a 1995 Stock Plan under which options may be granted to
purchase up to 1,675,000 shares of common stock. The 1995 Stock Plan provides
for the options issued to be either incentive stock options or nonstatutory
stock options as defined under Section 422A of the Internal Revenue Code. The
exercise price of the shares under option shall equal or exceed 85% and 100% of
the fair market value of the shares at the date of option grant for nonstatutory
and incentive stock options, respectively. The 1995 Stock Plan expires in the
year 2005 unless terminated earlier. The options generally vest over a 3 to 4
year period.

    The term of any stock option may not exceed 10 years from the date of grant
except for an incentive stock option granted to an optionee who owns stock
representing more than 10% of the voting power of all classes of stock of the
Company, in which case the term of the option shall be five years.

                                       46
<PAGE>
                              IMAGYN MEDICAL, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        DECEMBER 31, 1994, 1995 AND 1996

13.  1995 STOCK PLAN: (CONTINUED)
    A summary of the option activity under the 1995 Stock Plan is as follows:

<TABLE>
<CAPTION>
                                                                SHARES UNDER    OPTION PRICE
                                                                  OPTIONS         PER SHARE
                                                               --------------  ---------------
<S>                                                            <C>             <C>
Granted......................................................       888,765        $0.222
Exercised....................................................      (328,069)       $0.222
Canceled.....................................................       (15,797)       $0.222
                                                               --------------  ---------------

Outstanding at December 31, 1995.............................       544,899        $0.222

Granted......................................................       337,910     $0.222-$10.25
Exercised....................................................       (23,227)       $0.222
Canceled.....................................................       (15,812)       $0.222
                                                               --------------  ---------------

Outstanding at December 31, 1996.............................       843,770     $0.222-$10.25
                                                               --------------  ---------------
                                                               --------------  ---------------

Exercisable at December 31, 1996.............................       241,972     $0.222-$10.25
                                                               --------------  ---------------
                                                               --------------  ---------------
</TABLE>

    The difference between the exercise price and the fair market value, as
determined by an independent third-party valuation, of the options at the date
of grant of $845,870, net of cancellations of $14,557, at December 31, 1995, is
accounted for as unearned compensation and is being amortized to expense over
the related service period. During 1996, an additional $299,043 of unearned
compensation was recognized. During the years ended December 31, 1995 and 1996,
amortized compensation expense was $92,230 and $350,535, respectively.

14.  OTHER OPTION PLANS:

    1996 DIRECTOR OPTION PLAN

    The Company has adopted the 1996 Director Option Plan under which options
may be granted to purchase up to 200,000 shares of common stock. The 1996
Director Option Plan provides for 15,000 options to be granted to outside
directors on the date on which they become a member of the board of directors.
An additional 5,000 options are to be automatically granted to each outside
director on the first business day of each year of service provided such outside
director has served as an outside director for at least the previous six months.
The exercise price of the shares under option shall equal 100% of the fair
market value of the shares at the date of option grant. Options granted under
the 1996 Director Option Plan expire ten years from the date of grant unless
terminated earlier. The options vest over a 4-year period.

                                       47
<PAGE>
                              IMAGYN MEDICAL, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        DECEMBER 31, 1994, 1995 AND 1996

14.  OTHER OPTION PLANS: (CONTINUED)
    A summary of the option activity under the 1996 Director Option Plan is as
follows:

<TABLE>
<CAPTION>
                                                                SHARES UNDER     OPTION PRICE
                                                                   OPTIONS         PER SHARE
                                                               ---------------  ---------------
<S>                                                            <C>              <C>
Granted......................................................        75,000     $  10.75-$15.00
                                                                     ------     ---------------

Outstanding at December 31, 1996.............................        75,000     $  10.75-$15.00
                                                                     ------     ---------------
                                                                     ------     ---------------

Exercisable at December 31, 1996.............................        10,000     $  10.75-$15.00
                                                                     ------     ---------------
                                                                     ------     ---------------
</TABLE>

    1996 EMPLOYEE STOCK PURCHASE PLAN

    The Company has adopted the 1996 Employee Stock Purchase Plan ("ESPP") under
which employees may purchase up to 200,000 shares of common stock. Employees
eligible to participate in the ESPP must work an average of at least 20 hours
per week and at least five months per calendar year. The ESPP provides for
employees to purchase stock at a 15% discount from the lower of the fair market
value at the enrollment date or the exercise date (June 30 and December 31 of
each calendar year). Amounts to purchase stock are withheld through
employee-directed payroll deductions, not to exceed 10% of gross compensation,
up to $12,500 per each six-month purchase period not to exceed $21,250 per
calendar year. The ESPP expires in the year 2006 unless terminated earlier.
Unless an employee withdraws from the ESPP, shares are automatically purchased
on the stated exercise date.

    Shares are purchased in whole shares only. Any excess withholdings are
carried forward to the next period. On December 31, 1996, 5,113 shares were
purchased under the ESPP at a price of $6.91 per share. The Company recognized
$6,231 of compensation expense related to the ESPP for the year ended December
31, 1996.

    PRO FORMA EFFECT OF STOCK-BASED COMPENSATION

    The Company has adopted the disclosure-only provisions of SFAS No. 123. Had
compensation cost been determined on the fair value at the grant dates for
awards under those plans consistent with the method promulgated by SFAS No. 123,
the Company's net loss and loss per share would have been increased to the pro
forma amounts below:

<TABLE>
<CAPTION>
                                                                  FOR THE YEARS ENDED DECEMBER
                                                                              31,
                                                                  ----------------------------
                                                                      1995           1996
                                                                  -------------  -------------
<S>                                                               <C>            <C>
Net loss:
  As reported...................................................  $  (2,645,387) $  (4,407,946)
  Pro forma.....................................................  $  (2,649,366) $  (4,551,258)

Loss per share:
  As reported...................................................  $       (0.59) $       (0.61)
  Pro forma.....................................................  $       (0.59) $       (0.63)
</TABLE>

    For options granted from January 1, 1995 to April 30, 1996, the fair value
of each option grant was estimated on the date of the grant using the minimum
value method as the Company was a nonpublic

                                       48
<PAGE>
                              IMAGYN MEDICAL, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        DECEMBER 31, 1994, 1995 AND 1996

14.  OTHER OPTION PLANS: (CONTINUED)
entity when such options were granted. This value is the current stock price
less the present value of the exercise price for a stock that does not pay
dividends. For options granted from May 1, 1996 to December 31, 1996, the fair
value of each option grant was estimated on the date of grant using the Black-
Scholes option pricing model. The assumptions used under both models are as
follows: the risk-free interest rate was the U.S. Zero Coupon Bond rate for the
corresponding grant date and ranged from 5.48% to 6.0% in 1995 and from 5.33% to
6.56% in 1996; the exercise price is equal to the fair market value of the
underlying common stock at the grant date, the expected life of the option is
the term to expiration, generally 3 to 4 years; and the common stock will pay no
dividends. Under the Black-Scholes model only, the volatility is 92.36%.

15.  PREFERRED SHARES RIGHTS AGREEMENT:

    On November 7, 1996, the Board of Directors adopted a Preferred Shares
Rights Agreement and declared a dividend of one Preferred Share Purchase Right
(a "Right") for each outstanding share of common stock. Each Right enables its
holder to buy one one-thousandth of one share of the Company's Series A
Participating preferred stock, a designated series of preferred stock for which
each one-thousandth of a share has economic attributes and voting rights
equivalent to one share of the Company's common stock, at an exercise price of
$50.

