<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

                        FOR ANNUAL AND TRANSITION REPORTS
                             PURSUANT TO SECTIONS 13
                                 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

(Mark One)

|X|   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934.

      For the fiscal year ended: December 31, 2000

                                       OR

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

      For the transition period from ___ to ___

                         Commission File Number: 0-23247

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

               Delaware                             94-3142791
   (State or other jurisdiction of     (I.R.S. employer identification no.)
    incorporation or organization)

                       4 Maguire Road, Lexington, MA 02421
               (Address of principal executive offices) (Zip Code)

       Registrant's telephone number, including area code: (781) 280-7800

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

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

                          Common Stock, $0.01 par value
                                (Title of Class)
                         Preferred Share Purchase Rights
                                (Title of Class)

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

      Indicate by check mark if disclosures of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in part III of this Form 10-K or any
amendment to this Form 10-K. |X|

      The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $12,745,000 as of March 20, 2001, based upon the
average of the high and low prices of the Registrant's Common Stock reported for
such date on the NASDAQ National Market System. Shares of Common Stock held by
each executive officer and director and by each person who owns 10% or more of
the outstanding Common Stock have been excluded in that such persons may be
deemed to be affiliates. The determination of affiliate status is not
necessarily a conclusive determination for other purposes.

      As of March 20, 2001, the Registrant had outstanding 17,364,401 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 2001 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.

================================================================================

<PAGE>

                                     PART I

Item 1. BUSINESS

The Company

      Focal, Inc. ("Focal" or the "Company") develops, manufactures and
commercializes a unique family of biodegradable polymers based on the Company's
proprietary technology. This unique technology provides a platform for medical
devices and drug delivery vehicles. The first product developed from Focal's
technology platform is FocalSeal-L lung surgical sealant, which was approved by
the U.S. Food and Drug Administration ("FDA") for lung surgery in May 2000 and
launched in the U.S. in July 2000. The Company's family of FocalSeal surgical
sealant products is currently being developed for use inside the body to seal
leaks resulting from neurological, cardiovascular and gastrointestinal surgery.
The Company has entered into an exclusive marketing and distribution agreement
for its FocalSeal-L lung, cardiovascular and gastrointestinal surgical sealant
products in North America with Genzyme Biosurgery (formerly Genzyme Surgical
Products), a division of Genzyme Corporation ("Genzyme Biosurgery"). In markets
outside North America, Focal has entered into a marketing and distribution
agreement for all of its surgical sealant products with Ethicon, Inc., a
division of Johnson & Johnson ("Ethicon"). The Company has received FDA and CE
mark approval for FocalSeal(TM)-L surgical sealant for lung indications and has
received CE mark approval of FocalSeal-S surgical sealant for neurosurgery
indications in Europe. In addition, the Company has received marketing approval
for FocalSeal-L surgical sealant in Canada.

      There are more than 4 million open and minimally invasive lung,
neurological, cardiovascular and gastrointestinal surgical procedures
performed each year worldwide. In many of these procedures, air or fluid
leaks may arise and cannot be effectively treated with existing wound closure
products such as sutures and staples. These leaks may occur in an
unpredictable and unexpected manner, and the Company's products, may be
effective in reducing such post-surgical leaks. Because of the unpredictable
nature of these leaks, it may be difficult at the completion of surgery for
the surgeon to determine whether a particular surgical site will leak.
Accordingly, the Company believes that its FocalSeal surgical sealants may be
used routinely in certain procedures. The Company has successfully completed
clinical trials of FocalSeal-L surgical sealant for lung surgery in the
United States and in Europe. In these clinical trials, FocalSeal-L surgical
sealant was effective in sealing air and fluid leaks following lung surgery
and no unanticipated adverse device effects were observed. Focal has also
completed a clinical trial of FocalSeal-S surgical sealant for neurosurgery
in Europe and is working with the FDA on a U.S. clinical trial. Focal intends
to develop products for cardiovascular and gastrointestinal surgery
indications, although the timing and magnitude of these efforts are dependent
on the Company securing additional resources.

      Patients with persistent air or fluid leaks may require prolonged
hospitalization, have more complications, higher levels of post-operative pain,
and a higher risk of mortality. Sutures and staples represent the principal
products comprising the over $2.8 billion worldwide wound closure market.
Sutures and staples work very effectively in bringing dissected tissues back
together after surgery. However, sutures and staples alone do not have inherent
sealing capabilities, and therefore cannot consistently eliminate air and fluid
leakage at the wound site.

      Focal's surgical sealants have the following features which the Company
believes allow the product to effectively reduce the incidence of air and fluid
leaks following surgery:

      o provides an effective seal;

      o adheres and conforms very well to underlying tissue;

      o expands and contracts with tissue;


                                       1
<PAGE>

      o is safe and easy to use;

      o remains intact during the critical wound healing process; and

      o is bioabsorbable.

      FocalSeal surgical sealants, which are biocompatible, are designed to
remain intact through the critical wound healing period and are then absorbed
and eliminated by the body. Focal has developed two primary formulations of its
products, FocalSeal-L surgical sealant and FocalSeal-S surgical sealant, which
are designed to have absorption times that parallel long-term and short-term
synthetic, absorbable polymer sutures, respectively.

      Focal believes the use of its FocalSeal surgical sealants could
potentially shorten patient recovery times and hospital stays, and reduce
post-surgical complications. Focal's pivotal U.S. clinical trial of FocalSeal-L
surgical sealant for lung surgery demonstrated a trend toward earlier patient
discharge from the hospital.

      The Company received FDA approval for FocalSeal-L lung surgical sealant in
the United States in May 2000 and launched the product in July 2000 through
Genzyme Biosurgery's sales force. Currently, FocalSeal-L is the only FDA
approved lung sealant in the U.S.

      FocalSeal-S surgical sealant, the Company's second surgical sealant
formulation, is being developed initially to be used to seal cerebrospinal fluid
("CSF") leaks following neurosurgery. Focal received CE Mark approval for this
product in November of 1999. The Company is working with the FDA to receive an
IDE approval for a clinical trial in the United States.

      The Company believes, based upon preclinical evaluation of its polymers,
that its FocalSeal-L and FocalSeal-S surgical sealant formulations will also be
applicable to cardiovascular surgery, gastrointestinal surgery and other
surgical applications. Focal has successfully demonstrated in preclinical models
that FocalSeal-L surgical sealant is effective in sealing blood leaks in
coronary artery bypass graft ("CABG") surgery and other cardiovascular
indications. Focal is currently conducting further preclinical trials.

      Focal also intends to develop other applications for the liquid
formulations of its platform polymer technology, including local drug delivery
vehicles. In local drug delivery applications, the Company believes that its
polymers can deliver high concentrations of drugs at local disease sites,
thereby potentially enhancing efficacy and reducing toxicity associated with
systemic delivery of drugs. The Company believes that its polymer technology
will be uniquely effective because it adheres to the target tissue while it is
releasing drugs. Focal has demonstrated in preclinical models the ability to
obtain sustained release of drugs at a local disease site.

      Focal's family of surgical sealants and its other products under
development are based on the Company's proprietary synthetic absorbable polymer
technology. The Company's liquid formulations are comprised primarily of water,
absorbable polymers such as polyethylene glycol ("PEG") and other synthetic
components. These components are widely used in other medical products approved
for use inside the body, including synthetic absorbable sutures. The Company
designs its proprietary polymer formulations in order to control characteristics
such as absorption, viscosity, setting time, strength, flexibility and
elasticity. This enables the Company to tailor formulations for particular
surgical applications. A key distinguishing characteristic of the Company's


                                       2
<PAGE>

polymer formulations is that they are applied as liquids and then converted by
light into solid gels inside the body. The solid gel formed after the light has
been applied is highly flexible, elastic and transparent and strongly adheres to
moist or dry tissue. The resulting solid gel is then absorbed and eliminated
from the body over periods of time varying from weeks to months to years.

      The Company believes it has built a strong patent portfolio related to its
polymer technology. As of December 31, 2000, the Company has received, licensed
or believes it has the option or right to license 47 issued United States
patents and 36 foreign patents corresponding to certain of the issued United
States patents and has 23 patent applications pending in the United States, as
well as foreign counterparts of certain of these applications.

      Focal was incorporated in Delaware in June 1991. The Company's principal
executive offices are located at 4 Maguire Road, Lexington, Massachusetts 02421.
Its telephone number is (781) 280-7800.


                                       3
<PAGE>

Surgical Sealant Market

      Effective closure of internal wounds following surgical procedures is
critical to the restoration of the function of injured and diseased tissue and
the ultimate success of the surgical procedure. Failure to effectively seal
surgical wounds can result in leakage of air in lung surgery, cerebrospinal
fluid in neurosurgery, blood in cardiovascular surgery, and gastrointestinal
contents in gastrointestinal surgery. Air and fluid leaks resulting from
surgical procedures can lead to significant post-surgical morbidity that may
result in prolonged hospitalization, higher levels of postoperative pain and
complications and a higher mortality rate.

      The current annual worldwide market for wound closure products, consisting
primarily of surgical sutures and staples, is estimated at over $2.8 billion.
Sutures and staples facilitate healing by joining wound edges and allowing the
body to heal naturally. However, because sutures and staples do not have
inherent sealing capabilities, they cannot consistently eliminate air and fluid
leakage at the wound site. This is particularly the case when sutures and
staples are used to close tissues containing air or fluids under pressure, such
as the lobes of the lung, the dural membrane surrounding the brain and spinal
cord, blood vessels and the gastrointestinal tract. In addition, in minimally
invasive surgical procedures, where the physician must operate through small
access devices, it can be more difficult and time-consuming for the physician to
place sutures and staples as compared to open surgical procedures. The Company
believes that the use of surgical sealants in minimally invasive procedures
could enhance the efficacy of these procedures through more effective and rapid
wound closure.

      The limitations of sutures and staples in sealing certain air and fluid
leaks have led to the adaptation of other technologies to augment wound closure.
These alternatives include the use of liquid fibrin glues and non-liquid
collagen patch products. Fibrin glues were originally developed as hemostatic
agents to stop diffuse bleeding. They have limited effectiveness in many
surgical sealant applications because they do not adhere strongly to, or move
and expand with underlying tissue, particularly moist tissue. They are also not
capable of withstanding high pressure leaks. In spite of these limitations,
annual international sales of fibrin glue sealants are estimated to be
approximately $200 million.

      Collagen patches have similar limitations, in that they are not highly
adherent, strong or elastic. In addition, both collagen patches and fibrin glues
are absorbed by enzymatic reaction. Enzymatic reaction can result in variable
absorption time from patient to patient, depending upon metabolic rates, and can
potentially result in absorption prior to healing of the surgical site. Collagen
patches and fibrin glues are derived from animal by-products, including bovine
collagen and bovine and/or human plasma. These derivatives have resulted in
significant safety concerns such as disease transmission. Furthermore, the wound
closure industry has undergone a significant shift away from animal-derived
materials to synthetic materials due to the more predictable absorption,
superior performance characteristics and more favorable safety profile of
synthetic sutures. Currently, the Company estimates that over 65% of suture
materials are synthetic, as compared to only approximately 25% in 1975.

      Due to the limitations of sutures and staples in achieving rapid,
leakproof wound closure and the inadequacy of animal by-product sourced glues
and patches, Focal believes that a significant market opportunity exists for its
synthetic, absorbable, effective, surgical sealants.

Focal's Synthetic Polymer Technology

      Focal's family of surgical sealants and its other products under
development are based on the Company's proprietary synthetic, absorbable polymer
technology. The Company's polymers are designed to incorporate several
beneficial characteristics, which are critical to their use as surgical sealants
and in other medical applications, including adherence to tissue; strength,
flexibility and elasticity; consistent absorption; and safety and
biocompatibility.

      The Company's proprietary liquid formulations are primarily comprised of
water, absorbable polymers such as polyethylene glycol, or PEG, and other
synthetic components. Water makes up approximately 65 to 80% of Focal's
formulations and PEG and other synthetic components comprise the remaining 20 to
35% of the formulation. The components of Focal's surgical sealants are widely
used in other medical products approved for use inside the body, such as
synthetic absorbable sutures, intravenously administered pharmaceuticals, pain
medications and eye drops. The Company designs its proprietary polymer
formulations in order to control characteristics such as absorption, viscosity,
setting-time, strength, flexibility and elasticity. This enables the Company to
tailor polymers for particular applications. A key distinguishing characteristic
of the Company's


                                       4
<PAGE>

polymer formulations is that they are applied as liquids and are converted by
light into solid gels inside the body, a process known as photopolymerization.
The solid gel formed after the light has been applied is highly flexible,
elastic and transparent and strongly adheres to moist or dry tissue. The design
and macromer composition of the Company's polymers enable them to convert
quickly to solid gels without generating heat, which is a significant clinical
advantage over other in vivo polymerizable materials.

      The key technological hurdle which the Company overcame in the development
of its synthetic, liquid surgical sealants, was the crucial need to adhere
strongly to moist tissue surfaces. The Company's surgical sealants adhere to
tissue as a result of a proprietary two-step priming and sealing process. To use
FocalSeal surgical sealant, the physician first applies a liquid primer, which
penetrates the uneven surfaces of the tissue. Once the primer is brushed on, the
sealant is applied over the primer and both are exposed to a specific wavelength
of visible light. The primer and sealant contain a photoinitiator, which enables
them to convert rapidly to a solid gel upon exposure to light. The viscosity and
rapid conversion characteristics of the Company's surgical sealants enable the
physician to apply the sealant where desired and avoid significant run-off of
the material prior to its conversion to gel. Surgeons can perform the entire
surgical sealant application process quickly and efficiently after sufficient
training.


                                       5
<PAGE>

      The key properties of the Company's synthetic sealant polymers are:

      o     Adherence to Tissue. The Company's FocalSeal surgical sealants
            adhere well to both moist and dry tissue, a requirement for an
            effective sealant. The combination of a viscous liquid formulation
            polymer incorporating a photoinitiator enables the Company's
            polymers to adhere to tissue when applied as a liquid and to convert
            to gel rapidly when exposed to light. The Company's sealants have
            been shown to be four times more tissue adherent than fibrin glues.

      o     Strength, Flexibility and the Ability to Seal Leaks. The composition
            of the Company's polymers provides a high degree of strength,
            flexibility and elasticity, enabling them to stretch with the tissue
            to which they are applied. These qualities are especially
            significant when the polymers are used in areas where resistance to
            air and fluid pressure is critical, including the lungs, the dural
            membrane surrounding the brain, the vascular system and the
            gastrointestinal tract. The Company's sealants have been shown to be
            12 times more resistant to burst pressures than fibrin glues.

      o     Customizable Polymer Characteristics. By modifying the chemical
            composition of its polymers, the Company is able to control
            characteristics such as absorption, viscosity, strength, flexibility
            and elasticity. The customizable nature of the Company's polymer
            technology enables Focal to design and develop products with
            characteristics and properties that are tailored for specific
            clinical indications.

      o     Hydrolytic Absorption. The Company's synthetic polymers are designed
            to be predictably broken down by water, a process known as
            hydrolysis, and are absorbed by the body over a specified period of
            time depending upon their chemical composition. As a result, the
            Company's polymers should have a relatively consistent absorption
            profile from patient to patient. In contrast, collagen patches and
            fibrin glues are absorbed by enzymatic reaction, which can vary
            significantly from patient to patient depending upon an individual's
            metabolism.

      o     Totally Synthetic Composition; Safety and Biocompatibility. Focal's
            synthetic polymers are comprised of materials that are commonly
            found in other medical products approved for use in humans. The PEG
            backbone allows the formulations to be water-soluble and
            biocompatible, resulting in minimal reaction with the tissue to
            which the polymer is applied. In addition, the absence of animal or
            human derived materials eliminates safety concerns related to
            transmission of blood borne diseases such as HIV, hepatitis and mad
            cow disease. Preclinical toxicology testing of FocalSeal-L and
            FocalSeal-S surgical sealants, and clinical trials of FocalSeal-L
            and FocalSeal-S surgical sealants, indicate that these biomaterial
            formulations are non-toxic and safe.

      o     Transparency. The Company's polymers are transparent, enabling the
            physician to observe the underlying tissue to which the polymers
            have adhered to confirm sufficient coverage of the wound site. Other
            products used as surgical sealants, including fibrin glues and
            collagen patches, are not transparent.

      o     Long Acting. The Company's polymers are designed to remain intact
            during the critical wound healing process.

      The Company has also developed proprietary systems to deliver its surgical
sealants and other products to the wound site. Easy to use brush applicators
have been designed by the Company to apply its FocalSeal surgical sealants and
primer over tissue surfaces. These application devices have been tailored to
each specific indication, such as lung surgery and neurosurgery. The Company
also employs a light source and light wand to generate and deliver consistent
amounts of light necessary for conversion of its liquid formulations to solid
gels. These light sources and light wands are manufactured by third parties on
behalf of Focal.


                                       6
<PAGE>


Products and Product Development Programs

      The following table summarizes the status of the Company's products and
research and product development programs:

<TABLE>
<CAPTION>

             Product                                                           Marketing Rights
           Development                                                         ----------------
             Program        Indication            Status                   North America  International
           -----------      ----------            ------                   -------------  -------------
           Surgical
           Sealants
<S>        <C>               <C>             <C>                             <C>             <C>

           FocalSeal-L        Lung           FDA approved May                  Genzyme       Ethicon
                             Surgery         2000; product                   Biosurgery
                                             launched in the
                                             U.S. July 2000; CE
                                             Mark approval
                                             received March
                                             1998; approval
                                             received in Canada
                                             April 2000

           FocalSeal-S    Neurosurgery       CE Mark approval                  Focal         Ethicon
                                             received November
                                             1999; IDE approval
                                             for expanded
                                             patient population
                                             pending with FDA

           FocalSeal-L   Cardiovascular        Preclinical (1)                 Genzyme       Ethicon
                            surgery                                          Biosurgery

           FocalSeal-L   Gastrointestinal      Preclinical (1)                 Genzyme       Ethicon
                            surgery                                          Biosurgery

           Local Drug        Various           Preclinical (1)                 Focal          Focal
            Delivery

          Tissue Repair      Various           Preclinical (1)                 Focal          Focal
              and
          Restoration

         Other Medical       Various           Preclinical (1)                 Focal          Focal
           Devices
           (hemostats,
           grafts, etc.)
</TABLE>

(1)   "Preclinical" refers to formulation development and laboratory
      experimentation in animal models, including animal efficacy, safety and
      toxicology testing.

      FocalSeal Surgical Sealant Products.

      Focal is developing its FocalSeal-L and FocalSeal-S liquid surgical
sealants for use inside the body as an adjunct to sutures and staples to seal
leaks resulting from lung, neurological, cardiovascular and gastrointestinal
surgery. The FocalSeal surgical sealant system consists of a procedure kit
containing primer and sealant solutions and disposable applicators, a light
source used for converting Focal's product from a liquid to a solid gel, and a
reusable light wand. The Company's FocalSeal-L surgical sealant product for lung
surgery is marketed in North America by Genzyme Biosurgery and is being marketed
outside North America by Ethicon. Genzyme Biosurgery also has the marketing
rights to surgical sealants for cardiovascular and gastrointestinal indications
that Focal may develop in the future. Ethicon has marketing rights to all
additional surgical sealant products outside North America. Focal has retained
the marketing rights to its neurosurgery sealant in North America and has
retained manufacturing rights to its products worldwide.


                                       7
<PAGE>

      FocalSeal-L for Lung Surgery. The Company has developed FocalSeal-L
surgical sealant to seal air leaks resulting from lung surgery. During lung
surgery, air leaks can develop in the lung tissue that has been traumatized
during surgery and can unpredictably occur along staple and suture lines.
Approximately 300,000 lung surgery procedures, primarily for the treatment of
lung cancer, are performed worldwide each year including 190,000 such procedures
in the United States. According to the Company's clinical trial data in the U.S.
and Europe, the vast majority of patients undergoing lung surgery experience
intraoperative air leaks that are not resolved with sutures or staples.
Approximately 15% of lung surgery patients have air leaks that persist longer
than seven days and approximately 5% of patients have air leaks that are severe
enough to warrant additional surgery.

