<PAGE>
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                                 UNITED STATES
                       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)

<TABLE>
<C>        <S>
   /X/     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
           SECURITIES EXCHANGE ACT OF 1934.
           FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1999
                                  OR
   / /     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
           SECURITIES EXCHANGE ACT OF 1934.
           FOR THE TRANSITION PERIOD FROM                   TO
</TABLE>

                        Commission File Number: 0-23247
                           --------------------------

                                  FOCAL, INC.

             (Exact name of registrant as specified in its charter)

<TABLE>
<S>                                        <C>
             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)
</TABLE>

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
                                             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 / /  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. Yes /X/  No / /

    The aggregate value of voting stock held by non-affiliates of the Registrant
was approximately $95,449,000 as of March 20, 2000, based upon the average of
the high and low prices of the Registrant's Common Stock reported for such date
on the Nasdaq National Market. Shares of Common Stock held by each executive
officer and director and by each person who owns 10% or more of the outstanding
Common Stock have been excluded in that such persons may be deemed to be
affiliates. The determination of affiliate status is not necessarily a
conclusive determination for other purposes.

    As of March 20, 2000, the Registrant had outstanding 14,235,231 shares of
Common Stock.

                      DOCUMENTS INCORPORATED BY REFERENCE:

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

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
                                     PART I

ITEM 1. BUSINESS

THE COMPANY

    Focal, Inc. ("Focal" or the "Company") develops, manufactures and
commercializes synthetic, absorbable, liquid 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 leaks resulting from lung, neurological, cardiovascular and
gastrointestinal surgery. FOCALSEAL-L surgical sealant, the Company's first
product, is initially being used to seal air leaks following lung surgery. The
Company has entered into an exclusive marketing and distribution agreement for
its lung, cardiovascular and gastrointestinal surgical sealant products in North
America with the Genzyme Surgical Products division of Genzyme Corporation
("Genzyme Surgical"). In markets outside North America, Focal has entered into
an exclusive marketing and distribution agreement for all of its surgical
sealant products with Ethicon, Inc., a division of Johnson & Johnson
("Ethicon"). Focal has submitted a Premarket Approval ("PMA") application to the
FDA for FOCALSEAL-L surgical sealant for lung applications and the General and
Plastic Surgery Devices Advisory Panel of the FDA has scheduled a meeting on
May 8, 2000 to review this application. The Company has received CE mark
approval for FOCALSEAL-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, if approved, 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
and has completed a clinical trial of FOCALSEAL S surgical sealant for
neurosurgery in Europe. In these clinical trials, FOCALSEAL-L surgical sealant
was effective in sealing air and fluid leaks following lung surgery and
neurosurgery and no unanticipated adverse device effects were observed. Focal
intends to develop products and conduct clinical trials 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 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:

    - Adheres very well to underlying tissue;

    - Expands and contracts with tissue;

    - Withstands high levels of air and fluid pressure.

    - Conforms well to tissue surfaces;

                                       2
<PAGE>
    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 has completed a 180 patient, multicenter clinical trial in the
United States involving the use of FOCALSEAL-L surgical sealant in sealing air
leaks following lung surgery. Focal has submitted a Premarket Approval ("PMA")
application to the FDA for lung surgery indications and, pending FDA approval,
expects to launch FOCALSEAL-L surgical sealant in the United States through
Genzyme Surgical's sales force in 2000.

    FOCALSEAL-S surgical sealant, the Company's second surgical sealant
formulation, will initially be used to seal cerebrospinal fluid ("CSF") leaks
following neurosurgery. Focal has received CE Mark approval for this product. In
1998, the Company completed a 44 patient multicenter clinical trial of
FOCALSEAL-S surgical sealant for this neurosurgery indication in Europe. All of
the patients enrolled in this clinical trial received FOCALSEAL-S surgical
sealant and 100% of these patients were sealed at the end of surgery. The
Company has received IDE approval from the FDA and has initiated 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 is also developing other applications for the liquid formulations of
its polymer technology, including local drug delivery systems. 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. 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, crosslinking time, strength, flexibility and elasticity.
This enables the Company to tailor formulations for particular surgical
applications. A key distinguishing characteristic of the Company's 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
polymerizable polymer technology. The Company has received, licensed or believes
it has the option or right to license 41 issued United States patents and 29
foreign patents corresponding to certain of the issued United States patents,
has five additional United States patent applications that have been allowed and
has 24 patent applications pending in the United States, as well as foreign
counterparts of certain of these applications.

                                       3
<PAGE>
    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.

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 post-operative 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 for wound closure. These
alternatives include the use of liquid fibrin glues and nonliquid 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
material is 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, liquid, 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

                                       4
<PAGE>
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 70 to 85% of Focal's
formulations and PEG and other synthetic components comprise the remaining 15 to
30% 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 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 polymerization. Surgeons can perform the entire surgical
sealant application process quickly and efficiently after sufficient training.

