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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
                                   FORM 10-K

(MARK ONE)

<TABLE>
<C>        <S>
   /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, 2000.

                                       OR

<TABLE>
<C>        <S>
   / /     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: 000-27956
                            ------------------------
                               PHYSIOMETRIX, INC.
             (Exact name of registrant as specified in its charter)

<TABLE>
<S>                                            <C>
               DELAWARE                                     77-0248588
    (State or other jurisdiction of                      (I.R.S. employer
    incorporation or organization)                     identification no.)

         FIVE BILLERICA PARK,
 101 BILLERICA AVE., N. BILLERICA, MA                         01862
    (Address of principal executive                         (Zip code)
               offices)
</TABLE>

       Registrant's telephone number, including area code: (978) 670-2422

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

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

                         Common Stock, $0.001 par value
                                (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.

    The aggregate value of voting stock held by non-affiliates of the Registrant
was approximately $111,882,484 as of January 31, 2001, 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 5% 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 January 31, 2001, the
Registrant had outstanding 8,416,182 shares of Common Stock.

                      DOCUMENTS INCORPORATED BY REFERENCE

    Certain information is incorporated into Part III of this report by
reference to the Proxy Statement for the Registrant's 2000 annual meeting of
stockholders to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year covered
by this Form 10-K.

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                               PHYSIOMETRIX, INC.
                                     INDEX

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<CAPTION>
                                                                                  PAGE
                                                                                 NUMBER
                                                                                --------
<S>               <C>                                                           <C>
PART I........................................................................      3

        Item 1.   BUSINESS....................................................      3
        Item 2.   PROPERTIES..................................................     19
        Item 3.   LEGAL PROCEEDINGS...........................................     19
        Item 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........     19

PART II.......................................................................     20

        Item 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
                    STOCKHOLDER MATTERS.......................................     20
        Item 6.   SELECTED FINANCIAL DATA.....................................     21
        Item 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                    AND RESULTS OF OPERATIONS.................................     22
        Item 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................     26
        Item 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                    AND FINANCIAL DISCLOSURE..................................     26

PART III......................................................................     27

        Item 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..........     27
        Item 11.  EXECUTIVE COMPENSATION......................................     27
        Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                    MANAGEMENT................................................     27
        Item 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............     27

PART IV.......................................................................     28

        Item 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
                    8-K.......................................................     28
</TABLE>

                                       2
<PAGE>
                                     PART I

ITEM 1. BUSINESS

INTRODUCTION

    We design, develop, manufacture and market noninvasive, advanced medical
products incorporating proprietary materials, electronics technology and
software for use in neurological monitoring applications during surgical and
diagnostic procedures. We sell our products for use in hospitals, clinics and
physicians' offices domestically and internationally. Our current principal
product focus is our Patient State Analyzer, or PSA4000, an innovative system
for monitoring brain activity during anesthesia.

    Our initial products, which were commercially introduced in 1994, are our
e-Net headpiece and disposable HydroDot biosensors, which are based upon our
proprietary HydroGel technology, and its custom electronics. These products are
packaged as the HydroDot NeuroMonitoring System, which was developed and is sold
for brain monitoring applications, such as clinical electroencephalograph, or
EEG, procedures. The system is marketed and sold as a safer, lower cost
alternative to current EEG data collection technology. The system connects and
interfaces to the standard input on all conventional EEG instruments currently
in use worldwide, yet offers reduced patient setup time, more reliable data
readings, and enhanced patient comfort and safety. The Company intends to either
license the HydroDot NeuroMonitoring System to another company or transition out
of the business.

    PATIENT STATE ANALYZER.  The Patient State Analyzer (PSA4000) provides a
simplified, user-friendly analysis of patient brain activity during surgical
procedures involving general anesthesia. Currently, such monitoring is used only
in a small percentage of all such procedures, primarily during high-risk
interventions such as cardiology and neurology surgeries. Traditional EEG
devices also require a neurologist to interpret their data output. As a result,
anesthesiologists are reluctant to use EEG monitoring during other surgical
procedures, despite the potential benefits offered by brain monitoring, such as
improved patient safety, shorter patient recovery times, and lower overall costs
per procedure.

    We have shown in clinical studies that monitoring patients' brain activity
during surgery with the Patient State Analyzer will improve patient safety and
lower costs per surgical procedure by better controlling the amount of
anesthesia administered during surgeries. This will reduce the amount of
postoperative recovery time required, and eliminate the requirement of a
neurologist or specialized technologists to interpret EEG results during
surgery. We believe that these benefits create the opportunity for the Patient
State Analyzer to become the standard of care during surgical interventions
using general anesthesia. The product received 510(k) clearance from the FDA in
June 2000. We will market the Patient State Analyzer in the United States
through Baxter Healthcare Corporation.

    This Report on Form 10-K contains certain 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. Actual events or results may differ materially
from those projected in the forward-looking statements as a result of the
factors described herein under "Risk Factors" and in the documents incorporated
herein by reference. Such forward-looking statements include, but are not
limited to, statements concerning (i) business strategy; (ii) products under
development; (iii) other products; (iv) marketing and distribution;
(v) research and development; (vi) manufacturing; (vii) competition;
(viii) government regulation; (ix) third-party reimbursement; (x) operating and
capital requirements and (xi) clinical trials. Accordingly, you should carefully
review the "Risk Factors" section of this prospectus.

                                       3
<PAGE>
    The table below summarizes the products currently offered by us, the
products we are developing, the markets served by these products and their
present development and/or commercialization status:

<TABLE>
<CAPTION>
                                                                      DEVELOPMENT/
                                                                    COMMERCIALIZATION
           PRODUCT                      DESCRIPTION                      STATUS
           -------                      -----------                      ------
<S>                            <C>                            <C>
PATIENT STATE ANALYZER         Intraoperative EEG monitoring  Commercial sales
                               system
HYDRODOT NEUROMONITORING
SYSTEM
      E-Net                    EEG headpiece                  Commercial sales

      Small e-Net              EEG headpiece for children     Commercial sales

      OR e-Net                 EEG headpiece for operating    Commercial sales
                               room Applications

      HydroDot biosensors      Disposable biosensors for use  Commercial sales
                               with e-Nets

HYDROSPOT BIOSENSORS           Disposable biosensors          Commercial sales
                               attached to lead wires
</TABLE>

INDUSTRY OVERVIEW

    EEG MARKET

    An EEG procedure measures neurophysiological activity by measuring the
intensity and pattern of electrical signals generated by the brain. Undulations
in the recorded electrical signals are called brain waves, and the entire record
of electrical rhythms and other electrical activity (ongoing background signals
and event related transients) of the brain is an EEG. EEGs are widely used to
assist in the diagnosis of epilepsy, brain tumors, physiological disorders and
other brain abnormalities. Because the electrical waves produced by an injured
or abnormal brain will differ in predictable ways from waves produced by a
normal brain, an EEG exam should disclose and help diagnose brain abnormalities
and injuries.

    Although EEG based brain monitoring has been performed for over 70 years, it
is only recently that medical professionals have begun to recognize the benefits
of EEGs as a broad based diagnostic tool. This should be contrasted with the
field of cardiac monitoring in which medical professionals have long been aware
of the benefits of such monitoring, and have integrated electrocardiogram
("ECG") procedures into both preventive and diagnostic health care. As a result,
medical device and instrument companies have concentrated on, and provided
improved technology for, the cardiac monitoring market. However, EEG technology
has remained virtually unchanged since its inception.

    There are approximately 42 million surgical interventions performed annually
worldwide under general anesthesia according to Frost and Sullivan. This
represents a large market opportunity for the PSA4000. The Company has developed
the Patient State Analyzer to address this market. Currently, anesthesiologists
measure heart, breathing rates, as well as other physiological changes, to
monitor the effect of anesthesia on patients. However, the brain, the organ
which anesthetic drugs affect the earliest, is generally not directly monitored.
Nevertheless, in several types of surgical procedures, including high-risk
cardiology and vascular surgical procedures, brain monitoring is recognized by
clinicians as particularly important. Routine monitoring of brain functions
during surgery can result in earlier detection of abnormalities that, if left
undetected, could result in serious surgical and post surgical complications.
Such monitoring can also potentially reduce costs and postoperative recovery
times by enabling a reduction in the amount of anesthesia used during the
surgical procedure, which would enable patients to emerge from the effects of
the anesthesia and be ambulatory more quickly

                                       4
<PAGE>
following the procedure. In addition, anesthesiologists are typically not
familiar with conventionally produced EEG test results, and a neurologist must
therefore be on hand to interpret EEG test information. The Company believes
that the availability of a low cost, easy to use monitoring device such as the
Patient State Analyzer could substantially increase brain monitoring during
surgical procedures involving general anesthesia.

    CURRENT EEG PROCEDURE

    Currently, to perform a typical EEG exam, the technician must measure, mark,
clean and abrade 20 spots on the scalp. After these procedures are completed, 20
disc shaped electrodes are placed on the points identified on the scalp.
Collodion is typically used during this process. Abrasion of the skin is
necessary in order to provide a sufficiently low impedance signal (typically
less than 5,000 ohms) to the EEG monitor. Electrodes can be misplaced, resulting
in inaccurate readings, and can fall off, necessitating that the technician
restart the recording. At the end of the procedure, cleanup of the collodion
used to affix the electrodes to the scalp requires the use of toxic solvents and
is both time consuming and unpleasant for the patient. In addition, incomplete
sterilization of the cup electrodes can result in increased risk of infection
for the patient. These difficulties in patient setup and cleanup also contribute
to reduced operating efficiencies in the EEG laboratory. The current method for
performing EEGs also suffers from several functional deficiencies, including
difficulty in achieving effective electrical contact between the patient and the
device, the possibility of electrode movement or displacement during the EEG
examination, creation of salt bridges, or unwanted electrical circuits between
electrodes, that result in a high level of EEG signal interference. The
consequences of these deficiencies include poor signal quality making diagnoses
questionable, a need to administer repeat tests and signal format that is not
conducive to advanced diagnostic analytical techniques. The Company believes
that these deficiencies have limited the growth of EEG monitoring.

    A traditional EEG procedure takes an average of about 60 minutes, of which
about 30 minutes is made up of actual recording time. The traditional EEG is
extremely sensitive to patient movement, sweating, electrical interference and
muscle tension; any of these may make a tracing uninterpretable. For most of the
actual recording, the patient must lie calmly with their eyes closed. Additional
studies which most laboratories routinely perform include recording during
hyperventilation and photic simulation with a repetitive flash. For many
tracings, subjects are encouraged to fall asleep, if they can. Some laboratories
induce sleep with oral chloral hydrate.

    In response to the inherent inadequacies of traditional methods for
performing EEGs, one manufacturer has introduced a device, which it calls
ElectroCap. This product uses an enclosed "bathing cap" type format, in which
the electrodes are encased in a headpiece that is much like a rubber bathing
cap. The Company believes the ElectroCap suffers from several disadvantages,
including the requirement for many different sized caps for different head
sizes, difficulty in placing electrodes because the technician cannot see the
electrode positioning due to the cap, and the closed design of the cap which is
uncomfortably hot and confining for the patient. In addition, to improve signal
quality, the patient's scalp must be aggressively abraded with a blunt needle
which is a painful, awkward and potentially infectious procedure.

THE PHYSIOMETRIX SOLUTION

    The Company believes that the availability of a low-cost, easy to use
monitoring device such as the Patient State Analyzer, could substantially
increase brain monitoring during surgery and has the potential to become the
standard of care in brain monitoring during administration of general
anesthesia.

    The Physiometrix HydroDot NeuroMonitoring System has been developed to
address and seek to overcome the deficiencies of current methods of performing
EEGs. The HydroDot System incorporates innovative product features that improve
clinical efficacy, patient comfort and allow the EEG

                                       5
<PAGE>
laboratory to perform EEG procedures more efficiently. Physiometrix' e-Net is a
proprietary, flexible, open net matrix that fits over the patient's head and
uses disposable, soft hydrogel biosensors that are inserted into the matrix at
predetermined locations that correspond to points on the scalp where
conventional cup electrodes would otherwise be affixed manually. In effect, the
e-Net serves as a template to automatically position the HydroDot biosensors for
the EEG procedure. The e-Net fits a majority of adult head sizes. The elasticity
of the e-Net ensures accurate placement of the HydroDot biosensors and the
maintenance of proportionality between electrodes. The Company also sells a
smaller version of the e-Net which, together with the adult sized e-Net, enables
over 95% of head sizes to be accommodated. The proprietary hydrogel electrode
material is adhesive, but does not leave a residue. In contrast to conventional
EEG methods, time consuming and often painful scalp preparation is not required
to achieve a low impedance signal. The hair is simply parted and the HydroDot
biosensors are pressed into the sockets on the e-Net. For testing environments
in which there is the potential for hostile electrical interference, the e-Net
can connect to an adjacent analog to digital interface module that digitizes the
electrode signal, transmits the digital data via a fiber optic link to the
instrument location, where it is converted back into an analog form acceptable
to the EEG input electronics. This data transmission procedure virtually
eliminates ambient noise that is present in most EEGs (especially electronic
noise in the intensive care unit, operating room and emergency room) as a result
of the "antennae" effect from using wire leads to transmit electrical data, and
can be used with any EEG instrument.