      As air leaks from the lung it accumulates in the thoracic cavity, making
breathing difficult because the lung cannot expand and contract normally. As a
result, patients require insertion of chest drainage tubes to vent accumulated
air. These chest tubes prolong pain and limit patient mobility. In addition to
remaining in the hospital until the air leaks are resolved, patients with
persistent air leaks must receive more intense nursing observation and care
while in the hospital than patients who do not experience air leaks. This
additional hospitalization and more intensive care, as well as the additional
surgery required for patients whose air leaks are severely prolonged, result in
substantial additional healthcare costs. Because it is often not possible to
determine at the conclusion of surgery which air leaks are likely to be
prolonged or sustained, the Company believes that FocalSeal-L surgical sealant
may be used routinely in major lung surgery procedures.

      The FDA approved the Company's FocalSeal-L lung surgical sealant in May
2000 and the product was launched with Genzyme Biosurgery in the U.S. in July
2000. The approval of FocalSeal-L lung surgical sealant in the U.S. was a major
milestone for the Company and the product is currently the only FDA approved
lung sealant in the U.S.

      A 180 patient, multi-center clinical trial was completed in late 1998 in
the United States involving the use of FocalSeal-L surgical sealant in sealing
air leaks following lung surgery. The four hospitals involved in the clinical
trial were Massachusetts General Hospital, University of Pennsylvania Medical
Center, Johns Hopkins University Medical Center and Strong Memorial Hospital.
Patients were randomized into the treated (received sutures and/or staples plus
FocalSeal-L surgical sealant) or control (received suture and/or staples only)
group. In the study, prior to randomization, it was determined that the vast
majority of the patients had air leaks following the use of standard sutures and
staples. FocalSeal-L surgical sealant was effective in sealing intraoperative
air leaks in 92% of the patients who were randomized into the treated group. By
contrast, only 29% of those patients in the untreated control group were free of
intraoperative air leaks. Through the date of discharge from the hospital, 39%
of those patients treated with FocalSeal-L surgical sealant remained leak-free
compared with 11% in the control group. In addition, the mean time to air leak
cessation was 30.9 hours in the treated group of patients, compared with 52.3
hours in the control group. To summarize, the end points required by the FDA,
comparing the treated group with the control group, were as follows:

      o     % of patients leak-free intraoperatively;

      o     % of patients leak-free through hospital discharge; and

      o     time to air leak cessation.

      All three of these end points were met with statistical significance and
demonstrated clinical significance as well. In addition to these formal end
points, a trend toward earlier removal of the chest tube and earlier hospital
discharge was demonstrated. On average, chest tubes were removed 0.7 days
earlier in the treated group versus the control group and patients were
discharged 2.7 days earlier in the treated group versus the control group. There
were no unexpected safety results noted when comparing the treated group and the
control group, including at the six month follow-up period required for all
patients.

      Focal and its marketing partner outside North America, Ethicon, are
currently selling FocalSeal-L lung surgical sealant under Ethicon's tradename,
AdvaSeal-L, in thirteen countries in Europe and certain other countries
including Australia and New Zealand. During 2000, sales of AdvaSeal-L
represented 9.39% of the Company's total product revenues. The Company believes
that the lack of market acceptance in Europe is due in part to the fact that
providers have no financial incentive to shorten hospital stays by using Focal's
product instead of conventional products under Europe's health care
reimbursement system.


                                       8
<PAGE>

      FocalSeal-S for Neurosurgery. The Company is developing FocalSeal-S
surgical sealant to seal the dura, a membrane that encapsulates the brain and
spinal cord and contains cerebrospinal fluid ("CSF") for cushioning and support.
In cranial surgeries, the neurosurgeon must open the cranium and penetrate
through the dural membrane. Following surgery, the neurosurgeon must
meticulously suture the dura in an attempt to achieve leakproof closure, a
process that may require the use of up to hundreds of small sutures. These
attempts are not always successful, resulting in potentially serious CSF leaks.
Approximately 600,000 cranial and spinal surgeries are performed annually in the
United States, and the Company estimates that 900,000 procedures are performed
each year worldwide. Leakage of CSF has been reported to occur in up to 15% of
these procedures. Because these leaks occur in an unpredictable manner, an
effective surgical sealant may be used prophylactically in cranial surgery
procedures. CSF leakage can result in infections, including meningitis, caused
by the passage of infectious agents through the dural leak, as well as
debilitating headaches.

      In spinal cord surgeries, the surgeon seeks to avoid penetration of the
dura. According to published literature, inadvertent penetration of the dura
occurs in up to approximately 13% of these procedures. Penetration of the dura
can result in leakage of CSF with potential complications similar to those that
can arise in cranial surgeries. When inadvertent penetration of the dura occurs
in spinal surgeries, the surgeon generally does not elect to use sutures to
close the dural leak due to the risk of injuring the spinal cord with the
suturing needle. Therefore, there is a real need for a surgical sealant product
that can effectively seal CSF leaks in this spinal indication.

      Focal received European CE Mark approval of FocalSeal-S surgical sealant
in November of 1999 for neurosurgery and spinal surgery indications. The Company
and its marketing partner outside North America, Ethicon, plan to continue a
limited release of this product in Europe in 2001. A 44 patient clinical trial
was completed in 1998 at three hospitals in Europe, including one hospital in
The Netherlands and two hospitals in Switzerland. All patients enrolled in the
trial received FocalSeal-S surgical sealant on the dural membrane following
cranial surgery. There was no control arm of the study. The two clinical end
points were sealing of intraoperative CSF leaks and safety. These end points
were successfully attained. Following the use of FocalSeal-S surgical sealant,
100% of the patients were leak-free at the end of their surgery. There were no
unexpected safety issues noted during the clinical trial, including the three
month follow-up period required for all patients.

      The Company received approval of its investigational device exemption, or
IDE, application for FocalSeal-S from the FDA in the third quarter of 1999 and
initiated a multi-center clinical trial in the fourth quarter of 1999. Based on
limited enrollment, the Company elected to stop the study and apply for an
expanded IDE to include a broader patient population. The Company is working
closely with the FDA toward developing an acceptable revised protocol.

      Cardiovascular Surgical Sealant. Focal is evaluating use of its
FocalSeal-L surgical sealant for use in sealing vascular anastomoses (the
attachment of blood vessels in surgical procedures) and arteriotomies (the
surgical opening in a vein or artery) in cardiovascular surgeries. There are
approximately 1.3 million cardiac and vascular procedures performed annually
worldwide, and the Company believes that over 350,000 of these procedures have
the potential application for FocalSeal. These procedures include both open and
minimally invasive coronary artery bypass graft surgeries and other vascular
surgical procedures. In most cardiovascular surgical procedures, vascular
anastomoses are performed with sutures. These anastomoses use both blood vessel
grafts from the patient's own veins or arteries, which occasionally leak, and
synthetic grafts, which regularly leak. In minimally invasive CABG surgeries,
achievement of a leakproof vascular anastomosis can be particularly difficult
and time consuming because the small access ports through which the surgeon must
operate can make placement of sutures difficult. Failure to achieve a leakproof
vascular graft anastomosis can result in sudden blood leaks that may potentially
be life threatening and may occur unpredictably after the surgery has been
completed. These complications can add significant costs to cardiovascular
procedures by increasing the level of care required and prolonging
hospitalization. The Company's sealants have been shown to be effective in
sealing vascular leaks in several preclinical large animal models. A preclinical
study was completed by a collaborator from Massachusetts General Hospital using
a coronary artery bypass graft surgery model. In this study, FocalSeal-L
surgical sealant was effective in sealing blood leaks following a CABG
procedure. Additional preclinical testing of the cardiovascular sealant product
is in progress. The Company is currently formulating its plans for initiating
clinical trials of its cardiovascular sealant in the United States. The Company
does not expect to initiate such clinical trials until 2002 at the earliest.


                                       9
<PAGE>

      Focal is currently planning to submit a dossier to the regulatory body in
Europe to obtain CE Mark approval in 2001.

      Gastrointestinal Surgical Sealant. Focal is evaluating the use of its
FocalSeal surgical sealants to prevent leakage of gastrointestinal contents
following gastrointestinal surgery. Leakage can occur as a result of incomplete
reattachment of the portions of the digestive tract being operated upon and may
result in infections, delayed healing or fibrosis. Clinically significant
gastrointestinal tract leakage is most prevalent and unpredictable in esophageal
and large bowel surgeries. Approximately 250,000 gastrointestinal surgeries are
performed annually worldwide, including esophageal and large bowel surgeries
that have potential application for FocalSeal. Postoperative leaks are reported
to occur in up to 5 to 10% of large bowel surgeries and in up to 25% of
esophageal surgeries. The Company believes that, due to the unpredictable nature
of leaks in these procedures, FocalSeal surgical sealant may be used routinely.
The Company's sealants have been shown to be effective in sealing
gastrointestinal leaks in several preclinical large animal models.

      Local Drug Delivery

      Focal's polymers have properties that enable them to incorporate and
deliver drugs over a sustained period of time at local disease sites. Local drug
delivery can enable the administration of drugs in much higher concentrations
than if the drugs were delivered systemically. This can potentially increase the
efficacy of the drugs without a corresponding increase in side effects. Focal
has explored the delivery of drugs, including pain management, cancer drugs,
growth factors, proteins, antibiotics and cardiovascular drugs, with its
polymers.

      The focus of current research efforts is on the local delivery of cancer
drugs for the treatment of breast cancer. These projects are at an early stage
of development and while the Company has demonstrated proof of principle that
its drug delivery technology may work, there is substantial research and
development yet to be performed before these products enter human clinical
trials. There are several studies underway at university research hospitals and
preliminary results from these ongoing studies are encouraging. The Company is
seeking corporate partners to license or assist in the development of the local
drug delivery technology or, alternatively, may consider a sale of such
technology to a third party.

      Tissue Restoration and Repair

      The significant biocompatibility of the Focal polymers provides an
excellent matrix for cellular growth for the restoration and repair of damaged
tissue. This branch of the tissue engineering field is a natural extension of
the Focal hydrogel platform. Among the applications that the Company is actively
evaluating are bone repair, cartilage repair, disk repair, prevention of post
surgical adhesions, and ocular repair. The Company has developed some strong
intellectual property in this area in recent years which the Company hopes to
exploit through partner funded development programs.

      Other Medical Devices

      The Company has identified several additional potential applications for
its proprietary synthetic, liquid formulation polymer technology, including
synthetic coatings for vascular grafts, hemostats and arterial puncture closure
devices. Although the Company has generated early stage proof of principle in
certain of these indications, the Company is currently devoting minimal
resources to these projects. There can be no assurance that the Company will in
the future devote resources to any of these research initiatives, that any of
such research initiatives will result in the identification of product
formulations that demonstrate sufficient promise in animal models to enable them
to become candidates to enter human clinical trials, or that any products for
which the Company is able to seek and obtain regulatory approvals and introduce
commercially either in the United States or internationally will result from
these efforts.

      Research and Development Expenditures

      During the years ended December 31, 1998, 1999 and 2000, the Company
incurred expenses of $10.5, $12.6 and $8.0 million, respectively, on
Company-sponsored research and development activities, and $5.1, $1.9 and $0.1
million, respectively, on customer-sponsored research and development programs.


                                       10
<PAGE>

Strategic Alliances

      Focal's commercial strategy is to enter into strategic marketing alliances
with leading medical products company distributors. The Company's strategic
marketing relationships with Genzyme Biosurgery and with Ethicon are described
below.

      Genzyme Biosurgery (a division of Genzyme Corporation)

      In October 1999, Focal entered into a Marketing and Distribution Agreement
with Genzyme Biosurgery, a division of Genzyme Corporation. Genzyme Biosurgery
develops and markets a portfolio of devices, biomaterials and biotherapeutics
for the cardiothoracic and general surgery markets. Genzyme Biosurgery was
granted exclusive marketing and distribution rights to Focal's surgical sealant
products for lung surgery, cardiovascular surgery and gastrointestinal surgery
in North America. Focal retained marketing rights to its neurosurgery sealant
product and manufacturing rights to all surgical sealant products in North
America.

      Genzyme Biosurgery has approximately 30 sales representatives selling the
FocalSeal-L surgical sealant product since commercial launch in the U.S. in July
2000. In addition, Focal has hired product specialists to support the Genzyme
Biosurgery sales force in the field with training and product demonstrations.

      Under the terms of the Distribution Agreement, Focal will be reimbursed
for its cost of manufacturing FocalSeal-L sealant plus 50% of the gross margin
generated from Genzyme Biosurgery's sales of the product to end users. The term
of the Distribution Agreement is ten years, with two five-year renewal options,
which are automatic if Genzyme Biosurgery meets certain minimum performance
standards.

      In addition to the Marketing and Distribution Agreement, in October 1999
Focal and Genzyme Biosurgery also entered into a Stock Purchase Agreement, with
up to $20.0 million in purchases of the Company's common stock committed by
Genzyme Biosurgery over a twenty month period, subject to certain specified
conditions. The first $5.0 million purchase was made by Genzyme Biosurgery in
November 1999, with Genzyme Biosurgery purchasing approximately 810,000 shares
at a 25% premium to the ten day average trading price of the Company's common
stock prior to the investment. The second $5.0 million purchase was made by
Genzyme Biosurgery in April 2000, with Genzyme Biosurgery purchasing
approximately 614,000 shares at the twenty day average trading price of the
Company's common stock prior to the investment. The third $5.0 million
investment was made by Genzyme Biosurgery in January 2001, with Genzyme
Biosurgery purchasing approximately 2.4 million shares at the twenty day average
trading price of the Company's common stock prior to the investment. At Focal's
option, one additional $5.0 million investment will be made by Genzyme
Biosurgery. The final investment of $5.0 million may be called by Focal in the
second quarter of 2001, subject to the satisfaction of closing conditions. The
final investment will be priced based upon the twenty day trading average of the
Company's stock.

      Ethicon (a Johnson & Johnson company)

      In January 1997, the Company entered into an exclusive Distribution,
License and Supply Agreement with Ethicon, Inc., a Johnson & Johnson company,
for the research, development and commercialization of the Company's surgical
sealant products. Ethicon received marketing rights for all surgical sealant
indications in all territories outside North America, while the Company retained
manufacturing rights and receives a combined royalty/transfer price on all
Ethicon sales. The Ethicon Agreement outlines the basis and timetable for the
development, supply, marketing, packaging and distribution of FocalSeal-L and
FocalSeal-S surgical sealants for use intraoperatively as surgical sealants for
lung surgery and neurosurgery indications and other indications. In August 1998,
the Ethicon Agreement was expanded with a funding agreement for development of a
cardiovascular surgical sealant. However, in February 2000, Ethicon informed
Focal that it does not intend to continue the development and commercialization
of the cardiovascular surgical sealant.

      Ethicon is responsible for obtaining regulatory clearances and approvals
in Japan and countries outside of the European Union. Ethicon will pay Focal a
specified percentage of net sales of surgical sealant products manufactured by
Focal and shipped to Ethicon. In addition, in the event Focal is unable to
achieve specified supply targets or is in non-compliance with the manufacturing
standards established for the CE mark and by Ethicon,


                                       11
<PAGE>

Ethicon has the right to manufacture surgical sealants for sale in all
territories outside North America. Such manufacturing rights, if exercised by
Ethicon, will be royalty-bearing and non-exclusive.

      Ethicon may terminate the agreement at any time upon twelve months' prior
written notice. In addition, Focal has the right to terminate the agreement on
ninety days' prior written notice if Ethicon fails to meet the applicable annual
purchase minimums set forth in the agreement. Ethicon is required to satisfy its
initial annual purchase minimums on or before April 5, 2001 either by purchasing
products or by making a payment to the Company. If Ethicon fails to do so, Focal
has the right to terminate.

Patents and Proprietary Rights

      The Company believes that patents and other proprietary rights are
important to its business. The Company's policy is to file patent applications
to protect technology, inventions and improvements to its inventions that are
considered important to its business and that provide a competitive advantage.
Focal also relies on trade secrets, general know-how, in-licensing opportunities
and continuing technological innovation.

      The Company has received, licensed or believes it has the option or right
to license 47 issued United States patents and 36 foreign patents corresponding
to certain of the issued United States patents, has six additional United States
patent applications that have been allowed and has 23 patent applications
pending in the United States, as well as foreign counterparts of certain of
these applications. The issued United States patents have expiration dates
ranging from 2010 to 2017. These patents and patent applications cover certain
aspects of the Company's photopolymerizable polymer formulations, surgical
sealant compositions and methods, and designs for delivery devices.

      The Company has licensed from the University of Texas and Endoluminal
Therapeutics, Inc. (a company controlled by one of the Company's founding
scientists) worldwide rights to certain technologies which are the subject of
issued patents and pending patent applications based upon technologies developed
by two of the Company's founders. These licenses are terminable in the event of
failure by the Company to pay scheduled royalties, failure to commercialize
products in the fields covered by these licenses and under certain other
conditions.

      Because of the substantial length of time and expense associated with
bringing new products through the development and regulatory approval processes
in order to reach the marketplace, the medical products industry places
considerable importance on obtaining patent and trade secret protection for new
technologies, products and processes. Accordingly, the Company intends to seek
patent protection for its proprietary technology, products and processes.

      The Company's success will depend in part on its ability to obtain patent
protection for its products, preserve its trade secrets, prevent third parties
from infringing upon its proprietary rights and operate without infringing upon
the proprietary rights of others, both in the United States and internationally.
There can be no assurance that the Company's pending or future patent
applications will issue, or that the claims of the Company's issued patents, or
any patents that may issue in the future will provide any competitive advantages
for the Company's products or that they will not be successfully challenged,
narrowed, invalidated or circumvented in the future. Moreover, litigation and
interference or opposition proceedings associated with enforcing or defending
patents or trade secrets is expensive and can divert the efforts of technical
and management personnel.

      The Company has filed patent applications in certain foreign countries
corresponding to certain patent applications that it filed in the United States
and may file additional patent applications inside and outside the United
States. The Company believes that the protection afforded by foreign patents or
any other foreign intellectual property protection, if obtained, may be more
limited than that provided domestically. In addition, there can be no assurance
that competitors will not seek to apply for and obtain patents that will
prevent, limit or interfere with the Company's ability to make, use, import and
sell its products.

      The Company is aware that certain medical device, pharmaceutical and other
companies, universities and research institutions have filed patent applications
or have issued patents relating to the compositions and methods for wound
closure and adhesion prevention. In addition, the medical device and
pharmaceutical industries have been characterized by extensive litigation
regarding patents and other intellectual property rights, and many companies in
the medical device and pharmaceutical industries have employed intellectual
property litigation to gain a


                                       12
<PAGE>

competitive advantage. There can be no assurance that litigation will not be
brought against the Company by third parties in the future challenging the
Company's patent rights or claiming infringement by the Company of patents held
by the third parties. Because patent applications in the United States are
confidential until the patents issue, and publication of discoveries in the
scientific and patent literature tends to lag behind actual discoveries by
several months, the Company cannot be certain that Company inventors or
licensors were the first to conceive of inventions covered by pending patent
applications or that the Company was the first to file patent applications for
such inventions.

