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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, 1999.

                                       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)

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

            FIVE BILLERICA PARK,                                   01862
    101 BILLERICA AVE., N. BILLERICA, MA                        (Zip code)
  (Address of principal executive 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 $28,644,295 as of January 31, 2000, based upon the average of
the high and low prices of the Registrant's Common Stock reported for such date
on the Over The Counter Bulletin Board. 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, 2000, the
Registrant had outstanding 5,818,383 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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                                                                                  PAGE
                                                                                 NUMBER
                                                                                --------
<S>     <C>       <C>                                                           <C>
PART I........................................................................      3
        Item 1.   BUSINESS....................................................      3
        Item 2.   PROPERTIES..................................................     21
        Item 3.   LEGAL PROCEEDINGS...........................................     21
        Item 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........     21

PART II.......................................................................     22
        Item 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
                    STOCKHOLDER MATTERS.......................................     22
        Item 6.   SELECTED FINANCIAL DATA.....................................     23
        Item 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                    AND RESULTS OF OPERATIONS.................................     24
        Item 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................     27
        Item 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                    AND FINANCIAL DISCLOSURE..................................     27

PART III......................................................................     28
        Item 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..........     28
        Item      EXECUTIVE COMPENSATION......................................
        11......                                                                   28
        Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                    MANAGEMENT................................................     28
        Item 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............     28

PART IV.......................................................................     29
        Item 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
                    8-K.......................................................     29
</TABLE>

                                       2
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                                     PART I

ITEM 1.

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 to hospitals, clinics and
physicians' offices domestically and internationally. Our current principal
product focus is our Patient State Analyzer, or PSA, an innovative system for
monitoring brain activity during anesthesia. We are planning to submit a 510(k)
clearance application for the PSA to the Food and Drug Administration.

    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.

    PATIENT STATE ANALYZER.

    The Patient State Analyzer is being developed by us to provide 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,
short patient recovery times, and lower overall costs per procedure. In
addition, we are developing the final component of the Patient State Analyzer, a
proprietary software module which will process EEG data and provide an easy to
read signal to anesthesiologists regarding patient's brain activity.

    We believe 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 technologies 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. We plan to submit our 510(k)
clearance application for the PSA to the FDA during March 2000. We will not be
able to market the Patient State Analyzer in the United States unless and until
we receive clearance of our 510(k) application from the FDA. We cannot assure
you that we will be able to obtain this clearance on a timely basis, if at all.

    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
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    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        Under development
                                       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 room     Commercial sales
                                       Applications

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

HYDROSPOT BIOSENSORS                 Disposable biosensors attached to    Commercial sales
                                       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, representing
a market opportunity estimated by the company in excess of $300 million
annually. The Company is developing 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
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

                                       4
<PAGE>
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 will 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 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

                                       5
<PAGE>
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.

    The E-Net reduces average EEG setup times by approximately 75 percent (6 to
8 minutes versus 30 minutes), in addition to providing a high quality and
accurate signal. The HydroDot NeuroMonitoring System offers the following
advantages over traditional modalities:

    Electrode positioning is fast, easy, accurate and reproducible; time
    consuming measurements are avoided.

    Patient preparation time is greatly reduced and the use of toxic, flammable
    substances is avoided.

    Patient comfort is enhanced because patients can move around untethered; the
    open E-Net structure provides ventilation and the patient is not encumbered
    by a large number of wires.

    Adhesive qualities of the hydrogel provide excellent skin contact without
    slippage, eliminate salt bridges and prevent electrodes from falling off the
    scalp.

    Biosensors ensure reproducible signal quality and minimize collection of
    electrical interference from the environment.

    Risk of infection is reduced through the use of disposable biosensors and
    reduced need for scalp abrasion.

BUSINESS STRATEGY

    The Company's objective is to become the leader in the design, development
and commercialization of brain 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 will seek to implement a broad based
    marketing strategy, using distributors in the United States and
    internationally. The Company will need to select a

                                       6
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    distribution partner to market the Patient State Analyzer to
    anesthesiologists, hospital administrators, and, to a lesser extent, managed
    care centers.

    OUTSOURCE MANUFACTURING TO CONTROL COSTS. The Company will seek to outsource
    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

    CURRENT PRODUCTS

    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.

    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 is 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.

                                       7
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    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 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.

    PRODUCTS UNDER DEVELOPMENT

    PATIENT STATE ANALYZER.  Physiometrix is developing 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 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 are 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 patients 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.

                                       8
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    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 will consist 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 will include 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.

    The Patient State Analyzer is currently pending submission of a 510(k)
application to the FDA. The Company intends to resubmit a 510(k) clearance
application to the FDA for the Patient State Analyzer in the March/April 2000
time frame and is working with leading neurologists and anesthesiologists at
several institutions, including Harvard Medical School, in the development of
the system.

MARKETING AND DISTRIBUTION

    The Company intends, in connection with the planned commercial introduction
of the Patient State Analyzer, to select a distribution partner with substantial
experience and capabilities in sales of capital equipment to hospitals,
anesthesiologists and other potential users of such systems. The Company
currently intends to increase its sales force moderately to market the Patient
State Analyzer in conjunction with the partner.