BUSINESS STRATEGY

    The Company's objective is to become the leader in the design, development
and commercialization of anesthesia monitoring technology. Key elements of the
Company's strategy include the following:

    - DESIGN AND DEVELOP INNOVATIVE, PROPRIETARY PRODUCTS FOR THE NEUROLOGY AND
      SURGICAL MARKET. Physiometrix plans to capitalize on the growing
      recognition among medical professionals of easy to use and reliable method
      of brain monitoring. The Company intends to remain focused on the
      development and marketing of products for surgery including products that
      are designed to expand the use of neurological monitoring. The Company has
      substantial design and development expertise in the neurological
      monitoring field and will seek to position itself at the forefront of
      innovation in this industry.

    - DIVERSIFY PRODUCT OFFERINGS TO INCREASE MARKET PENETRATION. The Company
      seeks to offer a range of products, including hardware and disposable
      products designed to encourage broader use of EEG monitoring. The Company
      believes that it will be able to significantly expand its penetration of
      the neurology and surgery markets with the introduction of the Patient
      State Analyzer.

    - BROADEN MARKETING CHANNELS. The Company has already established a
      strategic relationship with Baxter Healthcare Corp. for distribution of
      its PSA 4000 in the United States. The Company will seek to secure an
      exclusive partner for distribution in major international markets,
      principally Europe and Japan.

    - OUTSOURCE MANUFACTURING TO CONTROL COSTS. The Company outsources many
      manufacturing processes to qualified contract manufacturers to control
      costs, maintain quality and reduce capital investment, while retaining
      control over key proprietary processes for certain components of its
      products.

PRODUCTS AND TECHNOLOGY

    PATIENT STATE ANALYZER (PSA4000).  Physiometrix developed the Patient State
Analyzer ("PSA") for brain monitoring in the operating room. The PSA is expected
to utilize a single use Disposable Appliance to record EEG for continuous
analysis by the PSA. The PSA is being designed to extract

                                       6
<PAGE>
data known to be sensitive to the functional level of each region of the brain,
the adequacy of blood supply and the interaction of each region with neighboring
regions on the opposite side of the brain. Based on such measurements,
statistical procedures will be used to deliver an analysis of the data into a
measurement for monitoring the effects of anesthesia. During intraoperative
procedures, the PSA will constantly monitor data and alert the anesthesiologist
as to changes in the patient's state of consciousness. The PSA will provide the
anesthesiologist with a readout regarding the patient's ideal anesthetized
state.

    Traditionally, the anesthesiologist has had three objectives:

    - put the patient to sleep

    - prevent patient response to pain

    - ensure that the patient does not move during surgery

    Typically, a combination of drugs is used to accomplish this, including
analgesics to block pain, drugs to induce unconsciousness and muscle relaxants
to immobilize the patient. Current anesthesia practice is not always successful,
however. Cases of surgical awareness are reported each year and, while fewer in
number, deaths during general anesthesia also occur. Other known issues related
to overmedication include nausea and exceptionally long recovery room time.

    Brain monitoring with traditional EEG techniques involves lengthy setups,
the use of flammable materials, and cumbersome equipment. Traditional EEG
devices also require a neurologist to interpret their data output. As a result,
anesthesiologists are generally reluctant to use EEG monitoring, despite the
potential benefits offered by brain monitoring such as improved patient safety
and shorter patient recovery times. The Company's PSA provides a simple
automated resolution of the difficulties of EEG use and interpretation in the
OR.

    The Company believes that monitoring patient's brain activity during surgery
will improve patient safety and lower costs per surgical procedure by better
controlling the amount of anesthesia administered during surgeries. This will
reduce the amount of postoperative recovery time required.

    There is also a market opportunity for the use of awareness monitoring
during the administration of sedation to patients--in recovery rooms and during
certain diagnostic and therapeutic procedures which are performed outside the
OR. The Company is ready to adopt its technology to any modular monitoring
system now in use in operating rooms around the world.

    The PSA consists of portions of the Company's Equinox EEG hardware with a
single use version of the e-Net in place of the standard e-Net and an 8-channel
preamplifier input. Software includes testing electrode impedance, amplifier
calibration, EEG collection, quantitative analysis after artifact removal (brain
wave abnormalities resulting from external stimulation, eye blinking or muscle
movement), display and storage. The capability to construct group norms for a
particular procedure will be provided, so the user can build criteria for the
typical patient.

    The Patient State Analyzer represents a new approach for brain monitoring
during surgery. Market acceptance of this product will be dependent upon, among
other things, the willingness of physicians, EEG technicians and others to adopt
use of these products. Market acceptance will also be dependent upon the
Company's ability to convince potential users of this product of its cost and
efficacy advantages.

    e-NET.  The e-Net is an open handed headpiece designed to position and hold
the HydroDot disposable biosensors symmetrically against the scalp during an EEG
study. The e-Net is manufactured from a proprietary elastic material and
positions 20 biosensors according to the internationally recognized 10-20 System
on head sizes varying from 48 to 62 centimeters in circumference. The 10-20
System is a standard, universal methodology for marking and measuring the
patient's scalp for electrode placement in EEG procedures.

                                       7
<PAGE>
    The e-Net is held in place by adjustable straps, one at the back of the neck
and the other around the chin. These strap positions minimize interaction
between head motion and electrode position. The open handed design of the e-Net
allows access to the scalp for parting the hair and for placing additional
biosensors on the patient. The expandable, shielded wire leads on the outside of
the e-Net are combined into a single connector that interfaces to the straight
cable. The e-Net is reusable with an expected lifetime of up to 200
applications. The elastic material is shielded by a fabric sheath and the wires
are covered in a protective jacket and ultrasonically welded to the biosensor
sockets. The disposable biosensors snap out of the e-Net after it is removed and
the entire e-Net may be sterilized in disinfectant solution. Its key competitive
features are elastic proportionality, increased patient comfort, standardized
placement of biosensors, elimination of measurements, open handed design,
integrated wiring, and durability. The e-Net is currently sold separately for
$250.00 or as a starter kit with a half case of HydroDot biosensors (enough for
approximately 10 EEG procedures) and a straight cable for connection to EEG
machines for $495.00.

    SMALL e-NET.  Because the HydroDot NeuroMonitoring System is much less
traumatic to patients than traditional EEG procedures, it is much easier to use
on children. Physiometrix' small e-Net, introduced in March 1995, enables
technicians to use the HydroDot NeuroMonitoring System on children.

    OR e-NET.  The Company has developed the OR e-Net, which is specially
designed so that it can be used during surgical procedures in which blood flow
to the brain could be compromised. Typically, hospitals have had to rely on
collodion as an adhesive for their operating room procedures to secure the metal
cup electrodes. Many institutions have banned collodion from operating room use
because it is highly flammable. As a result, the Company believes that the
HydroDot NeuroMonitoring System can potentially replace many products currently
available for such uses.

    HYDRODOT DISPOSABLE BIOSENSORS.  The HydroDot biosensors are disposable and
are used in lieu of conventional cup electrodes to acquire EEG signals from a
patient. The biosensors are packaged in ready-to-use sealed trays of 24 sensors.
Minimal skin preparation and no collodion are required when the sensors are
inserted into the sockets on the e-Net. When the e-Net is removed after
completion of an EEG examination, the sensors leave no residue on the scalp. The
HydroDot biosensors provide high signal quality through the incorporation of a
silver/silver chloride reference and an adhesive proprietary hydrogel material
that conforms to the scalp. Because the HydroDot biosensors are disposable, they
can be used on patients with contagious diseases and discarded, thereby reducing
the risk of spreading infectious disease. Their key competitive features are
ease of use, reduced risk of infection, cleanliness, improved signal quality and
increased safety. The HydroDot biosensors are sold in 20-tray cases for $180.00.

    HYDROSPOT.  The Company has developed the HydroSpot biosensor for those
technicians who want the benefits of the HydroDot biosensors, but do not wish to
use the e-Net because they prefer a procedure setup similar to that used with
conventional cup electrodes. The HydroSpot is a hydrogelled disposable biosensor
attached to a reusable lead wire and will be offered as an alternative to the
conventional cup electrodes typically employed in EEG procedures. In addition to
routine EEG procedures, the HydroSpot has potential application for long term
EEG monitoring and several other applications including evoked potentials and
nerve conduction velocity studies which are often used in evaluation of carpal
tunnel syndrome patients.

    The HydroDot NeuroMonitoring System represents a new method for EEG
monitoring, and market acceptance of the system will be dependent upon, among
other things, the willingness of physicians, EEG technicians and others to adopt
use of this new system. Market acceptance will also be dependent upon the
Company's ability to convince potential users of the system of its anticipated
cost and efficacy advantages. In addition, the HydroDot NeuroMonitoring System
may not be suitable for patients that have experienced severe head trauma
because the physician may not wish to surround the

                                       8
<PAGE>
patient's head with the e-Net. However, the Company's HydroSpot biosensors,
which do not require use of the e-Net, could be used for such patients.

MARKETING AND DISTRIBUTION

    The Company selected Baxter Healthcare Corporation, a major medical products
company with substantial experience and capabilities in sales of capital
equipment to hospitals, anesthesiologists and other potential users of brain
monitoring systems, as its exclusive distribution partner in the United States
for the Patient State Analyzer. The Company currently intends to increase its
sales force moderately to market the Patient State Analyzer in conjunction with
Baxter and to secure an exclusive partner for distribution in major
international markets, principally Europe and Japan.

RESEARCH AND DEVELOPMENT

    Physiometrix research and development activities are performed by the
Company's internal research and development staff, whose activities are
augmented by the use of outside consultants for particular projects and areas of
specialization. The Company has retained consultants for hardware and software
design and clinical evaluation and development of the Patient State Analyzer.
The Company's future research and development efforts are expected to be focused
on continued development of the Patient State Analyzer and related product
enhancements and extensions.

    Research and development expenses for the years ended December 31, 1998,
1999 and 2000 were $4,108,451, $2,153,956 and $2,775,324 respectively, none of
which was customer funded.

MANUFACTURING

    The Company manufactures its products at its facilities in North Billerica,
Massachusetts. Production occurs in approximately 5,000 square feet of space
utilizing standard production equipment for most processes and proprietary
equipment for several specialized operations. The Company's production area
includes a segregated area where temperature can be controlled and maintained
for the production of the HydroDot biosensors. The Company intends to increase
outsourcing of manufacturing to contract manufacturers for certain components in
order to reduce cost and capital requirements and improve quality, while
retaining control over certain proprietary manufacturing processes.

    The Company manufactures its products in conformance with FDA's Good
Manufacturing Practices (GMPs). The Company is ISO 9001 certified and Certified
Europe (CE)-marked which are required for sale of its products in Europe. Any
failure by the Company to remain in compliance with the GMPs or comply with ISO
9001 standards could have a material adverse effect on the Company's business,
financial condition and results of operation.

    The Company purchases components from various suppliers and relies on single
sources for several parts. To date, the Company has not experienced any
significant adverse effects resulting from shortages of components. Delays
associated with any future part shortages, particularly as the Company scales up
its manufacturing activities, would have a material adverse effect on the
Company's business, financial condition and results of operations.

    The Company currently manufactures its HydroDot NeuroMonitoring Systems in
limited quantities. The Company does not have experience in manufacturing its
products in commercial quantities. Manufacturers often encounter difficulties in
scaling up production of products, including problems involving production
yields, quality control and assurance, component supply and lack of qualified
personnel. Difficulties encountered by the Company in scaling up manufacturing
could have a material adverse effect on its business, financial condition and
results of operations.

                                       9
<PAGE>
COMPETITION

    The Company believes that the primary competitive factors in the market for
neurological monitoring devices are the ability to provide products that can
improve clinical efficacy, reduce patient setup time, and contribute to
improvement of laboratory operating efficiencies. The Company believes that the
innovations it has developed in the field of neurology monitoring can
potentially afford it a competitive advantage. There is currently one other
company, Aspect Medical, that has a commercial product for brain monitoring
during anesthesia similar to the Patient State Analyzer.

PATENTS AND PROPRIETARY RIGHTS

    The Company's policy is to protect its proprietary position by, among other
methods, filing United States and foreign patent applications to protect
technology, inventions and improvements that are important to its business. The
patent positions of medical device companies, including those of the Company,
are uncertain and involve complex and evolving legal and factual questions. The
coverage sought in a patent application either can be denied or significantly
reduced before or after the patent is issued. Consequently, there can be no
assurance that any patent applications will result in the issuance of patents,
or that the Company's issued or any future patents will provide significant
protection or commercial advantage or will not be circumvented by others. Since
patent applications are secret until patents are issued in the United States or
corresponding applications are published in international countries, and since
publication of discoveries in the scientific or patent literature often lags
behind actual discoveries, the Company cannot be certain that it was the first
to make the inventions covered by each of its pending patent applications or
that it was the first to file patent applications for such inventions. There can
be no assurance that patents held by or licensed to the Company or any patents
that may be issued as a result of the Company's pending or future patent
applications will be of commercial benefit, afford the Company adequate
protection from competing products or technologies or will not be challenged by
competitors or others or declared invalid. Also, there can be no assurance that
the Company will have the financial resources to defend its patents from
infringement or claims of invalidity.