      The Company may be required or find it desirable to obtain licenses to
patents or proprietary rights of others. No assurance can be given that any
licenses required under any patents or proprietary rights of third parties would
be made available on terms acceptable to the Company. If the Company does not
obtain such licenses, it could encounter delays in product introductions while
it attempts to design around such patents, or could find that the development,
manufacture or sale of products requiring such licenses is foreclosed.
Litigation may be necessary to defend against or assert claims of patent
infringement or invalidity, to enforce or defend patents issued to the Company;
to protect trade secrets or know-how owned by the Company, or to determine the
scope and validity of the proprietary rights of others. In addition,
interference proceedings declared by the United States Patent and Trademark
Office, or opposition proceedings in a foreign patent office, may be necessary
to determine the priority of inventions with respect to patent applications of
the Company or its licensors. Litigation, interference or opposition proceedings
could result in substantial costs to and diversion of effort by the Company, and
adverse determinations in any such proceedings could have a material adverse
effect on the business, financial condition or results of operations of the
Company.

      The Company also relies upon unpatented trade secrets and improvements,
unpatented know-how and continuing technological innovation to develop and
maintain its competitive position, which it seeks to protect, in part, by
confidentiality agreements with its commercial partners, collaborators,
employees and consultants. The Company also has invention and patent assignment
agreements with its employees and certain, but not all, commercial partners and
consultants. There can be no assurance that relevant inventions will not be
developed by a person not bound by an invention assignment agreement. There can
be no assurance that binding agreements will not be breached, that the Company
would have adequate remedies for any breach, or that the Company's trade secrets
will not otherwise become known or be independently discovered by competitors.

      The Company currently owns the following trademarks:

      o     Focal(R)

      o     FocalGel(R)

      o     FocalSeal(R)

      o     Corporate Logo

Government Regulation

      United States

      The Company's proposed products and its research and development
activities are subject to regulation by numerous governmental authorities,
principally the FDA and corresponding state and foreign regulatory agencies. The
Federal Food, Drug, and Cosmetic Act, as amended (the "FDC Act"), the
regulations promulgated thereunder, and other federal and state statutes and
regulations, govern, among other things, the preclinical and clinical testing,
manufacture, safety, efficacy, labeling, storage, record keeping, advertising
and promotion of medical devices and drugs, including the products currently
under development by the Company. Product development and approval within this
regulatory framework takes a number of years and involves the expenditure of
substantial resources.

      In the United States, medical devices are classified into three different
classes, class I, II and III, on the basis of controls deemed necessary to
reasonably ensure the safety and effectiveness of the device. Class I devices
are subject to general controls (e.g., labeling and adherence to the FDA's good
manufacturing practice requirements ("GMPs")) and class II devices are subject
to general and special controls (e.g., performance standards, postmarket


                                       13
<PAGE>

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 been found not to be
substantially equivalent to legally marketed Class I or II devices).

      Unless it is exempt, a new medical device can be marketed only with
marketing clearance obtained through a premarket notification under Section
510(k) of the FDC Act or a premarket approval ("PMA") application under Section
515 of the FDC Act. A 510(k) clearance will typically be granted by the FDA if
it can be established that the device is substantially equivalent to a
"predicate device," which is a legally marketed class I or II device or a
preamendment class III device (i.e. one that has been marketed since a date
prior to May 28, 1976) for which the FDA has not called for PMAs. The FDA has
been requiring an increasingly rigorous demonstration of substantial equivalence
and this may include a requirement to submit human clinical trial data. It
generally takes four to twelve months from the date of a 510(k) submission to
obtain clearance, but it may take longer.

      The FDA may determine that a medical device is not substantially
equivalent to a predicate device, or that additional information is needed
before a substantial equivalence determination can be made. A "not substantially
equivalent" determination, or a request for additional information, could
prevent or delay the market introduction of new products that fall into this
category. For any devices that are cleared through the 510(k) process,
modifications or enhancements that could significantly affect the safety or
effectiveness, or that constitute a major change in the intended use of the
device, will require new 510(k) submissions.

      A PMA application must be filed if a proposed device is not substantially
equivalent to a legally marketed class I or class II device, or if it is a
preamendment class III device for which the FDA has called for PMAs. A PMA
application must be supported by valid scientific evidence to demonstrate the
safety and effectiveness of the device, typically including the results of
clinical trials, bench tests, and laboratory and animal studies. The PMA must
also contain a complete description of the device and its components, and a
detailed description of the methods, facilities and controls used to manufacture
the device. In addition, the submission must include the proposed labeling,
advertising literature, and any training materials. The PMA process can be
expensive, uncertain and lengthy, and a number of devices for which FDA approval
has been sought by other companies have never been approved for marketing.

      Upon receipt of a PMA application, the FDA makes a threshold determination
as to whether the application is sufficiently complete to permit a substantive
review. If the FDA determines that the PMA application is sufficiently complete
to permit a substantive review, the FDA will accept the application for filing.
Once the submission is accepted for filing, the FDA begins an in-depth review of
the PMA. The FDA review of a PMA application generally takes one to three years
from the date the PMA is accepted for filing, but may take significantly longer.
The review time is often significantly extended by the FDA asking for more
information or clarification of information already provided in the submission.
During the review period, an advisory committee, typically a panel of
clinicians, may be convened to review and evaluate the application and provide a
recommendation to the FDA as to whether the device should be approved. The FDA
accords substantial weight to the recommendation but is not bound by it. Toward
the end of the PMA review process, the FDA generally will conduct an inspection
of the manufacturer's facilities to ensure compliance with applicable GMP
requirements, which include elaborate testing, control documentation and other
quality assurance procedures. The Company underwent an FDA GMP inspection of its
facilities in Lexington, Massachusetts, and the FocalSeal-L surgical sealant
data was subject to a bioresearch monitoring review in connection with the
Company's PMA approval.

      If the FDA's evaluations of both the PMA application and the manufacturing
facilities are favorable, the FDA may issue either an approval letter or an
approvable letter, which usually contains a number of conditions that must be
met in order to secure final approval of the PMA. When and if those conditions
have been fulfilled to the satisfaction of the FDA, the agency will issue a PMA
approval letter, authorizing marketing of the device for certain indications. If
the FDA's evaluation of the PMA application or manufacturing facilities is not
favorable, the FDA will deny approval of the PMA application or issue a
"non-approvable" letter. The FDA may determine that additional clinical trials
are necessary, in which case the PMA may be delayed for one or more years while
additional clinical trials are conducted and submitted in an amendment to the
PMA. Modifications to a device that is the subject of an approved PMA, its
labeling or manufacturing process may require approval by the FDA of PMA
supplements or new PMAs. Supplements to a PMA often require the submission of
the same type of information required for an initial PMA, except that the
supplement is generally limited to that information needed to support the
proposed change from the product covered by the original PMA. In May 2000, the
Company received the


                                       14
<PAGE>

approval letter for the FocalSeal-L surgical sealant. The Company has agreed to
a five-year, annual follow up review of the original 180 clinical trial patients
to monitor any potential differences between the treated group and the control
group. The Company does not consider this requirement burdensome or unusual for
a new implantable medical device.

      If human clinical trials of a device are required, either for a 510(k)
submission or a PMA application, and the device presents a "significant risk,"
the sponsor of the trial (usually the manufacturer or the distributor of the
device) must 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 laboratory testing. If the
IDE application is approved by the FDA and one or more appropriate Institutional
Review Boards ("IRBs"), human clinical trials may begin at a specific number of
investigational sites with a specific number of patients, as approved by the
FDA. If the device presents a "nonsignificant risk" to the patient, a sponsor
may begin the clinical trial after obtaining approval for the study by one or
more appropriate IRBs without the need for FDA approval. Submission of an IDE
does not give assurance that FDA will approve the IDE and, if it is approved,
there can be no assurance that FDA will determine that the data derived from the
studies support the safety and efficacy of the device or warrant the
continuation of clinical studies. Sponsors of clinical trials are permitted to
sell investigational devices distributed in the course of the study provided
such compensation does not exceed recovery of the costs of manufacture,
research, development and handling. An IDE supplement must be submitted to and
approved by the FDA before a sponsor or investigator may make a change to the
investigational plan that may affect its scientific soundness or the rights,
safety or welfare of human subjects.

      The Company's FocalSeal surgical sealant products will be regulated as a
class III medical device and will require a separate PMA approval for each
indication to be marketed in the United States. In addition, the Company may be
required to obtain IDEs for additional applications of FocalSeal surgical
sealant and for other products that the Company develops that are regulated by
the FDA as medical devices. There is no assurance that data, typically the
results of animal and laboratory testing, that may be provided by the Company in
support of future IDE applications will be deemed adequate for the purpose of
obtaining IDE approval, that the Company will obtain approval to conduct
clinical studies of any such future product, or that such clinical studies, if
completed, will generate data adequate to support PMA approval. There can be no
assurance that PMA approval can be obtained for any product in a timely fashion,
or at all.

      Upon clearance or approval by the FDA, any device manufactured or
distributed by the Company will be subject to pervasive and continuing
regulation by the FDA. The Company will be subject to inspection by the FDA and
will have to comply with the host of regulatory requirements that usually apply
to medical devices marketed in the United States, including labeling
regulations, GMP requirements, the Medical Device Reporting ("MDR") regulation
(which requires a manufacturer to report to the FDA certain types of adverse
events involving its products), and the FDA's prohibitions against promoting
products for unapproved or "off-label" uses. The Company's failure to comply
with applicable regulatory requirements could result in enforcement action by
the FDA, which could have a material adverse effect on the Company's business,
financial condition and results of operations.

      Other products that may be developed by the Company, including products
for local drug delivery, may be regulated as drugs requiring FDA approval of a
new drug application ("NDA") prior to commercialization in the United States.
The NDA approval process is generally considered more onerous, costly and
lengthy than the PMA process, often requiring more extensive preclinical and
clinical testing, and many products for which NDAs have been submitted by other
companies have never been approved for marketing.

      If the FDA believes that a company is not in compliance with 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 material adverse effect on the Company's business, financial
condition and results of operations. In addition, regulations regarding the
manufacture and sale of the Company's products are subject to change. The
Company cannot predict the effect, if any, that such changes might have on its
business, financial condition or results of operations.


                                       15
<PAGE>

      International

      In order for the Company and its strategic partners to market the
Company's products in Europe and other foreign countries, the Company and/or its
partners must obtain required regulatory approvals and comply with extensive
regulations governing safety, quality and manufacturing processes. These
regulations vary significantly from country to country. The time required to
obtain approval to market the Company's products may be longer or shorter than
that required in the United States. In order to market FocalSeal surgical
sealants and other products being developed by the Company in the member
countries of the European Union, the Company will be required to obtain CE mark
certification. CE mark certification is an international symbol of adherence to
quality assurance standards and compliance with applicable European medical
device directives. In December 1997, the Company received a CE mark for its
FocalSeal-L surgical sealant for lung surgery and obtained ISO 9001 status. In
November 1999, the Company received a CE mark for its FocalSeal-S sealant for
neurosurgery. In September 2000, Focal successfully completed the CE Mark
recertification audit, which occurs every three years. Although the audit has
been successfully completed, there can be no assurance that the Company will be
successful in maintaining its CE mark certification and ISO 9001 status or that
additional CE Mark approvals will be received for other clinical indications.

Sales and Marketing

      Focal is marketing and selling its surgical sealants in North America
through Genzyme Biosurgery and internationally through Ethicon, Inc., a Johnson
& Johnson Company. Genzyme Biosurgery has a team of approximately 30 sales
representatives who, together with Focal product specialists, have been
distributing the FocalSeal-L lung surgery sealant product throughout the United
States since commercial launch in July 2000. In Canada, a team of six of Genzyme
Biosurgery's sales representatives are distributing the product, which was
launched in Canada in April 2000. The sales team in the United States is
initially focused on the top several hundred largest cardiothoracic centers that
account for a majority of the lung surgery procedures performed annually.
FocalSeal-L surgical sealant is currently being used in over 130 hospitals in
the U.S., with a reorder rate of approximately 70%.

      Ethicon has a team of specialized sales representatives to sell Focal's
product in Europe and certain other countries including Israel and Australia.
Sales to date have not been substantial.

      The Company has limited sales and marketing experience and capabilities.
The Company relies significantly on Genzyme Biosurgery and Ethicon to market and
sell its lead products. Its revenue is significantly dependent on the success
and efforts of these parties. All product revenues, substantially all
collaborative research revenues and substantially all accounts receivable are
derived from Genzyme Biosurgery and Ethicon. If the Company terminates its
relationships with either Genzyme Biosurgery or Ethicon it may have to enter
into additional marketing arrangements, which may not be available on favorable
terms. If the Company determines to perform sales and marketing functions
independently, it will face a number of risks, including difficulties in hiring,
training and retaining a sales and marketing force, and increased expenses to
establish a sales and marketing strategy and hire and train employees. Any such
third party or independent sales and marketing efforts may not be successful,
which could materially impair the Company's ability to generate revenue.

      The Company's sales and marketing strategy for other products that it may
in the future seek to develop, includes using a combination of the Company's own
product specialists, strategic marketing partners and distributors. The sales
and marketing plans for these products, if any, will be dependent on the
Company's success in entering into strategic marketing relationships, its
ability to leverage its own internal sales force to market additional products
beyond the surgical sealant products and its ability to hire and retain
additional specialized sales personnel.

Manufacturing

      The Company believes that it has sufficient manufacturing capacity at its
Lexington, Massachusetts facility to meet anticipated supply requirements for
FocalSeal-L and FocalSeal-S surgical sealant in the United States and in
international markets for the next several years.

      The Company performs certain steps in the FocalSeal surgical sealant
manufacturing process internally and relies on outside contractors for others.
Certain proprietary processes, including polymer synthesis, are


                                       16
<PAGE>

performed by Focal. The Company uses outside contractors for nonproprietary,
high volume processes including sterilization and aseptic filling. The Company
also contracts with third parties for the manufacture of syringes, applicators,
light sources and light wands.

      Manufacturers often encounter difficulties in scaling up production of
their products, including problems involving production yields, quality control
and assurance, component supply and shortages of qualified personnel. The
Company expects that it has sufficient current manufacturing capacity to meet
commercial needs over the next several years. It may need to establish
additional manufacturing capacity if demand for its products increases in future
years. There can be no assurance that the Company will be successful in scaling
up its manufacturing efforts for new products or increased volume on existing
products in the future or that reliable high-volume manufacturing can be
maintained at commercially reasonable costs.

      The Company would experience supply interruptions in the event it is
unable to maintain commercial levels of polymer synthesis, as the Company's
polymer formulations are proprietary and are not available from third parties.
In addition, there can be no assurance that the Company will not encounter
unanticipated problems and delays in connection with its contract manufacturers
and suppliers. Delays associated with or difficulties encountered in maintaining
commercial manufacturing, the establishment of new manufacturing facilities as
needed, or problems encountered with contract manufacturers and suppliers, would
result in disruptions of product supply to the Company's marketing partners and
for use in clinical trials. In such event Ethicon or Genzyme could, under its
agreement with the Company, commence manufacturing of surgical sealant for
sales. Any of the foregoing would have a material adverse affect on the
Company's financial condition and results of operations.

      The Company purchases raw materials used in its products from various
suppliers. Certain materials and components are currently purchased by the
Company from single sources. These materials have generally been readily
available in the marketplace and have not been the subject of shortages. There
can, however, be no assurance that the Company or its suppliers or contract
manufacturers will not experience material shortages in the future. Any such
future shortages of materials or components could have a material adverse effect
on the Company's financial condition and results of operations.

      The Company is also required to register as a medical device manufacturer
with the FDA and to list its products with the FDA. As such, the Company is
subject to inspections by the FDA for compliance with applicable GMP
requirements, which include elaborate testing, control documentation and other
quality assurance procedures. Further, the Company and the third party
manufacturers of its products are required to comply with various FDA
requirements for design, safety, advertising and labeling.

      Complex medical devices, such as the Company's products, can experience
performance that require review and possible corrective action by the
manufacturer. There can be no assurance that component failures, manufacturing
errors or design defects that could result in an unsafe condition or injury will
not occur. If any such failures or defects were deemed serious, the Company
could be required to withdraw or recall products, which could result in
significant costs to the Company. There can be no assurance that market
withdrawals or product recalls will not occur in the future. Any future product
problems could result in market withdrawals or recalls of products, which could
have a material adverse affect on the Company's business, financial condition or
results of operations.

Competition and Technological Change

      The Company competes with many domestic and foreign medical device,
pharmaceutical and biopharmaceutical companies. In the surgical sealant area,
the Company will compete with existing methodologies for sealing air and fluid
leaks resulting from surgery, including some traditional wound closure products
such as sutures and staples, marketed by companies such as Johnson & Johnson,
and United States Surgical Corporation (Tyco). Other products currently being
marketed include fibrin glue, sold in Europe and the Pacific Rim countries by
Immuno AG, Cention and Fujisawa and in the U.S. by Baxter Healthcare Corporation
and others. Additional products are under development at Bristol-Myers Squibb
Company and Vitex. Other potential competitors in the surgical sealant market
include Closure Medical Corporation, B. Braun GmBH, Cryolife, Cohesion and
others. Competitive products may also be under development by other large
medical device, pharmaceutical and biopharmaceutical companies. The other areas
in which Focal is developing products, such as local drug delivery and adhesion
prevention, are intensely competitive markets and the Company will encounter
competition from major medical device, pharmaceutical and biopharmaceutical
companies in such markets. Many of the Company's


                                       17
<PAGE>

current and potential competitors have substantially greater financial,
technological, research and development, regulatory and clinical, marketing,
sales, and personnel resources than the Company.

      Certain of these competitors may also have greater experience in
developing products, conducting clinical trials, obtaining regulatory approvals,
and manufacturing and marketing such products. Certain of these competitors may
obtain patent protection, approval or clearance by the FDA or foreign countries
or product commercialization earlier than the Company, any of which could
materially adversely affect the Company. Furthermore, if the Company attains
significant commercial sales of its products, it will also be competing with
respect to manufacturing efficiency and marketing capabilities, areas in which
it currently has limited experience. Finally, there can be no assurance that the
Company's marketing partners will not pursue parallel development of other
technologies or products, which may result in a marketing partner developing
additional products that would compete with the Company's products.

      Other recently developed technologies or procedures are, or may in the
future be, the basis of competitive products. There can be no assurance that the
Company's current competitors or other parties will not succeed in developing
alternative technologies and products that are more effective, easier to use or
more economical than those which have or are being developed by the Company or
that would render the Company's technology and products obsolete and
non-competitive in these fields. In such event, the Company's business,
financial condition and results of operations could be materially adversely
affected.

Third Party Reimbursement

      Reimbursement and health care payment systems in international markets
vary significantly by country. In connection with international product
introductions, the Company and its strategic marketing partners may be required
to seek international reimbursement approvals. If required, there can be no
assurance that any such approvals will be obtained in a timely manner, or at
all, and failure to receive such international reimbursement approvals could
have an adverse effect on market acceptance of the Company's products in the
international markets in which such approvals are sought.

      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 surgical procedures. The Company anticipates that in a prospective
payment system, such as the DRG system utilized by Medicare, and in many managed
care systems used by private health care payors, there will be no separate,
additional reimbursement for the Company's products. Accordingly, the Company
believes that there will be no procedure-specific reimbursement codes for the
Company's products. The Company anticipates that hospital administrators and
physicians will justify the additional cost of surgical sealants by the
attendant cost savings and clinical benefits that the Company believes will be
derived from the use of its products.

      There can be no assurance that reimbursement for the Company's products
will be available in the United States or in international markets under either
governmental or private reimbursement systems. Furthermore, the Company could be
adversely affected by changes in reimbursement policies of governmental or
private health care payors. 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.