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 completion of development of the Patient State Analyzer.

    Research and development expenses for the years ended December 31, 1997,
1998 and 1999 were $2,500,601, $4,108,451 and $2,153,956 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 GMPs, and
intends to comply with ISO 9001 standards when required in order to continue to
produce products for sale in Europe. Any

                                       9
<PAGE>
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.

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 who has a commercial product 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.

                                       10
<PAGE>
    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 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

                                       11
<PAGE>
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.

    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 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 believes
that the Patient State Analyzer and other potential products currently under
development will be subject to FDA clearance by 510(k) notification, however,
the FDA may require the Company to submit a PMA application for such products.
There can be no assurance that the Company will be able to obtain necessary
510(k) clearance or PMA application approval to market the Patient State
Analyzer or any other products, on a timely basis, if at all, and delays in
receipt or failure to receive such clearances or approvals, the loss of
previously received clearances or approvals, or failure to comply with existing
or future regulatory requirements could have a material adverse effect on the
Company's business, financial condition and results of operations.

                                       12
<PAGE>
    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.

    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 relied on its
international distributors to obtain necessary foreign regulatory approvals for
sales of its products overseas. The Company also intends to seek any necessary
additional regulatory approvals in certain European countries and in Japan in
connection with future marketing and sales efforts in these countries. The
Company anticipates that it will rely on OEM partners and distributors for
assistance in obtaining any future international regulatory approvals. There can
be no assurance, however, that the Company will secure additional international
OEM partners or distributors or that international regulatory approvals, if
sought, will be obtained on a timely basis or at all.

    In connection with future sales in the European market, the Company
anticipates that it will implement policies and procedures which will allow 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.
Failure to receive CE mark certification will prohibit the Company from selling
its products in Europe. There can be no assurance that the Company will be
successful in meeting certification requirements. ISO 9001 certification is one
of the CE mark certification requirements.

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
DRG system

                                       13
<PAGE>
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
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, 1999, the Company had 19 full time employees. Of these
employees, 9 were engaged in research and development activities, 3 in
manufacturing and manufacturing engineering, 3 in quality assurance and
regulatory affairs, 4 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. Commercial introduction of the PSA system will require completion
of development activities and receipt of marketing clearance from the U.S. Food
and Drug Administration, or FDA. If we are unable to complete the necessary
development work or receive FDA marketing clearance, we will be unable to
introduce the system commercially in the U.S. 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

                                       14
<PAGE>
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 HAVE NOT RECEIVED FDA MARKETING CLEARANCE FOR THE PSA SYSTEM, AND WE
CANNOT COMMENCE U.S. COMMERCIAL SALES OF THE PSA SYSTEM UNLESS AND UNTIL WE
RECEIVE FDA CLEARANCE

    Before we can market the PSA system in the United States we must obtain
clearance from the FDA. If the FDA concludes that the PSA system does not meet
the requirements to obtain clearance of a premarket notification under
Section 510(k) of the Food, Drug and Cosmetic Act, then we would be required to
file a premarket approval application. The approval process for a premarket
approval application is lengthy, expensive and typically requires extensive
preclinical and clinical trial data. We may not obtain clearance of a 510(k)
notification or approval of a premarket approval application with respect to the
PSA system on a timely basis, if at all. If we fail to obtain timely clearance
or approval for our products, we will not be able to market and sell our
products, which will limit our ability to generate revenue. In addition, if we
obtain FDA clearance for the PSA system and elect to enhance or modify it, we
may also be required to obtain additional clearances from the FDA before we can
market enhanced or modified versions of this product. We anticipate filing our
510(k) premarket notification with the FDA during March, 2000. Although we
believe that the clinical and other information we will file with the FDA is
sufficient to support FDA clearance of our 510(k) notification, we cannot assure
that we will be able to obtain such clearance in a timely manner or at all.
Timeliness of FDA clearance is of particular concern to us because a competing
system for brain state monitoring during anesthesia was commercially introduced
in 1998. If we fail to obtain such clearance in a timely manner, our business
and operating results would be seriously harmed and our stock price would likely
decline.

    The FDA also requires us to adhere to current Good Manufacturing Practices
regulations, which include production design controls, testing, quality control,
storage and documentation procedures. The FDA may at any time inspect our
facilities to determine whether adequate compliance has been achieved.
Compliance with current Good Manufacturing Practices regulations for medical
devices is difficult and costly. In addition, we may not continue to be
compliant as a result of future changes in, or interpretations of, regulations
by the FDA or other regulatory agencies. If we do not achieve continued
compliance, the FDA may withdraw marketing clearance or require product recall.
When any change or modification is made to a device or its intended use, the
manufacturer may be required to reassess compliance with current Good
Manufacturing Practices regulations, which may cause interruptions or delays in
the marketing and sale of our products.

    Sales of our products outside the United States are subject to foreign
regulatory requirements that vary from country to country. The time required to
obtain approvals from foreign countries may be longer or shorter than that
required for FDA approval, and requirements for foreign licensing may differ
from FDA requirements. The Federal, state and foreign laws and regulations
regarding the manufacture and sale of our products are subject to future
changes, as are administrative interpretations of regulatory agencies. If we
fail to comply with applicable federal, state or foreign laws or regulations, we
could be subject to enforcement actions, including product seizures, recalls,
withdrawal of clearances or approvals and civil and criminal penalties.