    The Rights become exercisable and transferable apart from the common stock
only in certain limited circumstances involving acquisitions of or tender offers
for 15% or more of the Company's common stock. For a limited period of time
after the announcement of any such acquisition or offer, the Rights are
redeemable at the Company's option at a price of $.01 per Right. After becoming
exercisable, in certain more limited circumstances, each Right entitles its
holder to purchase for $50 an amount of common stock of the Company, or in
certain circumstances, securities of the acquiror, having a then current market
value equal to $100. The Rights expire on November 7, 2006.

16.  COMMITMENTS AND CONTINGENCIES:

    LEASES

    The Company leases office and manufacturing facilities in the United States
having noncancellable lease terms ranging from 30 to 36 months. In addition, the
Company leases office equipment with lease terms ranging from 21 to 48 months.
As of December 31, 1996, future minimum noncancellable annual lease commitments
for the years ended December 31 are as follows:

<TABLE>
<S>                                                 <C>
1997..............................................  $ 311,549
1998..............................................    309,220
1999..............................................     18,292
                                                    ---------
                                                    $ 639,061
                                                    ---------
                                                    ---------
</TABLE>

    Rent expense for the years ended December 31, 1994, 1995 and 1996 was
approximately $210,900, $202,400 and $256,200, respectively.

                                       49
<PAGE>
                              IMAGYN MEDICAL, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        DECEMBER 31, 1994, 1995 AND 1996

16.  COMMITMENTS AND CONTINGENCIES:(CONTINUED)

    401(k) PLAN

    The Company has a 401(k) Profit Sharing Plan (the "401(k) Plan") which is a
defined contribution plan for all Company employees who have reached age 21 and
have completed at least 1,000 hours of service. The 401(k) Plan is
self-contributory. The Company may, at its discretion, contribute to the Plan in
an amount not to exceed 12% of the employee's contribution. There were no
Company contributions in 1994, 1995 or 1996.

    MANAGEMENT INCENTIVE BONUS PROGRAMS

    During 1995, the Company approved a Management Incentive Bonus Program (the
"Bonus Plan") for directors and officers. The Bonus Plan provides for bonuses of
up to 20% of base compensation, provided certain specific performance criteria
are met. Bonuses of $246,000 were earned and payable at December 31, 1996 under
the Bonus Plan. No amounts were due or paid in 1995 under the Bonus Plan. A
similar bonus plan was in effect in 1994, and $24,549 was earned under that
plan.

    During 1995, the Company established a European Sales Incentive Program
which provides, for eligible employees based in Europe, for additional
compensation provided specific performance criteria are met. During the years
ended December 31, 1995 and 1996, $7,748 and $7,500, respectively, were earned
and paid under this European Program.

    DISTRIBUTION AGREEMENT

    In 1995, the Company entered into an agreement whereby another company was
appointed as the Company's distributor for certain products in certain
territories. The agreement required nonrefundable payments in the amount of
$3,500,000 which were received by the Company during the year ended December 31,
1995 and are included in operations on the accompanying consolidated statement
of operations as other operating income. The agreement does not have a fixed
term.

17.  NET LOSS PER COMMON SHARE:

    Net loss per common share is based on reported net loss, with such reported
net loss increased for accretion of the Series C preferred stock. The resulting
amount is presented below as loss applicable to common stock.

    Such loss applicable to common stock in each period presented is divided by
the weighted average number of outstanding common shares which, along with
shares issuable under other equity securities, have been computed in accordance
with Securities and Exchange Commission Staff Accounting Bulletin ("SAB") Topic
4-D. The SAB requires that common stock issued by the Company in the twelve
months immediately preceding a proposed public offering plus the number of
common equivalent shares which become issuable during the same period pursuant
to the issuance of warrants or grant of stock options (using the modified
treasury stock method), and issuance of convertible preferred stock, at prices
less than

                                       50
<PAGE>
                              IMAGYN MEDICAL, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        DECEMBER 31, 1994, 1995 AND 1996

17.  NET LOSS PER COMMON SHARE: (CONTINUED)
the per share initial public offering price be included in the calculation of
common stock and common stock equivalent shares as if they were outstanding for
all periods presented.

<TABLE>
<CAPTION>
                                                                       FOR THE YEARS ENDED DECEMBER 31,
                                                       ----------------------------------------------------------------
                                                               1994                  1995                  1996
                                                       --------------------  --------------------  --------------------
                                                                    (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                                        AMOUNT    PER SHARE   AMOUNT    PER SHARE   AMOUNT    PER SHARE
                                                       ---------  ---------  ---------  ---------  ---------  ---------
<S>                                                    <C>        <C>        <C>        <C>        <C>        <C>
Reported net loss....................................  $  (5,311) $   (1.24) $  (2,645) $   (0.58) $  (4,408) $   (0.61)
Adjustment for accretion of Series C preferred
  stock..............................................        (80)     (0.02)       (60)     (0.01)    --         --
                                                       ---------  ---------  ---------  ---------  ---------  ---------
Net loss applicable to common stock and net loss per
  common share and common equivalent share...........  $  (5,391) $   (1.26) $  (2,705) $   (0.59) $  (4,408) $   (0.61)
                                                       ---------  ---------  ---------  ---------  ---------  ---------
                                                       ---------  ---------  ---------  ---------  ---------  ---------
Weighted average number of:
  Common shares......................................        596                   922                 3,875
  Common equivalent shares...........................      3,667                 3,651                 3,321
                                                       ---------             ---------             ---------
Weighted average common shares and common equivalent
  shares outstanding.................................      4,263                 4,573                 7,196
                                                       ---------             ---------             ---------
                                                       ---------             ---------             ---------
</TABLE>

    Primary and fully-diluted loss per share amounts do not differ.

18.  CREDIT RISK:

    The Company maintains cash deposits at a bank and outside brokerage firms.
As of December 31, 1995 and 1996, the Company had cash on deposit $270,316 and
$45,716,855, respectively, in excess of the federally-insured limits.

    The Company's customers are primarily physicians and hospitals in the United
States and certain foreign countries, and domestic and international
distributors. The two largest customers accounted for approximately 56% of
accounts receivable at December 31, 1995 and the three largest customers totaled
approximately 43% of sales for the year ended December 31, 1995. One customer
accounted for approximately 90% of accounts receivable at December 31, 1996 and
approximately 91% of sales for the year ended December 31, 1996.

    The Company reviews a customer's credit history before extending credit and
may require an international customer to provide an irrevocable letter of credit
drawn on a bank previously approved by the Company. The Company establishes
allowances for doubtful accounts based upon factors surrounding the credit risk
of specific customers. The accounting loss, should a customer be unable to meet
its obligation to the Company, would be equal to the recorded account
receivable.

                                       51
<PAGE>
                              IMAGYN MEDICAL, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        DECEMBER 31, 1994, 1995 AND 1996

19.  SEGMENT INFORMATION:

    The Company's products are sold in the following geographic regions:

<TABLE>
<CAPTION>
                                                          FOR THE YEARS ENDED DECEMBER 31,
                                                      ----------------------------------------
                                                          1994          1995          1996
                                                      ------------  ------------  ------------
<S>                                                   <C>           <C>           <C>
United States.......................................  $      2,475  $    639,796  $  8,678,490
Japan...............................................        27,342       553,565       289,980
Europe..............................................       664,293       684,986       182,477
Australia...........................................       149,048       228,104       159,560
Other...............................................       161,584       136,204        60,315
                                                      ------------  ------------  ------------

                                                      $  1,004,742  $  2,242,655  $  9,370,822
                                                      ------------  ------------  ------------
                                                      ------------  ------------  ------------
</TABLE>

20.  SUBSEQUENT EVENTS (UNAUDITED):

    In January 1997, the Company granted 25,000 options to outside directors
under the 1996 Director Option Plan at $8.125 per share.

    In February 1997, the Company granted 157,500 options to purchase common
stock to employees at $8.125 per share.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

    Not applicable.