      The Company's business may be also materially adversely affected by the
continuing efforts of government and third-party payors to contain or reduce the
costs of health care through various means. For example, in certain foreign
markets, pricing or profitability of certain medical products and prescription
pharmaceuticals is subject to government control. In the United States, an
increasing emphasis on managed care has put, and will continue to put, pressure
on pharmaceutical and medical product pricing. Such initiatives and proposals,
if adopted, could decrease the price that the Company receives for any products
it may develop and sell in the future, and thereby have a material adverse
effect on the Company's business, financial condition and results of operations.
Further, to the extent that such proposals or initiatives have a material
adverse effect on other companies that are corporate partners or prospective
corporate partners for certain of the Company's products, the Company's ability
to commercialize its products may be materially adversely affected.


                                       18
<PAGE>

Employees

      As of December 31, 2000, the Company employed 66 persons of whom 15 were
in research and development, 17 were in manufacturing, 11 were in sales and
marketing, 12 were in clinical, regulatory affairs and quality assurance, and 11
were in management, finance and administration. None of the Company's current
employees is represented by a labor union or is the subject of a collective
bargaining agreement. The Company believes that relations with its employees are
good.


                                       19
<PAGE>

Scientific Advisors and Clinical Investigators

      Focal has recruited several physician specialists and experienced
practitioners in various fields pertaining to its products to serve as
scientific advisors and clinical investigators.

      There is no fixed term of service for the scientific advisors. Current
members may resign or be removed at any time, and additional members may be
appointed. In general, members do not serve on an exclusive basis with the
Company and are not obligated to assign inventions to the Company. Drs. Langer,
Brem, and Slepian are scientific founders of the Company and certain inventions
of Dr. Slepian have been licensed to the Company under the Company's license
agreements with Endoluminal Therapeutics, Inc., a company controlled by Dr.
Slepian. Drs. Langer and Brem also serve as members of the Company's board of
directors. Scientific advisors have from time to time received option grants to
purchase Common Stock of the Company. Scientific advisors have also received
cash compensation, with the amount of such compensation dependent on the time
commitment and level of involvement of each advisor. All scientific advisors
receive reimbursement for expenses incurred in traveling to and attending
meetings on behalf of the Company.

      The following individuals are currently either scientific advisors to
Focal or surgeons involved in Focal's clinical trials. Their respective areas of
specialization are identified below.

<TABLE>
<S>                              <C>
Procedure Development
Joseph LoCicero III, M.D.        Harvard Medical School
Peter Johnson, M.D.              University of Pittsburgh Medical School
David Torchiana, M.D.            Massachusetts General Hospital

Lung Surgery
John Wain, M.D.                  Massachusetts General Hospital
Larry Kaiser, M.D.               University of Pennsylvania Medical Center
Stephen Yang, M.D.               Johns Hopkins Medical Center
Richard Feins, M.D.              Strong Memorial Hospital
Cameron Wright, M.D.             Massachusetts General Hospital
David Johnstone, M.D.            Strong Memorial Hospital
Albert Linder, M.D.              Lungenklinik Hemer, Hemer Germany

Neurosurgery
Andre Grotenhuis, M.D.           University Hospital Nijmegan, The Netherlands
Prof. Nicholas de Tribolet, M.D. Centre Hospitalier Universitaire Vaudriis, Switzerland
Prof. Bernard George, M.D.       Hospital Lasiboisiere, France
Rees Cosgrove, M.D.              Massachusetts General Hospital
Henry Van Loveren, M.D.          Mayfield Neurological Institute, University of Cincinnati

Drug Delivery and Tissue
  Engineering
Robert Langer, Ph.D.             Massachusetts Institute of Technology
Marvin Slepian, M.D.             University of Arizona Medical Center
Henry Brem, M.D.                 Johns Hopkins Medical Center
Jane Shaw, Ph.D.                 President of Stable Network; Former
                                 President of Alza Corporation
</TABLE>


                                       20
<PAGE>

Risk Factors That May Affect Operating Results

      This Annual Report on Form 10-K contains forward-looking statements.
For this purpose, any statements contained herein that are not statements of
historical fact may be considered to be forward-looking statements. Although
not a complete list of words that might identify forward-looking statements,
Focal uses the words "believes," "anticipates," "plans," "expects," "intends"
and similar expressions to identify forward-looking statements. There are a
number of important factors that could cause our actual results to differ
materially from those indicated by forward-looking statements. Factors that
could cause or contribute to such differences include those discussed below,
as well as those discussed elsewhere in this Form 10-K, including without
limitation in "Business-Patents and Proprietary Rights," "Government
Regulation," "Sales and Marketing," "Manufacturing," "Competition and
Technological Change," and "Third Party Reimbursement," and in "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The Company expressly disclaims any obligation to update or alter its
forward-looking statements, whether as a result of new information, future
events or otherwise.

      History of Operating Losses; Accumulated Deficit; Uncertainty of Future
Profitability. The Company has incurred net losses in each year since its
inception, including a net loss of approximately $19.1 million during 2000. At
December 31, 2000, the Company had an accumulated deficit of $95.2 million. The
Company's operating losses have resulted primarily from expenses incurred in
connection with the Company's research, development and marketing activities,
including preclinical and clinical trials, development of manufacturing
processes and sales, general and administrative expenses. The Company expects to
incur net losses for the foreseeable future and may incur net losses in
subsequent periods, although the amount of future net losses and time required
by the Company to reach profitability are highly uncertain. The Company's
ability to achieve and sustain profitability will be dependent upon obtaining
regulatory approval for and successfully commercializing its FocalSeal surgical
sealants, including receiving adequate sales and marketing support from its
strategic marketing partners, Genzyme Biosurgery and Ethicon. There can be no
assurance that Focal will obtain required regulatory approvals, or successfully
develop, manufacture, commercialize and market products or that the Company will
ever record significant product revenues or achieve profitability.
Profitability, if achieved, may not be sustained.

      Need for Additional Funding in the Near Term; Uncertainty of Access to
Capital. The Company anticipates that its existing funds will be sufficient to
fund its operating and capital requirements through 2001. The Company expects to
use rather than generate funds from operations for the foreseeable future. In
particular, the Company will require substantial funds in the near term to
conduct research and development, including preclinical testing and clinical
trials of its FocalSeal surgical sealant products, and to manufacture and market
any products that are approved for commercial sale, including its FocalSeal-L
lung surgical sealant, which is currently marketed and sold domestically and
internationally. If the Company cannot raise more funds, the Company could be
required to reduce its capital expenditures, scale back its research and product
developments, reduce its workforce and/or license to others products or
technologies the Company would otherwise seek to commercialize itself.

      The Company may seek additional funding through collaborative
arrangements, borrowing money and by the sale of additional equity securities.
Any sales of additional equity securities are likely to result in further
dilution to its then-existing stockholders. Further, if the Company issues
additional equity securities, the new equity securities may have rights,
preferences or privileges senior to those of existing holders of its common
stock. The Company may also borrow money from conventional lenders, possibly at
high interest rates, which will increase the risk of its investors' holdings.
Despite its efforts, additional funding may not be available to it at all or
only on terms that are unacceptable to it. The Company also could be required to
seek funds through arrangements with collaborative partners or others that may
require it to relinquish rights to some of its technologies, product candidates
or products which the Company would otherwise pursue on its own.


                                       21
<PAGE>

      Even if the Company is able to raise additional funds in a timely manner,
its future capital requirements will vary depending on many factors, including
the following:

      o     continued progress in its research and development programs, as well
            as the magnitude of these programs;

      o     the resources required to successfully complete its clinical trials;

      o     the time and costs involved in obtaining regulatory approvals;

      o     the cost of manufacturing and commercialization activities;

      o     the cost of any additional facilities requirements;

      o     the timing, receipt and amount of sales and royalties from its
            potential products in the market; and

      o     the costs involved in preparing, filing, prosecuting, maintaining
            and enforcing patent claims and other patent-related costs,
            including litigation costs and the costs of obtaining any required
            licenses to technologies.

      The Company's ability to pursue further development and ultimate
commercialization of its surgical sealant products for cardiovascular and
gastrointestinal surgery is contingent on its ability to secure additional
resources for these programs.

      Dependence on Strategic Marketing Partners. The Company has established
strategic marketing alliances with Genzyme Biosurgery and Ethicon in the field
of surgical sealants. Under these agreements, the Company is dependent upon
Genzyme and Ethicon for the marketing and sale of the Company's surgical
sealants. The Company anticipates that revenues derived from sales of
FocalSeal-L surgical sealant in North America by Genzyme Biosurgery will account
for a substantial majority of the Company's near term product revenues. In June
1999, Ethicon announced that it has excess inventory of Focal Seal-L and,
consequently, the Company recorded negligible product sales under its
arrangement with Ethicon in 2000 and expects similar results in 2001. The
failure of Genzyme Biosurgery or Ethicon to continue to support the Company in
the commercialization of its sealant products would have a material adverse
affect on the Company's business, financial condition and results of operations.

      The Company's strategy for development and commercialization of certain of
its future products may depend upon the Company entering into additional
arrangements with research collaborators, corporate partners and others, and
upon the subsequent success of these third parties in performing their
obligations. There can be no assurance that the Company will be able to enter
into additional strategic alliances on terms favorable to the Company. The
Company's inability to enter into additional strategic alliances could have an
adverse affect on the Company's financial condition and results of operations.

      The Company cannot control the amount and timing of resources which its
current or any future corporate partners devote to the Company's programs or
potential products. If any of the Company's current or future corporate partners
breach their agreements with the Company or otherwise fail to conduct their
collaborative activities in a timely manner, the clinical development and/or
commercialization of products may be delayed, and the Company may be required to
devote additional resources to product development and commercialization, or
terminate certain development programs. The termination of any current or future
strategic alliances could have a material adverse affect on the Company's
business, financial condition and results of operations.

      In addition, Focal's current and any future strategic partners may
develop, either alone or with others, products that compete directly with the
development and marketing of the Company's products. Competing products, either
developed by the corporate partners or to which the corporate partners have
rights, may result in their withdrawal of support with respect to all or a
portion of the Company's technology, marketing and development efforts, which
would have a material adverse affect on the Company's business, financial
condition and results of operations. There can be no assurance that disputes
will not arise in the future with respect to the ownership of rights to any
products or technology developed with corporate partners. These and other
possible disagreements between corporate partners in the Company could lead to
delays in or termination of the collaborative


                                       22
<PAGE>

research, development or commercialization of certain products and could require
or result in litigation or arbitration, which would be time-consuming and
expensive, and would have a material adverse affect on the Company's business,
financial condition and results of operations.

      Uncertainty of Market Acceptance. The Company's FocalSeal surgical
sealants represent a new method of sealing air and fluid leaks that arise in
connection with surgery, and there can be no assurance that these products will
gain commercial acceptance among physicians, patients and health care payors,
even if necessary international and United States marketing approvals can be
obtained. The Company believes that recommendations and endorsements by
physicians will be essential for market acceptance of FocalSeal, and there can
be no assurance that any such recommendations or endorsements will be obtained.
Physicians will not use the FocalSeal surgical sealants unless they determine,
based on clinical data and other factors, that these systems are an effective
means of sealing air and fluid leaks and that the clinical benefits to the
patient and cost savings achieved through use of these systems outweigh their
cost. Such determinations will depend, in part, on the ability of the Company's
FocalSeal-L surgical sealant to reduce the time a lung surgery patient must be
connected to a chest tube and the length of hospital stays associated with lung
surgery. Acceptance among physicians may also depend upon the Company's ability
to train thoracic surgeons and other potential users of the Company's products
in the application of liquid surgical sealants, which such physicians typically
have not performed, and the willingness of such users to learn these new
techniques. Failure of the Company's products to achieve significant market
acceptance would have a material adverse effect on the Company's business,
financial condition and results of operations.

      Uncertainties Related to Early Stage of Commercialization and Development.
Except for the FocalSeal-L and FocalSeal-S surgical sealants for lung surgery
and neurosurgery indications, all of the Company's products are in early stages
of development or research. In addition, FocalSeal-L and FocalSeal-S surgical
sealants will potentially require significant additional research and
development efforts before either is suitable for any indications beyond lung
surgery and neurosurgery, if ever.

      The development and commercialization of new bioabsorbable synthetic
polymer products are highly uncertain and subject to a number of significant
risks. Potential products that appear to be promising at early stages of
development may not reach the market for a number of reasons. Such reasons
include the possibilities that the potential products will be found ineffective
or cause harmful side effects during preclinical testing or clinical trials,
fail to receive necessary regulatory approvals, be difficult to manufacture on a
commercial scale, be uneconomical, fail to achieve market acceptance or be
precluded from commercialization by proprietary rights of third parties. No
assurance can be given that any of the Company's development programs will be
successfully completed, that clinical trials will generate anticipated results
or will commence or be completed as planned, that any PMA application will be
accepted or ultimately approved by the FDA, that required regulatory approvals
will be obtained on a timely basis, if at all, or that any products for which
approval is obtained will be commercially successful. If any of the Company's
development programs are not successfully completed, required regulatory
approvals are not obtained, or products for which approvals are obtained are not
commercially successful, the Company's business, financial condition and results
of operations would be materially adversely affected.

      Early Stage of Clinical Testing and Lack of Extensive Clinical Data. Focal
has commenced United States clinical trials of FocalSeal-S surgical sealant and
the Company has been working to expedite its current clinical trial by revising
the trial to include a broader study population and a less complicated study
protocol. The Company has suspended enrollment of patients under the current
protocol and is actively working with the FDA on obtaining agreement on a more
efficient format. There are no assurances that the FDA will agree to the revised
study protocol or that the FDA will not require the Company to pursue certain
clinical endpoints. It may be more difficult for the Company to demonstrate the
efficacy of FocalSeal-S surgical sealant in the United States trial than in the
European trial, which could result in delays or adversely affect the success of
the clinical trial.

      There can be no assurance that FocalSeal-S surgical sealants will receive
marketing approval from the FDA or that any of the Company's other products will
prove to be safe and effective in United States or international clinical trials
under applicable regulatory guidelines. In addition, clinical trials may
identify significant technical or other obstacles to be overcome prior to
obtaining necessary regulatory or international approvals. If the FocalSeal-S
surgical sealant product and the Company's other products under development do
not prove to be safe and effective in clinical trials or if the Company is
otherwise unable to commercialize these products successfully, the Company's
business, financial condition and results of operations will be materially and
adversely affected.


                                       23
<PAGE>

      Uncertainty of Ability to Attract and Retain Key Management, Employees and
Consultants. The Company is highly dependent on the principal members of its
management and scientific staff. The loss of services of any of these personnel
could impede the achievement of the Company's development objectives.
Furthermore, recruiting and retaining qualified scientific personnel to perform
research and development work in the future will also be critical to the
Company's success. There can be no assurance that the Company will be able to
attract and retain personnel on acceptable terms given the competition among
biotechnology, pharmaceutical and healthcare companies, universities and
non-profit research institutions for experienced scientists. In addition, the
Company relies on members of its Scientific Advisory Board and a significant
number of consultants to assist the Company in formulating its research and
development strategy. All of Focal's consultants and the members of the
Company's Scientific Advisory Board are employed by employers other than the
Company, and may have commitments to, or advisory or consulting agreements with,
other entities that may limit their availability to the Company.

      Potential Product Liability or Product Recall Exposure; Limited Insurance
Coverage. The use of any of the Company's potential products in clinical trials,
and the sale of any approved products, may expose the Company to liability
claims resulting from the use of its products or to product recalls. Product
liability claims might be made directly by consumers, health care providers or
by distributors or others selling such products. Focal has obtained product
liability insurance coverage, subject to certain policy limits, for its clinical
trials. The Company has expanded its insurance coverage to include the sale of
commercial products if marketing approval is obtained for products in
development. However, insurance coverage is becoming increasingly expensive, and
no assurance can be given that the Company will be able to maintain insurance
coverage at a reasonable cost or in sufficient amounts to protect the Company
against losses due to liability. There can also be no assurance that the Company
will be able to obtain commercially reasonable product liability insurance for
any products approved for marketing. A successful product liability claim or
series of claims brought against the Company or a product recall could have a
material adverse effect on its business, financial condition and results of
operations.

Item 2. Properties

      Focal currently occupies approximately 54,000 square feet of
manufacturing, laboratory and administrative space in Lexington, Massachusetts
under a lease which expires in September 2004. Focal has an option to extend
this lease for several additional five-year periods. The Company believes that
this facility is sufficient to meet the Company's production and other
requirements through at least 2004.

Item 3. Legal Proceedings

      The Company is not currently a party to any material legal proceedings.

Item 4. Submission Of Matters To a Vote Of Security Holders

      None.


                                       24
<PAGE>

Executive Officers of the Company

      The executive officers of the Company, who are elected by the Board of
Directors, are as follows:

      Name                        Age                  Position
      ----                        ---    -------------------------------------

      Ronald S. Rudowsky.......    52    President, Chief Executive Officer and
                                         Director
      Peter K. Jarrett, Ph.D...    44    Vice President of Research and
                                         Development
      Thomas Bromander.........    43    Vice President of Operations
      Harry R. Trout III ......    32    Chief Financial Officer

      Ronald S. Rudowsky, age 52, has served as President and Chief Executive
Officers of the Company and as a director of the Company since February 1, 2001.
From October 2000 to February 2001 he served as Chief Operating Officer of the
Company; from January 1997 to October 2000 he served as Vice President of Sales
and Marketing of the Company; and from January 1994 to January 1997 he served as
Director, Procedure Development. From June 1991 to December 1993, he was the
Director of Marketing of Ethicon Endo-Surgery, a medical device company and a
division of Johnson & Johnson. Previously, he spent 14 years in various sales
and marketing positions at Ethicon, Inc. Mr. Rudowsky holds a B.B.A. in
Marketing from Marshall University.

      Peter K. Jarrett, Ph.D., age 44, has served as Vice President of Research
and Development of the Company since June 2000. Dr. Jarrett joined the Company
in 1993 as Senior Scientist in Materials Research and Development. In 1996, Dr.
Jarrett was promoted to the position of Director of Materials Development and to
Senior Director of Materials Research and Development in 1998. From 1984 to
1993, Dr. Jarrett was employed by Davis & Geck, a Tyco company primarily
involved in medical devices, in various positions including Research Fellow. Dr.
Jarrett received his Ph.D. in 1983 from the University of Connecticut in Polymer
Science and received a B.A. in Chemistry from Connecticut College.

      Thomas S. Bromander, age 43, has served as Vice President of Operations of
the Company since June 2000. Mr. Bromander joined the Company as Manager of
Manufacturing in August 1993. Mr. Bromander was promoted to Associate Director
of Manufacturing in March 1997 and to Director of Manufacturing in April 1998.
From 1991 to 1993, he served as Advanced Engineering Manager at Cordis
Corporation (a Johnson & Johnson company), a medical device company, and
Manufacturing Manager at Abiomed, Inc., a medical device company. From 1981 to
1991, Mr. Bromander held various engineering positions at C.R. Bard, Inc., a
medical device company, including Manufacturing Engineering Manager. Mr.
Bromander received his B.S. in Mechanical Engineering from the University of
Lowell.

      Harry R. Trout III, age 32, has served as Chief Financial Officer of the
Company since May 2000. Mr. Trout joined the Company in January 2000 as
Corporate Controller. He served as a consultant to the Company from July 1999 to
December 1999. From December 1998 to December 1999, he served as an independent
consultant working with start-up companies in the technology industry. From 1997
to 1998, he served as Corporate Controller at Fulfillment Plus Corporation, a
telecommunications company. From 1991 to 1997, he served as Controller for the
Abjerona Company, a real estate conglomerate. From 1988 to 1991, he served as a
Senior Accountant with Bicknell & Fuller Corporation, a packaging manufacturer.
Mr. Trout holds an M.B.A. from the New Hampshire College Graduate School and a
B.S. in Accounting from North Adams State College.


                                       25
<PAGE>

                                     PART II

Item 5.  Market For Registrant's Common Equity and Related Shareholder Matters

      Market Price of and Dividends on the Company's Common Stock and Related
Stockholder Matters

      The Company's Common Stock is traded on the NASDAQ National Market under
the symbol "FOCL." The following table sets forth the range of the high and low
sale prices by quarter as reported on the NASDAQ National Market for the last
two fiscal years.