    WE DO NOT HAVE INTERNAL SALES AND MARKETING RESOURCES SUFFICIENT TO SUPPORT
COMMERCIAL INTRODUCTION OF THE PSA SYSTEM, AND WILL NEED TO EITHER OBTAIN THESE
RESOURCES THROUGH STRATEGIC RELATIONSHIPS OR THROUGH INTERNAL DEVELOPMENT
EFFORTS

    We do not currently have the sales and marketing capabilities that we will
need to commercially introduce the PSA system. In order to commercially
introduce the system, we will need to either enter into alliances with other
major medical device companies or distributors of medical devices to market and
sell the PSA system or will need to develop internal marketing and sales
capabilities. If we are unable to enter into arrangements with third parties for
marketing, sales and distribution of the PSA system and must

                                       15
<PAGE>
develop internal capabilities, we will need to expend additional funds and
recruit a significant number of additional personnel. We cannot assure you that
we will be able to develop the sales and marketing capabilities we will require,
either through a third party relationship or through internal growth. If we are
unable to develop marketing and sales capabilities in a timely manner, our
ability to commercially introduce the PSA system would be seriously compromised.
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

    If we are able to obtain regulatory clearance for, and commercially
introduce, the PSA system, 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 significantly 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.

    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 UNDER DEVELOPMENT

    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 no 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
the PSA system 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, either on our own or 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.

                                       16
<PAGE>
    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.

    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, 1999 had an accumulated deficit of approximately $29.4 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
couple of years as we

                                       17
<PAGE>
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 timing of FDA clearance of the PSA
system, and whether the PSA system, if commercialized, 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. In particular, our funding needs
will increase significantly if we cannot obtain satisfactory third party
arrangements for marketing, sale and distribution of the PSA system. Although we
believe that our existing cash reserves, including the proceeds from the sale of
the securities being registered for resale, 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 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.

                                       18
<PAGE>
    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 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
COVERAGES

    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

                                       19
<PAGE>
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 IS CURRENTLY TRADED ON THE OVER THE COUNTER BULLETIN BOARD, WHICH
MAY LIMIT THE AMOUNT OF LIQUIDITY AVAILABLE TO STOCKHOLDERS

    Our common stock is currently traded on the Over the Counter Bulletin Board.
The Bulletin Board has limited liquidity when compared to more established stock
markets, such as the Nasdaq National Market and the Nasdaq Small-Cap Market. In
addition, Bulletin Board companies typically receive significantly less research
coverage and institutional investor attention that stocks that are traded on the
Nasdaq markets. Trading volumes of Bulletin Board stocks also tend to be lower.
All of these factors may harm your ability to sell your shares of our common
stock, and may adversely affect the price you are able to obtain for your
shares.

    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, 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.

                                       20
<PAGE>
    ANTITAKEOVER 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 12,000 square foot facility in North
Billerica, Massachusetts. This facility includes manufacturing, laboratory and
office space. The facility is leased through November 14, 2000. 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.

                                       21
<PAGE>
                                    PART II

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

    The Company's Common Stock is traded on the Over the Counter Bulletin Board
(PHYX). The number of record holders of the Company's Common Stock at
January 31, 2000 was 91. 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. 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, 1999..............................................  $1 15/16       $ 5/8
June 30, 1999...............................................  $1 3/8         $ 1/2
September 30, 1999..........................................  $1 3/16        $ 1/2
December 31, 1999...........................................  $3 11/16       $ 15/32
</TABLE>

<TABLE>
<CAPTION>
QUARTER ENDED                                                     HIGH           LOW
-------------                                                 ------------   -----------
<S>                                                           <C>            <C>
March 31, 1998..............................................  $2 1/4         $1 1/16
June 30, 1998...............................................  $2 1/8         $1 1/16
September 30, 1998..........................................  $3 13/16       $1
December 31, 1998...........................................  $1 5/8         $ 7/16
</TABLE>

                                       22
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                       YEAR ENDED DECEMBER 31,
                                 -------------------------------------------------------------------
                                    1995          1996          1997          1998          1999
                                 -----------   -----------   -----------   -----------   -----------
<S>                              <C>           <C>           <C>           <C>           <C>
STATEMENTS OF OPERATIONS DATA:
Revenues.......................  $   321,835   $   413,698   $ 1,006,381   $   596,535   $   362,848
Costs and expenses:
  Cost of goods sold...........    1,164,268     1,189,510     1,925,316     2,151,889       796,346
  Research and development.....      392,413     1,189,336     2,500,601     4,108,451     2,153,956
  Selling, general and
    administrative.............    1,575,481     1,652,596     2,739,423     1,935,941       985,559
Equipment writeoff.............           --            --            --       337,648            --
                                 -----------   -----------   -----------   -----------   -----------
                                   3,132,162     4,031,442     7,165,340     8,533,929     3,935,861
                                 -----------   -----------   -----------   -----------   -----------