                                       52
<PAGE>
                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

    The directors and executive officers of the Registrant, who are elected by
the board of directors, are as follows:

<TABLE>
<CAPTION>
NAME                                   AGE                                         POSITION
-------------------------------------  ---  ---------------------------------------------------------------------------------------
<S>                                    <C>  <C>
Franklin D. Brown(5).................  53   President, Chief Executive Officer and Chairman of the Board
J.C. MacRae..........................  45   Vice President and Chief Financial Officer
Susan E. Dub.........................  49   Vice President, Marketing and Business Development
Christopher F. Bova..................  39   Vice President of United States Sales
Manuel Garcia-Jurado.................  54   Vice President, Operations
Kristine F. Lahman...................  43   Vice President of Regulatory Affairs, Quality Assurance and Clinical
                                             Programs
Keith V. Tholin......................  47   Vice President, Market Development
Gary M. Woker........................  46   Vice President of Research and Development
David W. Chonette(1)(3)..............  61   Director
Samuel D. Colella(2)(5)..............  58   Director
Elizabeth B. Connell, M.D.(4)........  71   Director
Mark B. Logan(2)(3)..................  58   Director
Richard S. Schneider, Ph.D.(1)(4)....  56   Director
</TABLE>

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

(1) Member of the Audit Committee.

(2) Member of the Compensation Committee.

(3) Class I director.

(4) Class II director.

(5) Class III director.

    Franklin D. Brown joined Imagyn as President, Chief Executive Officer and
Chairman of the Board in October 1994 and has served as a Director of the
Company since that time. Mr. Brown, who has over 25 years of health care
experience, previously served as President and Chief Executive Officer of
Pharmacia Deltec, Inc. ("Pharmacia Deltec"), a manufacturer of medical devices
for ambulatory drug delivery, from 1986 until he joined the Company. Pharmacia
Deltec is currently SIMS Deltec, a subsidiary of Smiths Industries plc. Prior to
Pharmacia Deltec, he held a variety of general management, sales and marketing
positions in the health care industry, including President of the Healthcare
Group of Pharmacia Inc., a biomedical/pharmaceutical company. Mr. Brown is
currently a director of Xillix Technologies, a publicly-held Canadian company
that develops and markets cancer detection products. In 1991, Mr. Brown was
awarded an Ernst & Young Entrepreneur of the Year Award for the Midwest region
for the success of Pharmacia Deltec. Mr. Brown holds an M.B.A. from the
University of Michigan and a B.A. from Western Michigan University.

    J.C. MacRae joined Imagyn as Vice President and Chief Financial Officer in
June 1992. Since November 1993, Mr. MacRae has also served as a director of
Imagyn International, Inc., a wholly owned subsidiary of the Company. From April
1991 until he joined the Company, Mr. MacRae served as an independent consultant
to several medical device manufacturers, including the Company. From 1987 to
April 1991, Mr. MacRae was employed by Retroperfusion Systems, Inc., a
manufacturer of cardiovascular devices, serving as Chief Financial Officer from
1987 to 1990 and President from January 1990 to April 1991. From 1984 to 1987,
he was Vice President and Treasurer of Cruttenden Roth Incorporated, an

                                       53
<PAGE>
investment banking and venture capital firm. From 1981 to 1984 he was Vice
President and Chief Financial Officer of VLI Corporation, a publicly-held
manufacturer of women's health products. Mr. MacRae holds an M.B.A. from
California State University Fullerton and a B.A. from the University of
California Irvine.

    Susan E. Dube joined Imagyn as Vice President of Business Development in
January 1996 and has served as Vice President, Marketing and Business
Development since August 1996. Ms. Dube has over 20 years of experience in
health care, with a particular emphasis on women's health. From August 1995 to
December 1995 Ms. Dube served as a consultant for LifeScience Economics, Inc., a
health care consulting company, during which time she consulted for the Company.
From June 1994 until August 1995, Ms. Dube served as President and Chief
Executive Officer of BioInterventions, Inc., a women's pharmaceutical company.
From August 1993 to April 1994 she served as an independent consultant to a
number of health care companies. From May 1991 to August 1993, she was Executive
Vice President and Chief Operating Officer of Adeza Biomedical, Inc., a women's
health diagnostic company. Ms. Dube was Vice President of Ventures at Brigham
and Women's Hospital in Boston from 1985 to April 1991. Ms. Dube holds an M.B.A.
from Harvard University and a B.A. from Simmons College.

    Christopher F. Bova joined Imagyn as Vice President of United States Sales
in August 1995. From 1986 until he joined the Company, Mr. Bova served in a
variety of sales and sales management positions with Pharmacia Deltec and SIMS
Deltec. Most recently he was Director of Sales of the vascular access division
of SIMS Deltec. Mr. Bova holds a B.A. from Muskingum College.

    Manuel Garcia-Jurado joined Imagyn as Vice President, Operations in January
1997. From October 1997 until he joined the Company, Mr. Garcia-Jurado served as
Vice President, Operations for Medication Delivery Devices, a medical device
manufacturer. From July 1993 to October 1994, Mr. Garcia-Jurado was Director of
Operations for the Cardiac Assist Division of Datascope Corporation. From 1990
to 1993, Mr. Garcia-Jurado served as Vice President, Manufacturing for InterFlo
Medical Corporation, a medical device manufacturer. Mr. Garcia-Jurado holds a
B.S. in Engineering from the National University of Mexico.

    Kristine F. Lahman has served as Imagyn's Vice President of Regulatory
Affairs, Quality Assurance and Clinical Programs since May 1995. From February
1993 until she joined the Company, Ms. Lahman was Vice President of Clinical and
Regulatory Affairs of Pharmacia, Inc., Ophthalmics Division, a manufacturer of
ophthalmic surgical products. From 1991 until February 1993, Ms. Lahman served
as Director of Clinical and Regulatory Affairs for Baxter Healthcare Corp.,
Critical Care Division, a medical device manufacturer. From 1988 to 1991, Ms.
Lahman served as Vice President of Clinical and Regulatory Affairs of IatroMed,
Inc., a manufacturer of orthopedic medical devices. From 1980 to 1988 she
directed the clinical and regulatory groups of Syntex Ophthalmics, Inc., a
division of Syntex Corporation specializing in ophthalmic medical devices. Ms.
Lahman holds a B.A. from Northwestern University.

    Keith V. Tholin joined Imagyn as Vice President of Clinical Marketing in
October 1989 and has served as Vice President, Market Development since August
1996. From 1988 until he joined the Company, Mr. Tholin served as General
Partner of Advanced Marketing Decisions, a biomedical marketing firm. From 1981
to 1988, Mr. Tholin also served in various business development and marketing
management positions with Baxter Edwards, a manufacturer of medical devices for
cardiology, cardiovascular and orthopedic applications. Mr. Tholin holds an
M.B.A. from the University of Chicago and a B.S. from the University of
Illinois.

    Gary M. Woker has served as Imagyn's Vice President of Research and
Development since December 1990. From 1989 until he joined the Company, Mr.
Woker served as Vice President of Engineering of MCM Laboratories, Inc., a
manufacturer of medical laser devices. From 1986 to 1989, Mr. Woker was Vice
President of Engineering and co-founder of California Laboratories Inc., also a
manufacturer of medical laser devices. From 1982 to 1986, Mr. Woker served as
Manager of New Product Development for Cooper Lasersonics, also a medical laser
manufacturer. Mr. Woker holds a B.S. from California Polytechnic University.

                                       54
<PAGE>
    David W. Chonette has served as a director of Imagyn since January 1990.
Since 1986, Mr. Chonette has been a general partner of Brentwood Associates, a
venture capital firm. Prior to 1986, Mr. Chonette served as President of
American Edwards Laboratories, a division of American Hospital Supply
Corporation. Mr. Chonette is a director of KeraVision, Inc., an optical device
company, and Biopsys Medical, Inc., a breast cancer biopsy device company. Mr.
Chonette holds a B.S. in Engineering from the Massachusetts Institute of
Technology.