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

    - ADHERENCE TO TISSUE. The Company's FOCALSEALsurgical sealants adhere
      strongly 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 polymerize rapidly when exposed to
      light. The Company's sealants have been shown to be four times more
      adherent to tissue than fibrin glues.

    - STRENGTH, FLEXIBILITY AND ELASTICITY. 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.

    - CUSTOMIZABLE POLYMER CHARACTERISTICS. By modifying the chemical
      composition of its polymers, the Company is able to control
      characteristics such as absorption, viscosity, setting time, 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.

    - 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. Collagen
      patches and fibrin

                                       5
<PAGE>
      glues are absorbed by enzymatic reaction, which can vary significantly
      from patient to patient depending upon an individual's metabolism.

    - TOTALLY SYNTHETIC COMPOSITION; SAFETY AND BIOCOMPATIBILITY. Focal's
      synthetic polymers are comprised of materials which 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 and hepatitis. 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 nontoxic.

    - 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.

    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>
                                                                                       MARKETING RIGHTS
 PRODUCT DEVELOPMENT                                                             -----------------------------
       PROGRAM                INDICATION                    STATUS               NORTH AMERICA   INTERNATIONAL
 -------------------          ----------                    ------               -------------   -------------
<S>                     <C>                     <C>                              <C>             <C>
Surgical Sealants
  FOCALSEAL-L           Lung Surgery            PMA submitted to the FDA, panel   Genzyme         Ethicon
                                                meeting scheduled for May 8,      Surgical
                                                2000; CE Mark approval            Products
                                                received; Approval received in
                                                Canada

  FOCALSEAL-S           Neurosurgery            CE Mark approval received in      Focal           Ethicon
                                                Europe; IDE approved by FDA in
                                                Q3 1999 and pivotal clinic
                                                trials underway

  FOCALSEAL-L           Cardiovascular          Preclinical(1)                    Genzyme         Ethicon
                        surgery                                                   Surgical
                                                                                  Products

  FOCALSEAL             Gastrointestinal        Preclinical(1)                    Genzyme         Ethicon
                        surgery                                                   Surgical
                                                                                  Products

Local Drug Delivery     Various                 Preclinical (1)                   Focal           Focal
</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 with or without sutures and staples to seal leaks
resulting from lung, neurological, cardiovascular and gastrointestinal surgery.
FOCALSEAL surgical sealant is expected to be used as an adjunct to sutures and
staples in most indications. 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 will be marketed in North America by Genzyme
Surgical Products, pending FDA approval, and is being marketed outside North
America by Ethicon. Genzyme Surgical also has the marketing rights to Focal's
surgical sealants for cardiovascular and gastrointestinal indications. 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.

    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 150,000 such procedures
in the United States. According to the Company's clinical trial data

                                       7
<PAGE>
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 as 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.

    A PMA was submitted to the FDA in June 1999 for FOCALSEAL-L surgical sealant
and the PMA was accepted as a filing in July 1999. The FDA has given the PMA
filing expedited review status. A panel meeting at the FDA's General and Plastic
Surgery Devices Advisory Panel is scheduled for May 8, 2000. Pending FDA
approval, this product will be launched through Genzyme Surgical Products' sales
force in the United States. A 180 patient, multicenter 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, The 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, or 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:

    - % of patients leak-free intraoperatively;

    - % of patients leak-free through hospital discharge;

    - mean 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 surgical sealant for lung surgeries in thirteen
countries in Europe and certain other countries including Australia and New
Zealand. During 1999, Focal recorded approximately $1.4 million in product
revenues based on shipment of product to Ethicon. In June 1999, Ethicon
announced that it had excess inventories of FOCALSEAL-L sealant and,
consequently, during the second half of 1999, Focal recorded negligible product
sales. However, Ethicon continues to sell product from previously purchased
inventories. Focal believes

                                       8
<PAGE>
that approximately 3,000 procedures were performed using FOCALSEAL-L sealant in
lung surgery applications during 1999 primarily in Europe. In an effort to
increase market penetration in Europe, during 2000 Focal plans to add additional
marketing resources to work more closely with the Ethicon sales force in Europe
and with those surgeons who have become the early adopters of this new
technology. Additionally, the Company plans to use the knowledge obtained from
working directly with surgeons in Europe to leverage the Company's market
opportunity in the United States. See "Strategic Alliances-Ethicon-a division of
Johnson & Johnson."

    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 185,000 cranial surgeries are performed annually in the United
States, and the Company estimates that 370,000 of such 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 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 the approximately 800,000 spinal surgeries that are
performed annually worldwide. 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
the fourth quarter of 1999 for neurosurgery and spinal surgery indications. The
Company and its marketing partner outside North America, Ethicon, plan to launch
this product in Europe in 2000. 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 340 patient multicenter clinical trial in the fourth quarter of
1999.

    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,
including over 500,000 coronary artery bypass graft, or CABG, surgeries. 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

                                       9
<PAGE>
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 2001 at the earliest.