Operating loss.................   (2,810,327)   (3,617,744)   (6,158,959)   (7,937,394)   (3,573,013)
Interest income................       75,465       683,461       788,878       406,677       135,656
Interest expense...............      (36,876)      (90,090)      (23,016)           --            --
                                 -----------   -----------   -----------   -----------   -----------

Net loss.......................  $(2,771,738)  $(3,024,373)  $(5,393,097)  $(7,530,717)  $(3,437,357)
                                 ===========   ===========   ===========   ===========   ===========

Loss per common share (Pro
  forma in 1995)                 $      (.83)  $      (.80)  $      (.96)  $     (1.33)  $      (.60)
                                 ===========   ===========   ===========   ===========   ===========
Shares used in computing net
  loss per common share (Pro
  forma in 1995)...............    3,338,974     3,766,494     5,615,360     5,678,644     5,768,094
                                 ===========   ===========   ===========   ===========   ===========
</TABLE>

<TABLE>
<CAPTION>
                                                          DECEMBER 31,
                             -----------------------------------------------------------------------
                                1995           1996           1997           1998           1999
                             -----------   ------------   ------------   ------------   ------------
<S>                          <C>           <C>            <C>            <C>            <C>
Cash, cash equivalents and
  short-term investments...  $   432,126   $ 18,146,248   $ 11,588,286   $  4,589,585   $  1,365,002
Working capital
  (deficit)................     (214,710)    16,990,259     11,555,124      4,454,151      1,163,810
Total assets...............    1,048,000     19,151,982     13,376,170      5,201,374      1,853,759
Notes payable to
  stockholders, net of
  current portion..........       82,089             --             --             --             --
Accumulated deficit........   (9,976,714)   (13,001,087)   (18,394,184)   (25,924,901)   (29,362,258)
Total stockholders'
  equity...................       46,944     17,575,615     12,310,052      4,851,264      1,463,525
</TABLE>

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;

                                       23
<PAGE>
(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). The Company believes that the Patient State Analyzer will be
subject to FDA 510(k) clearance notification. However, the FDA may require the
Company to submit a premarket approval ("PMA") application for this product.
There can be no assurance that the Company will be able to obtain necessary
510(k) clearance or PMA application approval to market the Patient State
Analyzer or any other products on a timely basis, if at all.

    Physiometrix has a limited history of operations and has experienced
significant operating losses since its inception. As of December 31, 1999, the
Company had an accumulated deficit of approximately $29.4 million. The HydroDot
NeuroMonitoring System is currently the Company's principal commercial product.
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. There can be no
assurance the Company will achieve significant commercial revenues or
profitability.

RESULTS OF OPERATIONS

    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 GOODS SOLD

    Cost of goods 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
during 2000.

    GROSS MARGIN

    The negative gross profit margin 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

                                       24
<PAGE>
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 during 2000.

    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. The Company has no assurance that the testing which will be
undertaken will demonstrate that the device functions adequately to successfully
complete the clinical trials.

    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.

    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 a
lower average cash balance in 1999 versus 1998.

    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 ("FAS
No. 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
carryforwards of $21,300,000 and R&D tax credit carryforwards of $469,000, that
will expire in varying amounts through 2019, if not utilized. Utilization of net
operating loss and tax credit carryforwards 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 carryforwards before full utilization.

    YEARS ENDED DECEMBER 31, 1998 AND 1997

    Revenues were $597,000 in 1998, a $409,000 decrease over 1997. This was
primarily the result of decreased Equinox sales, which was discontinued in 1998.

                                       25
<PAGE>
    Cost of goods sold were $2,152,000 in 1998, an increase of $227,000 over
1997. This is due to inventory writedowns of $354,000 related to discontinuance
of the Company's Equinox product line and $236,000 related to net realizable
value of the remaining HydroDot NeuroMonitoring inventory.

    Research and development expenses were $4,108,000 in 1998, a $1,607,000
increase from 1997. This is primarily due to ongoing development and clinical
evaluation for the Patient State Analyzer including the assembly of units for
the clinical study.

    Selling, general and administrative expenses were $1,936,000 in 1998, a
decrease of $803,000 from 1997. This was primarily due to discontinuance of the
Equinox product line which resulted in a reduction of the Company's outside
sales force and related expenses.

    Interest income was $407,000 in 1998, a decrease of $382,000 from 1997. This
was the result of a lower average cash balance in 1998 versus 1997.

    Interest expense was $0 in 1998, a $23,000 decrease from 1997, due to the
repayment of a note payable during 1997.

LIQUIDITY AND CAPITAL RESOURCES

    At December 31, 1999, the Company's cash, cash equivalents and short-term
investments were $1,365,000 as compared to $4,590,000 at December 31, 1998.

    The Company's operating activities used cash of $3,268,000 in the year ended
December 31, 1999 as compared to $6,900,000 in the year ended December 31, 1998.
The $3,632,000 decrease in net cash used in 1999 compared to 1998 was primarily
the result of the decreased net loss of the Company.

    Net cash used by investing activities in the year ended December 31, 1999
was $6,000, as compared with $2,335,000 provided in the year ended December 31,
1998. The decrease was due to no short term investment activity in 1999.