    Samuel D. Colella has served as a director of Imagyn since January 1990.
Since 1984, Mr. Colella has been a general partner of Institutional Venture
Partners, a venture capital firm. From 1971 to 1984, Mr. Colella served as
President of Spectra-Physics, Inc., a laser manufacturer. Mr. Colella also
serves as a director of Biosys, Inc., a biopesticide company, Genta, Inc., a
drug delivery/antisense company, Pharmacopeia, Inc., a pharmaceutical discovery
company, Vivus, Inc., a manufacturer of therapeutic products for erectile
dysfunction, and Onyx Pharmaceuticals, a molecular oncology company. Mr. Colella
holds an M.B.A. from Stanford University and a B.S. in Business and Engineering
from the University of Pittsburgh.

    Elizabeth B. Connell, M.D. has served as a director of Imagyn since January
1994. Since 1981, Dr. Connell has been a professor of Gynecology and Obstetrics
at Emory University School of Medicine. She has served as a Chairperson of the
FDA Obstetrics and Gynecology Devices Panel from 1988 to 1992; as a member of
the FDA Panel on Review of Obstetrical and Gynecological Devices from 1976 to
1979; and as a member of the FDA Obstetrics and Gynecology Advisory Committee
from 1970 to 1978. Dr. Connell also serves as a director of UroMed Corp., and
Gynecare, Inc., both medical device companies. Dr. Connell holds an M.D. from
the University of Pennsylvania and an A.B. from the University of Pennsylvania.

    Mark B. Logan has served as a director of Imagyn since October 1996. Since
November 1994, Mr. Logan has been Chairman of the Board, President and Chief
Executive Officer of VISX, Incorporated, a medical device manufacturer of
products for the ophthalmology market. From January 1992 until July 1994, Mr.
Logan was Chairman of the Board, President and Chief Executive Officer of Insmed
Pharmaceuticals, Inc., a biopharmaceutical company. From 1985 to 1992, Mr. Logan
was a Principal Associate with McManis Associates, Inc., a Washington, D.C.
based research and management firm specializing in the health care field. From
1981 to 1985, Mr. Logan served as President, Health Care and Consumer Group, of
Bausch & Lomb, Inc. and was a member of Bausch & Lomb's board of directors. Mr.
Logan holds a B.A. from Hiram College and a P.M.D. from Harvard University.

    Richard S. Schneider, Ph.D. has served as a director of Imagyn since
September 1995. Since August 1990, Dr. Schneider has been a general partner of
Domain Associates, a venture capital firm. Prior to joining Domain Associates,
Dr. Schneider served as Vice President of 3i Ventures Corporation, a venture
capital firm, from April 1986 to July 1990. From 1983 to 1989, he was President
of Biomedical Consulting Associates. From 1967 to 1983, Dr. Schneider was Vice
President and founder of Syva Company, a diagnostics company that was part of
Syntex Corporation, a pharmaceutical company. Dr. Schneider also serves as a
director of Landec Corporation, a polymer applications research and design
company. Dr. Schneider holds a Ph.D. in organic chemistry from the University of
Wisconsin, completed post-doctoral studies at the Massachusetts Institute of
Technology, attended the Stanford Graduate School of Business and holds a B.S.
degree in Chemistry from the University of California, Berkeley.

                                       55
<PAGE>
Item 11.  EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLES

    SUMMARY COMPENSATION TABLE.  The following table sets forth the compensation
paid by the Company to the Chief Executive Officer and to the four other most
highly compensated executive officers who earned more than $100,000 during each
of the fiscal years ended December 31, 1995 and 1996 (the "Named Executive
Officers").

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                   LONG-TERM
                                                                                 COMPENSATION
                                                                        -------------------------------
                                                                                    AWARDS
                                                                        -------------------------------
                                                  ANNUAL COMPENSATION     RESTRICTED       SECURITIES         ALL
                                                 ---------------------       STOCK         UNDERLYING        OTHER
NAME AND PRINCIPAL POSITION        FISCAL YEAR     SALARY      BONUS        AWARDS          OPTIONS      COMPENSATION
--------------------------------  -------------  ----------  ---------  ---------------  --------------  -------------
<S>                               <C>            <C>         <C>        <C>              <C>             <C>
Franklin D. Brown...............         1996    $  225,000  $  63,450        --               40,000         --
  President, Chief                       1995    $  225,000     --         $       0(1)        --         $   187,504(2)
  Executive Officer
  and Chairman of the
  Board
Susan E. Dube(3)................         1996    $  125,000  $  45,000(4)       --             87,504     $    10,000(5)
  Vice President, Marketing
  and Business
  Development
Gary M. Woker...................         1996    $  130,000  $  22,100        --               20,000         --
  Vice President of                      1995    $  112,500     --            --               94,506         --
  Research and
  Development
J.C. MacRae.....................         1996    $  122,500  $  24,500        --               20,000         --
  Vice President and Chief               1995    $  114,577     --            --               77,630         --
  Financial Officer
Kristine F. Lahman(6)...........         1996    $  120,000  $  22,080        --                              --
  Vice President of                      1995    $   73,260  $  14,740(7)       --             47,253         --
  Regulatory Affairs,
  Quality Assurance and
  Clinical
  Programs
</TABLE>

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

(1) Mr. Brown purchased 328,069 shares of Common Stock for $0.22 per share, the
    fair market value at the time of issue as determined by the Company's Board
    of Directors.

(2) Consists of reimbursed relocation expenses comprising $59,315 to reimburse
    costs associated with the purchase of a residence in California, $42,900 to
    reimburse costs associated with the sale of Mr. Brown's former residence and
    $85,289 to cover tax liability for such reimbursements.

(3) Susan E. Dube joined the Company as Vice President of Business Development
    in January 1996.

(4) Includes a one-time, nonrecurring $10,000 bonus paid upon commencement of
    employment and a $25,000 guaranteed bonus paid during 1996 pursuant to the
    terms of Ms. Dube's employment.

(5) Consists of reimbursed relocation expenses.

(6) Kristine F. Lahman joined the Company as Vice President of Regulatory
    Affairs, Quality Assurance and Clinical Programs in May 1995.

(7) Consists of a $14,740 guaranteed bonus paid during 1995 pursuant to the
    terms of Ms. Lahman's employment.

                                       56
<PAGE>
    OPTION GRANTS IN LAST FISCAL YEAR. The following table sets forth certain
information concerning stock options granted during the fiscal year ended
December 31, 1996 to the Named Executive Officers.

                       OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
                                        INDIVIDUAL GRANTS                                        POTENTIAL REALIZABLE
                                  ------------------------------                                   VALUE AT ASSUMED
                                    NUMBER OF      % OF TOTAL                                   ANNUAL RATES OF STOCK
                                   SECURITIES        OPTIONS                                    PRICE APPRECIATION FOR
                                   UNDERLYING      GRANTED TO                                       OPTION TERM(4)
                                     OPTIONS      EMPLOYEES IN      EXERCISE OR    EXPIRATION   ----------------------
NAME                               GRANTED(1)    FISCAL YEAR(2)    BASE PRICE(3)      DATE          5%         10%
--------------------------------  -------------  ---------------  ---------------  -----------  ----------  ----------
<S>                               <C>            <C>              <C>              <C>          <C>         <C>
Franklin D. Brown...............       40,000             12%        $    8.00        7/30/06   $  201,246  $  509,998
Susan E. Dube...................       20,000              6%        $    8.00        7/30/06   $  100,623  $  254,999
                                       67,504             20%        $    0.22         1/8/06   $    9,340  $   23,668
Gary M. Woker...................       20,000              6%        $    8.00        7/30/06   $  100,623  $  254,999
J.C. MacRae.....................       20,000              6%        $    8.00        7/30/06   $  100,623  $  254,999
Kristine F. Lahman..............       --              --               --             --           --          --
</TABLE>

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

(1) Options were granted under the Company's 1995 Stock Plan and generally vest
    over four years from the date of commencement of employment.

