<PAGE>
                            SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,                                         1992       1993        1994        1995        1996
------------------------------------------------------------  ---------  ---------  ----------  ----------  ----------
<S>                                                           <C>        <C>        <C>         <C>         <C>
                                                                      (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Statement of Operations Data:
Revenues....................................................  $  --      $  --      $   --      $    1,052  $    2,622
                                                              ---------  ---------  ----------  ----------  ----------
Cost and expenses:
  Cost of revenues..........................................     --         --          --           2,564       5,110
  Research and development..................................      1,088      2,753       5,796       6,821      37,597(1)
  Marketing and sales.......................................        260        504       1,417       2,169       7,276
  General and administrative................................        387        719       2,007       1,898       2,898
                                                              ---------  ---------  ----------  ----------  ----------
      Total costs and expenses..............................      1,735      3,976       9,220      13,452      52,881
                                                              ---------  ---------  ----------  ----------  ----------
Loss from operations........................................     (1,735)    (3,976)     (9,220)    (12,400)    (50,259)
Interest income, net........................................        101        268       1,610       2,688       2,599
                                                              ---------  ---------  ----------  ----------  ----------
Net loss....................................................     (1,634)    (3,708)     (7,610)     (9,712)    (47,660)
  Excess of redemption price over carrying costs of Series A
    redeemable convertible preferred stock..................     --         --            (383)     --          --
                                                              ---------  ---------  ----------  ----------  ----------
Net loss attributable to common stockholders................  $  (1,634) $  (3,708) $   (7,993) $   (9,712) $  (47,660)
                                                              ---------  ---------  ----------  ----------  ----------
                                                              ---------  ---------  ----------  ----------  ----------
Net loss per share (unaudited pro forma net loss per share
  for the years ended December 31, 1993 and 1994)...........             $    (.23) $     (.41) $     (.46) $    (1.87)
                                                              ---------  ---------  ----------  ----------  ----------
                                                              ---------  ---------  ----------  ----------  ----------
  Weighted average common shares outstanding (unaudited pro
    forma weighted average common shares outstanding for the
    years ended December 31, 1993 and 1994).................                15,800      19,566      21,262      25,544
                                                              ---------  ---------  ----------  ----------  ----------
                                                              ---------  ---------  ----------  ----------  ----------
</TABLE>

<TABLE>
<CAPTION>
  DECEMBER 31,                                                  1992       1993        1994        1995        1996
------------------------------------------------------------  ---------  ---------  ----------  ----------  ----------
<S>                                                           <C>        <C>        <C>         <C>         <C>
Balance Sheet Data:
  Cash, cash equivalents and short-term investments.........  $   7,881  $  17,980  $   45,704  $   60,427  $  101,638
  Working capital...........................................      7,740     17,697      44,288      57,681      98,013
  Total assets..............................................      8,000     18,314      47,818      64,264     110,488
  Long-term debt and capital lease obligations..............         46         43          12      --          69,000
  Accumulated deficit.......................................     (2,222)    (5,929)    (13,922)    (23,634)    (71,294)
  Total stockholders' equity................................  $   7,814  $  17,874  $   45,660  $   60,092  $   35,952
</TABLE>

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

(1) Includes $30.2 million for the acquisition of the Impress Softpatch
    technology and related expenses.

See Note 3 to the Financial Statements.

                                       13

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

OVERVIEW

    UroMed Corporation ("the Company"), is focused on the development,
manufacture and marketing of products for the management of urological and
gynecological disorders. The Company's first two products, the
Reliance-Registered Trademark- Insert and the Impress-TM- Softpatch, are
intended for the management of certain types of female urinary incontinence
("UI").

    The Reliance Insert was cleared by the U.S. Food and Drug Administration
("FDA") for marketing in the United States in August 1996. The Reliance
Insert is a small, prescription, balloon-tipped, single-use plug designed to
be inserted in the urethra and inflated to block the flow of urine from the
bladder to the urethra. The Company has completed its manufacturing and
marketing scale-up and began the first phase of the commercial launch of the
Reliance Insert in the United States in November 1996. The Company expects
commercialization of the Reliance Insert to continue in 1997. The Reliance
Insert is also commercially available through the Company's European
distributors in Germany, the United Kingdom, Finland, Norway, Sweden, Denmark
and The Netherlands. Commercial activities in France commenced in the fourth
quarter of 1996.

    The Impress Softpatch was cleared by the FDA for marketing in the United
States in May 1996. The Impress Softpatch is a small, prescription,
disposable adhesive patch designed to be placed externally against the
urinary opening to block the leakage of urine in mild to moderate UI
patients. The Company is developing a marketing plan for the commercial
launch of the Impress Softpatch in the United States, which is currently
expected to occur in late 1997 or early 1998. The Company is also developing
the commercial manufacturing process for the Impress Softpatch.

RESULTS OF OPERATIONS

    YEARS ENDED DECEMBER 31, 1996 AND 1995--The Company had revenues of $2.6
million in 1996 compared to $1.1 million in 1995, an increase of $1.5 million
or 136%. Revenues in 1996 consisted primarily of initial stocking shipments
of the Reliance Insert product to the Company's three European distributors
and related recognition of deferred revenue from a portion of the advance
payments received upon the signing of European distributorship agreements.

    International sales of the Reliance Insert in the fourth quarter were
weaker than expected as a result of lower orders from distributors due to the
fact that they had adequate inventories already in place. The Company expects
that international sales of the Reliance Insert will be minimal for at least
the first half of 1997 due to distributors expected sales volume in relation
to their inventory levels. The Company believes that international revenue
will not be more than 10-15% of expected 1997 revenue.

    Due to the timing and targeted nature of the U.S. launch in the fourth
quarter of 1996, U.S. sales of the Reliance Insert did not contribute
significantly to fourth-quarter revenues. As of February 1997, as a result of
the first phase of the U.S. launch, the Company has trained over 1,000
physicians, primarily urologists. The Company is commencing the second phase
of the U.S. launch which will involve calling on gynecologists and initiating
a public relations campaign to patients and physicians. Since the Company
believes that demand for the Reliance Insert will be patient driven, it
believes that sales of the Reliance Insert in the U.S. will be immaterial
during at least the first two quarters of 1997 or until this next phase has
been executed.

    Revenue in 1995 was the result of initial stocking shipments, beginning
in August 1995, of the Reliance Insert to the Company's European
distributors, primarily E. Tosse for the German launch.

    Cost of revenues were $5.1 million for 1996 compared to $2.6 million for
1995, an increase of $2.5 million or 96% over 1995. These costs significantly
exceeded product revenue for the periods due to the current level of variable
product costs as well as the Company's manufacturing-related overhead costs,
relative to the low start-up volume of production in the periods. The Company
expects negative or low gross margins for the near term and, accordingly, has
considered this in its valuation of inventory. There can be no assurance that
the Company will ever realize sufficient production volumes or otherwise
reduce its manufacturing costs in order to raise gross margins. In addition,
the Company expects to increase future facilities spending in order to
accommodate changes in, as well as increases to, its manufacturing space for
both the Reliance Insert and the Impress Softpatch.