    The Company's financing activities provided cash of $50,000 in the year
ended December 31, 1999 as compared to $51,000 of cash provided in the year
ended December 31, 1998. These activities were related to stock option exercises
and stock purchases under the Employee Stock Purchase Plan.

    The Company's principal source of liquidity at December 31, 1999 consists of
cash and cash equivalents in the amount of $1,365,000. On February 29, 2000 the
Company closed a private placement of common stock and warrants totalling
$21.7 million in net proceeds to the Company. This cash will be sufficient to
fund the Company for more than a year from March 31, 2000.

YEAR 2000 CONSIDERATIONS

    The Company has reviewed its computer systems for Year 2000 compliance and
tested whether the systems will conform to Year 2000 requirements. The Company
has brought its internal financial systems into compliance and has determined
that the Patient State Analyzer is Year 2000 compliant. The total cost of this
effort did not exceed $50,000 and was completed in November 1998. The Company is
capitalizing the hardware and software components and expensing all other costs
of this effort. The Company does not have exposure due to third party compliance
issues. The Company believes it will incur no additional expenses related to
Year 2000 issues. There are no contingency plans in place as there are no
identified issues requiring action at this time, but the Company will
continually evaluate issues which may arise that would present a significant
risk to the Company and implement contingency plans if required.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

                                       26
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

    Not applicable.

                                       27
<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 2000 Annual Meeting of Stockholders (the "Proxy Statement") to be
held June 1, 2000 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.....................     52      President, Chief Executive Officer and Director
Daniel W. Muehl......................     37      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.

                                       28
<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..............................     F1
Balance Sheets at December 31, 1998 and 1999................     F2
Statements of Operations for the Years Ended December 31,
  1997, 1998 and 1999.......................................     F3
Statements of Cash Flows for the Years Ended December 31,
  1997, 1998 and 1999.......................................     F4
Statements of Stockholders' Equity for the Years Ended
  December 31, 1997, 1998 and 1999..........................     F5
Notes to Financial Statements...............................     F6
</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, 1999.

(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.
</TABLE>

                                       29
<PAGE>

<TABLE>
<CAPTION>
       EXHIBIT
         NO.                                    DESCRIPTION
---------------------   ------------------------------------------------------------
<C>                     <S>
       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.

         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-1999 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.

                                       30
<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, 1998 and 1999, and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. 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, 1998 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States.

                                          /s/ ERNST & YOUNG LLP

Boston, Massachusetts
February 29, 2000

                                      F-1
<PAGE>
                               PHYSIOMETRIX, INC.

                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                     DECEMBER 31,
                                                              ---------------------------
                                                                  1998           1999
                                                              ------------   ------------
<S>                                                           <C>            <C>
                                         ASSETS
Current assets:
  Cash and cash equivalents.................................  $  4,589,585   $  1,365,002
  Accounts receivable, net of allowance of $5,000 in 1998
    and $25,000 in 1999 for doubtful accounts...............        87,400         41,209
  Inventory.................................................            --         31,916
  Prepaid expenses..........................................       127,276        115,917
                                                              ------------   ------------
      Total current assets..................................     4,804,261      1,554,044
  Equipment, net............................................       306,795        209,397
  Due from officer..........................................        84,000         84,000
  Other assets..............................................         6,318          6,318
                                                              ------------   ------------
  Total assets..............................................  $  5,201,374   $  1,853,759
                                                              ============   ============
                          LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................  $    107,447   $     62,305
Accrued expenses............................................       242,663        327,929
                                                              ------------   ------------
      Total current liabilities.............................       350,110        390,234
Commitments and contingencies
Stockholders' equity
  Preferred stock: $.001 par value; 10,000,000 shares
    authorized..............................................            --             --
  Common stock: $.001 par value, 50,000,000 shares
    authorized; 5,707,366 shares in 1998 and 5,818,383
    shares in 1999 issued and outstanding...................         5,707          5,818
Additional paid-in capital..................................    30,770,458     30,819,965
Accumulated deficit.........................................   (25,924,901)   (29,362,258)
                                                              ------------   ------------
Total stockholders' equity..................................     4,851,264      1,463,525
                                                              ------------   ------------
Total liabilities and stockholders' equity..................  $  5,201,374   $  1,853,759
                                                              ============   ============
</TABLE>

                             See accompanying notes

                                      F-2
<PAGE>
                               PHYSIOMETRIX, INC.

                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                         ---------------------------------------
                                                            1997          1998          1999
                                                         -----------   -----------   -----------
<S>                                                      <C>           <C>           <C>
Revenues...............................................  $ 1,006,381   $   596,535   $   362,848
Costs and expenses:
  Cost of goods sold...................................    1,925,316     2,151,889       796,346
  Research and development.............................    2,500,601     4,108,451     2,153,956
  Selling, general and administrative..................    2,739,423     1,935,941       985,559
  Equipment writeoffs..................................           --       337,648            --
                                                         -----------   -----------   -----------
                                                           7,165,340     8,533,929     3,935,861
                                                         -----------   -----------   -----------
Operating loss.........................................   (6,158,959)   (7,937,394)   (3,573,013)
Interest income........................................      788,878       406,677       135,656
Interest expense.......................................      (23,016)           --            --
                                                         -----------   -----------   -----------
Net loss...............................................  $(5,393,097)  $(7,530,717)  $(3,437,357)
                                                         ===========   ===========   ===========
Basic net loss per common share........................  $      (.96)  $     (1.33)  $      (.60)
                                                         ===========   ===========   ===========
Shares used in computing basic net loss per common
  share................................................    5,615,360     5,678,644     5,768,094
                                                         ===========   ===========   ===========
</TABLE>

                             See accompanying notes

                                      F-3
<PAGE>
                               PHYSIOMETRIX, INC.