(2) Based on an aggregate of 337,910 options granted by the Company in the year
    ended December 31, 1996 under the Company's 1995 Stock Plan to all employees
    of and consultants to the Company, including the Named Executive Officers.

(3) The exercise price per share of each option was equal to the fair market
    value of the Common Stock on the date of grant as determined by the Board of
    Directors.

(4) The potential realizable value is calculated based on the term of the option
    at its time of grant (ten years). It is calculated assuming that the fair
    market value of Common Stock on the date of grant appreciates at the
    indicated annual rate compounded annually for the entire term of the option
    and that the option is exercised and sold on the last day of its term for
    the appreciated stock price.

    AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END VALUES.
There were no option exercises by the Named Executive Officers in the Summary
Compensation Table above for the year ended December 31, 1996. The following
table sets forth certain information with respect to the value of stock options
held by such individuals as of December 31, 1996.

                         FISCAL YEAR END OPTION VALUES

<TABLE>
<CAPTION>
                                                                        NUMBER OF SECURITIES
                                                                       UNDERLYING UNEXERCISED
                                                                                                VALUE OF UNEXERCISED
                                                                       OPTIONS AT FISCAL YEAR  IN- THE-MONEY OPTIONS
                                                                                END              AT FISCAL YEAR END
                                                                       ----------------------  ----------------------
NAME                                                                    VESTED     UNVESTED      VESTED     UNVESTED
---------------------------------------------------------------------  ---------  -----------  ----------  ----------
<S>                                                                    <C>        <C>          <C>         <C>
Franklin D. Brown....................................................      4,166      35,834   $      521  $    4,479
Susan E. Dube........................................................      2,083      85,421   $      260  $  535,859
Gary M. Woker........................................................     55,242      59,264   $  420,482  $  329,088
J.C. MacRae..........................................................     35,560      62,070   $  264,896  $  351,269
Kristine F. Lahman...................................................     14,766      32,487   $  116,725  $  256,810
</TABLE>

                                       57
<PAGE>
COMPENSATION OF DIRECTORS

    Directors do not currently receive any cash compensation from the Company
for their service as members of the Board of Directors, although they are
reimbursed for certain expenses incurred in connection with their attendance at
Board and Committee meetings. However, the Company has entered into an agreement
with Elizabeth B. Connell, M.D., a director of the Company, which provides for a
minimum annual payment of $15,000 for Dr. Connell's attendance at board meetings
and other Company related activities. Dr. Connell has received a grant of an
option to purchase an aggregate of 8,101 shares of Common Stock. Under the
Company's 1996 Director Option Plan, each director who is not also an employee
of the Company (an "Outside Director") will automatically receive an option to
purchase 15,000 shares of Common Stock on the date of this Prospectus or, if
later, upon joining the Board of Directors. In addition, beginning on the first
business day of 1997, and each year thereafter, each Outside Director who has
served on the Board of Directors for at least the preceding six months and
continues to serve as a director on the date of such grant will be granted an
option to purchase 5,000 shares of Common Stock.

EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
  ARRANGEMENTS

    The Company has entered into an employment agreement with Franklin D. Brown,
its President, Chief Executive Officer and Chairman of the Board, which
agreement provides for base pay of $225,000 per annum and performance bonus
based upon criteria established by the Board of Directors, and for six months of
base pay as severance compensation following termination without cause. The
Company has entered into Change in Control Agreements with each of its two
regional sales managers. Each agreement provides for six months' severance
compensation in the event of the employee's termination or substantial change in
his job responsibilities during the initial six months following a change in
control of the Company.

ADDITIONAL INFORMATION WITH RESPECT TO COMPENSATION COMMITTEE INTERLOCKS AND
  INSIDER PARTICIPATION IN COMPENSATION DECISIONS

    The Compensation Committee is responsible for determining salaries,
incentive compensation and other forms of compensation for directors, officers
and other employees of the Company. The Compensation Committee also administers
various incentive compensation plans. The Compensation Committee consists of
Messrs. Colella and Logan. Mr. Brown, who is the Company's President, Chief
Executive Officer and Chairman of the Board, participates in all discussions and
decisions regarding salaries and incentive compensation for all employees of and
consultants to the Company, except that Mr. Brown is excluded from discussions
regarding his own salary and incentive compensation. Until March 1996, Mr. Brown
served as a member of the Compensation Committee.

BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

    THE FOLLOWING IS PROVIDED TO STOCKHOLDERS BY THE MEMBERS OF THE COMPENSATION
COMMITTEE OF THE BOARD OF DIRECTORS:

    The Compensation Committee of the Board of Directors (the "Committee"),
comprising two outside directors, is responsible for the administration of the
Company's compensation programs. These programs include base salary for
executive officers and both annual and long-term incentive compensation
programs. The Company's compensation programs are designed to provide a
competitive level of total compensation and include incentive and equity
ownership opportunities linked to the Company's performance and stockholder
return.

                                       58
<PAGE>
COMPENSATION PHILOSOPHY

    The design and implementation of the Company's executive compensation
programs are based on a series of guiding principles derived from the Company's
values, business strategy and management requirements. These principles may be
summarized as follows:

    - Align the financial interests of the management team with the Company and
      its stockholders;

    - Attract, motivate and retain high-caliber individuals necessary to
      increase total return to stockholders;

    - Provide a total compensation program where a significant portion of pay is
      linked to individual achievement and short- and long-term Company
      performance; and

    - Emphasize reward for performance at the individual, team and Company
      levels.

COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(m)

    The Committee has considered the potential impact of Section 162(m) of the
Internal Revenue Code adopted under the Federal Revenue Reconciliation Act of
1993. Section 162(m) disallows a tax deduction for any publicly-held corporation
for individual compensation exceeding $1 million in any taxable year for any of
the named executive officers, unless compensation is performance based. Since
the targeted cash compensation of each of the named executive officers is well
below the $1 million threshold and the Committee believes that any options
granted under the Company's stock option plan will meet the requirement of being
performance based under the transition provisions provided in the regulations
under Section 162(m), the Committee believes that Section 162(m) will not reduce
the tax deduction available to the Company. The Company's policy is to qualify
to the extent reasonable its executive officers' compensation for deductibility
under applicable tax laws.

COMPENSATION PROGRAM

    The Company's executive compensation program has three major components, all
of which are intended to attract, retain and motivate executive officers
consistent with the principles set forth above. The Committee considers these
components of compensation individually as well as collectively in determining
total compensation for executive officers.

    1.  BASE SALARY. Each fiscal year the Committee establishes base salaries
for individual executive officers based upon (i) industry and peer group
surveys, (ii) responsibilities, scope and complexity of each position and (iii)
performance judgments as to each individual's past and expected future
contributions. The Committee reviews with the Chief Executive Officer and
approves, with appropriate modifications, an annual base salary plan for the
Company's executive officers other than the Chief Executive Officer. The
Committee reviews and fixes the base salary of the Chief Executive Officer based
on similar competitive compensation data and the Committee's assessment of his
past performance and its expectations as to his future contributions in leading
the Company.