                                 14

<PAGE>

Management's Discussion and Analysis of Financial Condition and results of
operations

    Research and development expenses increased by $30.8 million, or 453%, to
$37.6 million in 1996 as compared to $6.8 million in 1995. The increase was
primarily the result of the acquisition of the Impress Softpatch and related
technology in May 1996 (see Note 3 of Notes to Financial Statements) which
has been accounted for as purchased in-process research and development and,
as a result, the purchase price of $30.0 million and related expenses of $0.2
million was expensed as research and development in 1996. Before this charge,
research and development expenses increased by $0.6 million or 9% to $7.4
million in 1996 as compared to $6.8 million in 1995. The increase in research
and development costs was primarily due to additional engineering personnel
and research projects, outside consulting services and increased clinical
study costs. Partially offsetting this increase, manufacturing spending
relating to the Reliance Insert, starting in the third quarter of 1995, is
now being included in cost of revenues due to the Company's transition from
the development stage to the commencement of commercial product
manufacturing. The Company anticipates increased expenditures in
manufacturing and research and development as it continues with the process
development and scale-up for the Impress Softpatch. In 1997, the Company
anticipates it will continue to increase research and development spending
relating to its existing products and potential new products, including
development and clinical testing of other urological and gynecological
products.

    Marketing and sales expenses increased by $5.1 million or 232% to $7.3
million in 1996 as compared to $2.2 million in 1995. This increase was the
result of expenditures incurred in connection with the U.S. launch of the
Reliance Insert including hiring marketing and sales personnel, preparations
for an advertising campaign, marketing consulting fees, public relations
activities, sales training, exhibit costs and market research. The Company
anticipates increased expenditures on sales and marketing as it continues
with the commercialization of the Reliance Insert in the United States and
Europe and commercialization activities for the Impress Softpatch.

    General and administrative expenses increased $1.0 million or 53% to $2.9
million in 1996 as compared to $1.9 million in 1995. The increase is
attributable to hiring additional administrative personnel, and increased
systems, consulting and legal expenses.

    Interest income increased by $0.8 million or 30% to $3.5 million in 1996
as compared to $2.7 million in 1995. The increase was attributable to
significantly higher interest bearing cash equivalents and short-term
investments during 1996 as a result of the completion of a public offering of
the Company's common stock in the fourth quarter of 1995 and the issuance of
the Company's 6% Convertible Subordinated Notes due October 15, 2003 (the
"Convertible Notes") in the fourth quarter of 1996, partially offset by lower
interest rates on investments in 1996.

    Interest expense increased from $0.0 million in 1995 to $0.9 million in
1996 as a result of the issuance of the Convertible Notes in October 1996.

    Net losses were $47.7 million in 1996 and $9.7 million in 1995. Before
the charge for acquired technology mentioned above, net losses for 1996 and
1995 were $17.5 million and $9.7 million, respectively.

    YEARS ENDED DECEMBER 31, 1995 AND 1994 --The Company had revenues of $1.1
million for 1995 and no revenues in 1994. Revenue was the result of
shipments, beginning in August 1995, of the Reliance Insert to the Company's
European distributors, primarily E. Tosse for the German launch.

    Cost of revenues significantly exceeded product revenue during 1995 due
to the current level of variable product costs as well as the Company's
manufacturing related overhead costs, relative to the low start-up volume of
production in the year.

    Research and development expenses increased by 17% to $6.8 million in
1995 as compared to $5.8 million in 1994. The increase in research and
development costs was due primarily to the hiring of additional engineering
personnel, facilities costs, clinical trial costs, regulatory consulting fees
and patent fees. The Company also incurred expenses in the research and
development of additional products for the management of UI and other
urological and gynecological disorders. Partially offsetting these increases,
starting in the third quarter of 1995, manufacturing spending is included in
cost of revenues due to the Company's transition from the development stage
to the commencement of commercial product manufacturing.

                                 15

<PAGE>

    Management's Discussion and Analysis of Financial Condition and results of
operations

    Marketing and sales expenses increased by 57% to $2.2 million in 1995 as
compared to $1.4 million in 1994. This increase was mainly the result of the
payment of consulting fees in connection with the establishment of
distribution agreements in Europe, together with increases in product
literature development, public relations and personnel costs, including the
hiring of a Vice President of Marketing and Sales, which were partially
offset by reductions in other marketing consulting costs.

    General and administrative expenses decreased by 5% to $1.9 million in
1995 as compared to $2.0 million in 1994. The decrease in general and
administrative expenses was primarily attributable to lower allocated
facilities costs, partially offset by an increase in personnel and costs
associated with being a public company.

    Interest income increased by 69% to $2.7 million in 1995, as compared to
$1.6 million in 1994. The increase was attributable to the significant
increase in the Company's interest-bearing cash equivalents and short-term
investments as a result of the initial public offering of the Company's
common stock in March 1994 and the Company's additional public offering in
November 1995 as well as an increase in interest rates during this year.

LIQUIDITY AND CAPITAL RESOURCES

    At December 31, 1996, the Company had cash, cash equivalents and
short-term investments of $101.6 million, an increase of $41.2 million from
$60.4 million at December 31, 1995. At December 31, 1996, the Company's funds
were invested in U.S. government obligations, corporate debt obligations and
money market funds.

    Net cash used in operating activities was $22.5 million during the year
ended December 31, 1996 primarily due to the net loss for the year which was
partially offset by non-cash expenses of $24.3 million. In addition, accounts
receivable decreased by $0.2 million due to lower sales occurring near the
end of the quarter ended December 31, 1996 compared to the quarter ended
December 31, 1995. Inventories increased by $0.4 million for the U.S. launch
of the Reliance Insert. Prepaid expenses and other current assets increased
by $0.3 million as the result of an increase in interest receivable on cash,
cash equivalents and short-term investments. Accounts payable and related
accrued expenses together increased by $2.5 million primarily as a result of
expenses incurred in the launch of the Reliance Insert product, conducting
clinical studies and interest accrued on the Convertible Notes. Deferred
revenue decreased by $1.1 million as a portion of the advance payments
received upon the signing of European distributorship agreements were
recognized as revenue as commercial quantities of product were shipped to the
distributors.

    Net cash used in investing activities was $16.6 million during the year
ended December 31, 1996. Short-term investments increased by $14.0 million
due to moving cash and cash equivalents into investments with longer
maturities. Fixed assets increased by $2.6 million primarily as a result of
the purchase of information systems, milestone payments made on additional
automated assembly and packaging equipment and purchases of other machinery
and equipment. At December 31, 1996, the Company had outstanding commitments
of approximately $5.0 million for the purchase of automated assembly and
packaging equipment for the Impress Softpatch and other machinery and
equipment, against which advance and milestone payments of $0.5 million have
already been made.