                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                                                     -------------------------------------------
                                                         1997            1998           1999
                                                     -------------   -------------   -----------
<S>                                                  <C>             <C>             <C>
OPERATING ACTIVITIES:
Net loss...........................................  $  (5,393,097)  $  (7,530,717)  $(3,437,357)

Adjustments to reconcile net loss to net cash used
  in operating activities:
  Depreciation and amortization....................        205,456         166,824       103,262
  Stock compensation...............................         53,000          21,300            --
  Equipment writeoffs..............................             --         337,648            --
  Changes in operating assets and liabilities:
    Accounts receivable............................       (272,998)        223,794        46,191
    Inventories....................................       (360,342)        640,131       (31,916)
    Prepaid expenses and other assets..............         20,762         (43,445)       11,359
    Accounts payable and accrued expenses..........        113,321        (716,008)       40,124
                                                     -------------   -------------   -----------
Net cash used in operating activities..............     (5,633,898)     (6,900,473)   (3,268,337)

INVESTING ACTIVITIES:
Purchase of equipment..............................       (375,028)       (148,857)       (5,864)
Purchase of available-for-sale securities..........   (127,696,952)   (103,269,408)           --
Proceeds from maturity of available-for-sale
  securities.......................................    143,030,730     105,753,547            --
                                                     -------------   -------------   -----------
Net cash provided by (used in) investing
  activities.......................................     14,958,750       2,335,282        (5,864)

FINANCING ACTIVITIES:
Payments on demand note............................       (541,334)             --            --
Principal payments on notes payable to
  stockholders.....................................        (82,236)             --            --
Proceeds from issuance of common stock.............         74,534          50,629        49,618
                                                     -------------   -------------   -----------
Net cash provided by (used in) financing
  activities.......................................       (549,036)         50,629        49,618
                                                     -------------   -------------   -----------

Net increase (decrease) in cash and cash
  equivalents......................................      8,775,816      (4,514,562)   (3,224,583)
Cash and cash equivalents at beginning of year.....        328,331       9,104,147     4,589,585
                                                     -------------   -------------   -----------
Cash and cash equivalents at end of year...........  $   9,104,147   $   4,589,585   $ 1,365,002
                                                     =============   =============   ===========
</TABLE>

                             See accompanying notes

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

<TABLE>
<CAPTION>
                                PREFERRED STOCK          COMMON STOCK
                              -------------------   ----------------------                     ACCUMULATED    TOTAL STOCKHOLDERS'
                               SHARES     AMOUNT     SHARES       AMOUNT     PAID-IN CAPITAL     DEFICIT            EQUITY
                              --------   --------   ---------   ----------   ---------------   ------------   -------------------
<S>                           <C>        <C>        <C>         <C>          <C>               <C>            <C>
Balance at December 31,
  1996......................       --         --    5,580,324   $    5,580     $30,571,122     $(13,001,087)      $17,575,615
  Issuance of common stock
    upon exercise of
    options.................                           35,861           36          10,088                             10,124
  Issuance of common stock
    under Employee Stock
    Purchase Plan...........                           24,640           25          64,385                             64,410
  Stock compensation
    amortization............                                                        53,000                             53,000
  Net loss..................                                                                     (5,393,097)       (5,393,097)
                              -------    -------    ---------   ----------     -----------     ------------       -----------
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
                              =======    =======    =========   ==========     ===========     ============       ===========
</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. The ultimate success of the Company is dependent upon
the regulatory approval and marketing and production of its products and its
ability to secure adequate financing until the Company is operating profitably.
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).

LIQUIDITY

    The Company's principal source of liquidity at December 31, 1999 consists of
cash and cash equivalents in the amount of $1,365,000. On February 29, 2000 the
Company closed a private placement of common stock and warrants totalling
$21.7 million in net proceeds to the Company. This cash will be sufficient to
fund the Company for more than a year from March 31,2000.

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

    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.

CONCENTRATION OF CREDIT RISK

    One customer accounted for 44% and 38% of accounts receivable at
December 31, 1999 and 1998 respectively, and 9% of 1999 revenues and 12% of 1998
revenues. The Company reviews the creditworthiness of its 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 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

                                      F-6
<PAGE>
                               PHYSIOMETRIX, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. COMPANY DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 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 is not presented as the Company
has generated net losses in 1997, 1998 and 1999.

ACCOUNTING PRONOUNCEMENT

    In June 1998, SFAS No. 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 will not have a material
impact on the Company's financial statement.