   Fiscal Year Ended December 31, 2000                         High   Low
                                                               ----   ---

   First Quarter...........................................   $10.63  $3.88
   Second Quarter..........................................    $8.50  $2.31
   Third Quarter...........................................    $3.78  $2.38
   Fourth Quarter..........................................    $3.25  $0.81


   Fiscal Year Ended December 31, 1999
   First Quarter...........................................   $14.00  $5.75
   Second Quarter..........................................    $9.00  $6.69
   Third Quarter...........................................    $7.63  $3.13
   Fourth Quarter..........................................    $5.81  $3.38


      On March 20, 2001, the closing price per share of the Company's Common
Stock was $0.97 per share, as reported by the NASDAQ National Market, and the
number of common stockholders of record was 179. The Company has never paid any
dividends on its Common Stock. The Company currently intends to retain any
earnings for use in its business and does not anticipate paying any cash
dividends in the foreseeable future.

      Recent Sales of Unregistered Securities

      On April 14, 2000 and January 3, 2001, Focal sold 614,250 and 2,427,184
shares, respectively, of its Common Stock, $.01 par value per share, to Genzyme
Biosurgery, for aggregate proceeds, in each case, of $5.0 million. No person
acted as an underwriter with respect to these transactions. Focal relied on
Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act")
for the exemption from the registration requirements of the Securities Act,
since no registration of the shares to be offered was made prior to issuance and
sale.


                                       26
<PAGE>

Item 6.  Selected Financial Data

                                   FOCAL, INC.
                    SELECTED CONDENSED FINANCIAL INFORMATION
                 (in thousands, except share and per share data)

<TABLE>
<CAPTION>

                                                             Year ended December 31,
                                 -----------------------------------------------------------------------------
                                      1996            1997            1998            1999            2000
                                 -----------------------------------------------------------------------------
<S>                               <C>             <C>             <C>             <C>             <C>
Statements of Operations
Revenues:

  Collaborative R & D revenues    $      3,098    $     17,489    $      5,114    $      1,773    $        874
  Product revenues                                                       3,071           1,423           1,721
                                 -----------------------------------------------------------------------------
     Total revenues                      3,098          17,489           8,185           3,196           2,595
Costs and Expenses:
  Cost of product revenues                                               3,740           2,373           2,842
  Research and development              11,680          15,712          15,590          14,454           8,112
  Sales, general and
  administrative                         2,175           3,058           3,815           3,919           6,000
                                 -----------------------------------------------------------------------------
    Total costs and expenses            13,855          18,770          23,145          20,746          16,954
Insurance recovery                                                                                         475
Interest income and other                  691             968           1,765             908             705
income
Interest expense                           (92)           (129)           (212)           (199)           (298)
                                 -----------------------------------------------------------------------------
Loss before cumulative effect
of change in accounting
principle                              (10,158)           (442)        (13,407)        (16,841)        (13,477)
                                 -----------------------------------------------------------------------------
Cumulative effect of change in
  accounting principle (1)                                                                              (5,600)
                                 ------------------------------------------------------------------------------
Net loss                          $    (10,158)   $       (442)   $    (13,407)   $    (16,841)   $    (19,077)
                                 ==============================================================================

Amounts per common share:
Loss before cumulative effect
of change in accounting
principle, basic and
diluted (2)                       $      (1.26)   $      (0.04)   $      (1.01)   $      (1.24)   $      (0.92)

Cumulative effect of change in
accounting principle                                                                                     (0.38)
                                 ------------------------------------------------------------------------------
Net loss, basic and diluted (2)   $      (1.26)   $      (0.04)   $      (1.01)   $      (1.24)   $      (1.30)
                                 ==============================================================================

Shares used in computing net
loss per share                       8,088,898      10,410,091      13,291,182      13,551,856      14,707,345
                                 ==============================================================================

Pro forma amounts assuming the
accounting change is applied
retroactively:
Net loss                          $    (10,158)   $     (9,308)   $    (13,626)   $    (13,356)   $    (13,477)
Net loss per share, basic and
diluted                           $      (1.26)   $      (0.89)   $      (1.03)   $      (0.99)   $      (0.92)
</TABLE>


                                       27
<PAGE>

                                  FOCAL, INC.
                    SELECTED CONDENSED FINANCIAL INFORMATION
                (in thousands, except share and per share data)

                                                At December 31,
                             -------------------------------------------------
                               1996     1997      1998      1999      2000
                             -------------------------------------------------
Balance Sheets
Cash, cash equivalents and
  marketable securities      $12,208   $33,239   $25,346   $13,463   $ 3,874

Working capital                9,003    30,867    22,188    11,325     2,108
Total assets                  14,089    39,606    30,461    18,751     9,153
Capital lease obligations,
long term portion                315     1,422     1,391     1,333       651
Deferred revenue                                                       4,000
Total stockholders' equity
(deficit)                     10,099    32,512    23,776    13,148      (176)

(1) The cumulative effect of change in accounting principle is a one-time
noncash charge relating to Focal's adoption of Staff Accounting Bulletin No. 101
("SAB 101"). SAB 101 was issued by the Securities and Exchange Commission
("SEC") in December 1999. SAB 101 provides guidance related to revenue
recognition policies based on interpretations and practices followed by the SEC.
The impact of Focal's adoption of SAB 101 was to defer revenue recognition for
certain portions of the revenue previously recognized by the Company under its
collaborative research and development arrangements into future accounting
periods.

(2) Pro forma in 1996 and 1997 - Pro forma net loss per share for 1997 is
computed using the weighted average number of outstanding common shares and
convertible preferred shares, assuming conversion at date of issuance.
Historical earnings per share for 1997 has not been presented since such amounts
are not deemed meaningful due to the significant change in the Company's capital
structure that occurred in connection with the initial public offering in 1997.


                                       28
<PAGE>

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

      The following discussion should be read in conjunction with the financial
statements, including the notes thereto, appearing elsewhere in this Annual
Report on Form 10-K.

      The following financial results exclude the impact of the Company's
adoption of Staff Accounting Bulletin No. 101 (SAB 101), for all items denoted
by an "*". For a discussion of SAB 101's impact on the Company's financial
results, refer to "Impact of Recently Issued Accounting Standards" below.

Overview

      Focal was founded in 1991, and is focused on the development, manufacture
and commercialization of synthetic, absorbable surgical sealants based on the
Company's proprietary polymer technology. Since inception, Focal has funded its
operations primarily through the private placement of equity securities and
through an initial public offering of common stock. In addition, Focal has
entered into strategic alliances with corporate partners and has recorded
revenues totaling $28.6 million* through December 31, 2000, in connection with
these alliances.

      Focal introduced its first commercial product, FocalSeal-L surgical
sealant for lung surgery indications, in Europe in 1998 through its strategic
marketing alliance with Ethicon. In May 2000, the FDA approved FocalSeal-L for
commercial sale in North America. Focal launched FocalSeal-L sealant for lung
surgery indications in North America in July 2000 through its marketing partner,
Genzyme Biosurgery. Focal anticipates that revenues derived from the sales of
FocalSeal-L surgical sealant for lung surgery will account for nearly all of the
Company's short-term product revenues.

      Focal has incurred net losses in each year since its inception, including
net losses of approximately $13.5 million* during 2000. At December 31, 2000,
Focal had an accumulated deficit of $95.2 million. Focal's operating losses have
resulted primarily from expenses incurred in connection with its research,
development and marketing activities, including development of manufacturing
processes, sales and marketing, and administrative expenses. Focal expects to
incur net losses at least through 2004 and may incur net losses in subsequent
periods although the amount of future net losses and the time required by Focal
to reach profitability are highly uncertain. The Company has marketing and
distribution partners for the majority of its products throughout the world,
including Genzyme Biosurgery (formerly Genzyme Surgical Products), a division of
Genzyme Corporation, in North America and Ethicon, a Johnson & Johnson company,
in Europe and other international markets. In 2000, Ethicon continued to sell
product to customers from previously purchased inventory. Ethicon is required to
satisfy its initial annual purchase minimum on or before April 5, 2001 either by
purchasing products or by making a payment to the Company. If Ethicon fails to
do so, Focal has the right to terminate the agreement by providing 90 days
written notice. The Company's ability to achieve and sustain profitability is
dependent in large part on the ability of its marketing partners to effectively
market and distribute the Company's sealant products. There can be no assurance
that Focal will successfully develop, manufacture, commercialize and market
products or that Focal will ever achieve profitability.

Results of Operations

Year ended December 31, 2000, compared to year ended December 31, 1999

      Revenues for the year ended December 31, 2000 (the "2000 Period") were
$1.8 million* compared with $3.2 million for the year ended December 31, 1999
(the "1999 Period"). Revenues in the 2000 Period included $1.7 million in
product revenue and $0.1 million in collaborative research revenues. Revenues in
the 1999 Period included $1.4 million in product revenues and $1.8 million in
collaborative research revenues.

      Product revenues increased to $1.7 million in the 2000 Period from $1.4
million in the 1999 Period. In May 2000, the FDA approved FocalSeal-L for
commercial sales in North America. The first North American


                                       29
<PAGE>

shipments of FocalSeal-L surgical sealant were made to Genzyme Biosurgery in
July 2000. In 2000, Ethicon continued to sell product to customers from
previously purchased inventory. In the 1999 Period, product revenues were 45% of
total revenues. In the 2000 Period, product revenues were 95% of total revenues,
reflecting the Company's change of focus toward commercialization.

      Higher collaborative research and development revenues were recorded in
the 1999 Period ($1.8 million) than in the 2000 Period ($0.1 million). In the
1999 Period, collaborative research and development revenues included a
milestone payment of $1.0 million from Ethicon in connection with the receipt of
CE mark approval of FocalSeal-S sealant and $0.8 million in research funding by
a third party for the Company's cardiovascular sealant product under development
during 1999. Although the Company recognized a reduced amount of collaborative
research and development income in the 2000 Period compared to the 1999 Period,
the Company is seeking to enter into collaborative arrangements which could
provide research and development funding for the Company's programs in the areas
of adhesion prevention, anti-arrhythmia drug delivery, and bone and cartilage
restoration and repair.

      Cost of product revenues for the 2000 Period totaled $2.8 million compared
with $2.4 million for the 1999 Period. These costs were recorded in connection
with commercial sales of FocalSeal-L surgical sealant product through Genzyme
Biosurgery in the North American market and Ethicon in the international market.
Gross margins were relatively consistent, although negative in both periods due
to the lack of economies of scale and certain fixed overhead costs being spread
over the limited sales volumes. In addition, Focal increased the inventory
reserve due to high levels of inventory - resulting in a charge to cost of
product revenues of $737,000 in the fourth quarter of 2000.

      Research, development, clinical and regulatory expenses were $8.1 million
for the 2000 Period, compared with $14.5 million for the 1999 Period. The
Company has been working to expedite its current clinical trial for use of its
FocalSeal-S neuro surgical sealant by revising the trial to include a broader
study population and a less complicated study protocol. The Company has
suspended enrollment of patients under the current protocol until a more
efficient trial format can be agreed upon with the FDA. As a result of the trial
deferment, clinical and regulatory expenses decreased in the 2000 Period. The
Company expects research, development, clinical and regulatory expenses to
decrease as the Company seeks to enter into collaborative arrangements which
could provide research and development funding for the Company's programs.

      Sales, general and administrative expenses increased to $6.0 million for
the 2000 Period from $3.9 million for the 1999 Period. This increase is
primarily due to augmentation of the Company's sales staff and other expenses
attributable to the Company's domestic product launch in the second half of
2000. During both the 1999 and 2000 Periods, sales, general and administrative
expenses consisted primarily of information systems consulting, audit and
tax-related fees, public and investor relations, legal, insurance and general
overhead expenses, while sales expenses were incurred only in the 2000 Period.

      Interest and other income decreased to $0.7 million in the 2000 Period
from $0.9 million in the 1999 Period, as a result of lower average cash balances
available for investment, as the Company incurs net losses and draws down on the
proceeds from its equity financing arrangements. Other income of $475,000 during
the first quarter of 2000 was derived primarily from an insurance payment for
inventory damaged at an off site storage facility during 1999.

      The Company recorded a net loss of $13.5 million* for the 2000 Period,
compared with a net loss of $16.8 million for the 1999 Period. The increased net
loss was primarily the result of a decline in collaborative research revenues
and an increase in sales expenses associated with the U.S. product launch; as
compared with 1999. The Company anticipates that it will incur net operating
losses for the foreseeable future.

Year ended December 31, 1999, compared to year ended December 31, 1998

      Revenues for the the 1999 Period were $3.2 million compared with $8.2
million for the year ended December 31, 1998 (the "1998 Period"). Revenues in
the 1999 Period included $1.4 million in product revenue and $1.8 million in
collaborative research revenues. Revenues in the 1998 Period included $3.1
million in product revenues and $5.1 million in collaborative research
revenues.

                                       30
<PAGE>

      Product revenues decreased to $1.4 million in the 1999 Period from $3.1
million in the 1998 Period. Shipments of FocalSeal-L surgical sealant were made
to Ethicon during the first two quarters of 1999 for Ethicon's distribution to
its customers. In June 1999, Ethicon announced that it had sufficient
inventories to meet anticipated demand for the product for at least several
quarters. As a result, there were virtually no additional sales of product to
Ethicon in the second half of 1999. However, Ethicon continued to sell product
to customers from previously purchased inventory and it is estimated that
approximately 3,000 procedures were performed in Europe and other countries
outside of North America using FocalSeal-L surgical sealant during 1999. Focal
records revenues based on a specified transfer price at the time of shipment of
product to its marketing and distribution partner, Ethicon.

      Higher collaborative revenues were realized in the 1998 Period than the
1999 Period in connection with Focal's strategic alliance with Ethicon,
including $3.0 million in revenues from Ethicon for the development of its lung
surgery and neurosurgery sealant products and $1.5 million for the development
of its cardiovascular sealant product. In addition, in the 1998 Period $0.5
million in collaborative research revenues were realized from other sources,
including a grant from the National Institutes of Health. In the 1999 Period,
collaborative revenues included a milestone payment of $1.0 million from Ethicon
in connection with the receipt of CE mark approval of FocalSeal-S sealant and
$0.8 million in research funding of a cardiovascular sealant product.

      Cost of product revenues for the 1999 Period totaled $2.4 million compared
with $3.7 million for the 1998 Period. These costs were recorded in connection
with commercial sales of FocalSeal-L surgical sealant product through Ethicon in
Europe and other international markets. Gross margins were negative in both
periods due to the lack of economies of scale and certain fixed overhead costs
being spread over the limited sales volumes.

      Research, development, clinical and regulatory expenses were $14.5 million
for the 1999 Period, compared with $15.6 million for the 1998 Period. The number
of staff in research and development was reduced in June 1999 in connection with
the completion of substantially all of the development work on FocalSeal-L
sealant and FocalSeal-S sealant. Clinical and regulatory expenses decreased in
the 1999 Period due to the completion in late 1998 of the U.S. clinical trial of
FocalSeal-L surgical sealant. The Company expects research, development,
clinical and regulatory expenses to decrease as the Company shifts away from
research and development activities for its lead products and toward
commercialization of these products.

      General and administrative expenses increased to $3.9 million for the 1999
Period from $3.8 million for the 1998 Period. General and administrative
expenses during both years consisted primarily of personnel costs, travel,
public and investor relations, legal, insurance and general overhead expenses.

      Interest income decreased to $0.9 million in the 1999 Period from $1.8
million in the 1998 Period, as a result of lower average cash balances available
for investment, as the Company incurred net losses and drew down on the proceeds
from its initial public offering.

      The Company recorded a net loss of $16.8 million for the 1999 Period,
compared with a net loss of $13.4 million for the 1998 Period. The increased net
loss was primarily the result of a decline in collaborative research revenues
and lower product revenues in 1999 as compared with 1998. The Company
anticipates that it will incur net operating losses at least through 2001.

Liquidity and Capital Resources

      Since its inception, the Company has financed its operations primarily
from the sale of preferred stock in private placements, equity financings, as
well as the Company's 1997 initial public offering. In each of April 2000 and
January 2001, Focal received a $5.0 million equity investment from Genzyme
Biosurgery, in connection with the agreement described below. Through December
31, 2000, the Company has raised approximately $93.5 million from equity
financings and has received $7.0 million in equipment lease financing.

      Cash used in operations totaled $13.8 million for the year ended December
31, 2000, as compared to the use of $16.6 million for the same period in 1999.
The decrease in cash used in operations was due to lower net losses incurred in
2000 (excluding the effect of a cumulative non-cash adjustment for SAB 101)*,
compared to 1999, due to sales of FocalSeal-L in North America, offset by an
increase in working capital.

      Capital expenditures from inception through December 31, 2000 totaled $9.1
million, representing laboratory equipment, office furniture and equipment,
computers and certain leasehold improvements. The majority


                                       31
<PAGE>

of these purchases have been financed through either direct financing leases or
sale and leaseback arrangements. As of December 31, 2000, the Company did not
have any material commitments for future capital expenditures.

      In October 1999, in connection with entering into a Marketing and
Distribution Agreement with Genzyme Biosurgery, Focal and Genzyme Biosurgery
entered into a Stock Purchase Agreement, with up to $20.0 million in purchases
of the Company's common stock committed by Genzyme Biosurgery over an eighteen
month period, subject to certain specified conditions. The first $5.0 million
purchase was made by Genzyme Biosurgery in November 1999, with Genzyme
Biosurgery purchasing approximately 810,000 shares at a 25% premium to the ten
day average trading price of the Company's common stock prior to the investment.
The second $5.0 million purchase was made by Genzyme Biosurgery in April 2000,
with Genzyme Biosurgery purchasing approximately 614,000 shares at the twenty
day average trading price of the Company's common stock prior to the investment.
The third $5.0 million investment was made by Genzyme Biosurgery in January
2001, with Genzyme Biosurgery purchasing approximately 2.4 million shares at the
twenty day average trading price of the Company's common stock prior to the
investment. At Focal's option, one additional $5.0 million investment will be
made by Genzyme Biosurgery. The final investment of $5.0 million may be called
by Focal in the second quarter of 2001, subject to the satisfaction of closing
conditions. The final investment will be priced based upon the twenty day
trading average of the Company's stock.

      The Company anticipates that its existing funds at December 31, 2000,
including the $5.0 million received from Genzyme Biosurgery in January 2001 and
the $5.0 million it expects to receive from Genzyme Biosurgery in the second
quarter, subject to the satisfaction of closing conditions, will be sufficient
to fund its operating and capital requirements through 2001. The Company expects
to use rather than generate funds from operations for the foreseeable future. In
particular, the Company will require substantial funds in the near term to
conduct research and development, including preclinical testing and clinical
trials of its FocalSeal surgical sealant products, and to manufacture and market
any products that are approved for commercial sale, including its FocalSeal-L
lung surgical sealant which was launched in 2000. If the Company cannot raise
more funds, the Company could be required to reduce its capital expenditures,
scale back its research and product developments, reduce its workforce and/or
license to others products or technologies the Company would otherwise seek to
commercialize itself.

      The Company may seek additional funding through collaborative
arrangements, borrowing money and by the sale of additional equity securities.
Any sales of additional equity securities are likely to result in further
dilution to its then-existing stockholders. Further, if the Company issues
additional equity securities, the new equity securities may have rights,
preferences or privileges senior to those of existing holders of its common
stock. The Company may also borrow money from conventional lenders, possibly at
high interest rates, which will increase the risk of its investors' holdings.
Despite the Company's efforts, additional funding may not be available at all or
only on terms that are unacceptable to it. The Company also could be required to
seek funds through arrangements with collaborative partners or others that may
require it to relinquish rights to some of its technologies, product candidates
or products which the Company would otherwise pursue on its own.