    Net cash provided by financing activities was $66.4 million during the
year ended December 31, 1996. On October 15, 1996, the Company completed the
sale of $69.0 million of its Convertible Notes. Net proceeds to the Company
were $66.2 million. The Company also received $0.2 million of proceeds from
the exercise of stock options and from purchases under the Company's employee
stock purchase plan.

    The Company believes that available cash, cash equivalents and short-term
investments will be sufficient to meet the Company's operating expenses and
capital requirements for the foreseeable future. The Company's future
liquidity and capital requirements depend on numerous factors, including, but
not limited to, development of the Company's marketing capability, market
acceptance of the Reliance Insert and Impress Softpatch products, the
uncertainty of medical reimbursement, development of the Company's
manufacturing capability and achieving acceptable cost of production, the
uncertain protection afforded the Company by its intellectual property and
patents relating to the Reliance Insert and Impress Softpatch, the
development status of other potential products, potential acquisitions and
other potential strategic product opportunities. There can be no assurance
that the Company will not require additional financing or that, if required,
such financing will be available on terms acceptable to the Company.

                                 16

<PAGE>

Management's Discussion and Analysis of Financial Condition and results of
operations

FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS

    Certain statements contained in this Annual Report may be considered
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including statements regarding (i) the planned progression of the
Company's commercialization strategies for the Reliance Insert and Impress
Softpatch, including the timing and extent of initial sales in the United
States and abroad, (ii) the planned increases in manufacturing capacity for
the Reliance Insert and Impress Softpatch, including the timing and extent of
expenditures needed for capital equipment and inventory production, (iii)
consumer acceptance of the use of the Reliance Insert and Impress Softpatch
as strategies for the self-care of UI and the size and accessibility of the
Company's target markets, (iv) the Company's expectations regarding its
research and development and in-licensing activities, (v) the Company's
planned uses for its cash and other liquid resources and (vi) the extent of
future revenues, expenses and results of operations and the sufficiency of
the Company's financial resources to meet planned operational costs and other
expenditure needs. These forward-looking statements are based largely on the
Company's expectations and are subject to a number of risks and
uncertainties, many of which are beyond the Company's control. Actual results
could differ materially from these forward-looking statements as a result of
certain factors, including those described below:

    - The uncertainty that the Reliance Insert and the Impress Softpatch will
      gain market acceptance either among physicians or UI sufferers in the
      United States or in Europe and the risk that the adverse effects
      experienced by some of the parties enrolled in clinical trials of the
      Company's Reliance Insert will be more prevalent in widespread consumer
      use of such products and that such effects will affect the market
      acceptance of these products.

    - The dependence by the Company on the success of two products, the Reliance
      Insert and the Impress Softpatch, neither of which have been widely
      marketed.

    - The uncertainty that the Company will be able to develop the ability to
      produce commercial quantities of its products and produce such quantities
      at an acceptable cost.

   - The uncertainty that the Company will be able to develop an effective
      sales force and implement a successful marketing plan for the Reliance
      Insert and the Impress Softpatch in the United States.

    - The Company's dependence on others for raw materials and certain
      components of its products, including certain materials available only
      from single sources.

    - The effect of competing products and surgical and non-surgical alternative
      treatments for incontinence.

    - The uncertainty that the Company will be able to develop an effective
      distribution network and implement a successful distribution strategy for
      the Company's products in the United States, Europe and elsewhere.

    - The uncertain protection afforded the Company by its patents and other
      intellectual property relating to the Reliance Insert and the Impress
      Softpatch.

    - The uncertainty whether the Company will be able to achieve medical
      reimbursement for the Reliance Insert or the Impress Softpatch in the
      United States or in all the European markets targeted for the Company's
      products.

    - The uncertainty whether the Company will be able to manufacture, market
      and sell its products at prices that permit it to achieve satisfactory
      margins in the production and marketing of its products.

    - Risks relating to FDA or other governmental oversight of the Company's
      operations, including the possibility that the FDA could impose costly
      additional labeling requirements on, or restrict the marketing of, the
      Company's products, or suspend operations at one or more of the Company's
      facilities.

      Other relevant risks are described in the Company's Current Report on
      Form 8-K, filed January 31, 1997, under the headings "Forward-Looking
      Statements and Associated Risks" and "Risk Factors," which are
      incorporated herein by reference.

                                  17
<PAGE>

                                 BALANCE SHEET

<TABLE>
<CAPTION>

DECEMBER 31,                                                                                   1995        1996
------------------------------------------------------------------------------------------  ----------  ----------
<S>                                                                                         <C>         <C>
(IN THOUSANDS, EXCEPT SHARE RELATED DATA)
ASSETS
Current assets:
  Cash and cash equivalents...............................................................  $   18,165  $   45,556
  Short-term investments..................................................................      42,262      56,082
  Accounts receivable, net of allowance for uncollectible accounts of $21 and $36 in 1995
    and 1996, respectively................................................................         275          70
  Inventories.............................................................................         230         587
  Prepaid expenses and other assets.......................................................         921       1,254
                                                                                            ----------  ----------
      Total current assets................................................................      61,853     103,549
Fixed assets, net.........................................................................       2,042       3,962
Other assets..............................................................................         369       2,977
                                                                                            ----------  ----------
                                                                                            $   64,264  $  110,488
                                                                                            ----------  ----------
                                                                                            ----------  ----------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable........................................................................  $      355  $      713
  Accrued expenses........................................................................       2,055       4,216
  Deferred revenue........................................................................       1,750         607
  Capital lease obligations...............................................................          12      --
                                                                                            ----------  ----------
      Total current liabilities...........................................................       4,172       5,536
                                                                                            ----------  ----------
Convertible subordinated notes............................................................      --          69,000
                                                                                            ----------  ----------
Commitments (Note 12)
Stockholders' equity:
  Preferred stock, $.01 par value; 500,000 shares authorized; none issued.................      --          --
  Common stock, no par value; 50,000,000 shares authorized; 23,975,612 and 26,446,257
    shares issued and outstanding at December 31, 1995 and 1996, respectively.............      83,537     106,739
  Additional paid-in capital..............................................................         302         753
  Net unrealized gain (loss) on investments available-for-sale............................         160         (31)
  Deferred compensation...................................................................        (273)       (215)
  Accumulated deficit.....................................................................     (23,634)    (71,294)
                                                                                            ----------  ----------
      Total stockholders' equity..........................................................      60,092      35,952
                                                                                            ----------  ----------
                                                                                            $   64,264  $  110,488
                                                                                            ----------  ----------
                                                                                            ----------  ----------
</TABLE>

The accompanying notes are an integral part of the financial statements.