    2.  ANNUAL CASH (SHORT-TERM) INCENTIVES. Annual cash incentives are
established to provide a direct linkage between individual pay and annual
corporate performance. Target annual bonus awards for 1996 were established for
executive officer positions at 20% of base salary for officers other than the
Chief Executive Officer and 30% of base salary for the Chief Executive Officer.
In accordance with the provisions of the 1996 Management Incentive Bonus program
("Bonus Plan") each officer who served in an executive capacity during the last
fiscal year, including the Chief Executive Officer, received a cash bonus based
on the achievement of specific performance criteria, in amounts ranging from 14%
to approximately 20% of base salary for executive officers other than the Chief
Executive Officer and a cash bonus of approximately 28% of base salary was paid
to the Chief Executive Officer. Pursuant to the terms of the Bonus Plan,
officers were eligible for cash bonuses only if the Company achieved certain
operating

                                       59
<PAGE>
plan objectives. For the year ended December 31, 1996, the Company met these
objectives and executive officers became eligible for cash bonuses based on
specific individual performance objectives. Each quarter, each officer
establishes operating objectives for functional area of business for which such
officer is responsible . During the year, officers are rated on the attainment
of those objectives which provide the basis for determining the cash bonuses to
be paid under the Bonus Plan.

    3.  EQUITY BASED INCENTIVE COMPENSATION. Long-term incentives for the
Company's employees are provided under the Company's stock option plans. Each
fiscal year, the Committee considers the desirability of granting to executive
officers long-term incentives in the form of stock options. These option grants
are intended to motivate the executive officers to manage the business to
improve long-term Company performance and align the financial interests of the
management team with the Company and its stockholders. The Committee established
the grants of stock options to selected executive officers (other than the Chief
Executive Officer) in the Last Fiscal Year, based upon a review with the Chief
Executive Officer of proposed individual awards, taking into account each
officer's scope of responsibility and specific assignments, strategic and
operational goals applicable to the officer, anticipated performance
requirements and contributions of the officer and competitive data for similar
positions. The Committee independently reviewed these same factors in
determining the option grant to the Chief Executive Officer. During the Last
Fiscal Year, an option award of 40,000 shares of Common Stock was granted to the
Chief Executive Officer. This was the only option grant made to the Chief
Executive Officer since September 7, 1995. All stock options granted to
executive officers in the Last Fiscal Year provide for vesting over a four-year
period.

                                          Respectfully submitted,

                                          Samuel D. Colella
                                          Mark B. Logan

    THE FOREGOING COMPENSATION COMMITTEE REPORT SHALL NOT BE DEEMED TO BE
"SOLICITING MATERIAL" OR TO BE "FILED" WITH THE SECURITIES AND EXCHANGE
COMMISSION ("SEC"), NOR SHALL SUCH INFORMATION BE INCORPORATED BY REFERENCE INTO
ANY FUTURE FILING UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), OR THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"),
EXCEPT TO THE EXTENT THE COMPANY SPECIFICALLY INCORPORATES IT BY REFERENCE INTO
SUCH FILING.

                                       60
<PAGE>
PERFORMANCE GRAPH

    The following graph compares the cumulative total return to stockholders of
the Company's Common Stock at December 31, 1996 since May 30, 1996 (the date the
Company first became subject to the reporting requirements of the Exchange Act)
to the cumulative total return over such period of (i) "Nasdaq Stock
Market--U.S." index, and (ii) the Hambrecht & Quist "Healthcare-Excluding
Biotechnology" index. The graph assumes the investment of $100 on May 30, 1996
in the Company's Common Stock and each of such indices and reflects the change
in the market price of the Company's Common Stock relative to the noted indices
at December 31, 1996 and not for any interim period. The performance shown is
not necessarily indicative of future price performance.

                 COMPARISON OF 7 MONTH CUMULATIVE TOTAL RETURN*
         AMONG IMAGYN MEDICAL, INC., THE NASDAQ STOCK MARKET--US INDEX
      AND THE HAMBRECHT & QUIST HEALTHCARE--EXCLUDING BIOTECHNOLOGY INDEX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
             IMAGYN MEDICAL, INC.         NASDAQ STOCK MARKET-US
<S>        <C>                        <C>                           <C>
5/30/96                         $100                            $100
12/31/96                          48                             105

<CAPTION>
                   HAMBRECHT & QUIST HEALTHCARE - EXCLUDING BIOTECHNOLOGY

<S>        <C>
5/30/96                                                                      $100

12/31/96                                                                      106

</TABLE>

*   $100 invested on 5/30/96 in stock or index--including reinvestment of
    dividends. Fiscal year ending December 31.

    THE INFORMATION CONTAINED IN THE PERFORMANCE GRAPH SHALL NOT BE DEEMED TO BE
"SOLICITING MATERIAL" OR TO BE FILED WITH THE SEC, NOR SHALL SUCH INFORMATION BE
INCORPORATED BY REFERENCE INTO ANY FUTURE FILING UNDER THE SECURITIES ACT OR THE
EXCHANGE ACT, EXCEPT TO THE EXTENT THE COMPANY SPECIFICALLY INCORPORATES IT BY
REFERENCE INTO SUCH FILING.

                                       61
<PAGE>
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

    The following table sets forth certain information known to the Company with
respect to the beneficial ownership of its Common Stock as of February 28, 1997,
by (i) each person who is known by the Company to own beneficially more than
five percent of the outstanding shares of the Company's Common Stock, (ii) each
of the Company's directors, (iii) each Named Executive Officer and (iv) all
directors, and Named Executive Officers as a group. Unless otherwise indicated,
officers and directors can be reached at the Company's principal executive
offices. A total of 7,988,133 shares of the Company's Common Stock were issued
and outstanding as of February 28, 1997.

<TABLE>
<CAPTION>
                                                                            NUMBER OF SHARES
                                                                           BENEFICIALLY OWNED      APPROXIMATE
NAME AND ADDRESS                                                                  (1)           PERCENT OWNED (2)
------------------------------------------------------------------------  --------------------  -----------------
<S>                                                                       <C>                   <C>
Entities affiliated with Institutional Venture Partners(3)..............           890,958              11.2%
  Samuel D. Colella
  3000 Sand Hill Road
  Building 2, Suite 290
  Menlo Park, CA 94025
BankAmerica Ventures(4).................................................           546,590               6.8%
  950 Tower Lane, Suite 700
  Foster City, CA 94404
Entities affiliated with Domain Associates(5)...........................           546,589               6.8%
  Richard S. Schneider, Ph.D.
  One Palmer Square, Suite 515
  Princeton, NJ 08542
Biotechnology Investments Limited(6)....................................           546,589               6.8%
  Post Office Box 58
  St. Julian's Court, St. Peter's Port
  Guernsey, Channel Islands
Franklin D. Brown(7)....................................................           334,735               4.2%
Susan E. Dube (8).......................................................            24,428              *
Gary M. Woker (9).......................................................            64,368              *
J.C. MacRae (10)........................................................            45,221              *
Kristine F. Lahman (11).................................................            18,704              *
David W. Chonette(12)...................................................           209,775               2.6%
Samuel D. Colella(13)...................................................           894,707              11.2%
Elizabeth B. Connell, M.D. (14).........................................            11,850              *
Mark B. Logan(15).......................................................             2,187              *
Richard S. Schneider, Ph.D.(16).........................................         1,096,927              13.7%
All Directors and Named Executive Officers as a group (13
  persons)(17)..........................................................         2,817,286              34.3%
</TABLE>

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

*   Less than 1%

 (1) Except as indicated in the footnotes to this table and pursuant to
    applicable community property laws, the persons named in the table have sole
    voting and investment power with respect to all shares of Common Stock.

 (2) The number of shares of Common Stock beneficially owned includes the shares
    issuable pursuant to stock options that may be exercised within 60 days
    after February 28, 1996. Shares issuable pursuant to such options are not
    deemed outstanding for purposes of computing the percentage of any other
    person.