    In August 1998, Focal expanded its January 1997 agreement with Ethicon with
the funding of approximately $2.6 million for cardiovascular sealant development
efforts. Focal has received $2.0 million of this funding to date. In
February 2000, Ethicon informed Focal that it does not intend to continue the
development and commercialization of the cardiovascular sealant and will not pay
the final installment of $0.6 million. Focal is currently evaluating its plans
for submitting a dossier to the regulatory body in Europe to obtain CE Mark
approval.

    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 1.3 million gastrointestinal surgeries
are performed annually worldwide, including esophageal and large bowel
surgeries. 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 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.

    OTHER RESEARCH AND DEVELOPMENT INITIATIVES

    The Company has identified several additional potential applications for its
proprietary synthetic, liquid formulation polymer technology, including
synthetic coatings for vascular grafts. Although the

                                       10
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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, 1997, 1998 and 1999, the Company
incurred expenses of $15.7, $15.6 and $14.4 million, respectively, on research
and development activities, including amounts funded by the Company's strategic
partners.

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 Surgical Products and with Ethicon are
described below.

    GENZYME SURGICAL PRODUCTS (A DIVISION OF GENZYME CORPORATION)

    In October 1999, Focal entered into a Marketing and Distribution Agreement
with Genzyme Surgical Products, a tracking stock division of Genzyme
Corporation. Genzyme Surgical Products develops and markets a portfolio of
devices, biomaterials and biotherapeutics for the cardiothoracic and general
surgery markets. Genzyme 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 Surgical Products expects to have 25 sales representatives selling
the FOCALSEAL-L surgical sealant product if and when approved by the FDA. In
addition, Focal plans to hire eight product specialists to support the Genzyme
Surgical Products 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 Surgical Products' 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 Surgical Products meets minimum
performance standards.

    In addition to the Marketing and Distribution Agreement, in October 1999
Focal and Genzyme Surgical Products entered into a Stock Purchase Agreement,
with up to $20 million in Focal common stock purchases committed by Genzyme
Surgical Products over an 18 month period. An initial $5 million investment
closed in November 1999, with Genzyme 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. At Focal's option, up to three additional $5.0 million
investments will be made by Genzyme Surgical Products. The first additional
investment of $5 million may be called by Focal in April 2000, subject to the
satisfaction of specified conditions. This investment will be priced (i) at a
25% premium to a twenty day average trading price of the Company's common stock
prior to closing if the trading average is less than $6.40, (ii) at $8.00 per
share if the trading average is between $6.40 and $8.00 and (iii) at the twenty
day trading average if such trading average exceeds $8.00 per share. The final
two investments of $5 million each may be called by Focal in October 2000 and
April 2001, respectively. Each such investment is contingent on, among other
things, Focal receiving FDA approval of its PMA for FOCALSEAL-L surgical

                                       11
<PAGE>
sealant for lung surgery indications. These final two investments will be priced
based upon the twenty day trading average of the Company's common 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.

    The Ethicon Agreement provided the Company with an initial payment of
$7.0 million for research and development. During 1997 and 1998, Ethicon
provided Focal with development funding of $5 million and $3 million,
respectively, and paid a $2 million milestone payment upon receipt of a CE Mark
for FOCALSEAL-L surgical sealant for lung surgery. An additional milestone
payment of $1 million was received in the fourth quarter of 1999 upon the CE
Mark approval of FOCALSEAL-S 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, 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 after January 2000 upon
twelve months' prior written notice.

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 41 issued United States patents and 29 foreign patents corresponding to
certain of the issued United States patents, has five additional United States
patent applications that have been allowed and has 24 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 2016. 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

                                       12
<PAGE>
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 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 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, or at all. 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

                                       13
<PAGE>
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.

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 (the "FDC Act"), as amended, 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 FDA's good
manufacturing practice requirements ("GMPs")) and class II devices are subject
to general and special controls (e.g., performance standards, postmarket
surveillance, patient registries, and FDA guidelines). Generally, class III
devices are those which must receive premarket approval by the FDA to ensure
their safety and effectiveness (e.g., life-sustaining, life-supporting and
implantable devices, or new devices which have been found not to be
substantially equivalent to legally marketed Class I or II devices).

                                       14
<PAGE>
    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 recently underwent an FDA GMP
inspection of its facilities in Lexington, Massachusetts in connection with its
PMA application for FocalSeal L sealant for lung surgery. Also, prior to PMA
approval, the FDA undertakes a bioresearch monitoring review of some of the
investigational sites to assure the accuracy of the clinical data. The FDA has
undertaken such a review and Focal is presently working with the FDA in
connection with the bioresearch monitoring inspections of the FOCALSEAL-L
surgical sealant data. The Company believes it has satisfied the FDA's
bioresearch monitoring questions raised to date.

    If 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

                                       15
<PAGE>
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.

    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. There can be no assurance that
the Company will receive FDA approval of its PMA application for FOCALSEAL-L
surgical sealant for lung surgery 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.