                                     18

<PAGE>
                            STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,                                                            1994        1995        1996
-------------------------------------------------------------------------------  ---------  ----------  ----------
<S>                                                                              <C>        <C>         <C>

(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues.......................................................................  $  --      $    1,052  $    2,622
                                                                                 ---------  ----------  ----------
Costs and expenses:
  Cost of revenues.............................................................     --           2,564       5,110
  Research and development.....................................................      5,796       6,821      37,597
  Marketing and sales..........................................................      1,417       2,169       7,276
  General and administrative...................................................      2,007       1,898       2,898
                                                                                 ---------  ----------  ----------
      Total costs and expenses.................................................      9,220      13,452      52,881
                                                                                 ---------  ----------  ----------
Loss from operations...........................................................     (9,220)    (12,400)    (50,259)
Interest income................................................................      1,622       2,692       3,462
Interest expense...............................................................        (12)         (4)       (863)
                                                                                 ---------  ----------  ----------
Net loss.......................................................................     (7,610)     (9,712)    (47,660)
Excess of redemption price over carrying cost of Series A redeemable
  convertible preferred stock..................................................       (383)     --          --
                                                                                 ---------  ----------  ----------
Net loss attributable to common stockholders...................................  $  (7,993) $   (9,712) $  (47,660)
                                                                                 ---------  ----------  ----------
                                                                                 ---------  ----------  ----------
Net loss per share (unaudited pro forma net loss per share for the year ended
  December 31, 1994)...........................................................  $    (.41) $     (.46) $    (1.87)
                                                                                 ---------  ----------  ----------
                                                                                 ---------  ----------  ----------
Weighted average common shares outstanding (unaudited pro forma weighted
  average common shares outstanding for the year ended December 31,1994).......     19,566      21,262      25,544
                                                                                 ---------  ----------  ----------
                                                                                 ---------  ----------  ----------
</TABLE>

The accompanying notes are an integral part of the financial statements.

                                   19
<PAGE>

                   STATEMENT OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>


                                                      SERIES B, C AND D       SERIES A REDEEMABLE
                                                         CONVERTIBLE              CONVERTIBLE
                                                       PREFERRED STOCK          PREFERRED STOCK
                                                     ----------------------  ------------------------
FOR THE THREE                                        NUMBER                   NUMBER
YEARS IN THE PERIOD                                    OF       CARRYING        OF        CARRYING
ENDED DECEMBER 31, 1996                              SHARES       VALUE       SHARES        VALUE
---------                                            ---------  -----------  -----------  -----------
<S>                                                  <C>        <C>          <C>          <C>
                                                          (IN THOUSANDS, EXCEPT SHARE RELATED DATA)


Balance, December 31, 1993...............            6,132,178   $  22,599        9,580    $     958
Issuance of common stock upon exercise
  of stock options and warrants..........
Redemption of Series
  A redeemable convertible
  preferred stock.......                                                         (9,580)        (958)
Issuance of common stock pursuant to
  initial public offering, net of stock
  issuance costs of $3,300,000...........
Conversion of preferred stock to common
  stock pursuant to initial public
  offering...............................           (6,132,178)    (22,599)
Net unrealized loss on investments
  available-for-sale.....................
Net loss...............
                                                    -----------  -----------      -----------    -----
Balance, December 31, 1994...............                --          --                --          --
Issuance of common stock for services....
Issuance of common stock upon exercise
  of stock options.......................
Issuance of common stock pursuant
  to follow-on public offering, net of
  stock issuance costs of $1,795,750.....
Issuance of common stock under employee
  stock purchase plan....................
Net unrealized gain on investments
  available-for-sale.....................
Deferred compensation related to
  employee common stock options granted..
Amortization of deferred compensation....
Net loss.................................
                                                    ---------  -----------      -----------    -----
Balance, December 31, 1995...............               --          --               --          --
Issuance of common stock in connection
  with acquisition of technology.........
Issuance of common stock options for
  services...............................
Issuance of common stock upon exercise
  of stock options.......................
Issuance of common stock under employee
  stock purchase plan....................
Net unrealized loss on investments
  available-for-sale.....................
Amortization of deferred compensation....
Net loss.................................
                                                     ---------  -----------      -----------    -----
Balance, December 31, 1996...............                --       $  --                --        $ --
                                                     ---------  -----------      -----------     -----
                                                     ---------  -----------      -----------     -----


                                      20

<PAGE>
<CAPTION>






                                              NET
                                           UNREALIZED
     COMMON STOCK                          GAIN (LOSS)
----------------------                         ON
   NUMBER                  ADDITIONAL      INVESTMENTS                                             TOTAL
     OF       CARRYING       PAID-IN        AVAILABLE-             DEFERRED        ACCUMULATED   STOCKHOLDERS'
   SHARES       VALUE        CAPITAL        FOR-SALE            COMPENSATION        DEFICIT        EQUITY
 ---------  -----------  -------------  ---------------      -----------------  -------------  -------------
 <S>        <C>          <C>            <C>                  <C>                <C>            <C>
                                 (IN THOUSANDS, EXCEPT SHARE RELATED DATA)

 5,342,518  $   236           $10                                                  $  (5,929)     $  17,874

   275,148       51                                                                                      51


                                                                                        (383)        (1,341)


 5,000,000   36,700                                                                                  36,700


10,093,510   22,599                                                                                     --

                                                 $(15)                                                 (15)
                                                                                      (7,610)       (7,610)
----------  --------      -------               ------            ------         -------------  -------------
20,711,176   59,586            10                 (15)                --             (13,922)       45,659
    79,637      653                                                                                    653

   403,199       73                                                                                     73


 2,775,000   23,179                                                                                 23,179

     6,600       46                                                                                     46

                                                  175                                                  175

                              292                                   $(292)                              --
                                                                       19                               19
                                                                                     (9,712)        (9,712)
----------  --------      -------               -----              ------        -------------  -------------
23,975,612   83,537           302                 160                (273)          (23,634)        60,092

 2,335,026   23,000                                                                                 23,000

                              451                                                                      451

  123,185        89                                                                                     89

   12,434       113                                                                                    113

                                                (191)                                                 (191)
                                                                        58                              58
                                                                                    (47,660)       (47,660)
----------  --------      -------               -----                ------      --------------  -------------
26,446,257  $106,739         $753                $(31)               $(215)        $(71,294)       $35,952
----------  --------      -------               -----                ------      --------------  -------------
----------  --------      -------               -----                ------      --------------  -------------


</TABLE>

      The accompanying notes are an integral part of the financial statements.