      Even if the Company is able to raise additional funds in a timely manner,
its future capital requirements will vary depending on many factors, including
the following:

      o     continued progress in its research and development programs, as well
            as the magnitude of these programs;

      o     the resources required to successfully complete its clinical trials;

      o     the time and costs involved in obtaining regulatory approvals;

      o     the cost of manufacturing and commercialization activities;

      o     the cost of any additional facilities requirements;

      o     the timing, receipt and amount of sales and royalties from its
            potential products in the market; and


                                       32
<PAGE>

      o     the costs involved in preparing, filing, prosecuting, maintaining
            and enforcing patent claims and other patent-related costs,
            including litigation costs and the costs of obtaining any required
            licenses to technologies.

      Under certain agreements with universities and consultants, the Company is
obligated to make payments for sponsored research and consulting services. There
were no research funding commitments under these agreements at December 31,
2000. Payments under these agreements are typically made on a quarterly or
monthly basis. There can be no assurance that the Company's capital resources
will be sufficient to enable the Company to conduct its research and development
programs as planned. The Company's future capital requirements will depend on
many factors, including continued progress in its research and development
programs, progress with pre-clinical testing and clinical trials, the time and
costs involved in obtaining regulatory approvals, if any, the costs involved in
filing and prosecuting patent applications and enforcing patent claims,
competing technological and market developments, the establishment of additional
strategic alliances, the cost of manufacturing facilities and of
commercialization activities and arrangements, the success of the sales and
distribution efforts of its marketing partners, and the cost of product
in-licensing and any possible acquisitions. There can be no assurance that the
Company's cash, cash equivalents and marketable securities will be adequate to
satisfy its capital and operating requirements.

Impact of Recently Issued Accounting Standards

      In 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Investments and Hedging Activities", which was
amended by FAS 137 and FAS 138, which requires the adoption of FAS 133 by Focal
in the first quarter of 2001. Focal does not expect the implementation of this
statement to have a significant impact on its results of operations or financial
position.

      Effective in the fourth quarter of 2000, Focal changed its method of
accounting for revenue recognition in accordance with Staff Accounting Bulletin
(SAB) No. 101, Revenue Recognition in Financial Statements. Previously, Focal
had recognized revenue relating to non-refundable, up-front, license and
milestone payments and certain research funding payments from its strategic
partners in accordance with the contract or distribution arrangement. Under the
new accounting method adopted retroactively to January 1, 2000, Focal now
recognizes revenue from non-refundable, up-front, license and milestone payments
not specifically tied to a separate earnings process, ratably over the term of
the research contract or distribution agreement. When payments are specifically
tied to a separate earnings process and when considered appropriate, revenue is
recognized when earned. In addition, when appropriate, Focal recognized revenue
from certain research payments based upon the level of research services
performed during the research contract or over the term of the agreement. The
cumulative effect of the change on prior years resulted in a charge to income of
$5.6 million, which is included in the loss for the year ended December 31,
2000. The pro forma amounts presented in the consolidated statements of
operations were calculated assuming the accounting change was made retroactively
to prior periods. Included in 2000 revenue is $800,000 of revenue relating to
the adoption of SAB 101. The amount of revenue to be recognized in future years
that was included in the cumulative effect of change in accounting principle is
$800,000 for each of the next six years. After giving effect to the
implementation of SAB 101, Focal had a net loss of $19,076,598 or $1.30 per
share for the year 2000.

Impact of Inflation and Changing Prices

      The Company does not expect inflation, which has been low in recent years,
to have any significant impact on its business for the foreseeable future.

Item 7A.  Qualitative and Quantitative Disclosures About Market Risk

      The Company maintains an investment portfolio in accordance with its
Investment Policy. The primary objectives of the Company's Investment Policy are
to preserve principal, maintain proper liquidity to meet operating needs and
maximize yields. The Company's Investment Policy specifies credit quality
standards for the Company's investment and limits the amount of credit exposure
to any single issue, issuer or type of investment.

      The Company's investments consist of securities of various types and
maturities of one year or less, with an average maturity of 3 months. The
Company accounts for its investments in accordance with Statement of


                                       33
<PAGE>

Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" (SFAS 115). All of the Company's cash equivalents and
marketable securities are treated as available-for-sale under SFAS 115.

      The securities held in the Company's investment portfolio are subject to
interest rate risk. Changes in interest rates affect the fair market value of
the available-for-sale securities. After a review of the Company's marketable
securities as of December 31, 2000, the Company has determined that in the event
of a hypothetical ten percent increase in interest rates, the resulting decrease
in fair market value of the Company's marketable investment securities would be
insignificant to the financial statements as a whole.


                                       34
<PAGE>

Item 8.  Financial Statements and Supplemental Data

                         Report of Independent Auditors

The Board of Directors and Stockholders
Focal, Inc.

      We have audited the accompanying balance sheets of Focal, Inc. as of
December 31, 1999 and 2000, and the related statements of operations,
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

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

      As discussed in Note 1 to the financial statements, in 2000 the Company
changed its method of accounting for revenue recognition.

      The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 1, the
Company has incurred recurring losses and has a net capital deficiency. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.


                                          /S/  ERNST & YOUNG LLP


Boston, Massachusetts
January 31, 2001


                                       35
<PAGE>

                                   Focal, Inc.
                                 Balance Sheets

                                                           December 31,
                                                -------------------------------
                                                      1999              2000
                                                -------------------------------
ASSETS
Current assets:
    Cash and cash equivalents                    $  8,746,897      $  3,672,672
    Marketable securities                           4,715,842           201,318
    Accrued interest receivable                        76,770            10,111
    Accounts receivable                                52,579           395,407
    Inventories, net                                1,573,934         1,982,020
    Prepaid expenses and other assets                 428,112           408,780
                                                -------------------------------
Total current assets                               15,594,134         6,670,308

Notes receivable from related parties                 271,753           247,736

Property, plant & equipment                         8,241,952         8,378,465
Less: accumulated depreciation and
amortization                                        5,370,919         6,259,839
                                                -------------------------------
Property, plant & equipment, net                    2,871,034         2,118,626

Other assets                                           14,025                --
                                                -------------------------------
Total assets                                     $ 18,750,946      $  9,036,670
                                                ===============================

LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
    Accounts payable                             $    729,534      $    738,278
    Accrued liabilities                             2,613,875         2,201,257
    Current portion of capital lease
    obligations                                       926,041           688,828
    Current portion of deferred revenue                    --           933,877
                                                -------------------------------
Total current liabilities                           4,269,450         4,562,240

    Capital lease obligations                       1,333,090           650,528
    Deferred revenue                                       --         4,000,000
                                                -------------------------------
Total long term liabilities                         1,333,090         4,650,528

Stockholders' equity:
    Preferred stock, $0.01 par value;
      5,000,000 shares authorized;
      none issued and outstanding                          --                --
    Common stock, $.01 par value;
      50,000,000 shares authorized;
      14,234,208 and 14,935,735 shares
      issued and outstanding at
      December 31, 1999 and 2000,
      respectively                                    142,342           149,357
    Additional paid-in capital                     90,178,169        95,366,165
    Notes receivable from related parties            (828,131)         (447,743)
    Deferred compensation                            (183,713)               --
    Accumulated other comprehensive income              8,337             1,319
    Accumulated deficit                           (76,168,598)      (95,245,196)
                                                -------------------------------
Total stockholders' equity                         13,148,406          (176,098)
                                                -------------------------------
Total liabilities and stockholders' equity       $ 18,750,946      $  9,036,670
                                                ===============================

See accompanying notes.


                                       36
<PAGE>

                                   Focal, Inc.
                            Statements of Operations

                                          Year ended December 31,
                                ------------------------------------------------
                                     1998           1999            2000
                                ------------------------------------------------
Statements of Operations:
Revenues:
  Collaborative research
revenues                         $  5,113,953    $  1,772,617    $    874,375
  Product revenues                  3,071,490       1,422,919       1,720,568
                                ------------------------------------------------
     Total revenues                 8,185,443       3,195,536       2,594,943
Costs and Expenses:
  Cost of product revenues          3,739,807       2,373,383       2,842,023
  Research and development         15,590,647      14,453,371       8,112,363
  Sales, general and
administrative                      3,815,432       3,918,917       5,999,650
                                ------------------------------------------------
     Total costs and expenses      23,145,886      20,745,671      16,954,036
Insurance recovery                         --              --         475,408
Interest income and other
  income                            1,765,420         908,460         704,689
Interest expense                     (212,323)       (199,563)       (297,602)
Loss before cumulative effect
  of change in accounting
  principle                       (13,407,346)    (16,841,238)    (13,476,598)
                                ------------------------------------------------
Cumulative effect of change in
  accounting principle                     --              --      (5,600,000)
                                ------------------------------------------------
Net loss                         $(13,407,346)   $(16,841,238)   $(19,076,598)
                                ==============================================

Amounts per common share:
Loss before cumulative effect
  of change in accounting
  principle                      $      (1.01)   $      (1.24)   $      (0.92)
Cumulative effect of change in
  accounting principle regarding
  revenue recognition                      --              --           (0.38)
                                ------------------------------------------------
Net loss per share, basic and
diluted                          $      (1.01)   $      (1.24)   $      (1.30)
                                ================================================
Weighted average shares, basic     13,291,182      13,551,856      14,707,345
and diluted
                                ================================================

Pro forma amounts assuming the
change in accounting principle
is applied retroactively:

Net loss                         $(13,626,013)   $(13,355,904)   $(13,476,598)

Net loss per share, basic and
diluted                          $      (1.03)   $      (0.99)   $      (0.92)

See accompanying notes


                                       37
<PAGE>

                                   Focal, Inc.
                        Statements of Stockholders' Equity

<TABLE>
<CAPTION>
                                                   Convertible
                                                 Preferred Stock           Common Stock           Additional
                                                ----------------- ---------------------------      Paid-in       Accumulated
                                                Shares     Amount     Shares        Amount         Capital         Deficit
                                                ----------------- -----------   -------------   -------------   --------------
<S>                                               <C>  <C>        <C>           <C>             <C>             <C>
Balances at December 31, 1997                     --        --    12,868,570    $    128,686    $ 80,777,780    $(45,920,014)

Net proceeds from over-allotment option           --        --       375,000           3,750       3,545,750            --
Exercise of stock options and warrants            --        --        92,578             926         118,539            --
Adjustment for repurchase and retirement
  of stock                                        --        --       (24,884)           (249)        (29,675)           --
Principle loan repayments                         --        --          --              --              --              --
Shares issued under employee stock
  purchase plan                                   --        --        56,503             565         472,392            --
Amortization of deferred compensation             --        --          --              --              --              --
Comprehensive income:
    Unrealized gain on marketable securities      --        --          --              --              --              --
    Net loss                                      --        --          --              --              --       (13,407,346)

    Total comprehensive income                    --        --          --              --              --              --
                                                  ------------  ------------    ------------    ------------    ------------
Balances at December 31, 1998                     --   $    --    13,367,767    $    133,678    $ 84,884,786    $(59,327,360)
                                                  ------------  ------------    ------------    ------------    ------------

Net proceeds from equity financing                --        --       810,372           8,104       4,934,566            --
Exercise of stock options and warrants            --        --        68,586             685         188,828            --
Adjustment for repurchase and retirement
  of stock                                        --        --       (54,515)           (545)        (65,009)           --
Principle loan repayments                         --        --          --              --              --              --
Shares issued under employee stock
  purchase plan                                   --        --        41,998             420         198,748            --
Deferred compensation                             --        --          --              --            36,250            --
Amortization of deferred compensation             --        --          --              --              --              --
Comprehensive income:
    Unrealized gain on marketable securities      --        --          --              --              --              --
    Net loss                                      --        --          --              --              --       (16,841,238)

    Total comprehensive income
                                                  ------------  ------------    ------------    ------------    ------------
Balances at December 31, 1999                     --   $    --    14,234,208    $    142,342    $ 90,178,169    $(76,168,598)
                                                  ------------  ------------    ------------    ------------    ------------

Net proceeds from equity financing                --        --       614,250           6,142       4,993,853            --
Exercise of stock options and warrants            --        --        39,276             393         111,904            --
Adjustment for repurchase and retirement
  of stock                                        --        --        (3,526)            (35)         (4,205)           --
Principle loan repayments                         --        --          --              --              --              --
Shares issued under employee stock
  purchase plan                                   --        --        51,527             515          86,444            --
Deferred compensation                             --        --          --              --              --              --
Amortization of deferred compensation             --        --          --              --              --              --
Comprehensive income:                             --        --          --              --              --              --
    Unrealized gain on marketable securities      --        --          --              --              --              --
    Net loss                                      --        --          --              --              --       (19,076,598)

    Total comprehensive income                    --        --          --              --              --              --
                                                  ------------  ------------    ------------    ------------    ------------
Balances at December 31, 2000                     --   $    --    14,935,735    $    149,357    $ 95,366,165    $(95,245,196)
                                                  ============  ============    ============    ============    ============

<CAPTION>
                                                  Notes Receivable                    Accumulated         Total
                                                    From Related     Deferred     Other Comprehensive  Stockholders'
                                                      Parties      Compensation         Income           Equity
                                                  --------------  --------------  ----------------  -----------------
<S>                                               <C>             <C>             <C>               <C>
Balances at December 31, 1997                     $ (1,688,057)   $   (768,865)   $    (17,358)     $ 32,512,172

Net proceeds from over-allotment option                   --              --              --           3,549,500
Exercise of stock options and warrants                    --              --              --             119,464
Adjustment for repurchase and retirement
  of stock                                              29,923            --              --                  --
Principle loan repayments                              215,001            --              --             215,001
Shares issued under employee stock
  purchase plan                                           --              --              --             472,957
Amortization of deferred compensation                     --           304,659            --             304,659
Comprehensive income:
    Unrealized gain on marketable securities              --              --             9,140             9,140
    Net loss                                              --              --              --         (13,407,346)
                                                                                                    ------------
    Total comprehensive income                            --              --              --         (13,398,206)
                                                  ------------    ------------    ------------      ------------
Balances at December 31, 1998                     $ (1,443,133)   $   (464,206)   $     (8,218)     $ 23,775,547
                                                  ------------    ------------    ------------      ------------

Net proceeds from equity financing                        --              --              --           4,942,670
Exercise of stock options and warrants                    --              --              --             189,513
Adjustment for repurchase and retirement
  of stock                                              65,554            --              --                --
Principle loan repayments                              549,448            --              --             549,448
Shares issued under employee stock
  purchase plan                                           --              --              --             199,168
Deferred compensation                                     --           (36,250)           --                --
Amortization of deferred compensation                     --           316,743            --             316,743
Comprehensive income:
    Unrealized gain on marketable securities              --              --            16,555            16,555
    Net loss                                              --              --              --         (16,841,238)
                                                                                                    ------------
    Total comprehensive income                                                                       (16,824,683)
                                                  ------------    ------------    ------------      ------------
Balances at December 31, 1999                     $   (828,131)   $   (183,713)   $      8,337      $ 13,148,406
                                                  ------------    ------------    ------------      ------------

Net proceeds from equity financing                        --              --              --           4,999,995
Exercise of stock options and warrants                    --              --              --             112,297
Adjustment for repurchase and retirement
  of stock                                                --              --              --              (4,240)
Principle loan repayments                              380,388            --              --             380,388
Shares issued under employee stock
  purchase plan                                           --              --              --              86,959
Deferred compensation                                     --              --              --                --
Amortization of deferred compensation                     --           183,713            --             183,713
Comprehensive income:                                     --              --              --                --
    Unrealized gain on marketable securities              --              --            (7,018)           (7,018)
    Net loss                                              --              --              --         (19,076,598)
                                                                                                    ------------
    Total comprehensive income                            --              --              --         (19,083,616)
                                                  ------------    ------------    ------------      ------------
Balances at December 31, 2000                     $   (447,743)   $       --      $      1,319      $   (176,098)
                                                  ============    ============    ============      ============
</TABLE>

See accompanying notes.


                                       38
<PAGE>

                                   Focal, Inc.
                            Statements of Cash Flows
<TABLE>
<CAPTION>

                                                                       Year Ended December 31,
                                                        ------------------------------------------------------
                                                                1998            1999            2000
                                                        ------------------------------------------------------
<S>                                                           <C>             <C>             <C>
Operating Activities
Net loss                                                      $(13,407,346)   $(16,841,238)   $(19,076,598)
Adjustments to reconcile net loss to
net cash used in operating activities:
  Depreciation and amortization                                  1,158,452         954,490       1,050,771
  Amortization of deferred
    compensation                                                   304,659         316,743         183,713
  Cumulative effect of change in accounting
    principle                                                                                    4,800,000
  Write-down of notes receivable                                                                   160,414
  Interest income accrued on notes
    receivable from related parties                               (103,280)        (64,111)             --
  (Gain)/loss on disposal of equipment,
    furniture and fixtures                                              --             828         (43,251)
  Increase (decrease) in operating assets
    and liabilities:
         Accounts receivable, accrued interest
           receivable and prepaid expenses and
           other assets                                          1,430,927         577,805        (256,837)
         Inventories                                              (370,028)       (636,917)       (408,086)
         Accounts payable, accrued liabilities                    (373,863)     (1,064,535)       (403,874)
         Deferred revenue                                                                          133,877
         Other assets                                                 (672)           (657)         14,025
         Notes receivable from related parties                     164,318          74,800          24,018
                                                        ------------------------------------------------------
Net cash used in operating activities                          (11,093,553)    (16,618,681)    (13,821,828)
                                                        ------------------------------------------------------

Investing activities
Sale and maturity of marketable securities                      17,370,386      19,904,941       5,224,995
Purchase of marketable securities                              (27,762,163)     (7,774,937)       (710,471)
Purchase of property and equipment                              (1,130,337)     (1,143,954)       (262,129)
                                                        ------------------------------------------------------
Net cash provided by (used in) investing activities            (11,522,114)     10,986,050       4,252,395
                                                        ------------------------------------------------------

Financing activities
Proceeds from equity financings,
   net of issuance costs                                         3,549,500       4,942,670       4,999,995
Proceeds from exercise of stock options                            119,464         189,512         108,057
Proceeds from issuance of common stock
   under the employee stock purchase plan                          472,957         199,168          86,959
Principal payments on notes receivable                             215,001         549,449         219,972
Proceeds from lease financing                                    1,077,336       1,066,426          31,085
Principal payments on capital lease obligations                 (1,112,432)     (1,084,633)       (950,860)
                                                        ------------------------------------------------------
Net cash provided by financing activities                        4,321,826       5,862,592       4,495,208
                                                        ------------------------------------------------------

Net increase (decrease) in cash and cash equivalents           (18,293,841)        229,961      (5,074,225)

Cash and cash equivalents at beginning of year                  26,810,777       8,516,936       8,746,897
                                                        ------------------------------------------------------
Cash and cash equivalents at end of year                      $  8,516,936    $  8,746,897    $  3,672,672
                                                        ======================================================

Supplemental disclosure of cash flow
information:
     Interest paid                                            $    212,323    $    199,563    $    297,602
</TABLE>

See accompanying notes.


                                       39
<PAGE>

                                   Focal, Inc.
                          Notes to Financial Statements
                                December 31, 2000

1. Summary of Significant Accounting Policies

Organization and Business

Focal, Inc. (the "Company") develops, manufactures and commercializes synthetic,
absorbable surgical sealants based on the Company's proprietary polymer
technology. The Company's family of FocalSeal surgical sealant products is
currently being developed for use inside the body to seal air and fluid leaks
resulting from lung, neurological, cardiovascular and gastrointestinal surgery.