    In the event a third party has also filed a patent application relating to
an invention claimed in a Company patent application, the Company may be
required to participate in an interference proceeding declared by the United
States Patent and Trademark Office ("US PTO") to determine priority of
invention, which could result in substantial uncertainties and costs to the
Company, even if the eventual outcome is favorable to the Company. There can be
no assurance that any patents issued to the Company would be held valid by a
court of competent jurisdiction.

    The Company relies upon trade secret protection for certain unpatented
aspects of other proprietary technology. There is no assurance that others will
not independently develop or otherwise acquire substantially equivalent
proprietary information or techniques, others will not otherwise gain access to
the Company's proprietary technology or disclose such technology, or the Company
can meaningfully protect its trade secrets.

    The Company typically requires its employees and consultants to execute
appropriate confidentiality and proprietary information agreements upon the
commencement of employment or consulting relationship with the Company. These
agreements generally provide that all confidential information developed or made
known to the individual by the Company during the course of the individual's
relationship with the Company, is to be kept confidential and not disclosed to
third parties, except in specific circumstances. The agreements generally
provide that all inventions conceived by the individual in the course of
rendering services to the Company shall be the exclusive property of the
Company; however, certain of the Company's agreements with consultants, who
typically are employed on a full time basis by academic institutions or
hospitals, do not contain assignment of invention provisions. There can be no
assurance, however, that these agreements will provide meaningful

                                       10
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protection or adequate remedies for the Company in the event of unauthorized
use, transfer or disclosure of such information or inventions.

GOVERNMENT REGULATION

    UNITED STATES

    The Company's HydroDot NeuroMonitoring System, including its family of
e-Nets, and HydroDot biosensors, HydroSpot, Patient State Analyzer and other
potential products are and will be regulated in the United States as medical
devices by the FDA under the Federal Food, Drug, and Cosmetic Act ("FDC Act")
and require premarket clearance or approval by the FDA prior to
commercialization. In addition, certain material changes or modifications to
medical devices also are subject to FDA review and clearance or approval.
Pursuant to the FDC Act, the FDA regulates the research, testing, manufacture,
safety, labeling, storage, record keeping, advertising, distribution and
production of medical devices in the United States. Noncompliance with
applicable requirements can result in warning letters, fines, injunctions, civil
penalties, recall or seizure of products, total or partial suspension of
production, failure of the government to grant premarket clearance or premarket
approval for devices, and criminal prosecution. Medical devices are classified
into one of three classes, Class I, II or III, on the basis of the controls
deemed by FDA to be necessary to reasonably ensure their safety and
effectiveness. Class I devices are subject to general controls (E.G., labeling,
premarket notification and adherence to Good Manufacturing Practices ("GMP").
Class II devices are subject to general controls and to special controls (E.G.,
performance standards, postmarket surveillance, patient registries, and FDA
guidelines). Generally, Class III devices are those which must receive premarket
approval by the FDA to ensure their safety and effectiveness (E.G., life
sustaining, life supporting and implantable devices, or new devices which have
not been found substantially equivalent to legally marketed devices), and
require clinical testing to ensure safety and effectiveness and FDA approval
prior to marketing and distribution. FDA also has the authority to require
clinical testing of Class I and Class II devices. A premarket approval ("PMA")
application must be filed if the proposed device is not substantially equivalent
to a legally marketed predicate device or if it is a Class II device for which
FDA has called for such applications.

    If human clinical trials of a device are required and if the device presents
a "significant risk," the manufacturer or the distributor of the device is
required to file an investigational device exemption ("IDE") application prior
to commencing human clinical trials. The IDE application must be supported by
data, typically including the results of animal and, possibly, mechanical
testing. If the IDE application is approved by FDA, human clinical trials may
begin at a specific number of investigational sites with a maximum number of
patients, as approved by the agency. Sponsors of clinical trials are permitted
to sell those devices distributed in the course of the study provided such costs
do not exceed recovery of the costs of manufacture, research, development and
handling. The clinical trials must be conducted under the auspices of an
independent institutional review board ("IRB") established pursuant to FDA
regulations.

    Generally, before a new device can be introduced into the market in the
United States, the manufacturer or distributor must obtain FDA clearance of a
510(k) notification or approval of a PMA application. If a medical device
manufacturer or distributor can establish that a device is "substantially
equivalent" to a legally marketed Class I or Class II device, or to a Class II
device for which FDA has not called for PMAs, the manufacturer or distributor
may seek clearance from FDA to market the device by filing a 510(K)
notification. The 510(k) notification may need to be supported by appropriate
data establishing the claim of substantial equivalence to the satisfaction of
FDA. FDA recently has been requiring a more rigorous demonstration of
substantial equivalence.

                                       11
<PAGE>
    Following submission of the 510(k) notification, the manufacturer or
distributor may not place the device into commercial distribution until an order
is issued by FDA. No law or regulation specifies the time limit by which FDA
must respond to a 510(k) notification. At this time, FDA typically responds to
the submission of a 510(k) notification within 90 days. An FDA order may declare
that the device is substantially equivalent to another legally marketed device
and allow the proposed device to be marketed in the United States. FDA, however,
may determine that the proposed device is not substantially equivalent or
require further information, including clinical data, to make a determination
regarding substantial equivalence. Such determination or request for additional
information could delay market introduction of the products that are the subject
of the 510(k) notification.

    If a manufacturer or distributor of medical devices cannot establish that a
proposed device is substantially equivalent to a legally marketed 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 preclinical and clinical trial data, as well as
extensive literature to prove the safety and effectiveness of the device.
Following receipt of a PMA application, if FDA determines that the application
is sufficiently complete to permit a substantive review, FDA will "file" the
application. Under the FDC Act, FDA has 180 days to review a PMA application,
although the review of such an application more often occurs over a protracted
time period, and generally takes approximately two years or more from the date
of filing to complete.

    The PMA application approval process can be expensive, uncertain and
lengthy. A number of devices for which premarket approval has been sought have
never been approved for marketing. The review time is often significantly
extended by FDA, which may require more information or clarification of
information already provided in the submission. During the review period, an
advisory committee likely will be convened to review and evaluate the
application and provide recommendations to FDA as to whether the device should
be approved. In addition, FDA will inspect the manufacturing facility to ensure
compliance with FDA's GMP requirements prior to approval of an application. If
granted, the approval of the PMA application may include significant limitations
on the indicated uses for which a product may be marketed.

    The Company received clearance of 510(k) premarket notification from the FDA
to market the PSA4000, HydroDot NeuroMonitoring System, HydroSpot and Equinox
EEG System for EEG monitoring and the EP System for certain external
defibrillation applications and RF return during electrosurgical procedures
where a combination of defibrillation and RF return indications is required.

    The Company is also required to register as a medical device manufacturer
with the FDA and state agencies and to list its products with the FDA. As such,
the Company will be inspected by both FDA and state agencies for compliance with
the FDA's GMP and other applicable regulations. These regulations require that
the Company manufacture its products and maintain its documents in a prescribed
manner with respect to manufacturing, testing and control activities. Further,
the Company is required to comply with various FDA requirements for design,
safety, advertising and labeling.

    The Company is required to provide information to the FDA on death or
serious injuries alleged to have been associated with the use of its medical
devices, as well as product malfunctions that would likely cause or contribute
to death or serious injury if the malfunction were to recur. In addition, the
FDA prohibits an approved device from being marketed for unapproved
applications. If the FDA believes that a company is not in compliance with the
law, it can institute proceedings to detain or seize products, issue a recall,
enjoin future violations and assess civil and criminal penalties against the
company, its officers and its employees. Failure to comply with the regulatory
requirements could have a material adverse effect on the Company's business,
financial condition and results of operations.

    The advertising of most FDA regulated products is subject to both FDA and
Federal Trade Commission jurisdiction. The Company also is subject to regulation
by the Occupational Safety and Health Administration and by other governmental
entities.

                                       12
<PAGE>
    Regulations regarding the manufacture and sale of the Company's products are
subject to change. The Company cannot predict what impact, if any, such changes
might have on its business, financial condition or results of operations.

    INTERNATIONAL

    International sales of the Company's products are subject to the regulatory
agency product registration requirements of each country. The regulatory review
process varies from country to country. The Company has obtained necessary
regulatory approvals in certain European countries and will continue to seek
approval in Japan in connection with future marketing and sales efforts.

    In connection with future sales in the European market, the Company
implemented policies and procedures which allowed the Company's manufacturing
and quality assurance processes to receive ISO 9001 certification. ISO 9001
standards for quality operations have been developed to ensure that companies
know, on a worldwide basis, the standards of quality to which they will be held.
The European Union has promulgated rules which require that medical products
receive by mid 1998 the CE mark, an international symbol of quality and
compliance with applicable European medical device directives.

THIRD PARTY REIMBURSEMENT

    In the United States, health care providers, such as hospitals and
physicians, that purchase medical devices such as the Company's products,
generally rely on third party payors, principally federal Medicare, state
Medicaid and private health insurance plans, to reimburse all or part of the
cost of therapeutic and diagnostic catheterization procedures. Reimbursement for
neurophysiological monitoring procedures performed using devices that have
received FDA clearance or approval has generally been available in the United
States. The Company anticipates that in a capitated payment system, such as the
Diagnostically Related Group (DRG) system utilized by Medicare and many managed
care systems used by private health care payors, the cost of the Company's
products will be incorporated into the overall cost of the procedure and that
there will be no separate, additional reimbursement for the Company's products.

    Internationally, future market acceptance of the Company's products may be
dependent in part upon the availability of reimbursement within prevailing
health care payment systems. Reimbursement and health care payment systems in
international markets vary significantly by country. The main types of health
care payment systems in international markets are government sponsored health
care and private insurance. There can, however, be no assurance that
reimbursement for procedures performed using the Company's products will be
available in international markets under either governmental or private
reimbursement systems.

    The Company could be adversely affected by changes in reimbursement policies
of governmental or private health care payors, particularly to the extent any
such changes affect reimbursement for procedures 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
procedures in which the Company's products are used, or adverse changes in
governmental and private third party payors' policies toward reimbursement for
such procedures, would have a material adverse effect on the Company's business,
financial condition and results of operations.

PRODUCT LIABILITY AND INSURANCE

    The Company's business involves the risk of product liability claims. The
Company has not experienced any product liability claims to date. Although the
Company maintains product liability insurance with coverage limits of
$2 million per occurrence and an annual aggregate maximum of $3 million, there
can be no assurance that product liability claims will not exceed such insurance

                                       13
<PAGE>
coverage limits, which could have a material adverse effect on the Company, or
that such insurance will be available on commercially reasonable terms or at
all.

EMPLOYEES

    As of December 31, 2000, the Company had 48 full time employees. Of these
employees, 10 were engaged in research and development activities, 16 in
manufacturing and manufacturing engineering, 8 in quality assurance and
regulatory affairs, 8 in sales and marketing, and 6 in general and
administrative functions. No employees are covered by collective bargaining
agreements, and the Company believes it maintains good relations with its
employees.

RISK FACTORS

    You should carefully consider the risks described below before making an
investment decision. If any of the following risks actually occur, our business,
financial condition and operating results could be seriously harmed. As a
result, the trading price of our common stock could decline, and you could lose
all or part of the value of your investment.

    WE ARE DEPENDENT UPON THE PATIENT STATE ANALYZER SYSTEM, AND IF WE ARE
UNABLE TO INTRODUCE AND SUCCESSFULLY COMMERCIALIZE THIS PRODUCT, OUR BUSINESS
WILL BE SERIOUSLY HARMED

    Our business is completely dependent upon the Patient State Analyzer, or
PSA, system. If we are able to introduce the PSA system, we will need to build
market acceptance for the system. Because we will depend upon our PSA system for
substantially all of our future revenue and we have no other significant
products, if we are unable to commence commercial sales of or achieve widespread
market acceptance for the PSA system, we will not be able to sustain or grow our
business. In this event, our business and operating results would be seriously
harmed and our stock price would likely decline.

    WE WILL NOT BE ABLE TO ACHIEVE REVENUE GROWTH OR PROFITABILITY IF HOSPITALS
AND ANESTHESIA SERVICE PROVIDERS DO NOT BUY AND USE THE PSA SYSTEM IN SUFFICIENT
QUANTITIES

    Our revenue growth and prospects will depend on customer acceptance and
usage of the PSA system. Customers may determine that the cost of the PSA system
exceeds cost savings in drugs, personnel and post-anesthesia care recovery
resulting from use of the PSA system. In addition, hospitals and anesthesia
providers may not accept the PSA system as an accurate means of assessing a
patient's level of consciousness during surgery if patients regain consciousness
during surgery while being monitored with the PSA system or if they do not
consider the PSA system to be a clinically reliable measuring system for other
reasons. If extensive or frequent malfunctions occur, these providers may also
conclude that the PSA system is unreliable. If hospitals and anesthesia
providers do not accept the PSA system as cost-effective, accurate or reliable,
they will not buy and use the PSA system in sufficient quantities to enable us
to be profitable. In this event, our business, operating results and long-term
prospects would be seriously harmed. Our stock price would also likely decline.