                                       21
<PAGE>
                            STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,                                                            1994        1995        1996
-------------------------------------------------------------------------------  ---------  ----------  ----------
<S>                                                                              <C>        <C>         <C>
                                                                                          (IN THOUSANDS)
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities:
  Net loss.....................................................................  $  (7,610) $   (9,712) $  (47,660)
  Adjustments to reconcile net loss to net cash used in operating activities:
    Depreciation and amortization..............................................        179         406         867
    Issuance of common stock in connection with acquisition of technology......     --          --          23,000
    Issuance of common stock and stock options for services....................        175         478         451
    Changes in assets and liabilities:
      Decrease (increase) in accounts receivable...............................     --            (275)        205
      Increase in inventories..................................................     --            (229)       (357)
      Increase in prepaid expenses and other assets............................       (617)       (191)       (333)
      Increase in accounts payable and accrued expenses........................      1,097         970       2,519
      Decrease (increase) in deferred revenue..................................        500       1,250      (1,143)
                                                                                 ---------  ----------  ----------
        Net cash used in operating activities..................................     (6,276)     (7,303)    (22,451)
                                                                                 ---------  ----------  ----------
Cash flows from investing activities:
  (Purchases) sales of short-term investments, net.............................     12,465     (38,716)    (14,011)
  Purchases of fixed assets....................................................       (906)     (1,486)     (2,647)
  (Increase) decrease in other assets..........................................       (436)         72          75
                                                                                 ---------  ----------  ----------
      Net cash provided by (used in) investing activities......................     11,123     (40,130)    (16,583)
                                                                                 ---------  ----------  ----------
Cash flows from financing activities:
  Proceeds from issuance of convertible subordinated notes, net of issuance
    costs......................................................................     --          --          66,235
  Principal payments on capital lease obligations..............................        (53)        (31)        (12)
  Redemption of Series A redeemable preferred stock............................     (1,341)     --          --
  Proceeds from issuance of common stock, net of issuance costs................     36,751      23,297         202
                                                                                 ---------  ----------  ----------
      Net cash provided by financing activities................................     35,357      23,266      66,425
                                                                                 ---------  ----------  ----------
Net increase (decrease) in cash and cash equivalents...........................     40,204     (24,167)     27,391
Cash and cash equivalents, beginning of period.................................      2,128      42,332      18,165
                                                                                 ---------  ----------  ----------
Cash and cash equivalents, end of period.......................................  $  42,332  $   18,165  $   45,556
                                                                                 ---------  ----------  ----------
                                                                                 ---------  ----------  ----------
Supplemental disclosure of cash flow information:
  Interest paid................................................................  $      12  $        4  $        1

</TABLE>

The accompanying notes are an integral part of the financial statements.

                                       22
<PAGE>
                         NOTES TO FINANCIAL STATEMENTS

1. NATURE OF BUSINESS

    UroMed Corporation, a Massachusetts corporation, was incorporated in October
1990 to develop, manufacture and market products for the management of
urological and gynecological disorders.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    Basis of Presentation --The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from these estimates.

    Cash Equivalents and Short-Term Investments --The Company accounts for
investments in accordance with Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
115"), which requires that investments in debt and equity securities be
classified as trading, available-for-sale or held-to-maturity. Except for those
debt securities classified as held-to-maturity, securities are reported in the
balance sheet at fair value. Held-to-maturity securities are reported in the
balance sheet at amortized cost. Any unrealized gains and losses on trading or
available-for-sale securities are included in current period earnings or are
reported as a separate component of stockholders' equity, respectively. Upon the
sale of securities (the cost of which are based upon the specific identification
method), realized gains and losses are reported in the statement of operations.
At December 31, 1995 and 1996, all of the Company's investments are classified
as available-for-sale.

    The Company invests its excess cash primarily in securities of U.S.
government agencies, high grade corporate debt obligations and money market
funds. These investments are subject to minimal credit and market risks. The
Company considers investments with original maturities of three months or less
to be cash equivalents. All other investments are classified as short-term
investments as they are highly liquid and are available to meet working capital
needs.

    Revenue Recognition -- Revenue from product sales is recorded upon shipment
of product to the customer. The Company accrues anticipated product warranty
costs at that time.

    Deferred revenue represents fees received by the Company upon the execution
of distribution agreements. Initially, these fees were refundable under certain
conditions and, accordingly, upon receipt they were classified as deferred
revenue. As these amounts become non-refundable, they are recognized as revenue
over a period approximating one year, as commercial quantities of product are
shipped to the distributors.

    Concentration of Credit Risk and Major Customers -- At December 31, 1996,
the Company's accounts receivable are predominantly from its European
distributors, potentially exposing the Company to concentration of credit risk.
Management regularly monitors the financial condition of its customers and
believes that it has adequately provided for any exposure to potential credit
losses. The Company does not require collateral.

    During the year ended December 31, 1996, revenues from the Company's
distributor for Scandinavia, the United Kingdom and The Netherlands represented
63% of total revenues and revenues from the Company's distributor for Germany
represented 34% of total revenues. During the year ended December 31, 1995,
revenues from the Company's distributor for Germany represented 87% of total
revenues.

    Inventories -- Inventories are stated at the lower of cost or market, cost
being determined using the first-in, first-out method. Cost includes material,
labor and manufacturing overhead.

    Fixed Assets -- Fixed assets are recorded at cost and depreciated over
the estimated useful lives of the assets using the straight-line method.
Leasehold improvements are depreciated using the straight-line method, over
their estimated useful lives or the term of the lease, if shorter. Additions,
renewals and betterments are capitalized. Repair and maintenance costs are
expensed as incurred.

    Financing Costs -- Deferred financing costs, which are included in other
assets, are being amortized over the seven year life of the Company's 6%
Convertible Subordinated Notes using the straight-line method, which
approximates the interest method. Unamortized costs at December 31, 1996 are
$2,683,000.

    Net Loss Per Share and Unaudited Pro Forma Net Loss Per Share -- Net loss
per share is determined by dividing net loss attributable to common stockholders
by the weighted average number of common shares outstanding during the period.
All common stock equivalent shares from stock options have been excluded from
the calculation of weighted average number of common shares outstanding since
their inclusion would be antidilutive. Net loss per share was $.46 per share for
the year ended December 31, 1994.

    Unaudited pro forma net loss per share is determined by dividing net loss
attributable to common stockholders by the pro forma weighted average number of
common shares outstanding during the period. Unaudited pro forma net loss per
share reflects the conversion of the Series B, C and D convertible preferred
stock that occurred upon, and the redemption of the Series A convertible
preferred stock that occurred before the close of, the Company's initial public
offering of common stock, using the if-converted method.
                                                                              23
<PAGE>
                         NOTES TO FINANCIAL STATEMENTS

    Reclassifications -- Certain prior year amounts have been reclassified to
conform to the current year financial statement presentation. The
reclassifications had no impact on net loss for these years.