    If clearance or approval is obtained, 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

                                       16
<PAGE>
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.

    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 1999, Focal successfully completed the annual CE Mark surveillance
audit. 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 intends to market and sell its surgical sealants in North America
through Genzyme Surgical Products and internationally through Ethicon. Genzyme
Surgical has a team of 25 sales representatives who will be distributing the
FOCALSEAL-L lung surgery sealant product throughout the United States and a team
of six sales representatives who will be distributing the product in Canada. The
sales representatives in the United States will initially be focused on the
several hundred largest centers that account for a substantial portion of the
lung surgery procedures performed annually.

    Ethicon has a team of specialized sales representatives to sell Focal's
product in Europe and certain other countries including Australia and New
Zealand. Sales to date have not been substantial. However, there has been more
aggressive adoption in selected areas by certain surgeons who have historically
been early adopters of new technologies. In an effort to increase market
penetration, during 2000 Focal plans to add additional marketing resources to
work more closely with the Ethicon sales force. Additionally, the Company plans
to use the knowledge obtained from working directly with surgeons in Europe to
leverage the Company's market opportunity in the United States

    The Company's sales and marketing strategy for other products that it may in
the future seek to develop, may include using a combination of the Company's own
direct sales force, 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. There can be no assurance that the Company will be
able to secure any additional strategic marketing partners or international
distributors on terms that are

                                       17
<PAGE>
acceptable to the Company, or at all, or that the Company will be successful in
building a direct sales force in the United States.

MANUFACTURING

    The Company has only limited experience in manufacturing its FOCALSEAL
surgical sealants. The Company believes 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 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.

    There can be no assurance that the Company will be able to attract, train
and retain the required manufacturing personnel or will be able to increase its
manufacturing capability in the future to meet potentially increasing demand for
its surgical sealant products in a timely manner, or at all. 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 anticipates that it
will need to significantly increase its current manufacturing capacity to meet
commercial needs over the next several years and that it may need to establish
additional manufacturing capacity to meet these anticipated needs. In addition,
the Company expects that it will need to identify and qualify additional sources
for materials and outsourced manufacturing processes. There can be no assurance
that the Company's manufacturing scale-up efforts will be successful or that
reliable, high-volume manufacturing can be established or maintained at
commercially reasonable costs on a timely basis, or at all.

    The Company would experience supply interruptions in the event it is unable
to establish or 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 establishing commercial manufacturing, the establishment of new manufacturing
facilities, 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 could, under its
agreement with the Company, commence manufacturing of surgical sealants for
sales in all territories outside North America. Any of the foregoing would have
a material adverse affect on the Company's business, 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 business, 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.

                                       18
<PAGE>
    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 and 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 current and potential
competitors have substantially greater financial, technological, research and
development, regulatory and clinical, marketing and 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.

                                       19
<PAGE>
    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.

EMPLOYEES

    As of December 31, 1999, the Company employed 76 persons of whom 38 were in
research and, development, 9 were in manufacturing, 19 were in clinical,
regulatory affairs and quality assurance, and 10 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.

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.

                                       20
<PAGE>
    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>
BIOMATERIALS/POLYMER SCIENCE
John Eaton, Ph.D.                         Baylor University College of Medicine
Joseph Vacanti, M.D.                      Boston Children's Hospital
Allan Hoffman, Ph.D.                      University of Washington

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

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
Paolo Maccharini, M.D.                    Hanover, Germany
Albert Linder, M.D.                       Lugenklinik-Heuer, Germany

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

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, we use
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.

    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 $16.8 million during 1999. At
December 31, 1999, the Company had an accumulated deficit of $76.2 million. The
Company's operating losses have resulted primarily from expenses incurred in
connection with the Company's research and development activities, including
preclinical and clinical trials, development of manufacturing processes and
general and administrative expenses. The Company expects to incur net

                                       21
<PAGE>
losses through at least 2001 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 FOCALSEALsurgical sealants, including
receiving adequate sales and marketing support from its strategic marketing
partners, Genzyme Surgical Products 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 product revenues or achieve profitability. Profitability, if achieved,
may not be sustained.

    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. To date the Company has received a CE
Mark approval for FOCALSEAL-L surgical sealant for lung surgery, a CE mark for
FOCALSEAL-S sealant for neurosurgery and approval in Canada for FOCALSEAL-L
sealant for lung surgery. Focal has not received marketing approval for any
products from the FDA. 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, 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. A 180
patient clinical trial of the Company's FOCALSEAL-L surgical sealant product for
lung surgery has been completed in the United States, and the company has
submitted its PMA to the FDA and is anticipating a panel meeting in the first
half of 2000. Although the Company believes that the results of this trial are
sufficient to obtain marketing approval in the U.S., there are no assurances
that the FDA will not require additional clinical testing of FOCALSEAL-L
surgical sealant to obtain U.S. marketing approval. Although Focal has commenced
United States clinical trials of FOCALSEAL-S surgical sealant, there are no
assurances 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-L or 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-L and FOCALSEAL-S surgical sealant products 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.