    WE EXPECT TO CONTINUE TO INCUR LOSSES IN THE FUTURE, AND WE CANNOT ASSURE
YOU THAT WE WILL EVER BECOME PROFITABLE

    We have incurred net losses in each year since inception. We expect to
increase our research and development, sales and marketing and general and
administrative expenses in future periods. We will spend these amounts before we
receive any incremental revenue from these efforts. Therefore, our losses will
be greater than the losses we would incur if we developed our business more
slowly. In addition, we may find that these efforts are more expensive than we
currently anticipate, which would further increase our losses. Failure to become
and remain profitable may depress the market price of our common stock and our
ability to raise capital and continue our operations.

                                       14
<PAGE>
    WE HAVE A LIMITED OPERATING HISTORY THAT YOU MAY USE TO ASSESS OUR
PROSPECTS, AND WE HAVE NO OPERATING EXPERIENCE OR HISTORY RELATED TO THE PSA
SYSTEM, OUR CURRENT PRINCIPAL PRODUCT.

    We have a limited history of operations. Since our inception in
January 1990, we have been primarily engaged in research and development of
neurophysiological monitoring products. To date, we have sold only a small
number of units of our HydroDot NeuroMonitoring System and these sales have
generated only limited revenues. Furthermore, these products are not central to
our core business, which relates to the development and commercialization of the
PSA system. We have had limited revenues from commercial sales of the PSA
system. Accordingly, our historical results of operations may be of limited
utility in evaluating our future prospects. In addition, we do not have
experience in manufacturing, marketing or selling our products in quantities
necessary for achieving profitability. Whether we can successfully manage the
transition to a larger scale commercial enterprise will depend upon the
successful development of our manufacturing capability, the development of our
marketing and distribution network, obtaining U.S. FDA and foreign regulatory
approvals for future products and other potential products and strengthening our
its financial and management systems, procedures and controls. With respect to
our PSA system, we will need to develop in collaboration with third parties, a
sales and marketing effort targeted towards anesthesiologists, rather than
neurologists to whom we have previously marketed our products. Accordingly, due
to the significant change in our business associated with the PSA, our
historical financial information is of limited utility in evaluating our future
prospects, and we cannot assure that we will be able to achieve or sustain
revenue growth or profitability.

    WE FACE INTENSE COMPETITION AND MAY NOT BE ABLE TO COMPETE EFFECTIVELY,
WHICH COULD HARM THE MARKET FOR OUR PRODUCTS AND OUR OPERATING RESULTS

    We expect to face substantial competition from larger medical device
companies that have greater financial, technical, marketing and other resources
than we do. As our resources in these areas are extremely limited, any current
or potential competitor of ours is likely to have greater resources in these
areas. In particular, Aspect Medical markets an anesthesia monitoring system
that competes with the PSA. Aspect has received FDA clearance for this system
and is marketing it in the U.S. We may not be able to compete effectively with
Aspect or other potential competitors. Other companies may develop
anesthesia-monitoring systems that perform better than the PSA system and/or
sell for less. Competition in the sale of anesthesia-monitoring systems could
result in the inability of the PSA to achieve market acceptance, price
reductions, fewer orders, reduced gross margins and inability to establish or
erosion of market share. Any of these events would harm our business and
operating results and cause our stock price to decline.

    WE MAY NOT BE ABLE TO KEEP UP WITH NEW PRODUCTS OR ALTERNATIVE TECHNIQUES
DEVELOPED BY COMPETITORS, WHICH COULD IMPAIR OUR FUTURE GROWTH AND OUR ABILITY
TO COMPETE

    The medical industry in which we market our products is characterized by
rapid product development and technological advances. Our current or planned
products are at risk of obsolescence from:

    - new monitoring products, based on new or improved technologies,

    - new products or technologies used on patients or in the operating room
      during surgery in lieu of monitoring devices,

    - electrical or mechanical interference from new or existing products or
      technologies,

    - alternative techniques for evaluating the effects of anesthesia,

    - significant changes in the methods of delivering anesthesia, and

    - the development of new anesthetic agents.

                                       15
<PAGE>
    We may not be able to improve our products or develop new products or
technologies quickly enough to maintain a competitive position in our markets
and continue to grow our business.

    IF WE DO NOT SUCCESSFULLY DEVELOP AND INTRODUCE NEW OR ENHANCED PRODUCTS,WE
COULD LOSE REVENUE OPPORTUNITIES AND CUSTOMERS

    As the market for anesthesia monitoring equipment matures, we need to
develop and introduce new products for anesthesia monitoring or other
applications. We face at least the following risks:

    - we may not successfully adapt the PSA system to function properly in the
      intensive care unit, for procedural sedation, when used with anesthetics
      we have not tested or with patient populations we have not studied, such
      as infants and young children, and

    - our technology is complex, and we may not be able to develop it further
      for applications outside anesthesia monitoring.

    If we do not successfully adapt the PSA system for new products and
applications both within and outside the field of anesthesia monitoring, then we
could lose revenue opportunities and customers.

    WE HAVE EXPERIENCED SIGNIFICANT OPERATING LOSSES TO DATE, AND OUR FUTURE
OPERATING RESULTS COULD FLUCTUATE SIGNIFICANTLY

    We have experienced significant operating losses since inception and, as of
December 31, 2000 had an accumulated deficit of approximately $34.1 million. The
development and commercialization of the PSA system and other new products, if
any, will require substantial development, clinical, regulatory and other
expenditures. We expect our operating losses to continue for at least the next
year as we continue to expend substantial resources to expand marketing and
sales activities, scale up manufacturing capabilities, continue research and
development and support regulatory and reimbursement approvals. Results of
operations may fluctuate significantly from quarter to quarter and will depend
upon numerous factors, including actions relating to regulatory and
reimbursement matters, including particularly if the PSA system is able to
garner market acceptance. In addition, competition, availability of third party
reimbursement and other factors may affect our future results of operations.

    WE MAY NEED ADDITIONAL FUNDS, AND SUCH FUNDS MAY NOT BE AVAILABLE ON
COMMERCIALLY REASONABLE TERMS WHEN WE NEED THEM

    We plan to continue to expend substantial funds for obtaining regulatory
approvals, expansion of sales and marketing activities and research and
development. We may be required to expend greater than anticipated funds if
unforeseen difficulties arise in the course of obtaining necessary regulatory
approvals or in other aspects of our business. Although we believe that our
existing cash reserves will be sufficient to meet our operating and capital
requirements during the next 12 months, we may require additional financing
within this time frame. Our future liquidity and capital requirements will
depend upon numerous factors, including actions relating to regulatory matters,
and the extent to which the PSA system gains market acceptance. Any additional
financing, if required, may not be available on satisfactory terms or at all.
Future equity financings may result in dilution to the holders of our common
stock. Future debt financings may require us to pledge assets and to comply with
financial and operational covenants.

    OUR RELIANCE ON SOLE AND LIMITED SOURCE SUPPLIERS COULD HARM OUR ABILITY TO
MEET CUSTOMER REQUIREMENTS IN A TIMELY MANNER OR WITHIN BUDGET

    Some of the components that are necessary for the assembly of our PSA system
are currently provided to us by separate sole suppliers or a limited group of
suppliers. We purchase components through purchase orders rather than long-term
supply agreements and generally do not maintain large

                                       16
<PAGE>
volumes of inventory. We have experienced shortages and delays in obtaining some
of the components of our PSA systems in the past, and we may experience similar
delays or shortages in the future. The disruption or termination of the supply
of components could cause a significant increase in the costs of these
components, which could affect our profitability. A disruption or termination in
the supply of components could also result in our inability to meet demand for
our products, which could lead to customer dissatisfaction and damage our
reputation. Furthermore, if we are required to change the manufacturer of a key
component of the PSA system, we may be required to verify that the new
manufacturer maintains facilities and procedures that comply with quality
standards and with all applicable regulations and guidelines. The delays
associated with the verification of a new manufacturer could delay our ability
to manufacture PSA systems in a timely manner or within budget.

    OUR BUSINESS DEPENDS ON OUR INTELLECTUAL PROPERTY RIGHTS, AND MEASURES WE
TAKE TO PROTECT THOSE RIGHTS MAY NOT BE SUFFICIENT

    Our ability to compete effectively will depend in part on its ability to
develop and maintain proprietary aspects of its technology. We cannot assure you
that our issued patents or any patents that may be issued as a result of our
U.S. or international patent applications will offer any degree of protection.
We cannot assure you that any patents that may be issued to us or any of our
patent applications will not be challenged, invalidated or circumvented in the
future. In addition, we cannot assure you that competitors, many of which have
substantial resources and have made substantial investments in competing
technologies, will not seek to apply for and obtain patents that will prevent,
limit or interfere with the our ability to make, use or sell its products either
in the U.S. or in international markets.

    In addition to patents, we rely on trade secrets and proprietary know how,
which we seek to protect, in part, through appropriate confidentiality and
proprietary information agreements. These agreements generally provide that all
confidential information developed or made known to the individual by us during
the course of the individual's relationship with us, is to be kept confidential
and not disclosed to third parties, except in specific circumstances. The
agreements generally provide that all inventions conceived by the individual in
the course of rendering services to us are our exclusive property. However, some
of our agreements with consultants, who typically are employed on a full time
basis by academic institutions or hospitals, do not contain assignment of
invention provisions. We cannot assure you that proprietary information or
confidentiality agreements with employees, consultants and others will not be
breached, that we would have adequate remedies for any breach, or that our trade
secrets will not otherwise become known to or independently developed by
competitors.

    WE COULD BECOME INVOLVED IN LITIGATION RELATING INTELLECTUAL PROPERTY
RIGHTS, AND ANY SUCH LITIGATION, EVEN IF RESOLVED FAVORABLY TO US, WILL RESULT
IN SIGNIFICANT COST AND DIVERSION OF MANAGEMENT'S TIME AND EFFORT

    The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights, and companies in the
medical device industry have employed intellectual property litigation to gain a
competitive advantage. We cannot assure you that we will not in the future
become subject to patent infringement claims and litigation or interference
proceedings declared by the U.S. Patent and Trademark Office to determine the
priority of inventions. The defense and prosecution of intellectual property
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 us, to protect trade secrets or know how owned by us
or to determine the enforceability, scope and validity of the proprietary rights
of others.

    Any litigation or interference proceedings will result in substantial
expense to us and significant diversion of effort by our technical and
management personnel. An adverse determination in litigation or interference
proceedings to which we may become a party could subject us to significant
liabilities to

                                       17
<PAGE>
third parties or require us to seek licenses from third parties. Costs
associated with licensing or similar arrangements that may be involved in
statement of intellectual property disputes, including patent disputes, may be
substantial and could include ongoing royalties. Furthermore, there can be no
assurance that necessary licenses would be available to us on satisfactory terms
if at all. Adverse determinations in a judicial or administrative proceeding or
failure to obtain necessary licenses could prevent us from manufacturing,
marketing and selling our products, which would seriously harm our business and
operating results and would likely cause our stock price to decline.

    OUR BUSINESS ENTAILS THE RISK OF PRODUCT LIABILITY CLAIMS, AND THESE CLAIMS
COULD HARM OUR FINANCIAL CONDITION AND OUR ABILITY TO MAINTAIN INSURANCE
COVERAGE

    The manufacture and sale of our products expose us to product liability
claims and product recalls, including those which may arise from misuse or
malfunction of, or design flaws in, our products or use of our products with
components or systems not manufactured or sold by us. Product liability claims
or product recalls, regardless of their ultimate outcome, could require us to
spend significant time and money in litigation or to pay significant damages. We
currently maintain insurance; however, it might not cover the costs of any
product liability claims made against us. Furthermore, we may not be able to
obtain insurance in the future at satisfactory rates or in adequate amounts.

    IF WE DO NOT ATTRACT AND RETAIN SKILLED PERSONNEL, WE WILL NOT BE ABLE TO
EXPAND OUR BUSINESS.

    Our products are based on complex technology. Accordingly, we require
skilled personnel to develop, manufacture, sell and support our products. In
addition, as we move toward commercialization of our products, we will require
additional personnel skilled in the sales and marketing of medical device
products. Our future success will depend largely on our ability to continue to
hire, train, retain and motivate additional skilled personnel, particularly
sales representatives and clinical specialists who are responsible for customer
education and training and post-installation customer support. We continue to
experience difficulty in recruiting and retaining skilled personnel because the
pool of experienced persons is small and we compete for personnel with other
companies, many of which have greater resources than we do. Consequently, if we
are not able to attract and retain skilled personnel, we will not be able to
expand our business.