    Accounting for Stock-Based Compensation -- In October 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). The Company
adopted this standard during the year ended December 31, 1996 through disclosure
only.

3. ACQUISITION OF TECHNOLOGY

    On May 9, 1996, the Company acquired all of the incontinence technology of
the ASI Liquidating Trust, the successor to Advanced Surgical Intervention,
Inc., including the Miniguard-TM- Patch, an FDA-cleared prescription adhesive
patch placed externally against the urethral opening to help block leakage in
women with mild to moderate stress urinary incontinence. The Company purchased
the Miniguard Patch technology for $30.0 million, consisting of $7.0 million in
cash and common stock valued at $23.0 million. The value of the common stock
issued was based on the market value of the common stock for the five day period
preceding the transaction. The acquisition of this incontinence technology has
been accounted for as purchased in-process research and development and, as a
result, the purchase price and related expenses of $0.2 million were charged to
operations in the second quarter of 1996.

4. INVESTMENTS

    Following is a summary of available-for-sale investments, by balance sheet
classification (in thousands):
<TABLE>
<CAPTION>
                                                                                   UNREALIZED
                                                               AMORTIZED     ----------------------
                                                                  COST          GAINS      LOSSES    FAIR VALUE
                                                             --------------  -----------  ---------  -----------
<S>                                                          <C>             <C>          <C>        <C>
December 31, 1996:
Cash equivalents:
  Corporate debt obligations...............................  $       38,741   $      --   $      --  $    38,741
  Money market funds.......................................           6,003          --          --        6,003
                                                             --------------         ---   ---------  -----------
                                                             $       44,744   $      --   $      --  $    44,744
                                                             --------------         ---   ---------  -----------
                                                             --------------         ---   ---------  -----------
Short-term investments:
  U.S. Government obligations..............................  $       17,263          --   $     (24) $    17,239
  Corporate debt obligations...............................          38,850          --          (7)      38,843
                                                             --------------         ---   ---------  -----------
                                                             $       56,113   $      --   $     (31) $    56,082
                                                             --------------         ---   ---------  -----------
                                                             --------------         ---   ---------  -----------
December 31, 1995:
Cash equivalents:
  Money market funds.........................................  $     17,859   $      --   $      --  $    17,859
                                                             --------------         ---   ---------  -----------
                                                             --------------         ---   ---------  -----------
Short-term investments:
  U.S. Government obligations..............................  $       20,114   $      57   $      --  $    20,171
  Corporate debt obligations...............................          21,988         103          --       22,091
                                                             --------------         ---   ---------  -----------
                                                             $       42,102   $     160   $      --  $    42,262
                                                             --------------         ---   ---------  -----------
                                                             --------------         ---   ---------  -----------
</TABLE>


    At December 31, 1996, the fair value of short-term investments having
contractual maturities of one year or less totaled $25,733,000 and the fair
value of short-term investments with contractual maturities greater than one
year but less than two years totaled $30,349,000. The proceeds from sales of
securities amounted to approximately $12,189,000 and $15,853,000 for the years
ended December 31, 1995 and 1996, respectively. Gross realized gains and losses
on these sales were not significant.

5. INVENTORIES

    Inventories consist of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,                                                                      1995       1996
------------------------------------------------------------------------------  ---------  ---------
<S>                                                                             <C>        <C>
Raw materials.................................................................  $     218  $     279
Work in process...............................................................         12        112
Finished goods................................................................         --        196
                                                                                ---------  ---------
                                                                                $     230  $     587
                                                                                ---------  ---------
                                                                                ---------  ---------
</TABLE>

6. FIXED ASSETS

    Fixed assets consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                                     DECEMBER 31,
                                                                                    USEFUL LIFE  --------------------
                                                                                     IN YEARS      1995       1996
                                                                                    -----------  ---------  ---------
<S>                                                                                 <C>          <C>        <C>
Machinery and equipment...........................................................         3-4   $   1,272  $   1,756
Computer and office equipment.....................................................         3-4         530      2,733
Leasehold improvements............................................................           7         384        384
Machinery and equipment not yet placed in service.................................          --         533        492
                                                                                                -----------  ---------
                                                                                                     2,719       5,365
Less--Accumulated depreciation and amortization...................................                     677       1,403
                                                                                                -----------  ---------
                                                                                                 $   2,042   $   3,962
                                                                                                -----------  ---------
                                                                                                -----------  ---------
Fixed assets related to equipment held under capital leases.......................               $      60   $      --
Related accumulated amortization on fixed assets under capital leases.............               $      50   $      --
Amortization expense for fixed assets under capital leases........................               $      31   $      10
</TABLE>

7. ACCRUED EXPENSES

    Accrued expenses consist of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,                                                                   1995       1996
---------------------------------------------------------------------------  ---------  ---------
<S>                                                                          <C>        <C>
Clinical trials............................................................  $     482  $     631
Professional fees..........................................................        313        574
Interest...................................................................         --        863
Employee related...........................................................         55        520
Product related............................................................          5        362
Other......................................................................      1,200      1,266
                                                                             ---------  ---------
                                                                             $   2,055  $   4,216
                                                                             ---------  ---------
                                                                             ---------  ---------
</TABLE>

24
<PAGE>
                         NOTES TO FINANCIAL STATEMENTS

8. CONVERTIBLE SUBORDINATED NOTES

    On October 15, 1996, the Company completed the sale of $69.0 million of its
6% Convertible Subordinated Notes due October 15, 2003 (the "Notes"), to
qualified institutional buyers in reliance on Rule 144A under the Securities Act
of 1933 and to foreign investors. The Notes are convertible at any time into
shares of common stock of the Company at a conversion price of $13.281 per
share, subject to adjustment under certain circumstances. Interest on the Notes
is payable each year on April 15 and October 15, commencing on April 15, 1997
unless previously converted or repurchased. The Notes are redeemable at the
option of the Company on or after October 15, 1999, at specified redemption
prices plus accrued and unpaid interest to the date of redemption. The Notes are
unsecured obligations of the Company and subordinated to all other Senior Debt
(as defined) of the Company.

9. STOCKHOLDERS' EQUITY

    Preferred Stock -- On February 23, 1994, the Company redeemed all of the
outstanding shares of its Series A redeemable convertible preferred stock (par
value $100) at a redemption price of $140 per share. On March 16, 1994, the
effective date of the Company's initial public offering, each share of the
Company's Series B, C and D preferred stock was automatically converted into
1.646 shares of common stock.

    The Company has authorized 500,000 shares of $.01 par value preferred stock,
of which none have been issued at December 31, 1996. Preferred stock may be
issued at the discretion of the Board of Directors of the Company with such
designations, rights and preferences as the Board of Directors may in its
discretion determine. Upon issuance, the preferred stock may include, among
other things, extraordinary dividend, redemption, conversion, voting or other
rights which may adversely affect the holders of the common stock.