Liquidity and Management's Plans

The Company has incurred recurring losses and has a net capital deficiency at
December 31, 2000. These conditions raise substantial doubt about the Company's
ability to continue as a going concern.

Focal will require substantial additional capital resources to fund continuing
operations through the end of 2001 and beyond. The Company believes there may be
a number of alternatives available to meet the continuing capital requirements
of its operations, such as collaborative agreements and public or private
financings. There can be no assurance that any of these alternatives will be
available on terms acceptable to the Company, or at all. If adequate funds are
not available, the Company will be required to significantly curtail its
operations and may have to sell or license out significant portions of the
Company's technology or potential products or discontinue operations.

The 2000 financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of this uncertainty.

Use of Estimates

The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

Cash, Cash Equivalents and Marketable Securities

Cash and cash equivalents include cash accounts and funds held in investments
with original maturities of three months or less. Marketable securities consist
of investments in agencies of the U.S. government, investment grade corporate
notes and other investments with original maturities of greater than three
months. The Company has classified all cash equivalents and marketable
securities as available-for-sale securities, which are carried at fair value,
with unrealized gains and losses reported as a separate component of
stockholders' equity.

The Company invests its cash equivalents and marketable securities with
institutions that have strong credit ratings. The Company has developed
guidelines relative to investment risk and liquidity.

All product revenues, substantially all collaborative research revenues and
substantially all accounts receivable are derived from two customers.


                                       40
<PAGE>

                                   Focal, Inc.
                      Notes to Financial Statements (Continued)
                                December 31, 2000

1. Summary of Significant Accounting Policies (Continued)

Fair Value of Financial Instruments

Carrying amounts of financial instruments held by the Company, which include
cash, cash equivalents, marketable securities, accounts receivable, accounts
payable and accrued expenses, approximate fair value due to their short
duration.

Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market
using estimated standard costs.

Property and Equipment

Property and equipment are recorded at cost and are depreciated using the
straight-line method over estimated useful lives of 3-5 years. Property and
equipment under capital leases are amortized using the straight-line method over
the lease term, typically 4 years.

Revenue Recognition

Revenues from collaborative research agreements are recognized over the
contract life. Revenue from non-refundable, up-front, license and milestone
payments not specifically tied to a separate earnings process, are recognized
ratably over the term of the research contract. When payments are
specifically tied to a separate earnings process and when considered
appropriate, revenue is recognized when earned. In addition, when
appropriate, the Company recognizes revenue from certain research payments
based on the level of research services performed during the contract or over
the term of the agreement. Payments received in advance of research performed
are designated as deferred revenue. Reimbursable expenses incurred or
milestones achieved but not yet reimbursed are designated as contract
revenues receivable.

Product revenues are recognized only when the contract is signed, the product
has been shipped and all obligations have been delivered to the customer, the
fee is fixed and determinable, and collection is probable (see Note 8).

Research and Development Costs and Patent Costs

All research and development costs, including the cost of acquiring patents and
licensing fees paid in connection with university technology licensing
agreements, are expensed as incurred.

Stock Based Compensation

The Company accounts for its stock based compensation arrangements under the
provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations. The Company has adopted the disclosure provisions only
of Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (FAS 123).

Income Taxes

The liability method is used to account for income taxes. Deferred tax assets
and liabilities are determined based on differences between the financial
reporting and income tax basis of assets and liabilities as well as net
operating loss carryforwards and are measured using the enacted tax rates and
laws that will be in effect when the differences reverse. Deferred tax assets
are reduced by a valuation allowance to reflect the uncertainty associated with
their ultimate realization.

Basic and Diluted Net Loss Per Share

Basic and diluted net loss per share is presented in accordance with the
provisions of Statement of Financial Accounting Standards No. 128, Earnings Per
Share. Basic net loss per share is computed based on the weighted


                                       41
<PAGE>

                                   Focal, Inc.
                      Notes to Financial Statements (Continued)
                                December 31, 2000

1. Summary of Significant Accounting Policies (Continued)

average number of shares of common stock outstanding. Diluted net loss per share
does not differ from basic net loss per share since potential common shares to
be issued upon exercise of stock options are anti-dilutive for all periods
presented.

Reclassifications

Certain reclassifications have been made in the accompanying financial
statements in order to conform to the 2000 presentation.

Impact of Recently Issued Accounting Standards

In 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Investments and Hedging Activities", which was
amended by FAS 137 and FAS 138, which requires the adoption of FAS 133 by Focal
in the first quarter of 2001. Focal does not expect the implementation of this
statement to have a significant impact on its results of operations or financial
position.

Effective in the fourth quarter of 2000, Focal changed its method of accounting
for revenue recognition in accordance with Staff Accounting Bulletin (SAB) No.
101, "Revenue Recognition in Financial Statements." Previously, Focal had
recognized revenue relating to non-refundable, up-front, license and milestone
payments and certain research funding payments from its strategic partners in
accordance with the contract. Under the new accounting method adopted
retroactively to January 1, 2000, Focal now recognizes revenue from
non-refundable, up-front, license and milestone payments not specifically tied
to a separate earnings process, ratably over the term of the research contract
or the distribution arrangement. When payments are specifically tied to a
separate earnings process and when considered appropriate, revenue is recognized
when earned. In addition, when appropriate, Focal recognized revenue from
certain research payments based upon the level of research services performed
during the research contract or over the term of the agreement. The cumulative
effect of the change in accounting principle resulted in a charge to income of
$5.6 million, which is included in the loss for the year ended December 31,
2000. The pro forma amounts presented in the consolidated statements of
operations were calculated assuming the accounting change was made retroactively
to the prior periods presented. Included in revenue for the year ended December
31, 2000 is $800,000 of revenue relating to the adoption of SAB 101. The amount
of revenue to be recognized in future years that is included in the cumulative
effect of the change in accounting principle is $800,000 for each of the next
six years. After giving effect to the implementation of SAB 101, Focal had a net
loss of $19,076,598 or $1.30 per share for the year 2000.


                                       42
<PAGE>

                                   Focal, Inc.
                      Notes to Financial Statements (Continued)
                                December 31, 2000

2. Marketable Securities

Available-for-sale marketable securities consisted of the following:

                                         December 31, 1999
                          ---------------------------------------------------
                                         Gross         Gross
                                      Unrealized    Unrealized     Estimated
                             Cost        Gains        Losses      Fair Value
                          ---------------------------------------------------

Corporate notes due
  within one year         $4,707,503    $    8,339        -        $4,715,842
                          ---------------------------------------------------
Total debt securities
  included in marketable
  securities              $4,707,503    $    8,339        -        $4,715,842
                          ===================================================

                                         December 31, 2000
                          ---------------------------------------------------
                                         Gross         Gross
                                      Unrealized    Unrealized     Estimated
                             Cost        Gains        Losses      Fair Value
                          ---------------------------------------------------
Corporate notes
  (maturing in 2025)      $  199,999    $    1,319        _        $  201,318

                          ---------------------------------------------------
Total debt securities
  included in marketable
  securities              $  199,999    $    1,319        -        $  201,318
                          ===================================================

Amortized cost basis was used in computing the cost of marketable securities
sold.

3.  Inventories

Inventories consist of the following at December 31:

                                               1999           2000
                                           -----------------------------

   Purchased parts and subassemblies       $   146,906   $  1,443,572
   Work in process                           1,265,623        321,006
   Finished goods                              161,405        217,442
                                           -----------------------------
                                           $ 1,573,934   $  1,982,020
                                           =============================


                                       43
<PAGE>

                                   Focal, Inc.
                      Notes to Financial Statements (Continued)
                                December 31, 2000

4. Property and Equipment
Property and equipment consist of the following at December 31:

                                               1999           2000
                                           -----------------------------

   Leasehold improvements                  $  1,187,801  $  1,216,569
   Laboratory equipment                       5,530,008     5,511,712
   Office equipment, computers and
   software                                     897,351     1,009,382
   Furniture and fixtures                       626,793       640,803
                                           -----------------------------
                                           $  8,241,953  $  8,378,465
   Less accumulated depreciation and
   amortization                               5,370,919     6,259,839
                                           -----------------------------
                                           $  2,871,034  $  2,118,626
                                           =============================

5.  Accrued Liabilities

Accrued liabilities consist of the following at December 31:

                                                  1999          2000
                                              ----------------------------
Accrued university research funding and
  outside services                            $    687,167  $      6,883
Accrued payroll and related expenses               620,145       460,358
Accrued professional fees                          250,492       347,140
Accrued other                                    1,056,071     1,386,876
                                              ----------------------------
                                              $  2,613,875  $  2,201,257
                                              ============================

6. Stockholders' Equity

Preferred Stock

The Company is authorized to issue up to 5,000,000 shares of preferred stock,
$.01 par value, in one or more series, each of such series to have such rights
and preferences, including voting rights, dividend rights, conversion rights,
redemption privileges and liquidation preferences, as shall be determined by the
Board of Directors.

In 1997, the Board of Directors of the Company adopted a Preferred Shares Rights
Agreement (the "Rights Plan") designed to protect shareholders from unsolicited
attempts to acquire the Company on terms that do not maximize stockholder value.
In connection with the Rights Plan, the Board of Directors will designate a
certain number of shares of the Company's preferred stock as Series A
Participating Preferred Stock. Under the Rights Plan, a right to purchase one
one-thousandth of one share of the Series A Preferred Stock (the "Rights") will
be distributed as a dividend for each share of common stock. The terms of the
Rights Plan provide that the Rights will become exercisable upon the earlier of
the tenth day after any person or group acquires 15% or more of the Company's
outstanding common stock or the tenth business day after any person or group
commences a tender or exchange offer which would, if completed, result in the
offer or owning 15% or more of the Company's outstanding common stock. The
Rights may generally be redeemed by action of the Board of Directors at $.001
per Right at any time prior to the tenth day following the public announcement
that any person or group has acquired 15% or more of the outstanding common
stock of the Company. The Rights expire on January 28, 2007. The Rights have
certain anti-takeover effects in that they would cause substantial dilution to
the party attempting to acquire the Company. In October 1999, the Board of
Directors approved an amendment to the Rights Plan, which provides that certain
purchases of voting stock by Genzyme Biosurgery Corporation will not trigger the
exercisability of the Rights under the Rights Plan.


                                       44
<PAGE>

                                   Focal, Inc.
                      Notes to Financial Statements (Continued)
                                December 31, 2000

6. Stockholders' Equity (Continued)

In certain circumstances, the Rights allow the Company's stockholders to
purchase the number of shares of the Company's common stock having a market
value at the time of the transaction equal to twice the exercise price of the
Rights, or in certain circumstances, the stockholders would be able to acquire
that number of shares of the acquirer's common stock having a market value, at
the time of the transaction, equal to twice the exercise price of the Rights.
The Company will continue to issue Rights with future issuances of common stock.

Warrants

Prior to the initial public offering, the Company granted warrants to secure
lease financing, to raise capital, to obtain letters of credit and as a form of
compensation to various consultants. At December 31, 2000, the Company has
common stock warrants outstanding covering 43,782 shares at exercise prices
ranging from $5.66 to $12.03 per share expiring at various dates through
February 2006.

Stock Options

The 1992 Incentive Stock Plan (the "1992 Plan") authorizes the grant of
incentive stock options and nonqualified stock options to employees and
nonqualified stock options to consultants. A total of 2,600,000 shares have been
reserved for issuance under the 1992 Plan. The exercise price of incentive stock
options granted under the 1992 Plan may not be less than 100% of the fair market
value of the common stock as of the grant date, as determined by the Board of
Directors. The exercise price of nonqualified stock options may not be less than
85% of the fair market value of the common stock as of the grant date. Options
issued under the 1992 Plan generally have a four-year vesting period, unless
otherwise determined by the Board of Directors. The term of stock options
granted under the 1992 Plan may not exceed ten years. Subject to the approval of
the Board of Directors, the Plan allows option holders the right to immediately
exercise outstanding options (both vested and unvested), with the subsequent
share issuances being subject to a repurchase option by the Company under
certain conditions according to the original vesting schedule and exercise
price.

In May 1999, the Company adopted the 1999 Stock Incentive Plan (the "1999
Plan"). A total of 875,000 shares have been reserved for issuance under the 1999
Plan. The 1999 Plan authorizes the grant of incentive and nonqualified stock
options to officers, directors, consultants and advisors of the Company. The
Board establishes the exercise price at the time an option is granted and
specifies such price in the applicable option agreement. Options issued under
the 1999 Plan generally have a four-year vesting period, unless otherwise
determined by the Board of Directors. The term of stock options granted under
the 1999 Plan may not exceed ten years.

In February 2000, the Board of Directors approved an increase in the number of
shares reserved for issuance under the 1999 Plan from 875,000 shares to
1,525,000 shares. The increase was approved by the Company's shareholders at the
May 2000 annual meeting.

For certain options granted under the 1992 Plan, the Company recognizes as
compensation expense the excess of the deemed value for accounting purposes of
the common stock issuable upon exercise of such options over the aggregate
exercise price of such options. In connection with these grants, $316,743 and
$183,713 of deferred compensation amortization was recorded in the year ended
December 31, 1999 and 2000, respectively. There was no compensation expense to
be amortized in future periods as of December 31, 2000.

In January 1997, the Board of Directors approved a program under which
directors, executive officers and certain other key employees were permitted to
exercise options to purchase 1,494,775 common shares in exchange for four-year
notes with an interest rate of 6% per annum as permitted by the 1992 Plan. The
notes are full recourse and principal and accrued interest are payable upon the
maturity of the note. In October 2000, the Board of Directors approved an
extension to the maturity of the notes in the program for an additional 12
months or forgiveness due to change in control. Under certain conditions, the
shares are subject to a repurchase option by the Company according to the
original vesting schedule. At December 31, 2000, a total of 54,572 shares issued
under the 1992 Plan were subject to the Company's repurchase option and $447,745
of notes receivable were outstanding and included in the stockholders' equity
section of the accompanying financial statements.


                                       45
<PAGE>

                                   Focal, Inc.
                      Notes to Financial Statements (Continued)
                                December 31, 2000

6. Stockholders' Equity (Continued)

The 1997 Employee Stock Purchase Plan (the "Purchase Plan") has 200,000 shares
of common stock reserved for issuance thereunder. Under the Purchase Plan,
eligible employees may purchase common shares at a price per share equal to 85%
of the lower of the fair market value of the common stock at the beginning of a
two year offering period or the end of each six month purchase period included
in such offering period. Participation in the offering period is limited to 15%
of the employee's compensation or $25,000 in any calendar year. The first
offering period commenced in January 1998 and the Purchase Plan will terminate
in 2007.

The 1997 Non-Employee Director Option Plan (the "Director Plan") has 150,000
shares of common stock reserved for issuance thereunder. Effective with the 1998
annual meeting of stockholders and annually thereafter, each nonemployee
director is automatically granted a nonstatutory option to purchase 5,000 shares
of common stock. The exercise price of each of these options will be equal to
the fair market value of the common stock on the date of grant. Each option
granted under the Director Plan will vest on a cumulative monthly basis over a
four-year period. The Director Plan will terminate in September 2007, unless
terminated earlier in accordance with the provisions of the Director Plan.

The following table presents the activity of all of the Company's stock plans
for the years ended December 31, 1998, 1999 and 2000:

                       1998                 1999                  2000
                ------------------  --------------------  ----------------------
                         Weighted              Weighted             Weighted
                         Average               Average              Average
                Options  Exercise     Options  Exercise    Options  Exercise
                           Price                 Price                Price
                ------------------  --------------------  ----------------------

Outstanding at
  beginning of
  year           497,267    $4.42     780,362     $7.55   1,723,274    $5.53
Granted          394,778     9.87   1,171,392      4.40   1,017,816     2.83
Exercised        (92,578)    1.26     (53,675)     1.66     (39,264)    2.62
Canceled         (19,105)    4.66    (174,805)     8.18    (423,938)    5.93
                ------------------  --------------------  ----------------------
Outstanding at
  end of year    780,362    $7.55   1,723,274     $5.53   2,277,888    $4.30
                ==================  ====================  ======================
Options
  exercisable
  at end of
  year           189,439    $5.07     310,721     $6.27     912,622    $5.07
                ==================  ====================  ======================

Weighted average fair
  value per share of
  options granted during
  the year                  $5.84                 $2.55                $2.47
                         ===========           ===========          ===========

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

                            Options Outstanding            Options Exercisable
                      ---------------------------------  -----------------------
                                   Weighted
                                   Average     Weighted                 Weighted
                                   Remaining   Average                   Average
     Range of           Number     Contractual Exercise      Number     Exercise
  Exercise Prices     Outstanding  Life (Yrs.)  Price     Exercisable    Price
--------------------  ---------------------------------  -----------------------

$ 0.0000 - $ 1.7500      54,560      5.91       $1.19       47,469        $1.17
$ 2.5000 - $ 2.5000     846,500      9.71       $2.50      161,965        $2.50
$ 2.5940 - $ 4.0625     307,154      8.55       $3.81      148,275        $3.87
$ 4.3750 - $ 4.3750     660,000      8.97       $4.38      291,874        $4.38
$ 4.6875 - $18.0000     409,674      7.77       $8.67      263,039        $8.80
                      -----------                        ----------
                      2,277,888                            912,622
                      ===========                        ==========


                                       46
<PAGE>

                                   Focal, Inc.
                      Notes to Financial Statements (Continued)
                                December 31, 2000

6. Stockholders' Equity (Continued)

FAS 123 Disclosures

If the compensation cost for the option plans had been determined based on the
fair value at the grant date for grants in 1998, 1999 and 2000, consistent with
the provisions of FAS 123, the pro forma net loss and net loss per share for
1998, 1999 and 2000, would be as follows (in thousands except per share
amounts):


                 1998                   1999                   2000
         ----------------------  ----------------------  ----------------------
         As Reported  Pro Forma  As Reported Pro Forma   As Reported  Pro Forma
         ----------------------  ----------------------  ----------------------

Net loss   $(13,407)  $(14,121)    $(16,841)  $(17,914)     $(19,077)  $(20,568)
Basic
  and       $(1.01)    $(1.06)      $(1.24)    $(1.32)        $(1.30)   $(1.40)
  diluted
  net
  loss
  per
  share

The fair value of options and warrants issued at the date of grant were
estimated using the Black-Scholes model with the following weighted average
assumptions:

                                      Options Granted
                          ----------------------------------------
                              1998         1999         2000
                          ----------------------------------------

      Expected life
        (years)                 5.0          5.0          5.0
      Interest rate             4.5          6.4          6.5
      Volatility                66%          60%         130%

The Company has never declared nor paid dividends on any of its capital stock
and does not expect to do so in the foreseeable future.

The effects on 1998, 1999 and 2000 pro forma net loss and net loss per share of
expensing the estimated fair value of stock options are not necessarily
representative of the effects on reporting the results of operations for future
years as the periods presented include only two, three and four years,
respectively, of option grants under the Company's plans.

Common Stock Reserved for Issuance

At December 31, 2000, the Company has reserved 2,321,670 shares of common stock
for issuance upon the exercise of all outstanding warrants and options
authorized under the Company's various stock plans.

7. Commitments

The Company has a ten-year lease agreement expiring in 2004 for its principal
facility. In connection with this lease, the lessor funded approximately
$4,367,000 of leasehold improvements which are reimbursed as part of the minimum
lease payments. The Company has certain options to purchase the building and the
leasehold improvements.

The Company leases the majority of its equipment, furniture and fixtures under
capital leases. Included in property and equipment at December 31, 1999 and
2000, respectively, were assets with a cost basis of $7,994,045 and $8,111,464
acquired under capital leases. Accumulated amortization as of December 31, 1999
and 2000,


                                       47
<PAGE>

                                   Focal, Inc.
                      Notes to Financial Statements (Continued)
                                December 31, 2000

7. Commitments (Continued)

respectively, related to these assets was $5,229,830 and $5,400,476.
Amortization of assets under capital leases are included with depreciation and
amortization in the accompanying financial statements.