    FAILURE OF USERS OF THE PSA SYSTEM TO OBTAIN ADEQUATE REIMBURSEMENT FROM
THIRD PARTY PAYORS COULD LIMIT MARKET OF THE SYSTEM, WHICH COULD PREVENT US FROM
GROWING OUR BUSINESS

    Anesthesia providers are generally not reimbursed separately for patient
monitoring activities, including any such activities that would involve use of
the PSA system. Accordingly, potential users of the PSA system would have to
justify its use based on the clinical and cost benefits they believe use of the
system provides. For hospitals and outpatient surgical centers, when
reimbursement is based on charges or costs, patient monitoring with the PSA
system may reduce reimbursements for surgical procedures, because charges or
costs may decline as a result of monitoring with the PSA system. Failure by
hospitals and other users of the PSA system to obtain adequate reimbursement
from third-party payors, or any reduction in the reimbursement by third-party
payors to hospitals and other users as a result of using the PSA system could
limit market acceptance of the PSA system, which could prevent us from growing
our revenues and our business.

    OUR STOCK PRICE MAY FLUCTUATE, WHICH MAY CAUSE YOUR INVESTMENT IN OUR STOCK
TO SUFFER A DECLINE IN VALUE

    The market price of our common stock has fluctuated significantly in the
past and may fluctuate significantly in the future in response to factors which
are beyond our control. In addition, the stock market in general has recently
experienced extreme price and volume fluctuations. In addition, the market
prices of securities of technology and medical device companies have been
extremely volatile,

                                       18
<PAGE>
and have experienced fluctuations that often have been unrelated or
disproportionate to the operating performance of these companies. These broad
market fluctuations could result in extreme fluctuations in the price of our
common stock, which could cause a decline in the value of your shares.

    WE MAY INCUR SIGNIFICANT COSTS FROM SECURITIES CLASS LITIGATION DUE TO OUR
STOCK PRICE VOLATILITY

    Our stock price may fluctuate for many reasons, including timing of
regulatory actions relating to the PSA system, variations in our quarterly
operating results and changes in market valuations of medical device companies.
Recently, when the market price of a stock has been volatile as our stock price
may be, holders of that stock have occasionally instituted securities class
action litigation against the company that issued the stock. If any of our
stockholders were to bring a lawsuit of this type against us, even if the
lawsuit is without merit, we could incur substantial costs defending the
lawsuit. The lawsuit could also divert the time and attention of our management.

    ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND UNDER DELAWARE LAW
COULD PREVENT OR DELAY TRANSACTIONS THAT STOCKHOLDERS MAY FAVOR

    Provisions of our restated certificate of incorporation and amended and
restated by-laws may discourage, delay or prevent a merger or acquisition that
stockholders may consider favorable, including transactions in which you might
otherwise receive a premium for your shares. These provisions include:

    - authorizing the issuance of "blank check" preferred stock without any need
      for action by stockholders,

    - requiring supermajority stockholder voting to effect certain amendments to
      our restated certificate of incorporation and amended and restated
      by-laws,

    - eliminating the ability of stockholders to call special meetings of
      stockholders,

    - prohibiting stockholder action by written consent, and

    - establishing advance notice requirements for nominations for election to
      the board of directors or for proposing matters that can be acted on by
      stockholders at stockholder meetings.

ITEM 2. PROPERTIES

    The Company leases an approximately 15,600 square foot facility in North
Billerica, Massachusetts. This facility includes manufacturing, laboratory and
office space. The facility is leased through November 14, 2003. The Company
believes these facilities will be adequate to meet its current and reasonably
anticipated future requirements.

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.

                                       19
<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 under the
symbol PHYX. During all of 1999 and through June 11, 2000, the Company's Common
Stock was traded on the over-the-counter bulletin board. The number of record
holders of the Company's Common Stock at January 31, 2001 was 81. 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 2,000,000 shares of
Common Stock in April 1996. On February 29, 2000, the Company closed a private
placement of 2,080,340 shares of Common Stock. 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>
March 31, 2001............................................   16.375      4.750
</TABLE>

<TABLE>
<CAPTION>
                      QUARTER ENDED                           HIGH       LOW
                      -------------                         --------   --------
<S>                                                         <C>        <C>
March 31, 2000............................................  $23.938    $ 3.875
June 30, 2000.............................................  $24.000    $ 9.500
September 30, 2000........................................  $28.000    $20.250
December 31, 2000.........................................  $25.500    $12.625
</TABLE>

<TABLE>
<CAPTION>
                      QUARTER ENDED                           HIGH       LOW
                      -------------                         --------   --------
<S>                                                         <C>        <C>
March 31, 1999............................................  $ 1.313    $ 0.625
June 30, 1999.............................................  $ 1.375    $ 0.500
September 30, 1999........................................  $ 1.188    $ 0.500
December 31, 1999.........................................  $ 3.688    $ 0.469
</TABLE>

                                       20
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                    YEAR ENDED DECEMBER 31,
                            ------------------------------------------------------------------------
                                1996           1997           1998           1999           2000
                            ------------   ------------   ------------   ------------   ------------
<S>                         <C>            <C>            <C>            <C>            <C>
STATEMENTS OF OPERATIONS
DATA:
Revenues..................  $    413,698   $  1,006,381   $    596,535   $    362,848   $  2,466,595
Costs and expenses:
  Cost of products sold...     1,189,510      1,925,316      2,151,889        796,346      2,957,652
  Research and
    development...........     1,189,336      2,500,601      4,108,451      2,153,956      2,775,324
    Selling, general and
      administrative......     1,652,596      2,739,423      1,935,941        985,559      2,595,554
Equipment write-off.......            --             --        337,648             --             --
                            ------------   ------------   ------------   ------------   ------------
                               4,031,442      7,165,340      8,533,929      3,935,861      8,328,530
                            ------------   ------------   ------------   ------------   ------------
Operating loss............    (3,617,744)    (6,158,959)    (7,937,394)    (3,573,013)    (5,861,935)
Interest income...........       683,461        788,878        406,677        135,656      1,139,802
Interest expense..........       (90,090)       (23,016)            --             --             --
                            ------------   ------------   ------------   ------------   ------------
Net loss..................  $ (3,024,373)  $ (5,393,097)  $ (7,530,717)  $ (3,437,357)  $ (4,722,133)
                            ============   ============   ============   ============   ============
Basic and diluted net loss
  per common share........  $       (.80)  $       (.96)  $      (1.33)  $       (.60)  $       (.60)
                            ============   ============   ============   ============   ============
Shares used in computing
  basic and diluted net
  loss per common share...     3,766,494      5,615,360      5,678,644      5,768,094      7,812,544
                            ============   ============   ============   ============   ============
</TABLE>

<TABLE>
<CAPTION>
                                                          DECEMBER 31,
                            ------------------------------------------------------------------------
                                1996           1997           1998           1999           2000
                            ------------   ------------   ------------   ------------   ------------
<S>                         <C>            <C>            <C>            <C>            <C>
Cash, cash equivalents and
  short-term
  investments.............  $ 18,146,248   $ 11,588,286   $  4,589,585   $  1,365,002   $ 21,850,127
Working capital...........    16,990,259     11,555,124      4,454,151      1,163,810     22,426,459
Total assets..............    19,151,982     13,376,170      5,201,374      1,853,759     25,096,179
Accumulated deficit.......   (13,001,087)   (18,394,184)   (25,924,901)   (29,362,258)   (34,084,391)
Total stockholders'
  equity..................    17,575,615     12,310,052      4,851,264      1,463,525     22,983,557
</TABLE>

                                       21
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

    The following discussion of the financial condition and results of
operations of Physiometrix, Inc. should be read in conjunction with the
Financial Statements and related Notes thereto included elsewhere in this
Form 10-K. This Report on Form 10-K contains certain 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. Actual events or results may differ
materially from those projected in the forward-looking statements as a result of
the factors described in the Risk Factors section of Item 1 of this report on
Form 10-K and in the documents incorporated herein by reference. Such
forward-looking statements include, but are not limited to, statements
concerning (i) business strategy; (ii) products under development; (iii) other
products; (iv) marketing and distribution; (v) research and development;
(vi) manufacturing; (vii) competition; (viii) government regulation especially
as it relates to FDA approvals; (ix) third-party reimbursement, (x) operating
and capital requirements and (xi) clinical trials.

OVERVIEW

    Since its inception in January 1990, Physiometrix has been engaged primarily
in the design and development and more recently the manufacture and sale of
noninvasive, advanced medical products. The Company's products which incorporate
proprietary materials and electronics technology are used in neurological
monitoring applications. The Company's initial products are its e-Net headpiece
and disposable HydroDot biosensors and custom electronics, which are packaged as
the HydroDot NeuroMonitoring System. The Company also has two additional
neurological monitoring products, the Equinox EEG System which was commercially
introduced in February 1997 and discontinued in June 1998 and the Patient State
Analyzer (PSA) which received FDA 510(k) approval on June 30, 2000. The Company
began shipments of the PSA in the third quarter of 2000 to Baxter Healthcare
Corporation, our exclusive U.S. distribution partner.

    Physiometrix has a limited history of operations and has experienced
significant operating losses since its inception. As of December 31, 2000, the
Company had an accumulated deficit of approximately $34.1 million. The Patient
State Analyzer and the HydroDot NeuroMonitoring System are currently the
Company's principal commercial products. The Company anticipates that its
operating results will fluctuate on a quarterly basis for the foreseeable future
due to several factors, including actions relating to regulatory and
reimbursement matters, the extent to which the Company's products gain market
acceptance, introduction of alternative means for neurophysiological monitoring
and competition. Results of operations will also be affected by the progress of
clinical trials and in-house development activities, and the extent to which the
Company establishes distribution channels for its products domestically and
internationally. For the year ended December 31, 2000, substantially all of the
Company's sales were to Baxter Healthcare Corporation. There can be no assurance
the Company will achieve significant commercial revenues or profitability.

RESULTS OF OPERATIONS

  YEARS ENDED DECEMBER 31, 2000 AND 1999

    REVENUES

    Revenues increased 580% to $2,467,000 for the year ended December 31, 2000
from $363,000 for the year ended December 31, 1999. This increase is primarily
due to the Company's distribution agreement with Baxter Healthcare Corporation
entered into in 2000, which resulted in sales of 460 units of the Patient State
Analyzer, which began during the third quarter of 2000. Sales of the Company's
HydroDot NeuroMonitoring products were relatively unchanged compared with the

                                       22
<PAGE>
previous year. The Company continues to explore options to either license the
HydroDot NeuroMonitoring technology to another company or transition out of the
business.

    COST OF PRODUCTS SOLD

    Cost of goods sold increased 271% to $2,958,000 for the year ended
December 31, 2000 from $796,000 for the year ended December 31, 1999. This
increase was primarily due to product costs of the Patient State Analyzer, which
began during the third quarter of 2000, and additional headcount and expenses in
the manufacturing group.

    GROSS MARGIN DEFICIT

    The gross margin deficit results from costs of the product and the level of
headcount and overhead required in the Company's manufacturing group. The gross
margin produced by our current products at the current sales volume is not
sufficient to cover these expenses. We began shipments of the Patient State
Analyzer in September 2000 and will not achieve positive gross margin until at
least fiscal year 2001. The Patient State Analyzer will be the main product that
provides gross margin going forward.

    RESEARCH AND DEVELOPMENT EXPENSES

    Research and development expenses consisting principally of headcount
related expenses, consulting fees and clinical trial expenses increased 29% to
$2,775,000 for the year ended December 31, 2000 from $2,154,000 for the year
ended December 31, 1999. This increase is primarily the result of outside
consulting related to the analysis of the data from the prospective study of the
Patient State Analyzer, stock option compensation expense and continued
development of future product offerings related to the Patient State Analyzer.
The Company filed a 510(k) submission to the FDA on March 31, 2000 and received
510(k) approval for the Patient State Analyzer on June 30, 2000.

    SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

    Selling, general and administrative expenses increased 163% to $2,596,000
for the year ended December 31, 2000 from $986,000 for the year ended
December 31, 1999. This increase is due to expenses related to relisting on the
Nasdaq National Market, headcount related expenses, costs associated with
investor relations, professional fees and marketing expenses incurred related to
the commercialization of the Patient State Analyzer.

    INTEREST INCOME AND EXPENSE:

    Interest income increased $1,004,000 to $1,140,000 for the year ended
December 31, 2000 from $136,000 for the year ended December 31, 1999. This was
due to higher average cash balances available for investment in 2000 as a result
of a private placement of the Company's common stock during the first quarter of
2000 which raised $21.4 million in net proceeds and warrant exercises which
raised $4.4 million during the year.

    INCOME TAXES:

    The Company has experienced operating losses since inception 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
("SFAS 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, 2000 and 1999, have been established in each period to reflect
these uncertainties.

                                       23
<PAGE>
    At December 31, 2000, the Company had federal net operating loss
carry-forwards of $23,000,000 and research and development tax credit
carry-forwards of $607,000, that will expire in varying amounts through 2020, if
not utilized. Utilization of net operating loss and tax credit carry-forwards
will be subject to substantial annual limitations provided by the Internal
Revenue Code of 1986, as amended. The annual limitation may result in the
expiration of net operating loss and tax credit carry-forwards before full
utilization.

  YEARS ENDED DECEMBER 31, 1999 AND 1998

    REVENUES

    Revenues decreased 39% to $363,000 for the year ended December 31, 1999 from
$597,000 for the year ended December 31, 1998. This decrease is primarily the
result of a lower level of sales of the Company's HydroDot NeuroMonitoring
System and the Equinox EEG System. The Equinox EEG System was discontinued in
the second quarter of 1998 due to slow demand in the market and increased
competition.