    Common Stock -- On January 14, 1994, the Board of Directors authorized a
1.646-for-1 stock split of the Company's common stock in the form of a stock
dividend. The stock split was effective on January 19, 1994. All common stock,
options and warrants and per share amounts included in the accompanying
financial statements have been adjusted to give retroactive effect to the common
stock split.

    On March 16, 1994, the Company completed an initial public offering of
5,000,000 shares of its common stock at a price of $8.00 per share. The net
proceeds to the Company were approximately $36,700,000.

    On November 13, 1995, the Company completed a follow-on public offering of
2,775,000 shares of its common stock at a price of $9.00 per share (including
the exercise of the underwriter's overallotment option). The net proceeds to the
Company were approximately $23,179,000.

    During the year ended December 31, 1995, the Company issued 79,637 shares of
its common stock in exchange for negotiation services provided by an investment
banking firm in connection with the execution of European distribution
agreements.

    At December 31, 1996, the Company has reserved 2,330,612 shares of common
stock for issuance pursuant to exercise of common stock options granted under
the Stock Option Plan, 280,966 shares of common stock for issuance under the
Employee Stock Purchase Plan, and 5,195,391 shares for issuance upon conversion
of the 6% Convertible Subordinated Notes.

10. EMPLOYEE BENEFIT PLANS

    Stock Option Plan -- On June 7, 1991, the Company adopted the 1991 Stock
Option Plan (the "Plan") which provides for the granting of either incentive
stock options or non-statutory stock options to employees, officers, directors
and consultants of the Company. The Plan, as amended, allows for a maximum of
3,200,000 shares of common stock to be issued.

    The exercise price of any incentive stock option shall not be less than the
fair value of the stock on the date of grant or less than 110% of the fair value
in the case of optionees holding more than 10% of the total combined voting
power of all classes of stock of the Company. Options under the Plan are
exercisable over periods determined by the Board of Directors, not to exceed 10
years from the date of grant, except for incentive stock options granted to
optionees holding more than 10% of the total combined voting power of all
classes of stock, which must be within five years.

    Under the Plan, non-employee directors of the Company will receive options
to purchase 20,000 shares of common stock upon their election to the Board of
Directors and, after having served on the Board of Directors for one year,
options to purchase 750 shares of common stock on a quarterly basis, up to a
maximum of 24 grants. All of these option grants are exercisable over a 10 year
period and must have an exercise price equal to the fair market value of the
shares on the grant date.

                                                                              25
<PAGE>
                         NOTES TO FINANCIAL STATEMENTS

    Option activity for the years ended December 31, 1994, 1995 and 1996 is
summarized as follows:

<TABLE>
<CAPTION>
                                              1994                            1995                       1996
                                --------------------------------  ----------------------------  -----------------------
                                                    WEIGHTED                        WEIGHTED                 WEIGHTED
                                                     AVERAGE                         AVERAGE                  AVERAGE
                                                    EXERCISE                        EXERCISE                 EXERCISE
YEAR ENDED DECEMBER 31,             SHARES            PRICE           SHARES          PRICE       SHARES       PRICE
------------------------------  ---------------  ---------------  ---------------  -----------  ----------  -----------
<S>                             <C>              <C>              <C>              <C>          <C>         <C>
Outstanding at beginning of
  period......................       1,376,633   $          0.24        1,394,005   $    1.19    1,268,523   $    3.11
    Granted...................         331,695   $          4.20          319,650   $    7.67      461,975   $   10.25
    Canceled..................         (70,079)  $          0.56          (41,933)  $    2.09      (60,455)  $    6.51
    Exercised.................        (244,244)  $          0.11         (403,199)  $    0.18     (123,185)  $    0.72
                                ---------------                   ---------------               ----------
Outstanding at end of
  period......................        1,394,005  $          1.19        1,268,523   $    3.11    1,546,858   $    5.31
                                ---------------                   ---------------               ----------
                                ---------------                   ---------------               ----------
Options exercisable at end of
  period......................          631,471  $          0.40          471,803   $    0.67      598,431     $  1.39
                                ---------------                   ---------------               ----------
                                ---------------                   ---------------               ----------
Weighted average fair value of
  options granted during the
  period......................                                    $          4.68               $     6.73
                                                                  ---------------               ----------
                                                                  ---------------               ----------
</TABLE>

    At December 31, 1996, options to purchase 783,754 shares of common stock
were available for future grants under the Plan.

    The following table summarizes information about employee and director stock
options outstanding at December 31, 1996:

<TABLE>
<CAPTION>
                                                            OPTIONS OUTSTANDING
                                              ------------------------------------------------
                                                                      WEIGHTED
                                                    NUMBER             AVERAGE          WEIGHTED
                                                OUTSTANDING AT        REMAINING          AVERAGE
RANGE OF EXERCISE PRICES                      DECEMBER 31, 1996    CONTRACTUAL LIFE   EXERCISE PRICE
--------------------------------------------  ------------------  ------------------  ---------------
<S>                                           <C>                 <C>                 <C>
$0.01 to $0.91..............................            570,500            6.0          $    0.33
$3.04 to $9.88..............................            580,558            8.0          $    5.91
$10.00 to $13.88............................            395,800            9.1          $   11.60
                                              ------------------
Total.......................................          1,546,858
                                              ------------------
                                              ------------------
</TABLE>

<TABLE>
<CAPTION>
                                                                             OPTIONS EXERCISABLE
                                                                       --------------------------------
                                                                            NUMBER            WEIGHTED
RANGE OF EXERCISE PRICES                                                EXERCISABLE AT        AVERAGE
                                                                       DECEMBER 31, 1996   EXERCISE PRICE
---------------------------------------------------------------------  ------------------  --------------
<S>                                                                    <C>                 <C>
$0.01 to $0.91.......................................................           473,251      $    0.31
$3.04 to $9.88.......................................................           109,430      $    4.48
$10.00 to $13.88.....................................................            15,750      $   12.27
                                                                       ------------------
Total................................................................           598,431
                                                                       ------------------
                                                                       ------------------
</TABLE>

    Fair Value Disclosures -- As discussed in Note 2, the Company has elected
to adopt SFAS 123 through disclosure only. Had compensation cost for the
Company's option plans been determined based on the fair value at the grant
dates, as prescribed by SFAS 123, the Company's net loss and net loss per
share would have been as follows (in thousands, except per share data):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,                                                     1995          1996
------------------------------------------------------------------------  ---------    ----------
<S>                                                                       <C>          <C>
Net loss:
  As reported...........................................................    ($9,712)   ($47,660)
  Pro forma.............................................................    ($9,912)   ($48,620)
Net loss per share:
  As reported...........................................................    ($ 0.46)   ($  1.87)
  Pro forma.............................................................    ($ 0.47)   ($  1.90)
</TABLE>

    The fair value of each option grant is estimated on the date of grant using
the Black-Scholes model with the following assumptions used for grants during
the applicable period: dividend yield of 0.0% for both periods; risk-free
interest rates of 5.5% to 6.7% for options granted during the year ended
December 31, 1995 and 5.8% to 6.8% for options granted during the year ended
December 31, 1996; expected option terms of .3 years to 5.8 years for both
periods; and a volatility of .60 for both periods.