                                       22
<PAGE>
    DEPENDENCE UPON FOCALSEAL SURGICAL SEALANTS.  The Company anticipates that
revenues derived from the North American launch of FOCALSEAL-L surgical sealant,
pending FDA approval, will account for a substantial majority of the Company's
near term product revenues. In addition, the Company's future success will
depend, in significant part, on its ability to successfully complete additional
clinical trials and to obtain regulatory approval and market acceptance of
FOCALSEAL-L and FOCALSEAL-S surgical sealant in the United States. Although the
Company has submitted a PMA application to the FDA based on the results of a
180-patient clinical trial in the United States, there can be no assurance that
the FDA will approve the PMA or, if marketing approval were granted by the FDA,
that the Company and its marketing partner, Genzyme Surgical Products, will
successfully commercialize FOCALSEAL-L surgical sealant in the United States.
Failure by the Company to gain marketing approval from the FDA for FOCALSEAL-L
surgical sealant or to be able to successfully commercialize FOCALSEAL-L
surgical sealant in the United States would have a material adverse effect on
the Company's business, financial condition and results of operations. In
addition, 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 Surgical and Ethicon in the field of
surgical sealants. Under these agreements, the Company is dependent upon Genzyme
Surgical and Ethicon for the marketing and sale of the Company's surgical
sealants. 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 the second half of 1999. To date, all of the
Company's revenues have been derived from sales by Ethicon. The failure of
Genzyme Surgical 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, or at
all. The Company's inability to enter into additional strategic alliances could
have an adverse affect on the Company's business, 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 research, development or commercialization of certain
products and could require or result in litigation or arbitration, which would
be time-consuming

                                       23
<PAGE>
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.

    NEED FOR ADDITIONAL FUNDING; UNCERTAINTY OF ACCESS TO CAPITAL.  Focal will
require substantial additional funding in order to continue its research and
product development programs, including for preclinical testing and clinical
trials of its product candidates, for operating expenses, for the pursuit of
regulatory approvals for its product candidates, and may require additional
funding for establishing manufacturing and marketing capabilities in the future.
The Company believes that its existing capital resources, interest income and
committed equity financing from Genzyme Corporation, will be sufficient to
satisfy its current and projected funding requirements for at least 12 months.
However, no assurance can be given that the Company's resources will be
sufficient to conduct its research and development programs as planned.
Moreover, the receipt of two of the three future equity payments by Genzyme is
subject to the satisfaction of certain conditions, including the receipt of FDA
approval of the PMA for FOCAL-L lung sealant, and there can be no assurance that
such conditions will be satisfied. In June 1999 and in January 2000, the Company
reduced its workforce to focus the majority of its capital resources and efforts
on the commercialization of its lung sealant product and on the clinical trials
of its neurosurgery sealant product, and certain other development efforts were
put on hold due to resource constraints.

    The Company's future capital requirements will depend on many factors,
including continued scientific progress in its research and development
programs, the magnitude of these programs, progress with preclinical 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 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, and interest income
earned thereon, together with funding, if any, that may be received under the
Company's Stock Purchase Agreement with Genzyme Corporation, will be adequate to
satisfy its capital and operating requirements.

    Focal intends to seek additional funding through strategic alliances, and
may seek additional funding through public or private sales of the Company's
securities, including equity securities. In addition, the Company has obtained
equipment lease financing and other forms of debt financing and may continue to
pursue opportunities to obtain additional lease or debt financing in the future.
There can be no assurance, however, that additional equity or debt financing
will be available on reasonable terms, if at all. Any additional equity
financings would be dilutive to the Company's stockholders. If adequate funds
are not

                                       24
<PAGE>
available, Focal may be required to curtail significantly one or more of its
research and development programs and/or obtain funds through arrangements with
corporate partners or others that may require Focal to relinquish rights to
certain of its technologies or product candidates.

    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 intends to expand 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.

    HAZARDOUS MATERIALS; ENVIRONMENTAL MATTERS.  The Company's research and
development processes involve the controlled use of hazardous materials. The
Company is subject to federal, state and local laws and regulations governing
the use, manufacture, storage, handling and disposal of such materials and
certain waste products. Although the Company believes that its safety procedures
for handling and disposing of such materials comply with the standards
prescribed by such laws and regulations, the risk of accidental contamination or
injury from these materials cannot be completely eliminated. In the event of
such an accident, the Company could be held liable for any damages that result
and any such liability could exceed the resources of the Company. The Company
believes that it is in compliance in all material respects with applicable
environmental laws and regulations.

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 requirements through at least 2001.

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.

                                       25
<PAGE>
                                    PART II

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

    (A) MARKET PRICE OF AND DIVIDENDS OF 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.