    COST OF PRODUCTS SOLD

    Cost of products sold decreased 63% to $796,000 for the year ended
December 31, 1999 from $2,152,000 for the year ended December 31, 1998. This
decrease was primarily due to headcount reductions due to discontinuance of the
Company's Equinox product line and lower sales volume of Equinox and HydroDot
NeuroMonitoring products. The Company intends to either license the HydroDot
NeuroMonitoring System to another company or transition out of the business.

    GROSS MARGIN DEFICIT

    The gross margin deficit results from fixed headcount and overhead in the
quality assurance and manufacturing groups. The gross margin produced by the
HydroDot NeuroMonitoring business does not provide enough sales volume to cover
these fixed expenses. Gross margin percentage related to the HydroDot
NueroMonitoring business in 1999 was slightly higher compared with gross margin
produced in 1998. Pricing of the product did not change in 1999 but material
costs of the product were lower than 1998. In 1998, the Company wrote down the
HydroDot NueroMonitoring inventory to reflect the net realizable value. The
Company intends to either license the technology to another company or
transition out of the business.

    RESEARCH AND DEVELOPMENT EXPENSES

    Research and development expenses consisting principally of salaries,
consulting fees, and clinical trial expenses decreased 48% to $2,154,000 for the
year ended December 31, 1999 from $4,108,000 for the year ended December 31,
1998. This decrease is primarily the result of a lower headcount and outside
consulting related to ongoing development for the Patient State Analyzer. The
final study of the PSA was substantially completed on January 5, 2000 and the
Company will incur approximately $350,000 to conclude the analysis of the study
in early 2000.

    SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

    Selling, general and administrative expenses decreased 49% to $986,000 for
the year ended December 31, 1999 from $1,936,000 for the year ended
December 31, 1998. This decrease is primarily due to discontinuation of the
Equinox product line which resulted in a reduction of the Company's outside
sales force and related expenses and continued cost controls.

                                       24
<PAGE>
    WRITEDOWN OF ASSETS

    The Company recorded a $338,000 charge in the year ended December 31, 1998
related to long lived assets no longer utilized by the Company with the
discontinuance of the Equinox product line and the net realizable value of the
HydroDot NueroMonitoring equipment. This resulted in lower depreciation expense
in 1999 and forward.

    INTEREST INCOME AND EXPENSE:

    Interest income decreased $271,000 to $136,000 for the year ended
December 31, 1999 from $407,000 for the year ended December 31, 1998 due to
lower average cash balances available for investment in 1999 versus 1998.

    INCOME TAXES:

    The Company has experienced operating losses since inception 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
("SFAS 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, 1999 and 1998, have been established in each period to reflect
these uncertainties.

    At December 31, 1999, the Company had federal net operating loss
carry-forwards of $21,300,000 and R&D tax credit carry-forwards of $469,000,
that will expire in varying amounts through 2019, if not utilized. Utilization
of net operating loss and tax credit carry-forwards will be subject to
substantial annual limitations provided by the Internal Revenue Code of 1986, as
amended. The annual limitation may result in the expiration of net operating
loss and tax credit carry-forwards before full utilization.

SELECTED QUARTERLY FINANCIAL DATA:
<TABLE>
<CAPTION>
                                                        QUARTER ENDED
                       --------------------------------------------------------------------------------
                       MARCH 31,   JUNE 30,    SEPTEMBER 30,   DECEMBER 31,    MARCH 31,     JUNE 30,
                         1999        1999          1999            1999          2000          2000
                       ---------   ---------   -------------   ------------   -----------   -----------
<S>                    <C>         <C>         <C>             <C>            <C>           <C>
Revenues.............  $118,379    $  82,230     $  84,231     $    78,008    $    87,243   $    91,662
Cost of products
  sold...............   213,071      192,172       178,851         212,252        224,631       252,476
Operating loss.......  (877,709)    (826,700)     (750,120)     (1,118,484)    (1,465,813)   (1,094,579)
Net loss.............  (832,855)    (790,075)     (719,237)     (1,095,190)    (1,349,275)     (780,122)
Basic and diluted net
  loss per share.....    $(0.15)      $(0.14)       $(0.12)         $(0.19)        $(0.21)       $(0.10)

<CAPTION>
                              QUARTER ENDED
                       ----------------------------
                       SEPTEMBER 30,   DECEMBER 31,
                           2000            2000
                       -------------   ------------
<S>                    <C>             <C>
Revenues.............   $   907,120    $ 1,380,570
Cost of products
  sold...............     1,011,310      1,469,235
Operating loss.......    (1,575,876)    (1,725,667)
Net loss.............    (1,234,388)    (1,358,348)
Basic and diluted net
  loss per share.....        $(0.15)        $(0.16)
</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

    At December 31, 2000, the Company's cash, cash equivalents and short-term
investments were $21,850,000 as compared to $1,365,000 at December 31, 1999.

    The Company's operating activities used cash of $5,129,000 in the year ended
December 31, 2000 as compared to $3,268,000 in the year ended December 31, 1999.
The $1,861,000 increase in net cash used in 2000 compared to 1999 was primarily
the result of the increased net loss of the Company, increased accounts
receivable due to shipments of the Patient State Analyzer and increased
inventory of the Patient State Analyzer. These increases were partially offset
by an increase in accounts payable and accrued expenses as well as the effect of
non-cash stock compensation expense.

    Net cash used by investing activities in the year ended December 31, 2000
was $18,807,000, as compared with $6,000 used in the year ended December 31,
1999. The increase was due to the net

                                       25
<PAGE>
purchases of short term investments by the Company as a result of the
$21.4 million in net proceeds raised in the private placement of the Company's
common stock during the first quarter of 2000 and warrant exercises, which
raised $4.4 million during the year.

    The Company's financing activities provided cash of $25,970,000 in the year
ended December 31, 2000 as compared to $50,000 of cash provided in the year
ended December 31, 1999. During the first quarter of 2000, the Company completed
a private placement of common stock that raised $21.4 million in net proceeds.
As part of the private placement, the Company issued warrants to purchase
624,102 shares of common stock at $14.04 per share. A total of 345,858 of
warrants were exercised for $4.4 million in proceeds during the year.

    The Company's principal source of liquidity at December 31, 2000 consists of
cash, cash equivalents and short-term investments in the amount of
$21.9 million. On February 29, 2000, the Company issued common stock totaling
$21.4 million in net proceeds to the Company. On June 12, 2000, the Company's
stock was re-listed on the Nasdaq National Market. The Company believes it has
the necessary cash and cash equivalents on hand to fund its operations for more
than a year from March 31, 2001.

    The Company believes that the success of the Patient State Analyzer is the
most critical component to the Company's ability to become profitable. The
Company completed its pivotal study on January 5, 2000. A 510(k) was submitted
to the FDA on March 31, 2000 and the Company received FDA 510(k) approval on
June 30, 2000. The Company signed a distribution agreement with Baxter
Healthcare Corporation on May 31, 2000 for exclusive distribution rights in the
United States. The Company shipped the first units of the Patient State Analyzer
during the third quarter of 2000. The Company believes that it has one
commercial competitor for the PSA. The Company believes it will be able to
successfully compete against them in the marketplace, although it has no
assurance that it will be able to do so.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    The Report of Independent Auditors, Financial Statements and Notes to
Financial Statements begin on page F-1.

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

    Not applicable.

                                       26
<PAGE>
                                    PART III

    Certain information required by Part III is omitted from this Report on
Form 10-K in that the Registrant will file a definitive proxy statement within
120 days after the end of its fiscal year pursuant to Regulation 14A with
respect to the 2001 Annual Meeting of Stockholders (the "Proxy Statement") to be
held June 1, 2001 and certain information included therein is incorporated
herein by reference.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

    The information required by this item relating to directors is incorporated
by reference to the information under the caption "PROPOSAL NO. 1 ELECTION OF
DIRECTORS" in the Proxy Statement.

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

<TABLE>
<CAPTION>
NAME                               AGE                        POSITION
----                             --------                     --------
<S>                              <C>        <C>
John A. Williams...............     53      President, Chief Executive Officer and
                                            Director
Daniel W. Muehl................     38      Vice President of Finance & Administration
                                            and Chief Financial Officer
</TABLE>

    JOHN A. WILLIAMS joined the Company in December 1993 and has served as a
member of the Board of Directors and as the Company's President and Chief
Executive Officer. Prior to that time, Mr. Williams served as President of Bruel
and Kjaer Medical, a medical device company, from 1990 to 1993. Mr. Williams was
Vice President of Sales and Marketing at Medtronic/AMI, a medical device
company, from 1988 to 1990 and Vice President of Sales and Marketing, Worldwide
at Merrimack Laboratories from 1983 to 1987.

    DANIEL W. MUEHL joined the Company in February 1998 as Vice President of
Finance & Administration and Chief Financial Officer. Previously, Mr. Muehl was
Chief Operating Officer and Chief Financial Officer at Number Nine Visual
Technology from 1995 to 1998 and served in various finance positions at
Powersoft Corporation and Medical Care America from 1991 to 1995. Mr. Muehl is a
Certified Public Accountant and served his public accountancy with Ernst & Young
LLP and Laventhol and Horwath from 1985 to 1991.

ITEM 11. EXECUTIVE COMPENSATION

    The information required by this item is incorporated by reference to the
information under the caption "Executive Compensation" in the Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

    The information required by this item is incorporated by reference to the
information under the caption "Record Date and Stock Ownership" in the Proxy
Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    The information required by this item is incorporated by reference to the
information under the caption "Certain Transactions" in the Proxy Statement.

                                       27
<PAGE>
                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

    (A) 1. FINANCIAL STATEMENTS

       The following Financial Statements of Physiometrix, Inc. and Report of
       Ernst & Young LLP, Independent Auditors are in this Form 10-K.

<TABLE>
<CAPTION>
                                                                            PAGE
                                                                          --------
            <S>                                                           <C>
            Report of Independent Auditors..............................    F-1
            Balance Sheets at December 31, 1999 and 2000................    F-2
            Statements of Operations for the Years Ended December 31,
              1998, 1999 and 2000.......................................    F-3
            Statements of Cash Flows for the Years Ended December 31,
              1998, 1999 and 2000.......................................    F-4
            Statements of Stockholders' Equity for the Years Ended
              December 31, 1998, 1999 and 2000..........................    F-5
            Notes to Financial Statements...............................    F-6
</TABLE>

       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 year ended December 31, 2000.

    (C) EXHIBITS

<TABLE>
<CAPTION>
       EXHIBIT
         NO.                                    DESCRIPTION
---------------------                           -----------
<C>                     <S>
       3.1(1)           Restated Certificate of Incorporation of the Company.
       3.2(1)           Bylaws of the Company, as amended.
       4.1(1)           Specimen Common Stock Certificate.
       4.2(1)           Form of Warrant Agreement between the Company and Cruttenden
                        Roth Incorporated, with form of Warrant attached
      10.1(1)           Form of Indemnification Agreement between the Company and
                        each of its directors and officers.
      10.2(1)           1991 Incentive Stock Plan and Form of Stock Option Agreement
                        thereunder.
      10.3(2)           1996 Director Option Plan.
      10.4(2)           1996 Employee Stock Purchase Plan and forms of agreements
                        thereunder.
      10.5(1)           Lease dated October 11, 1994 between the Company and Yvon
                        Cormier, Trustee of YCEE Investment Trust, for a facility
                        located at Five Billerica Park, 101 Billerica Avenue, North
                        Billerica, Massachusetts 01862.
      10.6(1)           Restated Shareholder Rights Agreement dated June 24, 1994
                        between the Company and certain holders of the Company's
                        securities.
</TABLE>

                                       28
<PAGE>

<TABLE>
<CAPTION>
       EXHIBIT
         NO.                                    DESCRIPTION
---------------------                           -----------
<C>                     <S>
      10.7(3)           Stock Purchase Agreement dated February 29, 2000 between the
                        Registrant and the purchasers of common stock of the
                        Registrant named therein, including form of Stock Purchase
                        Warrant and other exhibits thereto.
      10.8(4)           Strategic Alliance and Exclusive Distribution Agreement
                        dated May 31, 2000 by and between the Company and Baxter
                        Healthcare Corporation.
      10.9              Amendment A to Strategic Alliance and Exclusive Distribution
                        Agreement dated May 31, 2000.
      10.10             Amendment B to Strategic Alliance and Exclusive Distribution
                        Agreement dated May 31, 2000.
      10.11             2000 Supplemental Stock Plan.
      23.1              Consent of Ernst & Young LLP, Independent Auditors.
      24.1              Power of Attorney. Reference is made to page F-12
      27.1              Financial Data Schedule-2000 Year-End
</TABLE>

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

(1) Filed as an Exhibit to the Company's Registration Statement on Form S-1
    (File No. 33302138) and incorporated herein by reference.

(2) Filed as an Exhibit to the Company's Registration Statement on Form S-8
    (File No. 33316525) and incorporated herein by reference.

(3) Filed as an Exhibit to the Company's Registration Statement on Form S-3
    (File No. 33333660) and incorporated herein by reference.