2. INVENTORIES

    Inventory is recorded at the lower of cost (first-in, first-out) or market,
and consists of raw materials of $28,743 and finished goods of $3,173 at
December 31, 1999.

3. EQUIPMENT

    Equipment consists of the following at December 31:

<TABLE>
<CAPTION>
                                                            1998       1999
                                                          --------   --------
<S>                                                       <C>        <C>
Computer equipment......................................  $339,768   $345,631
Machinery and equipment.................................   245,849    245,850
                                                          --------   --------
                                                           585,617    591,481
Accumulated depreciation................................  (278,822)  (382,084)
                                                          --------   --------
                                                          $306,795   $209,397
                                                          ========   ========
</TABLE>

                                      F-7
<PAGE>
                               PHYSIOMETRIX, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

4. ACCRUED EXPENSES

    Accrued expenses consist of the following at December 31:

<TABLE>
<CAPTION>
                                                            1998       1999
                                                          --------   --------
<S>                                                       <C>        <C>
Payroll.................................................  $110,487   $ 77,953
Professional fees.......................................   121,737    227,100
Other...................................................    10,439     22,876
                                                          --------   --------
                                                          $242,663   $327,929
                                                          ========   ========
</TABLE>

5. LEASES

    The Company leases its administrative and manufacturing facility under a
non-cancelable operating lease which expires in November 2000. Total rent
expense was approximately $115,000 in 1997, $144,000 in 1998 and $144,000 in
1999. Future minimum operating lease payments as of December 31, 1999 are
$150,717 in 2000.

6. STOCKHOLDERS' EQUITY

    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.

    The Company has issued warrants to purchase 100,000, 6,000 and 52,227 shares
of common stock at $13.20, $11.00 and $6.60 per share respectively, expiring in
2001, all of which are outstanding at December 31, 1999. At December 31, 1999,
1,427,586 shares of common stock have been reserved for issuance upon exercise
of common stock warrants and stock options.

7. EMPLOYEE BENEFIT PLANS

    STOCK OPTION PLANS

    The Company's 1991 Incentive Stock Plan (the Plan) provides for the issuance
of incentive and nonstatutory common stock options to employees, officers and
consultants. The Plan provides for the granting of up to 1,500,000 options to
purchase shares of the Company's common stock. Except for nonstatutory 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 nonemployee director who becomes a director will be granted a nonstatutory
option to purchase 15,000 shares of common stock at its then fair market value.
Annually thereafter, each nonemployee director will be granted a nonstatutory
option to purchase 5,000 shares of common stock as its then fair market value.
All options will vest ratably over four years and expire ten years after date of
grant. A total of 95,000 shares of common stock are available for grant under
the Director Plan.

                                      F-8
<PAGE>
                               PHYSIOMETRIX, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

7. EMPLOYEE BENEFIT PLANS (CONTINUED)
    A summary of option activity for the two plans is as follows:

<TABLE>
<CAPTION>
                                                      WEIGHTED                            WEIGHTED                       WEIGHTED
                                                       AVERAGE                            AVERAGE                        AVERAGE
                                                      EXERCISE                            EXERCISE                       EXERCISE
                                    1997                PRICE               1998           PRICE           1999           PRICE
                              -----------------   -----------------   -----------------   --------   -----------------   --------
<S>                           <C>                 <C>                 <C>                 <C>        <C>                 <C>
Outstanding at beginning of
  year......................            685,681   $            1.03             847,561    $1.51               945,916     $.87
Granted.....................            246,100                2.78             592,650     1.21               209,100      .93
Canceled....................            (48,359)               1.97            (464,424)    2.47              (259,627)    1.03
Exercised...................            (35,861)                .28             (29,871)     .62               (22,333)     .11
                              -----------------                       -----------------              -----------------
Outstanding at end of
  year......................            847,561   $            1.51             945,916    $ .87               873,056     $.86
                              =================   =================   =================    =====     =================     ====
Price Range at end of
  year......................  $       .04-$6.25                       $       .04-$4.00              $       .04-$4.00
                              =================                       =================              =================
Exercisable at end of
  year......................            513,668   $            1.03             574,199    $ .76               587,045     $.75
                              =================   =================   =================    =====     =================     ====
Available for grant at end
  of year...................            474,002                                 345,776                        396,303
                              =================                       =================              =================
</TABLE>

    The following table presents weighted average price and life information
about significant option groups outstanding at December 31, 1999:

<TABLE>
<CAPTION>
                                                          OPTIONS       OPTIONS
EXERCISE PRICE                                          OUTSTANDING   EXERCISABLE
--------------                                          -----------   -----------
<S>                                                     <C>           <C>
$.04--$.69............................................    541,406       405,515
$.75--$4.00...........................................    331,650       181,530
                                                          -------       -------
                                                          873,056       587,045
                                                          =======       =======
</TABLE>

    The weighted average contractual life of options outstanding at
December 31, 1998 and 1999 was 7.5 years and 6.9 years, respectively. The
weighted average fair value of options granted in 1998 and 1999 was $1.13 and
$.91.