<TABLE>
<CAPTION>
                                                                HIGH       LOW
                                                              --------   --------
<S>                                                           <C>        <C>
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

FISCAL YEAR ENDED DECEMBER 31, 1998
First Quarter...............................................   $19.00     $10.63
Second Quarter..............................................   $20.50     $ 8.75
Third Quarter...............................................   $12.50     $ 5.50
Fourth Quarter..............................................   $10.50     $ 6.50
</TABLE>

    On March 20, 2000, the closing price per share of the Company's Common Stock
was $8.125 per share, as reported by the Nasdaq National Market, and the number
of common stockholders of record was 190. 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.

    (B) RECENT SALES OF UNREGISTERED SECURITIES

    On November 5, 1999, Focal sold 810,372 shares of its Common Stock, $.01 par
value per share, to Genzyme Corporation, for aggregate proceeds of
$5.0 million. No person acted as an underwriter with respect to this
transaction. 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.

    (C) REPORT OF OFFERING OF SECURITIES AND USE OF PROCEEDS THEREFROM

    On December 11, 1997, the Company commenced and completed its initial public
offering (the "IPO") of 2,500,000 shares of its Common Stock, $0.01 par value
per share, at a public offering price of $10.00 per share pursuant to a
registration statement on Form S-1 (file no. 333-38379) filed with the
Securities and Exchange Commission. All of the shares registered were sold,
including an additional 375,000 shares which were sold upon exercise of the
underwriters' over-allotment option. Lehman Brothers, Piper Jaffray, Inc., and
Pacific Growth Equities, Inc. were the managing underwriters of the IPO. All of
the net proceeds of the IPO, less funds expended to date, were held in cash,
cash equivalents and marketable securities at December 31, 1999.

                                       26
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA

                                  FOCAL, INC.
                    SELECTED CONDENSED FINANCIAL INFORMATION
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                       -----------------------------------------------------------
                                         1995       1996         1997         1998         1999
<S>                                    <C>        <C>         <C>          <C>          <C>
                                       -----------------------------------------------------------
STATEMENTS OF OPERATIONS DATA:
Revenues:
  Collaborative R&D revenues.........    $  968     $ 3,098      $17,489      $ 5,114      $ 1,773
  Product revenues...................                                           3,071        1,423
                                       -----------------------------------------------------------
    Total revenues...................       968       3,098       17,489        8,185        3,196
Costs and Expenses:
  Cost of product revenues...........                                           3,740        2,373
  Research & development.............     9,665      11,680       15,712       15,590       14,454
  General & administrative...........     2,098       2,175        3,058        3,815        3,919
                                       -----------------------------------------------------------
    Total costs and expenses.........    11,763      13,855       18,770       23,145       20,746
Interest income......................       443         691          968        1,765          908
Interest expense.....................      (107)        (92)        (129)        (212)        (199)
                                       -----------------------------------------------------------
NET LOSS.............................  $(10,459)   $(10,158)     $  (442)    $(13,407)    $(16,841)
                                       ===========================================================
Basic and diluted net loss per share
  (1)................................              $  (1.26)    $  (0.04)    $  (1.01)    $  (1.24)
                                                  ================================================
Shares used in computing net loss
  per share..........................             8,088,898   10,410,091   13,291,182   13,551,856
                                                  ================================================

<CAPTION>
                                                             AT DECEMBER 31,
                                       -----------------------------------------------------------
                                         1995       1996         1997         1998         1999
                                       -----------------------------------------------------------
BALANCE SHEETS.
<S>                                    <C>        <C>         <C>          <C>          <C>
Cash and cash equivalents and
  marketable securities..............   $ 6,948     $12,208      $33,239      $25,346      $13,463
Working Capital......................     4,401       9,003       30,867       22,188       11,325
Total assets.........................     9,306      14,089       39,606       30,461       18,751
Capital lease obligations, long term
  portion............................       462         315        1,422        1,391        1,333
Total stockholders' equity...........     5,995      10,099       32,512       23,776       13,148
</TABLE>

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

(1) Pro forma in 1996 and 1997. See note 1 to the financial statements.

                                       27
<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.

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 totalling $28.5 million through December 31, 1999, in connection with
these alliances.

    Focal has incurred net losses in each year since its inception, including
net losses of approximately $16.8 million during 1999. At December 31, 1999,
Focal had an accumulated deficit of $76.2 million. Focal's operating losses have
resulted primarily from expenses incurred in connection with its research and
development activities, including preclinical and clinical trials, development
of manufacturing processes and general and administrative expenses. Focal
expects to incur net losses at least through 2001 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's
ability to achieve and sustain profitability will be dependent upon obtaining
regulatory approval for and successfully commercializing its FOCALSEALsurgical
sealants in North America. The Company has marketing and distribution partners
for the majority of its products throughout the world, including Genzyme
Surgical Products, a division of Genzyme Corporation, in North America and
Ethicon, a Johnson & Johnson company, in Europe and other international markets.
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 obtain required regulatory approvals, or successfully develop, manufacture,
commercialize and market products or that Focal will ever achieve profitability.