(4) Filed as an Exhibit to the Company's Form 10-Q, Q3 2000 and incorporated
    herein by reference.

                                       29
<PAGE>
                         REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Physiometrix, Inc.

    We have audited the accompanying balance sheets of Physiometrix, Inc. as of
December 31, 1999 and 2000, and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2000. 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

    In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Physiometrix, Inc. at
December 31, 1999 and 2000, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2000, in conformity
with accounting principles generally accepted in the United States.

                                          /s/ ERNST & YOUNG LLP

Boston, Massachusetts
January 31, 2001

                                      F-1
<PAGE>
                               PHYSIOMETRIX, INC.
                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                     DECEMBER 31,
                                                              ---------------------------
                                                                  1999           2000
                                                              ------------   ------------
<S>                                                           <C>            <C>
ASSETS
Current assets:
  Cash and cash equivalents.................................  $  1,365,002   $  3,399,310
  Short-term investments....................................            --     18,450,817
  Accounts receivable, net of allowance of $25,000 in 1999
    and
    $5,074 in 2000 for doubtful accounts....................        41,209      1,342,076
  Inventory.................................................        31,916      1,010,466
  Prepaid expenses..........................................       115,917        336,412
                                                              ------------   ------------
    Total current assets....................................     1,554,044     24,539,081
Equipment, net..............................................       209,397        460,276
Due from officer............................................        84,000         84,000
Other assets................................................         6,318         12,822
                                                              ------------   ------------
  Total assets..............................................  $  1,853,759   $ 25,096,179
                                                              ============   ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................  $     62,305   $  1,072,527
  Accrued expenses..........................................       327,929      1,040,095
                                                              ------------   ------------
    Total current liabilities...............................       390,234      2,112,622

Commitments and contingencies

Stockholders' equity
  Preferred stock: $.001 par value; 10,000,000 shares
    authorized; none issued.................................            --             --
  Common stock: $.001 par value, 50,000,000 shares
    authorized; 5,818,383 shares in 1999 and 8,416,182
    shares in 2000 issued and outstanding...................         5,818          8,416
  Additional paid-in capital................................    30,819,965     57,448,021
  Deferred compensation.....................................            --       (388,489)
  Accumulated deficit.......................................   (29,362,258)   (34,084,391)
                                                              ------------   ------------
Total stockholders' equity..................................     1,463,525     22,983,557
                                                              ------------   ------------
Total liabilities and stockholders' equity..................  $  1,853,759   $ 25,096,179
                                                              ============   ============
</TABLE>

                            See accompanying notes.

                                      F-2
<PAGE>
                               PHYSIOMETRIX, INC.
                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                         ---------------------------------------
                                                            1998          1999          2000
                                                         -----------   -----------   -----------
<S>                                                      <C>           <C>           <C>
Revenues...............................................  $   596,535   $   362,848   $ 2,466,595
Costs and expenses:
  Cost of products sold................................    2,151,889       796,346     2,957,652
  Research and development.............................    4,108,451     2,153,956     2,775,324
  Selling, general and administrative..................    1,935,941       985,559     2,595,554
  Equipment write-offs.................................      337,648            --            --
                                                         -----------   -----------   -----------
                                                           8,533,929     3,935,861     8,328,530
                                                         -----------   -----------   -----------
Operating loss.........................................   (7,937,394)   (3,573,013)   (5,861,935)
Interest income........................................      406,677       135,656     1,139,802
                                                         -----------   -----------   -----------
Net loss...............................................  $(7,530,717)  $(3,437,357)  $(4,722,133)
                                                         ===========   ===========   ===========
Basic and diluted net loss per common share............  $     (1.33)  $      (.60)  $      (.60)
                                                         ===========   ===========   ===========
Shares used in computing basic and diluted net loss per
  common share.........................................    5,678,644     5,768,094     7,812,544
                                                         ===========   ===========   ===========
</TABLE>

                            See accompanying notes.

                                      F-3
<PAGE>
                               PHYSIOMETRIX, INC.
                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
                                                       -----------------------------------------
                                                           1998           1999          2000
                                                       -------------   -----------   -----------
<S>                                                    <C>             <C>           <C>
OPERATING ACTIVITIES:
Net loss.............................................  $  (7,530,717)  $(3,437,357)  $(4,722,133)
Adjustments to reconcile net loss to net cash used in
  operating activities:
  Depreciation and amortization......................        166,824       103,262       104,809
  Stock-based compensation in connection with
    issuance of stock options to consultants.........         21,300            --       158,859
  Issuance of common stock for services..............             --            --       113,553
  Equipment write-offs...............................        337,648            --            --
  Changes in operating assets and liabilities:
    Accounts receivable..............................        223,794        46,191    (1,300,867)
    Inventories......................................        640,131       (31,916)     (978,550)
    Prepaid expenses and other assets................        (43,445)       11,359      (226,999)
    Accounts payable and accrued expenses............       (716,008)       40,124     1,722,388
                                                       -------------   -----------   -----------
Net cash used in operating activities................     (6,900,473)   (3,268,337)   (5,128,940)

INVESTING ACTIVITIES:
Purchase of equipment................................       (148,857)       (5,864)     (355,688)
Purchase of short-term investments...................   (103,269,408)           --   (57,587,450)
Proceeds from maturity of short-term investments.....    105,753,547            --    39,136,633
                                                       -------------   -----------   -----------
Net cash provided by (used in) investing
  activities.........................................      2,335,282        (5,864)  (18,806,505)

FINANCING ACTIVITIES:
Proceeds from issuance of common stock and
  warrants...........................................         50,629        49,618    25,969,753
                                                       -------------   -----------   -----------
Net cash provided by financing activities............         50,629        49,618    25,969,753
                                                       -------------   -----------   -----------
Net increase (decrease) in cash and cash
  equivalents........................................     (4,514,562)   (3,224,583)    2,034,308
Cash and cash equivalents at beginning of year.......      9,104,147     4,589,585     1,365,002
                                                       -------------   -----------   -----------
Cash and cash equivalents at end of year.............  $   4,589,585   $ 1,365,002   $ 3,399,310
                                                       =============   ===========   ===========
</TABLE>

                            See accompanying notes.

                                      F-4
<PAGE>
                               PHYSIOMETRIX, INC.
                       STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                    COMMON STOCK                                                        TOTAL
                                                --------------------     DEFERRED        PAID-IN     ACCUMULATED    STOCKHOLDERS'
                                                 SHARES      AMOUNT    COMPENSATION      CAPITAL       DEFICIT         EQUITY
                                                ---------   --------   -------------   -----------   ------------   -------------
<S>                                             <C>         <C>        <C>             <C>           <C>            <C>
Balance at December 31, 1997..................  5,640,825    $5,641             --     $30,698,595   $(18,394,184)   $12,310,052
  Issuance of common stock upon exercise of
    options...................................     29,871        30                         18,525                        18,555
  Issuance of common stock under Employee
    Stock Purchase Plan.......................     36,670        36                         32,038                        32,074
  Stock compensation amortization.............                                              21,300                        21,300
  Net loss....................................                                                        (7,530,717)     (7,530,717)
                                                ---------    ------      ---------     -----------   ------------    -----------
Balance at December 31, 1998..................  5,707,366     5,707             --      30,770,458   (25,924,901)      4,851,264
  Issuance of common stock upon exercise of
    options...................................     22,333        22                          2,477                         2,499
  Issuance of common stock under Employee
    Stock Purchase Plan.......................     88,684        89                         47,030                        47,119
  Net loss....................................                                                        (3,437,357)     (3,437,357)
                                                ---------    ------      ---------     -----------   ------------    -----------
Balance at December 31, 1999..................  5,818,383     5,818             --      30,819,965   (29,362,258)      1,463,525
  Issuance of common stock pursuant to private
    offering, net of issuance costs of
    $1,074,423................................  2,080,340     2,081                     21,390,808                    21,392,889
  Issuance of common stock....................    172,101       172                        280,903                       281,075
  Issuance of common upon exercise of
    warrants, net of issuance costs of
    $133,375..................................    345,358       345                      4,408,997                     4,409,342
  Issuance of options to purchase common stock
    to consultants............................                            (547,348)        547,348                            --
  Stock compensation amortization.............                             158,859                                       158,859
  Net loss....................................                                                        (4,722,133)     (4,722,133)
                                                ---------    ------      ---------     -----------   ------------    -----------
Balance at December 31, 2000..................  8,416,182    $8,416      $(388,489)    $57,448,021   $(34,084,391)   $22,983,557
                                                =========    ======      =========     ===========   ============    ===========
</TABLE>

                            See accompanying notes.

                                      F-5
<PAGE>
                               PHYSIOMETRIX, INC.
                         NOTES TO FINANCIAL STATEMENTS

1.  COMPANY DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

THE COMPANY

    Physiometrix, Inc. (the "Company") is engaged in the development,
manufacturing and marketing of medical devices for use in neurodiagnostic
monitoring in health care. In 2000, the Company received FDA 510-k approval to
sell its Patient State Analyzer product in the United States and entered into a
distribution agreement with Baxter Healthcare Corporation, the Company's primary
customer. During 1998, the Company decided to discontinue the sale of products
ancillary to the Company's core technology to devote all of its resources to the
introduction of the Patient State Analyzer (PSA).

USE OF 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 reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

    Cash equivalents consist principally of United States Treasury bills and
certificates of deposit with maturities of three months or less at the date of
purchase. In addition, the Company has certain investments in commercial paper,
U.S. government agencies and debt securities, which do not meet the definition
of cash equivalents and have been classified as short-term investments, and
mature within one year.

CONCENTRATION OF CREDIT RISK

    One customer accounted for 98% and 44% of accounts receivable at
December 31, 2000 and 1999, respectively, and 88% of 2000 revenues and 9% of
1999 revenues. The Company has specifically evaluated the creditworthiness of
its major customer and otherwise generally reviews the creditworthiness of its
other customers prior to shipment and establishes its allowance for doubtful
accounts based on certain factors including ongoing creditworthiness. The
Company does not require collateral for its accounts receivable.

EQUIPMENT

    Equipment is recorded at cost and is depreciated using the straight-line
method over its estimated useful life of three to five years.

REVENUE RECOGNITION

    The Company recognizes revenue for product sales upon shipment, net of
allowances for discounts and estimated returns which are also provided for at
the time of shipment.

STOCK-BASED COMPENSATION

    The Company has elected to follow Accounting Principles Board Opinion
No. 25 ("APB 25"), "Accounting for Stock Issued to Employees" and related
interpretations in accounting for its stock-based compensation plans, rather
than the alternative fair value accounting method provided for under Statement
of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for
Stock-Based

                                      F-6
<PAGE>
Compensation," as this alternative requires the use of option valuation models
that were not developed for use in valuing employee stock options. Under APB 25,
where the exercise price of options granted under these plans equals the market
price of the underlying stock on the date of grant, no compensation expense is
required.

NET LOSS PER COMMON SHARE

    Basic net loss per share represents net loss divided by weighted average
shares outstanding. Diluted earnings per share are not presented as the Company
has generated net losses in 1998, 1999 and 2000.

ACCOUNTING PRONOUNCEMENTS

    In June 1998, SFAS 133, "Accounting For Derivative Instruments and Hedging
Activities" was issued which is effective for fiscal year 2001. The Company
believes that the adoption of this statement is not expected to have a material
impact on the Company's financial statements.

    The Company adopted the Securities and Exchange Commission's Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101) in the fourth quarter of 2000 and its adoption did not have any impact on
the Company's financial statements.

    In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation (the Interpretation). This
Interpretation clarifies how companies should apply APB 25. The Interpretation
is applied prospectively to new awards, modifications to outstanding awards, and
changes in employee status on or after July 1, 2000, except as follows: the
definition of an employee applies to awards granted after December 15, 1998; the
Interpretation applies to modifications that reduce the exercise price of an
award after December 15, 1998; and the Interpretation applies to modifications
that add a reload feature to an award made after January 12, 2000. There have
been no awards granted by the Company, which resulted in an adjustment as a
result of the adoption of this Interpretation.

2.  INVENTORIES

    Inventory is recorded at the lower of cost (first-in, first-out) or market,
and consists of the following at December 31:

<TABLE>
<CAPTION>
                                                           1999        2000
                                                         --------   ----------
<S>                                                      <C>        <C>
Purchased components...................................  $28,743    $  986,128
Work in process........................................       --        17,190
Finished units.........................................    3,173         7,148
                                                         -------    ----------
                                                         $31,916    $1,010,466
                                                         =======    ==========
</TABLE>

3.  EQUIPMENT

    Equipment consists of the following at December 31:

<TABLE>
<CAPTION>
                                                          1999        2000
                                                        ---------   ---------
<S>                                                     <C>         <C>
Computer equipment....................................  $ 345,631   $ 555,549
Machinery and equipment...............................    245,850     391,620
                                                        ---------   ---------
                                                          591,481     947,169
Accumulated depreciation..............................   (382,084)   (486,893)
                                                        ---------   ---------
                                                        $ 209,397   $ 460,276
                                                        =========   =========
</TABLE>

                                      F-7
<PAGE>
4.  ACCRUED EXPENSES

    Accrued expenses consist of the following at December 31:

<TABLE>
<CAPTION>
                                                          1999        2000
                                                        --------   ----------
<S>                                                     <C>        <C>
Payroll...............................................  $ 77,953   $  334,447
Professional fees.....................................   227,100      209,635
Accrued inventory purchases...........................     5,318      289,144
Other.................................................    17,558      206,869
                                                        --------   ----------
                                                        $327,929   $1,040,095
                                                        ========   ==========
</TABLE>

5.  LEASES

    The Company leases its administrative and manufacturing facility under a
non-cancelable operating lease which expires in November 2003. Total rent
expense was approximately $144,000 in 1998, $144,000 in 1999 and $138,000 in
2000. Future minimum operating lease payments as of December 31, 2000 are
$209,695 in 2001, $209,695 in 2002 and $179,212 in 2003.