26
<PAGE>
                         NOTES TO FINANCIAL STATEMENTS

    Employee Stock Purchase Plan -- On May 19, 1995, the shareholders of UroMed
approved the 1995 Employee Stock Purchase Plan. This plan provides for the
purchase by employees of up to 300,000 shares of common stock at 85% of the fair
market value on the first or last day of the offering period (as defined in the
plan) whichever is lower. During the year ended December 31, 1996, 12,736 shares
were issued under the plan at a range of $8.29 to $11.05 per share. During the
year ended December 31, 1995, 6,600 shares were issued under the plan at $6.91
per share.

    401(k) Retirement Plan -- On January 1, 1993 the Company adopted a 401(k)
Retirement Plan (the "401(k) Plan") under Section 401(k) of the Internal
Revenue Code. The 401(k) Plan covers substantially all employees who meet
minimum age and service requirements. The 401(k) Plan is non-contributory on
the part of the Company.

11. INCOME TAXES

    The components of deferred income tax benefit (expense) are as follows (in
thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,                                  1994       1995       1996
-----------------------------------------------------  ---------  ---------  ---------
<S>                                                    <C>        <C>        <C>
Income tax benefit:
  Federal............................................  $   2,835  $   3,317  $  15,497
  State..............................................        830      1,082      4,796
                                                       ---------  ---------  ---------
                                                           3,665      4,399     20,293
Change in deferred tax asset valuation allowance.....     (3,665)    (4,399)   (20,293)
                                                       ---------  ---------  ---------
                                                       $      --  $      --  $      --
                                                       ---------  ---------  ---------
                                                       ---------  ---------  ---------
</TABLE>

    No federal or state taxes were payable in any years as a result of losses
incurred.

    Deferred tax assets consist of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,                                                                 1995       1996
-------------------------------------------------------------------------  ---------  ---------
<S>                                                                        <C>        <C>
Deferred tax assets:
 Purchased research and development......................................  $      --  $  11,882
 Accrued expenses........................................................        282        582
 Depreciation............................................................        107        253
 Operating reserves......................................................        130        176
 Deferred revenue........................................................        700        154
 Tax credit carryforwards................................................      1,021      1,383
 Net operating loss carryforwards........................................      8,347     16,353
 Other...................................................................         93        190
                                                                           ---------  ---------
Gross deferred tax assets................................................     10,680     30,973
Deferred tax asset valuation allowance...................................    (10,680)   (30,973)
                                                                           ---------  ---------
                                                                           $      --  $      --
                                                                           ---------  ---------
                                                                           ---------  ---------
</TABLE>

    A reconciliation between the amounts of reported income tax benefit
(expense) and the amount determined by applying the U.S. federal statutory rate
of 35% to net loss follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,                                                        1994           1995          1996
---------------------------------------------------------------------------  ---------  ----------------  ---------
<S>                                                                          <C>        <C>               <C>
Net loss at statutory rate.................................................  $   2,663     $  3,399         $16,681
 State tax benefit, net of federal tax liability...........................        406          600           2,988
 Federal and state research and development credits........................        405          201             292
 Non-qualified stock options and warrants..................................        339          237              82
 Nondeductible research and development expenses...........................       (123)          --              --
 Other.....................................................................        (25)         (38)            250
                                                                             ---------  ----------------  ---------
                                                                                 3,665        4,399          20,293
Benefit of loss not recognized, increase in valuation allowance............     (3,665)      (4,399)        (20,293)
                                                                             ---------  ----------------  ---------
                                                                             $      --  $      --         $      --
                                                                             ---------  ----------------  ---------
                                                                             ---------  ----------------  ---------
</TABLE>

    The Company has provided a full valuation allowance for deferred tax assets
since there is no assurance that future tax benefits will be realized. As the
Company achieves profitability, these deferred tax assets would be available to
offset future income tax liabilities and expense. Of the $30,973,000 valuation
allowance at December 31, 1996, $790,000 relating to deductions for
non-qualified stock options will be credited to additional paid-in capital upon
realization.

    At December 31, 1996, the Company had net operating loss carryforwards for
federal and state income tax reporting purposes of approximately $40,000,000. At
December 31, 1996, the Company had research and development tax credit
carryforwards for federal and state income tax reporting purposes of $965,000
and $418,000, respectively. The federal carryforwards expire between the years
2006 and 2011. The state carryforwards expire between the years 1997 and 2002.

    Ownership changes, as defined in the Internal Revenue Code (the "Code"),
have limited the amount of net operating loss and tax credit carryforwards that
can be used annually to offset future taxable income or tax liabilities. The
annual limitation amount as defined in the Code is approximately $8,600,000 and
the net operating loss and tax credit carryforwards subject to this limitation
are approximately $20,900,000 and $802,000, respectively. Future changes in
ownership could further affect the limitation in future years.

                                                                              27
<PAGE>
                         NOTES TO FINANCIAL STATEMENTS
12. COMMITMENTS

    Leases --The Company leases its present office and manufacturing space under
operating leases which expire on various dates through 2001. These leases
contain options to extend the initial lease terms for additional periods of one
to five years. In connection with one of the leases, the Company provided a
security deposit to a landlord of $514,000 in consideration of tenant
renovations made by the landlord. Such deposit is being held in escrow and will
be returned to the Company at the rate of $36,750 each six-month period during
the lease term. Total rent expense under operating leases was approximately
$231,000, $334,000 and $390,000 for the years ended December 31, 1994, 1995 and
1996, respectively.

    Future minimum payments for the operating leases as of December 31, 1996 are
as follows (in thousands):

<TABLE>
<S>                                                            <C>
1997.........................................................  $     382
1998.........................................................        341
1999.........................................................        357
2000.........................................................        357
2001.........................................................        357
                                                               ---------
Total minimum lease payments.................................  $   1,794
                                                               ---------
                                                               ---------
</TABLE>

    Purchase Commitments -- At December 31, 1996, the Company had outstanding
commitments of approximately $5,000,000 for the purchase of additional machinery
and equipment, against which advance and milestone payments of approximately
$500,000 have been made.

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of UroMed Corporation

In our opinion, the accompanying balance sheet and the related statements of
operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of UroMed Corporation at December
31, 1996 and 1995, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles. 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 of these statements in accordance with generally
accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.

/s/Price Waterhouse LLP

Price Waterhouse LLP
Boston, Massachusetts
February 17, 1997

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