 (3) Includes 877,588 shares beneficially owned by Institutional Venture
    Partners IV, L.P. and 13,370 shares beneficially owned by Institutional
    Venture Management IV, L.P. Samuel D. Colella, a director of the Company, is
    a general partner of the General Partner of Institutional Venture Partners
    IV, L.P. and Institutional Venture Management IV, L.P. Mr. Colella disclaims
    beneficial ownership of the shares

                                       62
<PAGE>
    beneficially owned by such entities except to the extent of his
    proportionate partnership interest therein.

 (4) Includes 491,930 shares beneficially owned by BankAmerica Ventures and
    54,660 shares beneficially owned by BA Venture Partners I.

 (5) Includes 528,105 shares beneficially owned by Domain Partners III, L.P. and
    18,484 shares beneficially owned by DP III Associates, L.P. Richard S.
    Schneider, a director of the Company, is a general partner of One Palmer
    Square Associates III, L.P., the general partner of Domain Partners III,
    L.P. and DP III Associates, L.P. Dr. Schneider has indirect beneficial
    ownership of these shares. Dr. Schneider disclaims beneficial ownership of
    the shares beneficially owned by such entities except to the extent of his
    proportionate partnership interest therein.

 (6) Old Court Limited is the record holder of the shares as custodian for
    Biotechnology Investments Limited.

 (7) Includes 6,666 shares issuable upon exercise of options exercisable within
    60 days of February 28, 1997 held by Mr. Brown and 328,069 shares
    beneficially owned by Mr. Brown subject to a repurchase option in favor of
    the Company. Such repurchase option lapses with respect to 114,824 shares in
    September 1996 and 8,886 shares each month thereafter.

 (8) Includes 16,428 shares issuable upon exercise of options exercisable within
    60 days of February 28, 1997 held by Ms. Dube.

 (9) Includes 64,368 shares issuable upon exercise of options exercisable within
    60 days of February 28, 1997 held by Mr. Woker.

(10) Includes 45,221 shares issuable upon exercise of options exercisable within
    60 days of February 28, 1997 held by Mr. MacRae.

(11) Includes 18,704 shares issuable upon exercise of options exercisable within
    60 days of February 28, 1997 held by Ms. Lahman.

(12) Includes 204,972 shares held by Brentwood Associates V, L.P. and 3,749
    shares issuable upon exercise of options exercisable within 60 days of
    February 28, 1997 held by Mr. Chonette. Mr. Chonette, a director of the
    Company, is a general partner of the General Partner of Brentwood Associates
    V, L.P. Mr. Chonette disclaims beneficial ownership of the shares
    beneficially owned by Brentwood Associates V, L.P. except to the extent of
    his proportionate partnership interest therein.

(13) Includes 877,588 shares beneficially owned by Institutional Venture
    Partners IV, L.P. and 13,370 shares beneficially owned by Institutional
    Venture Management IV, L.P. Samuel D. Colella, a director of the Company, is
    a general partner of the General Partner of Institutional Venture Partners
    IV, L.P. and Institutional Venture Management IV, L.P. Mr. Colella disclaims
    beneficial ownership of the shares beneficially owned by such entities
    except to the extent of his proportionate partnership interest therein. Also
    includes 3,749 shares issuable upon exercise of options exercisable within
    60 days of February 28, 1997, held by Mr. Colella.

(14) Includes 11,850 shares issuable upon exercise of options exercisable within
    60 days of February 28, 1997 held by Dr. Connell.

(15) Includes 2,187 shares issuable upon exercise of options exercisable within
    60 days of February 28, 1997 held by Mr. Logan.

(16) Includes 528,105 shares beneficially owned by Domain Partners III, L.P. and
    18,484 shares beneficially owned by DP III Associates, L.P. Richard S.
    Schneider, a director of the Company, is a general partner of One Palmer
    Square Associates III, L.P., the general partner of Domain Partners III,
    L.P. and DP III Associates, L.P. Dr. Schneider has indirect beneficial
    ownership of these shares. Dr. Schneider disclaims beneficial ownership of
    the shares beneficially owned by such entities except to the extent of his
    proportionate partnership interest therein. Also includes 546,589 shares
    beneficially owned by Biotechnology Investments Limited. Old Court Limited
    is the record holder of the shares as custodian for Biotechnology
    Investments Limited. Pursuant to a contractual agreement, Domain Associates
    is the U.S. venture capital advisor to Biotechnology Investments Limited.
    Dr. Schneider is a general partner of Domain Associates. Domain Associates
    has neither voting nor investment power over Biotechnology Investments
    Limited and Dr. Schneider and Domain Associates disclaim beneficial
    ownership of the Biotechnology Investments Limited shares. Dr. Schneider

                                       63
<PAGE>
    disclaims beneficial ownership of shares held by One Palmer Square
    Associates III, L.P. except to the extent of his proportionate partnership
    interest therein. Also includes 3,749 shares issuable upon exercise of
    options exercisable within 60 days of February 28, 1997.

(17) Includes 234,351 shares issuable upon exercise of options exercisable
    within 60 days of February 28, 1997 held by Directors and Executive
    Officers.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    The Company entered into an agreement in March 1996 with Guy R. Lowery, a
former officer and director of the Company. The agreement provided for
resignation, consulting services, and certain amendments to a pledge agreement
made in connection with a secured promissory note for $75,000 collateralized by
47,253 shares of Common Stock. Pursuant to the agreement, the principal of and
accrued interest on the promissory note were paid with shares of Common Stock,
and in connection with such repayment, the Company repurchased 7,585 shares of
Common Stock at $11.00 per share.

                                       64
<PAGE>
                                    PART IV
   ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

    (A)  1.  FINANCIAL STATEMENTS

           The following Financial Statements of Imagyn Medical, Inc. and Report
           of Coopers & Lybrand L.L.P., Independent Accountants are filed as
           part of this report:

               Report of Coopers & Lybrand L.L.P., Independent Accountants

               Consolidated Balance Sheets at December 31, 1996 and 1995

               Consolidated Statements of Operations for the Years Ended
                 December 31, 1996, 1995 and 1994

               Consolidated Statements of Stockholders' Equity for the Years
                 Ended December 31, 1996, 1995 and 1994

               Consolidated Statements of Cash Flows for the Years Ended
                 December 31, 1996, 1995 and 1994

               Notes to Consolidated Financial Statements

       2.  FINANCIAL STATEMENT SCHEDULES

           All schedules are omitted because they are not applicable or the
           required information is shown in the Financial Statements or the
           notes thereto.

       3.  EXHIBITS

               Refer to (c) below.

    (B) REPORTS ON FORM 8-K

       The Company was not required to and did not file any reports on Form 8-K
       during the three months ended December 31, 1996.

    (C) EXHIBITS

<TABLE>
<CAPTION>
 EXHIBIT
   NO.      DESCRIPTION
----------  --------------------------------------------------------------------
<S>         <C>
 3.4(1)     Restated Certificate of Incorporation of the Registrant.

 3.5        Bylaws of the Registrant, as amended.

 3.6(2)     Certificate of Designations of Rights, Preferences and Privileges of
              Series A Participating Preferred Stock.

 3.7(2)     Preferred Shares Rights Agreement, dated as of November 7, 1996.

 4.1(1)     Specimen Common Stock Certificate.

10.2        1995 Stock Plan and form of Stock Option Agreement thereunder, as
              amended.

10.3(1)     1996 Director Option Plan and form of Director Option Agreement.

10.4(1)     1996 Employee Stock Purchase Plan and form of Subscription
              Agreement.

10.5(1)     License Agreement dated September 1, 1992 between Otmar Bauer, M.D.
              ("Bauer") and Registrant.