6.  STOCKHOLDERS' EQUITY

    PREFERRED STOCK

    The Company is authorized to issue 10,000,000 shares of preferred stock,
$.001 par value, in one or more series, each of such series to have such rights
and preferences, including voting rights, dividends rights, conversion rights,
redemption privileges and liquidation preferences, as shall be determined by the
Board of Directors.

    WARRANTS

    The Company has warrants outstanding to purchase 46,500, 32,563 and 351,201
shares of common stock at $13.20, $6.60 and $14.04 per share respectively,
expiring in 2001. At December 31, 2000, 1,667,522 shares of common stock have
been reserved for issuance upon exercise of common stock warrants and stock
options.

    STOCK OPTION PLANS

    The Company's 1991 Incentive Stock Plan (the Plan) provides for the issuance
of incentive and non-statutory common stock options to employees, officers and
consultants. The Plan provides for the granting of options to purchase up to
1,500,000 shares of the Company's common stock. Except for non-statutory
options, the exercise price of the options granted under the Plan may not be
less than 100% of the fair market value of the common stock subject to the
option on the date of grant as determined by the Board of Directors. Generally,
options granted under the Plan vest over a four-year period and expire ten years
from the date of grant.

    The Company's 1996 Director Option Plan (the Director Plan) provides that
each non-employee director who becomes a director will be granted a
non-statutory option to purchase 15,000 shares of common stock at its then fair
market value. Annually thereafter, each non-employee director will be granted a
non-statutory option to purchase 5,000 shares of common stock at its then fair
market value. All options will vest ratably over four years and expire ten years
after date of grant.

    The Company's 2000 Supplemental Stock Plan provides for the granting of
non-statutory options to purchase up to 100,000 shares of the Company's common
stock. The exercise price of the options granted under this plan may not be less
than 100% of the fair market value of the common stock

                                      F-8
<PAGE>
subject to the option on the date of grant as determined by the Board of
Directors. Generally, options granted under this plan vest over a four-year
period and expire ten years from the date of grant.

    A summary of option activity for the three plans is as follows:

<TABLE>
<CAPTION>
                                                   WEIGHTED                  WEIGHTED                   WEIGHTED
                                                   AVERAGE                   AVERAGE                    AVERAGE
                                                   EXERCISE                  EXERCISE                   EXERCISE
                                        1998        PRICE         1999        PRICE         2000         PRICE
                                    ------------   --------   ------------   --------   -------------   --------
<S>                                 <C>            <C>        <C>            <C>        <C>             <C>
Outstanding at beginning of
  year............................       847,561    $1.51          945,916    $ .87           873,056    $  .86
Granted...........................       592,650     1.21          209,100      .93           419,750     15.35
Canceled..........................      (464,424)    2.47         (259,627)    1.03           (44,770)     1.29
Exercised.........................       (29,871)     .62          (22,333)     .11          (132,101)     1.27
                                    ------------              ------------              -------------
Outstanding at end of year........       945,916    $ .87          873,056    $ .86         1,115,935    $ 6.24
                                    ============    =====     ============    =====     =============    ======
Price range at end of year........  $.04 - $4.00              $.04 - $4.00              $.04 - $24.00
                                    ============              ============              =============
Exercisable at end of year........       574,199    $ .76          587,045    $ .75           560,462    $ 1.01
                                    ============    =====     ============    =====     =============    ======
Available for grant at end of
  year............................       345,776                   396,303                    121,323
                                    ============              ============              =============
</TABLE>

    The following table presents weighted average price and life information
about significant option groups outstanding at December 31, 2000:

<TABLE>
<CAPTION>
       EXERCISE             OPTIONS       OPTIONS
         PRICE            OUTSTANDING   EXERCISABLE
       --------           -----------   -----------
<S>                       <C>           <C>
        $  .04 - $  .63      290,013      286,680
        $  .69 - $  .75      295,839      164,853
        $ 1.44 - $12.88      305,083      102,679
        $15.88 - $24.00      225,000        6,250
                           ---------      -------
                           1,115,935      560,462
                           =========      =======
</TABLE>

    The weighted average contractual life of options outstanding at
December 31, 2000 was 7.3 years. The weighted average fair value of options
granted in 1998, 1999 and 2000 was $1.13, $.91 and $15.35, respectively.

    Pro forma information regarding net loss and net loss per share was computed
in accordance with SFAS 123, and has been determined as if the Company has
accounted for its employee stock options granted subsequent to December 31, 1994
under the fair value method of that Statement. The fair value for these options
was estimated at the date of grant using a Black-Scholes option pricing model
with the following weighted-average assumptions for 1998, 1999 and 2000
respectively, risk-free interest rate of 4.92%, 5.50% and 5.95%; dividend yield
of 0%, volatility factor of the expected market price of the Company's common
stock of 151%, 190% and 214%; and a weighted-average expected life of the option
of 5.5 years for all periods. The Company has also included the compensation
related to its Employee Stock Purchase Plan in 1998 and 1999 under SFAS 123 in
the pro forma net loss presented

                                      F-9
<PAGE>
below. The Company has determined that the pro forma net loss per share as
computed under Statement 123 is as follows:

<TABLE>
<CAPTION>
                                            1998          1999          2000
                                         -----------   -----------   -----------
<S>                                      <C>           <C>           <C>
Net loss
  As reported..........................  $(7,530,717)  $(3,437,357)  $(4,722,133)
  Pro forma............................  $(7,781,080)  $(3,725,029)  $(5,364,762)
Basic net loss per share
  As reported..........................       $(1.33)        $(.60)        $(.60)
  Pro forma............................       $(1.37)        $(.65)        $(.69)
</TABLE>

7.  401(k) SAVINGS PLAN

    The 401(k) Savings Plan ("Savings Plan") allows all employees that have
attained the age of 21 to make annual, tax-deferred contributions of up to 15%
of their eligible compensation. Annually, the Company may make discretionary
matching contributions based upon a percentage of the employees' contributions.
The Company made no such contributions to the Savings Plan in 1998, 1999 or
2000.

8.  INCOME TAXES

    Since the Company has incurred only losses since inception, and due to the
degree of uncertainty related to the use of the loss carry-forwards, the Company
has fully reserved this benefit. At December 31, 2000, the Company had tax net
operating loss carry-forwards of approximately $23.0 million available to offset
taxable income. The Company also has research and development tax credit
carry-forwards of approximately $607,000 available to offset federal and state
income taxes. Both carry-forwards expire in varying amounts through 2020. In
accordance with Section 382 of the Internal Revenue Code, the use of the above
carry-forwards will be subject to annual limitations based upon ownership
changes of the Company's stock which have occurred.

    Significant components of the Company's deferred income taxes are as follows
as of December 31:

<TABLE>
<CAPTION>
                                                       1999           2000
                                                   ------------   ------------
<S>                                                <C>            <C>
Net operating loss carry-forwards................  $  8,528,000   $  9,206,000
Research and development costs...................     2,533,000      1,898,000
Research and development tax credits.............       469,000        607,000
Other............................................        40,000        130,000
                                                   ------------   ------------
                                                     11,570,000     11,841,000
Valuation allowance..............................   (11,570,000)   (11,841,000)
                                                   ------------   ------------
Net deferred tax asset...........................  $         --   $         --
                                                   ============   ============
</TABLE>

    The valuation allowance increased by $271,000 in 2000 and $1,386,000 in 1999
due primarily to the fact that the Company has not benefited its current year
net operating losses due to uncertainty regarding future taxable income. The net
operating loss carry-forward differs from the accumulated deficit principally
due to temporary differences in the recognition of certain revenue and expense
items for financial and tax reporting purposes, consisting primarily of research
and development costs.

9.  RELATED PARTY TRANSACTIONS

    The Company has a loan outstanding to an officer in the amount of $84,000 at
December 31, 2000. The Company amended the loan agreement in 2000 to allow for
periodic payments between 2002 and 2004. The loan accrues interest at the
applicable federal rate (6.31% at December 31, 2000).

                                      F-10
<PAGE>
10. COMMITMENTS

    In May 2000, the Company entered into a distribution arrangement with Baxter
Healthcare Corp. (Baxter) for the exclusive distribution of the Company's
PSA4000 in the United States. Baxter is required to make quarterly minimum
purchases under the contract. The penalty for purchases below minimum
requirements is loss of exclusivity. The contract is for five years and is
cancelable by either party eighteen months after the effective date with a
six-month notice.

                                      F-11
<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.

<TABLE>
<S>                                                    <C>  <C>
                                                       PHYSIOMETRIX, INC.

                                                       By:             /s/ JOHN A. WILLIAMS
                                                            -----------------------------------------
                                                                         John A. Williams
                                                              PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>

    KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints John A. Williams and Daniel W. Muehl,
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.

<TABLE>
<CAPTION>
                      SIGNATURE                                    TITLE                    DATE
                      ---------                                    -----                    ----
<C>                                                    <S>                             <C>
                                                       President, Chief Executive
                /s/ JOHN A. WILLIAMS                     Officer and Director
     -------------------------------------------         (Principal Executive          March 28, 2001
                  John A. Williams                       Officer)

                                                       Vice President and Chief
                 /s/ DANIEL W. MUEHL                     Financial Officer (Principal
     -------------------------------------------         Financial and Accounting      March 28, 2001
                   Daniel W. Muehl                       Officer)

                  /s/ THOMAS BARUCH                    Director
     -------------------------------------------                                       March 28, 2001
                    Thomas Baruch

                 /s/ JAMES SAALFIELD                   Director
     -------------------------------------------                                       March 28, 2001
                   James Saalfield

              /s/ CHRISTOPHER MITCHELL                 Director
     -------------------------------------------                                       March 28, 2001
                Christopher Mitchell
</TABLE>
<PAGE>
                                 EXHIBIT INDEX

(C) EXHIBITS

<TABLE>
<CAPTION>
       EXHIBIT
         NO.                                    DESCRIPTION
---------------------                           -----------
<C>                     <S>
       3.1(1)           Restated Certificate of Incorporation of the Company.
       3.2(1)           Bylaws of the Company, as amended.
       4.1(1)           Specimen Common Stock Certificate.
       4.2(1)           Form of Warrant Agreement between the Company and Cruttenden
                        Roth Incorporated, with form of Warrant attached
      10.1(1)           Form of Indemnification Agreement between the Company and
                        each of its directors and officers.
      10.2(1)           1991 Incentive Stock Plan and Form of Stock Option Agreement
                        thereunder.
      10.3(2)           1996 Director Option Plan.
      10.4(2)           1996 Employee Stock Purchase Plan and forms of agreements
                        thereunder.
      10.5(1)           Lease dated October 11, 1994 between the Company and Yvon
                        Cormier, Trustee of YCEE Investment Trust, for a facility
                        located at Five Billerica Park, 101 Billerica Avenue, North
                        Billerica, Massachusetts 01862.
      10.6(1)           Restated Shareholder Rights Agreement dated June 24, 1994
                        between the Company and certain holders of the Company's
                        securities.
      10.7(3)           Stock Purchase Agreement dated February 29, 2000 between the
                        Registrant and the purchasers of common stock of the
                        Registrant named therein, including form of Stock Purchase
                        Warrant and other exhibits thereto.
      10.8(4)           Strategic Alliance and Exclusive Distribution Agreement
                        dated May 31, 2000 by and between the Company and Baxter
                        Healthcare Corporation.
      10.9              Amendment A to Strategic Alliance and Exclusive Distribution
                        Agreement dated May 31, 2000.
      10.10             Amendment B to Strategic Alliance and Exclusive Distribution
                        Agreement dated May 31, 2000.
      10.11             2000 Supplemental Stock Plan.
      23.1              Consent of Ernst & Young LLP, Independent Auditors.
      24.1              Power of Attorney. Reference is made to page F-12
      27.1              Financial Data Schedule-2000 Year-End
</TABLE>

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(1) Filed as an Exhibit to the Company's Registration Statement on Form S-1
    (File No. 33302138) and incorporated herein by reference.

(2) Filed as an Exhibit to the Company's Registration Statement on Form S-8
    (File No. 33316525) and incorporated herein by reference.

(3) Filed as an Exhibit to the Company's Registration Statement on Form S-3
    (File No. 33333660) and incorporated herein by reference.

(4) Filed as an Exhibit to the Company's Form 10Q, Q3 2000 and incorporated
    herein by reference.