    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. Focal anticipates the launch of FOCALSEAL-L sealant for
lung surgery indications in North America through its marketing partner, Genzyme
Surgical Products, in 2000, pending FDA approval. Focal anticipates that
revenues derived from the sales of FOCALSEAL-L surgical sealant for lung surgery
will account for all of the Company's near term product revenues.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1999, COMPARED TO YEAR ENDED DECEMBER 31, 1998

    Revenues for the year ended December 31, 1999 (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.

    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 its 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

                                       28
<PAGE>
during 1999. Focal records revenues based on the 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 totalled $2.4 million compared
with $3.7 million for the 1998 Period. These costs were recorded in connection
with the 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 the 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 annually for the next several years
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 incurs net losses and draws 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.

YEAR ENDED DECEMBER 31, 1998, COMPARED TO YEAR ENDED DECEMBER 31, 1997

    Revenues for the 1998 Period were $8.2 million compared with $17.5 million
for the year ended December 31, 1997 (the "1997 Period"). Revenues in the 1998
Period included $3.1 million in product revenues and $5.1 million in
collaborative research revenues. Revenues in the 1997 Period of $17.5 million
consisted exclusively of collaborative research revenues.

    Higher collaborative revenues were realized in the 1997 Period than the 1998
Period in connection with Focal's strategic alliance with Ethicon, including a
one-time, non-refundable payment of $7.0 million, as well as funding of
$5.0 million for research and development activities and a milestone payment of
$2.0 million for obtaining a CE mark for FOCALSEAL-L sealant for lung surgery.
In addition, during the 1997 Period, Focal recorded $3.4 million in revenues
from its local drug delivery partnership with Novartis. This alliance was
terminated in early 1998.

                                       29
<PAGE>
    During the 1998 Period, Focal recorded $3.0 million in collaborative
research 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, $0.6 million in collaborative
research revenues were realized from other sources, including a grant from the
National Institutes of Health.

    Product revenues of $3.1 million realized in the 1998 Period represented
Focal's shipments of AdvaSeal surgical sealant products to Ethicon for its
distribution in Europe and other markets outside North America. The Company
realized no product revenues in the 1997 Period.

    Cost of product revenues for the 1998 Period totalled $3.7 million. These
costs were recorded in connection with commercial sales of FOCALSEAL-L surgical
sealant product. Gross margins in the 1998 Period were negative due to the
startup phase of Focal's manufacturing operations and the resulting lack of
economies of scale and certain fixed overhead costs being amortized over the
limited volume experienced in the year of launch. Additionally, costs of
approximately $150,000 were incurred relating to a voluntary product recall
announced in August 1998.

    Research and development expenses were $15.6 million for the 1998 Period,
compared with $15.7 million for the 1997 Period. The number of staff in the
research and development group were at approximately the same levels in 1997 and
1998. Clinical and regulatory expenses increased in the 1998 Period with
clinical trials ongoing in both Europe and the United States. Manufacturing
scale-up costs decreased in the 1998 Period from the 1997 Period. During the
1997 Period, manufacturing scale-up costs were charged to research and
development, since the lung sealant product CE Mark approval had not yet been
received. During the 1998 Period, the majority of manufacturing scale-up costs
were capitalized and charged to cost of goods sold upon product shipment.

    General and administrative expenses increased to $3.8 million for the 1998
Period from $3.1 million for the 1997 Period. General and administrative
expenses during these years consisted primarily of personnel costs, which
increased in the 1998 Period due to the hiring of additional administrative and
finance personnel. In addition, in the 1998 Period, certain general and
administrative expenses, including public and investor relations, insurance and
legal expenses, increased as a result of Focal's transition to a publicly traded
company.

    Interest income increased to $1.8 million for the 1998 Period, from
$1.0 million for the 1997 Period, as a result of higher average cash balances,
including the proceeds from the initial public offering.

    The Company recorded a net loss of approximately $13.4 million for the 1998
Period, compared with a net loss of $0.4 million for the 1997 Period. This
increase in net loss was primarily due to the receipt of a one-time payment of
$7.0 million in the 1997 Period and higher collaborative research and
development funding in the 1997 Period.

LIQUIDITY AND CAPITAL RESOURCES

    Since its inception, the Company has financed its operations primarily from
the sale of preferred stock in private placements as well as the Company's 1997
initial public offering. In October 1999, Focal received a $5.0 million equity
investment from Genzyme Surgical Products, in connection with the agreement
described below. Through December 31, 1999, the Company has raised approximately
$88.5 million from equity financings and has received $7.0 million in equipment
lease financing. In addition, the Company has received collaborative funding,
exclusive of equity investments, from Ethicon and other corporate partners
totaling approximately $28.5 million through December 31, 1999.

    Cash used in operations totalled $16.6 million for the year ended
December 31, 1999, as compared to the use of $11.1 million for the same period
in 1998. The increase in cash used in operations was due to higher net losses
incurred in 1999, compared to 1998, as well as higher investments in working
capital. Cash used in operations is equal to the net loss incurred for each
period, plus non-cash charges such as depreciation and amortization of property
and equipment plus any changes in working capital.