10.6(1)     Amendment dated April 1, 1994 to Exhibit 10.5 between Bauer and
              Registrant.
</TABLE>

                                       65
<PAGE>
<TABLE>
<CAPTION>
 EXHIBIT
   NO.      DESCRIPTION
----------  --------------------------------------------------------------------
<S>         <C>
10.7(1)*    License Agreement dated January 12, 1990 among Baxter International,
              Inc. ("Baxter"), Thomas J. Fogarty ("Fogarty") and Gyntech
              MedSystems, Inc. (predecessor to Registrant).

10.8(1)     Letter Agreement dated October 29, 1992 between Baxter and
              Registrant relating to Exhibit 10.7.

10.9(1)*    Amendment dated September 30, 1992 to Exhibit 10.7 among Baxter,
              Fogarty and Registrant.

10.10(1)    Lease of primary office space dated December 21, 1995 between
              Birtcher Niguel and Registrant.

10.11(1)*   License, Manufacturing and Distribution Agreement dated November 30,
              1992 between Registrant and Terumo Corporation.

10.12(1)*   Distributorship Agreement dated October 23, 1995 between Registrant
              and United States Surgical Corporation ("USSC").

10.13(1)*   Amendment dated February 20, 1996 to Exhibit 10.12 between USSC and
              Registrant.

10.14(1)    Employment Agreement dated October 10, 1994 between Franklin D.
              Brown and Registrant.

10.15(1)    Employment Agreement dated April 6, 1995 between Kristine F. Lahman
              and Registrant.

10.16(1)    Employment Agreement dated June 7, 1995 between Christopher Bova and
              Registrant.

10.17(1)    Stock Purchase Agreement dated October 30, 1995 between Franklin D.
              Brown and Registrant.

10.18(1)    Repurchase Agreement dated April 3, 1996 relating to Exhibit 10.17
              between Franklin D. Brown and Registrant.

10.19(1)    Form of Indemnification Agreement between Imagyn Medical, Inc., a
              Delaware corporation, and each of its directors and officers.

10.20(1)    Lease of office space dated April 5, 1996 between Birtcher Niguel
              and Registrant.

22.1(1)     Subsidiaries of Registrant.

23.1        Consent of Coopers & Lybrand L.L.P. Independent Accountants.

24.1        Power of Attorney (see page 67).

27.1        Financial Data Schedule
</TABLE>

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

*   Confidential treatment granted.

(1) Incorporated by reference to the same-numbered exhibit filed with the
    Registrant's Registration Statement on Form S-1 (File No. 333-3542, as
    amended).

(2) Incorporated by reference to the Registrant's Registration Statement on Form
    8-A filed with the Securities and Exchange Commission on November 19, 1996.

                                       66
<PAGE>
                                   SIGNATURES

    Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                IMAGYN MEDICAL, INC.

                                By:            /s/ FRANKLIN D. BROWN
                                     -----------------------------------------
                                                 Franklin D. Brown
                                       PRESIDENT AND CHIEF EXECUTIVE OFFICER

    KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Franklin D. Brown and J. C. MacRae,
jointly and severally, his or her attorneys-in-fact, and each with the power of
substitution, for him or her 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 or her substitute or substitutes, may do or cause to
be done by virtue thereof.

    Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.

            SIGNATURE                        TITLE                  DATE
---------------------------------  -------------------------  -----------------

                                   President, Chief
      /s/ FRANKLIN D. BROWN          Executive Officer and
---------------------------------    Director (Principal       March 28, 1997
        Franklin D. Brown            Executive Officer)

                                   Vice President and Chief
        /s/ J. C. MACRAE             Financial Officer
---------------------------------    (Principal Financial      March 28, 1997
          J. C. MacRae               and Accounting Officer)

      /s/ DAVID W. CHONETTE
---------------------------------  Director                    March 28, 1997
        David W. Chonette

      /s/ SAMUEL D. COLELLA
---------------------------------  Director                    March 28, 1997
        Samuel D. Colella

 /s/ ELIZABETH B. CONNELL, M. D.
---------------------------------  Director                    March 28, 1997
   Elizabeth B. Connell, M.D.

        /s/ MARK B. LOGAN
---------------------------------  Director                    March 28, 1997
          Mark B. Logan

 /s/ RICHARD S. SCHNEIDER, PH.D.
---------------------------------  Director                    March 28, 1997
   Richard S. Schneider, Ph.D.

                                       67
<PAGE>
                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
 EXHIBIT
   NO.      DESCRIPTION
----------  --------------------------------------------------------------------
<S>         <C>
 3.4(1)     Restated Certificate of Incorporation of the Registrant.
 3.5        Bylaws of the Registrant, as amended.
 3.6(2)     Certificate of Designations of Rights, Preferences and Privileges of
              Series A Participating Preferred Stock.
 3.7(2)     Preferred Shares Rights Agreement, dated as of November 7, 1996.
 4.1(1)     Specimen Common Stock Certificate.
10.2        1995 Stock Plan and form of Stock Option Agreement thereunder, as
              amended.
10.3(1)     1996 Director Option Plan and form of Director Option Agreement.
10.4(1)     1996 Employee Stock Purchase Plan and form of Subscription
              Agreement.
10.5(1)     License Agreement dated September 1, 1992 between Otmar Bauer, M.D.
              ("Bauer") and Registrant.
10.6(1)     Amendment dated April 1, 1994 to Exhibit 10.5 between Bauer and
              Registrant.
10.7(1)*    License Agreement dated January 12, 1990 among Baxter International,
              Inc. ("Baxter"), Thomas J. Fogarty ("Fogarty") and Gyntech
              MedSystems, Inc. (predecessor to Registrant).
10.8(1)     Letter Agreement dated October 29, 1992 between Baxter and
              Registrant relating to Exhibit 10.7.
10.9(1)*    Amendment dated September 30, 1992 to Exhibit 10.7 among Baxter,
              Fogarty and Registrant.
10.10(1)    Lease of primary office space dated December 21, 1995 between
              Birtcher Niguel and Registrant.
10.11(1)*   License, Manufacturing and Distribution Agreement dated November 30,
              1992 between Registrant and Terumo Corporation.
10.12(1)*   Distributorship Agreement dated October 23, 1995 between Registrant
              and United States Surgical Corporation ("USSC").
10.13(1)*   Amendment dated February 20, 1996 to Exhibit 10.12 between USSC and
              Registrant.
10.14(1)    Employment Agreement dated October 10, 1994 between Franklin D.
              Brown and Registrant.
10.15(1)    Employment Agreement dated April 6, 1995 between Kristine F. Lahman
              and Registrant.
10.16(1)    Employment Agreement dated June 7, 1995 between Christopher Bova and
              Registrant.
10.17(1)    Stock Purchase Agreement dated October 30, 1995 between Franklin D.
              Brown and Registrant.
10.18(1)    Repurchase Agreement dated April 3, 1996 relating to Exhibit 10.17
              between Franklin D. Brown and Registrant.
10.19(1)    Form of Indemnification Agreement between Imagyn Medical, Inc., a
              Delaware corporation, and each of its directors and officers.
10.20(1)    Lease of office space dated April 5, 1996 between Birtcher Niguel
              and Registrant.
22.1(1)     Subsidiaries of Registrant.
23.1        Consent of Coopers & Lybrand L.L.P. Independent Accountants.
24.1        Power of Attorney (see page 67).
27.1        Financial Data Schedule
</TABLE>

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

*   Confidential treatment granted.

(1) Incorporated by reference to the same-numbered exhibit filed with the
    Registrant's Registration Statement on Form S-1 (File No. 333-3542, as
    amended).

(2) Incorporated by reference to the Registrant's Registration Statement on Form
    8-A filed with the Securities and Exchange Commission on November 19, 1996.

                                       68