    Pro forma information regarding net loss and net loss per share was computed
in accordance with Statement 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 1997, 1998 and 1999
respectively, risk-free interest rate of 5.91%, 4.92% and 5.50%; dividend yield
of 0%, volatility factor of the expected market price of the Company's common
stock of 118%, 151% and 190%; 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

                                      F-9
<PAGE>
                               PHYSIOMETRIX, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

7. EMPLOYEE BENEFIT PLANS (CONTINUED)
Purchase Plan in 1998 and 1999 under FAS 123 in the pro forma net loss presented
below. The Company has determined that the pro forma net loss per share as
computed under Statement 123 is as follows:

<TABLE>
<CAPTION>
                                            1997          1998          1999
                                         -----------   -----------   -----------
<S>                                      <C>           <C>           <C>
Net loss
  As reported..........................  $(5,393,097)  $(7,530,717)  $(3,437,357)
  Pro forma............................  $(5,604,513)  $(7,781,080)  $(3,725,029)
Basic net loss per share
  As reported..........................  $      (.96)  $     (1.33)  $      (.60)
  Pro forma............................  $     (1.00)  $     (1.37)  $      (.65)
</TABLE>

    EMPLOYEE STOCK PURCHASE PLAN

    Under the 1996 Employee Stock Purchase Plan ("the Purchase Plan") eligible
employees may purchase common stock at a price per share equal to 85% of the
lower of the fair market value of the common stock at the beginning of the
offering period or end of each six month purchase period. Participation in the
offering is limited to 20% of the employees compensation or $25,000 in any
purchase period. The first offering commenced on December 1, 1996 and the
Purchase Plan terminated on November 30, 1999 upon the purchase of all the
remaining shares in the plan as of that date. A total of 150,000 shares of
Common Stock had been reserved for issuance under the Purchase Plan. A total of
24,640, 36,670 and 88,684 shares of Common Stock were purchased in 1997, 1998
and 1999, respectively. The Plan expired in November 1999 as the remaining
shares of the 150,000 shares that were reserved for the Plan were purchased
through the Plan.

    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 1997, 1998 or
1999.

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 carryforwards, the Company
has fully reserved this benefit. At December 31, 1999, the Company had tax net
operating loss carryforwards of approximately $21.3 million available to offset
taxable income. The Company also has research and development tax credit
carryforwards of approximately $469,000 available to offset federal and state
income taxes. Both carryforwards expire in varying amounts through 2019. In
accordance with Section 382 of the Internal Revenue Code, the use of the above
carryforwards will be subject to annual limitations based upon ownership changes
of the Company's stock which have occurred.

                                      F-10
<PAGE>
                               PHYSIOMETRIX, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

8. INCOME TAXES (CONTINUED)
    Significant components of the Company's deferred income taxes are as follows
as of December 31:

<TABLE>
<CAPTION>
                                                        1998          1999
                                                     -----------   -----------
<S>                                                  <C>           <C>
Net operating loss carryforwards...................  $ 7,261,000   $ 8,528,000
Research and development costs.....................    2,510,000     2,533,000
Research and development tax credits...............      409,000       469,000
Other..............................................        4,000        40,000
                                                     -----------   -----------
                                                      10,184,000    11,570,000
Valuation allowance................................  (10,184,000)  (11,570,000)
                                                     -----------   -----------
Net deferred tax asset.............................  $        --   $        --
                                                     ===========   ===========
</TABLE>

    The valuation allowance increased by $1,386,000 in 1999 and $2,931,000 in
1998 due primarily to the unbenefitted net operating losses incurred. The tax
net operating loss carryforward 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

    Certain of the Company's legal services, principally related to patent
matters, are provided by a firm which is affiliated with a director/shareholder.
Payments to this company amounted to approximately $23,900 in 1997. There were
no such payments in 1998 and 1999.

    The Company has a loan outstanding to an officer in the amount of $84,000 at
December 31, 1999 which is due periodically from 2000 to 2002. The loan accrued
interest at the applicable federal rate (6.31% at December 31, 1999).

10. SUBSEQUENT EVENT

    On February 29, 2000 the Company closed a private placement of common stock
and warrants totalling $21 million in net proceeds less offering costs to the
Company. The Company issued 2,080,340 shares of common stock at $10.80 and
warrants to purchase 624,102 shares of common stock at $14.04 per share.

                                      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>
                /s/ JOHN A. WILLIAMS                   President, Chief Executive
     -------------------------------------------       Officer and Director            March 24, 2000
                  John A. Williams                     (Principal Executive Officer)

                                                       Vice President and Chief
                 /s/ DANIEL W. MUEHL                   Financial Officer (Principal
     -------------------------------------------       Financial and Accounting        March 24, 2000
                   Daniel W. Muehl                     Officer)

                  /s/ THOMAS BARUCH                    Director
     -------------------------------------------                                       March 24, 2000
                    Thomas Baruch

               /s/ JAMES E. NICHOLSON                  Director
     -------------------------------------------                                       March 24, 2000
                 James E. Nicholson

                /s/ PETER BERNARDONI                   Director
     -------------------------------------------                                       March 24, 2000
                  Peter Bernardoni
</TABLE>

                                      F-12
<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.

        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-1999 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.