As of December 31, 2000, the Company's minimum lease payments under capital and
operating leases are as follows:

                                                 Capital      Building
                                                 Leases       Operating
                                                                Lease
                                              ----------------------------
2001                                           $  762,782    $ 1,147,974
2002                                              500,780      1,147,974
2003                                              204,580      1,147,974
2004                                                8,317        860,980
Thereafter                                             --             --
                                              ----------------------------
Total minimum lease payments                    1,476,459    $ 4,304,902
                                                            ==============
Less interest                                     137,103
                                              --------------
Present value of minimum lease payments         1,339,356
Less capital lease obligations due within
  one year                                        688,828
                                              --------------
Capital lease obligations - long-term portion  $  650,528
                                              ==============

Total rent expense was $1,114,389, $1,126,917 and $1,046,811 in 1998, 1999, and
2000, respectively.

The Company has a lease commitment totaling $1.5 million from a leasing company
for the financing of equipment and leasehold improvements. Under this agreement,
the term for financing equipment purchases and leasehold improvements is 48
months and 36 months, respectively. The interest rate is established as of the
commencement date for each new drawdown, based on a treasury security index, and
is fixed for the term of the financing. There is a fixed percentage buy-out
provision at the end of the lease period. The lease financings are
collateralized by the equipment and leasehold improvements being financed. As of
December 31, 2000, there were $1,339,000 in outstanding borrowings under this
financing arrangement. There are no financial covenants in connection with this
lease financing.

In September 2000, the Company entered into a sublease agreement with
TruExchange, Inc. to sublease 8,000 square feet of space for $24,027 per month.
In October 2000, the Company entered into a sublease agreement with Lexigen
Pharmaceuticals Corp. to sublease 3,360 square feet of space for $9,800 per
month.

8. Research and Development, Licensing and Marketing and Distribution Agreements

In October 1999, the Company entered into a Marketing and Distribution Agreement
with Genzyme Biosurgery (formerly Genzyme Surgical Products), a division of
Genzyme Corporation. Genzyme Biosurgery was granted exclusive marketing and
distribution rights to Focal's surgical sealant products for lung surgery,
cardiovascular surgery and gastrointestinal surgery in North America. The
Company retained manufacturing rights to these products. Under the terms of the
agreement, the Company will be reimbursed for its cost of manufacturing product
plus 50% of the gross margin generated from Genzyme Biosurgery's sales of the
Company's sealant products to customers. The term of the agreement is for ten
years, with two five-year renewal options which are automatic if Genzyme
Biosurgery meets certain minimum performance standards. In addition to the
Marketing and Distribution Agreement, in October 1999 Focal and Genzyme
Biosurgery also entered into a Stock Purchase Agreement, with up to $20.0
million in purchases of the Company's common stock committed by Genzyme
Biosurgery over a twenty month period, subject to certain specified conditions.
The first $5.0 million purchase was made by Genzyme Biosurgery in November 1999,
with Genzyme Biosurgery purchasing approximately 810,000 shares at a 25%


                                       48
<PAGE>

                                   Focal, Inc.
                      Notes to Financial Statements (Continued)
                                December 31, 2000

8. Research and Development, Licensing and Marketing and Distribution
   Agreements (Continued)

premium to the ten day average trading price of the Company's common stock prior
to the investment. The second $5.0 million purchase was made by Genzyme
Biosurgery in April 2000, with Genzyme Biosurgery purchasing approximately
614,000 shares at the twenty day average trading price of the Company's common
stock prior to the investment. The third $5.0 million investment was made by
Genzyme Biosurgery in January 2001, with Genzyme Biosurgery purchasing
approximately 2.4 million shares at the twenty day average trading price of the
Company's common stock prior to the investment. At Focal's option, one
additional $5.0 million investment will be made by Genzyme Biosurgery. The final
investment of $5.0 million may be called by Focal in the second quarter of 2001,
subject to the satisfaction of closing conditions. The final investment will be
priced based upon the twenty day trading average of the Company's stock.

In January 1997, the Company entered into a distribution and licensing agreement
with the Ethicon, Inc. division of Johnson & Johnson ("Ethicon") for the
research, development and commercialization of the Company's surgical sealant
products. Ethicon received marketing rights to all territories outside North
America in exchange for (a) a one-time, nonrefundable payment to the Company for
past research and development expenditures; (b) fixed quarterly funding for two
years to be applied toward future research and development costs; (c) funding of
certain additional research and development expenses; (d) payments upon
achievement of specific milestones; and (e) specified percentages of product
sales, if any, representing a combined royalty and product cost payment. The
Company retained worldwide manufacturing rights and North American marketing
rights. The term of the Ethicon Agreement extends until January 2007, subject to
one-year extensions at Ethicon's discretion. In addition, Ethicon may terminate
the agreement at any time upon 12 months' prior written notice with or without
cause. In August 1998, the Ethicon Agreement was expanded to include research
and development funding for a cardiovascular sealant which Ethicon subsequently
elected not to fund.

The Company has collaborative research agreements and technology licensing
agreements with certain universities. The Company has worldwide exclusive
licenses to the technologies developed under these agreements, in exchange for
funding certain research and payment of licensing fees and royalties on
applicable product sales. Research and development expense and licensing fees
incurred under these agreements during the years ended December 31, 1998, 1999,
and 2000, totaled $150,000, $134,000 and $355,000, respectively. In connection
with these agreements, the Company has no research funding commitments at
December 31, 2000.

9. Income Taxes

Due to net losses incurred by the Company in each year since its inception, no
provision for income taxes has been recorded. At December 31, 2000, the Company
had federal and state tax net operating loss carryforwards of approximately
$86.1 and $51.0 million, respectively, and federal and state research and
development tax credit carryforwards of approximately $4.4 million which expire
at various times through 2020.


                                       49
<PAGE>

                                   Focal, Inc.
                      Notes to Financial Statements (Continued)
                                December 31, 2000

9. Income Taxes (Continued)


Significant components of the Company's deferred tax assets as of December 31
are as follows:

                                                  1999          2000
                                              ----------------------------
Deferred tax assets:
  Net operating losses                         $27,418,000   $32,341,000
  Research and development tax credits           4,067,000     4,390,000
  Other                                            709,000     2,652,000
                                              ----------------------------
                                                32,194,000    39,383,000
  Valuation allowance                          (32,194,000)  (39,383,000)
                                              ----------------------------
Net deferred tax assets                        $         -   $         -
                                              ============================

For financial reporting purposes, a valuation allowance has been provided since
realization of such deferred tax assets is uncertain. The valuation allowance
increased by $7,189,000 during 2000, due primarily to the increase in tax
credits and net operating loss carryforwards. The future utilization of the net
operating loss carryforwards may be subject to limitations under the change in
stock ownership provisions of the Internal Revenue Code.

10. Related Party Transactions

In connection with an employment agreement, interest-bearing loans aggregating
$120,000 were made to an officer of the Company. Principal and accrued interest
on this loan were paid in full during 1998. Other officer and nonofficer
employee notes receivable, certain of which notes contain similar repayment
terms as those described above, are outstanding and included in notes receivable
from related parties in the accompanying financial statements.

11. Quarterly Financial Information (unaudited)

      The quarterly information for the first three quarters of 2000 reflect the
quarters as previously reported prior to the adoption of SAB 101. In 2000, the
"as restated" quarterly amounts represent the quarterly information restated for
the retroactive adoption of SAB 101 to January 1, 2000, as noted in the column
headings. Focal increased the inventory reserve due to high levels of inventory
- resulting in a charge to cost of product revenues of $737,000 in the fourth
quarter of 2000. The 1999 quarterly information is as previously reported.


                                       50
<PAGE>

                                   Focal, Inc.
                             Statement of Operations

<TABLE>
<CAPTION>
                                                 First Quarter Ended            Second Quarter Ended
                                                    March 31, 2000                  June 30, 2000
                                             ----------------------------   ----------------------------
                                             As previously        As        As previously        As
                                               reported        restated       reported        restated
                                             -------------  ------------    -----------      -----------
<S>                                           <C>           <C>             <C>             <C>
Statement of Operations:
 REVENUES:
     Collaborative Revenues                             -        200,000         17,212          217,212
     Product Revenues                             237,366        237,366        397,072          397,072
                                             -------------  ------------    -----------      -----------
         Total Revenues                           237,366        437,366        414,284          614,284
                                             -------------  ------------    -----------      -----------

         Total costs and expenses               4,486,111      4,486,111      3,805,955        3,805,955
         Total other (income) expense            (606,906)      (606,906)      (129,379)        (129,379)
                                             -------------  ------------    -----------      -----------
 Net loss before cumulative effect of change
      in accounting principle                  (3,641,839)    (3,441,839)    (3,262,292)      (3,062,292)
                                             -------------  ------------    -----------      -----------
Cumulative effect of change in accounting
     principle                                          -     (5,600,000)             -                -
                                             -------------  ------------    -----------      -----------
 Net Loss                                      (3,641,839)  $ (9,041,839)   $(3,262,292)    $ (3,062,292)
                                             =============  ============    ===========     ============

 Basic and diluted per share                  $     (0.26)  $      (0.64)   $     (0.22)         $ (0.21)

Weighted average shares, basic and diluted     14,235,994     14,235,994     14,777,506      14,777,506

<CAPTION>
                                                   Third Quarter Ended         Fourth Quarter Ended
                                                  September 30,   2000          December 31, 2000
                                              -----------------------------------------------------
                                              As previously         As                  As
                                                reported         restated            reported
                                              -------------    -----------         --------------
<S>                                            <C>             <C>                      <C>
Statement of Operations:
 REVENUES:
     Collaborative Revenues                         33,083         233,083              224,080
     Product Revenues                              486,872         486,872              598,258
                                              -------------    -----------         ------------
         Total Revenues                            519,955         719,955              822,338
                                              -------------    -----------         ------------

         Total costs and expenses                3,684,951       3,684,951            4,977,019
         Total other (income) expense             (112,394)       (112,394)             (33,816)
                                              -------------    -----------         ------------
 Net loss before cumulative effect of change
     in accounting principle                    (3,052,602)     (2,852,602)          (4,119,865)
                                              -------------    -----------         ------------
Cumulative effect of change in accounting
     principle                                           -               -                    -
                                              -------------    -----------         ------------
 Net Loss                                      $(3,052,602)    $(2,852,602)        $ (4,119,865)
                                              -------------    -----------         ------------

 Basic and diluted per share                   $     (0.20)    $     (0.19)             $ (0.28)

Weighted average shares, basic and diluted      14,900,436      14,900,436           14,707,345

<CAPTION>
                                             First Quarter    Second Quarter    Third Quarter         Fourth Quarter
                                                 Ended           Ended              Ended                  Ended
                                            March 31, 1999     June 30, 1999    September 30, 1999    December 31, 1999
                                            ---------------------------------   -----------------------------------------
<S>                                            <C>              <C>                   <C>                  <C>
Statement of Operations:

 REVENUES:
     Collaborative Revenues                         608,160           94,238                18,236            1,051,983
     Product Revenues                               717,832          679,268                12,986               12,833
                                               ------------     ------------          ------------         ------------
         Total Revenues                           1,325,992          773,506                31,222            1,064,816
                                               ------------     ------------          ------------         ------------

         Total costs and expenses                 5,659,696        5,968,223             4,536,854            4,580,898
     Total other (income) expense                  (250,970)        (195,162)             (138,859)            (123,906)
                                               ------------     ------------          ------------         ------------
 Net loss before cumulative effect of change
  in accounting principle                        (4,082,734)      (4,999,555)           (4,366,773)          (3,392,176)
                                               ------------     ------------          ------------         ------------

     SAB 101 cumulative adjustment                        -                -                     -                    -
                                               ------------     ------------          ------------         ------------
 Net Loss                                      $ (4,082,734)    $ (4,999,555)         $ (4,366,773)        $ (3,392,176)
                                               ============     ============          ============         ============

 Basic and diluted per share                   $      (0.30)    $      (0.37)         $      (0.32)        $      (0.24)

 Weighted average shares, basic and diluted      13,391,484       13,407,029            13,441,931           13,961,920
</TABLE>


                                       51
<PAGE>

Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure

During the Company's two most recently completed fiscal years there have been no
disagreements with its independent accountants on accounting and financial
disclosure matters.


                                       52
<PAGE>

                                    PART III

Item 10. Directors and Executive Officers of the Company

Except as set forth in Part I of this annual report under the caption "Executive
Officers of the Company," the information required by this item is incorporated
by reference to the information under the captions "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in the definitive
proxy statement to be filed with the Securities and Exchange Commission with
respect to the Company's 2001 Annual Meeting of Stockholders (the "Proxy
Statement") to be held May 24, 2001.

Item 11. Executive Compensation

The information required by this item is incorporated by reference from the
information under the captions "Election of Directors - Compensation of
Directors," "- Compensation of Executive Officers," "- Agreements with Executive
Officers," "-Report of the Compensation Committee" and "- Compensation Committee
Interlocks and Insider Participation" in the Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The information required by this item is incorporated by reference from the
information under the caption "Stock Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement.

Item 13. Certain Relationships and Related Transactions

The information required by this item is incorporated by reference from the
information under the caption "Certain Relationships and Related Transactions"
in the Proxy Statement.


                                       53
<PAGE>

                                     PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)   The following documents are included as part of this Annual Report on Form
      10-K

      1.    Financial Statements:

                                                               Page No.
Reports of Independent Auditors............................      35
Balance Sheets, as of December 31, 1999 and 2000...........      36
Statements of Operations for the Years Ended December 31,
  1998, 1999 and 2000......................................      37
Statements of Stockholders' Equity for the Years Ended
  December 31, 1998, 1999 and 2000.........................      38
Statements of Cash Flows for the Years Ended December 31,
  1998, 1999 and 2000......................................      39
Notes to Financial Statements..............................      40

      2.    Financial Statement Schedules:

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

      3.    Exhibits:

      The exhibits listed in the Exhibit Index immediately preceding the
Exhibits are filed as a part of this Annual Report on Form 10-K.

(b)   Reports on Form 8-K:

      None.

      The following registered trademarks of the Company are mentioned in
this Annual Report on Form 10-K: FocalSeal(R), FocalGel(R) and Focal(R).


                                       54
<PAGE>

                                   SIGNATURES

      Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

                                   FOCAL, INC

Date:  March 29, 2001                     By: /s/ Ronald S. Rudowsky
                                             -------------------------
                                             Ronald S. Rudowsky
                                             President and
                                             Chief Executive Officer

      KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Robert J. DePasqua, Ronald Rudowksy and
Harry R. Trout III, jointly and severally, his or her attorneys-in-fact, and
each with the power of substitution, for him or her in any and all capacities,
to sign any amendments to this Report on Form 10-K, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his or her substitute or substitutes, may do
or cause to be done by virtue thereof.

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

          Signature                     Title                   Date
          ---------                     -----                   ----

/s/ Robert J. DePasqua        Chairman of the Board of      March 29, 2001
----------------------------- Directors
    (Robert J. DePasqua)

/s/ Ronald S. Rudowsky        President, Chief Executive    March 29, 2001
----------------------------- Officer and Director
    (Ronald S. Rudowsky)

/s/ Harry R. Trout III        Chief Financial Officer       March 29, 2001
----------------------------- (Principal Financial and
    (Harry R. Trout III)      Accounting Officer)

/s/ Henry Brem, M.D.          Director                      March 29, 2001
-----------------------------
     (Henry Brem, M.D.)

/s/ Robert Langer, Ph.D.      Director                      March 29, 2001
-----------------------------
   (Robert Langer, Ph.D.)

/s/ Donald Grilli             Director                      March 29, 2001
-----------------------------
       (Donald Grilli)


                                       55
<PAGE>

                                  EXHIBIT INDEX


Exhibit
 Number

  3.2(1)   Restated Certificate of Incorporation of the Company.
  3.3(1)   Bylaws of the Company as amended.
  4.2(1)   Specimen Common Stock Certificate.
 10.1(1)   Form of  Indemnification  Agreement between the Company and each
           of its directors and officers.
 10.2(1)*  1992 Incentive Stock Plan, as amended,  and form of Stock Option
           Agreement thereunder.
 10.3(1)*  1997 Directors' Option Plan and forms of agreements thereunder.
 10.4(1)*  1997  Employee  Stock  Purchase  Plan  and  forms  of  agreement
           thereunder.
 10.5(1)   Restated Investors Rights Agreement dated April 12,
           1996 among the Company and certain stockholders of
           the Company.
 10.6(1)   Lease Agreement dated April 4, 1994 between the
           Company and The Mutual Life Insurance Company of New
           York relating to lease of facility located at 4
           Maguire Road, Lexington, MA, as amended to date.
 10.7(1)   Master Loan and Security  Agreement dated April 18, 1997 between
           the Company and Transamerica Leasing.
 10.8(1)+  Patent and Technology License Agreement dated June
           11, 1992 between the Company and University of
           Texas.
 10.9+     Exclusive  License  Agreement  dated as of January 1, 2001 among
           the Company, Marvin Slepian, M.D. and Endoluminal  Therapeutics,
           Inc.
 10.10(1)+ Distribution,  License  and Supply  Agreement  dated  January 2,
           1997 between the Company and Ethicon, Inc.
 10.11(1)  Agreement  for  Consulting  Services  dated  November  15,  1991
           between the Company and Robert Langer, Ph.D.
 10.12+    Agreement for Consulting Services dated as of
           January 1, 2001 between the Company and Marvin
           Slepian, M.D.
 10.13(1)  Form of Restricted Stock Purchase Agreement and
           schedule of current officers and directors party
           thereto.
 10.14(2)  Preferred Shares Rights Agreement dated as of
           December 17, 1997, as amended by Amendment No. 1 to
           Rights Agreement, dated March 31, 2001, by and
           between the Company and Norwest Bank Minnesota N.A,
           as Rights Agent
 10.15(3)+ Marketing and Distribution  Agreement  between Focal and Genzyme
           Surgical Products dated October 21, 1999.
 10.16(3)  Stock Purchase  Agreement between Focal and Genzyme  Corporation
           dated October 21, 1999.
 10.17(3)  Registration   Rights   Agreement   between  Focal  and  Genzyme
           Corporation dated October 21, 1999.
 10.18(4)  Separation  Agreement,  dated July 12, 2000, between the Company
           and Tom Bromander.
 10.19     Separation  Agreement,  dated July 12, 2000, between the Company
           and Peter Jarrett.
 10.20(4)  Separation  Agreement,  dated  October  30,  2000,  between  the
           Company and Ronald Rudowsky.
 10.21(4)  Separation  Agreement,   dated  August  16,  2000,  between  the
           Company and Harry Trout III.
 10.22*    1999 Incentive Stock Plan, as amended.
 23.1      Consent of Ernst & Young LLP, independent auditors.


                                       56
<PAGE>

(1)   Incorporated by reference to the Company's Registration Statement on Form
      S-1, File No. 333-38379, originally filed with the Securities and Exchange
      Commission on October 21, 1997.
(2)   Incorporated by reference to the Company's Quarterly Report on Form 10-Q
      for the quarter ended June 30, 2000, filed with the Securities and
      Exchange Commission on August 14, 2000.
(3)   Incorporated by reference to the Company's Annual Report on Form 10-K for
      the fiscal year ended December 31, 1999, filed with Securities and
      Exchange Commission on March 30, 2000.
(4)   Incorporated by reference to the Company's Quarterly Report on Form 10-Q
      for the quarter ended September 30, 2000, filed with the Securities and
      Exchange Commission on November 14, 2000.
*     Management contract or compensatory plan filed as an exhibit pursuant to
      Items 14(a) and 14(c) of Form 10-K.
+     Confidential treatment requested as to certain portions.


                                       57