                                       30
<PAGE>
    Capital expenditures from inception through December 31, 1999 totalled
$8.7 million, representing laboratory equipment, office furniture and equipment,
computers and certain leasehold improvements. The majority of these purchases
have been financed through either direct financing leases or sale and leaseback
arrangements. As of December 31, 1999, the Company did not have any material
commitments for future capital expenditures. The Company has commitments from
lenders in the form of lease lines totalling approximately $750,000 to provide
for its expected capital needs during 2000.

    In October 1999, in connection with entering into a Marketing and
Distribution Agreement with Genzyme Surgical Products, Focal and Genzyme
Surgical Products entered into a Stock Purchase Agreement, with up to
$20.0 million in purchases of the Company's common stock committed by Genzyme
Surgical over an eighteen month period. The first $5.0 million purchase was made
by Genzyme Surgical in November 1999, with Genzyme 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. At Focal's option, up to three
additional $5.0 million investments will be made by Genzyme Surgical Products.
The first additional investment of $5.0 million may be called by Focal in
April 2000, subject to the satisfaction of specified conditions. This investment
will be priced (i) at a 25% premium to a twenty day average trading price of the
Company's common stock prior to closing if the trading average is less than
$6.40, (ii) at $8.00 per share if the trading average is between $6.40 and $8.00
and (iii) at the twenty day trading average if such trading average exceeds
$8.00 per share. The final two investments of $5.0 million each may be called by
Focal in October 2000 and April 2001, respectively. Each such investment is
contingent on, among other things, the Company receiving FDA approval of its PMA
for FOCALSEAL-L surgical sealant for lung surgery indications. These final two
investments will be priced based upon the twenty day trading average of the
Company's common stock.

    The Company believes that its existing capital resources will be sufficient
to satisfy its current and projected funding requirements for at least
15 months. The Company intends to seek additional funding through strategic
alliances, and may seek additional funding through public or private sales of
the Company's securities, including the sale of up to an additional
$15.0 million of the Company's common stock to Genzyme Corporation, subject to
the satisfaction of specified closing conditions. In addition, the Company has
obtained equipment lease financing and other forms of debt financing and may
continue to pursue opportunities to obtain additional lease or debt financing in
the future. There can be no assurance, however, that additional equity or debt
financing will be available on reasonable terms, if at all. Any additional
equity financing would be dilutive to the Company's stockholders. If adequate
funds are not available, the Company may be required to curtail significantly
one or more of its research and development programs and/or obtain funds through
arrangements with corporate partners or others that may require the Company to
relinquish rights to certain of its technologies or product candidates.

    Under certain agreements with universities and consultants, the Company is
obligated to make payments for sponsored research and consulting services. The
Company's research funding commitments under these agreements totalled
approximately $134,000 at December 31, 1999. 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 preclinical 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 will be adequate to
satisfy its capital and operating requirements.

                                       31
<PAGE>
YEAR 2000 DISCLOSURE

    Year 2000 issues, created by information systems that are unable to
accurately interpret dates after December 31, 1999, created potential risks for
the Company, including potential problems with the Company's products as well as
in the information technology ("IT") and non-IT systems that the Company uses in
its business operations. The Company was also exposed to risks from third
parties with whom the Compant interacts who fail to adequately address their own
year 2000 issues.

    The Company's plans to address these year 2000 issues with its IT systems
consisted of four phases: (1) inventory-identifying all IT systems;
(2) assessing--identifying IT systems that use date functions and assessing them
for year 2000 functionality; (3) remediation--reprogramming or replacing where
necessary inventoried items to ensure that they are year 2000 ready; and
(4) testing and certification--testing the code modifications and new inventory
with other associated systems, including extensive date testing and performing
quality assurance testing to ensure successful operation in the post-1999
environment.

    The Company completed substantially all planned phases of its year 2000
program without significant incident. The Company had also identified its most
important customers, suppliers and business partners to assess any year 2000
issues which they might pose to the Company. To date, the Company has not
experienced any significant problems with its most important customers,
suppliers and business partners. The Company used both internal and external
resources to reprogram or replace and test software for year 2000 issues. As of
December 31, 1999, the Company spent approximately $340,000 on its year 2000
project and the development of new systems and system modifications.

    Focal developed contingency plans late in 1999 to address any potential year
2000 issues. These contingency plans included the use of manual or alternative
processes. Focal has not had to use these contingency plans to date.

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 Financial Accounting Standards Board Statement No. 137, which
deferred the adoption of FAS 133 until fiscal years beginning after June 15,
2000. Focal does not expect the implementation of this statement to have a
significant impact on its results of operations or financial position.

    In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101 (SAB 101), Revenue Recognition in Financial Statements,
which provides interpretative guidance on various matters concerning revenue
recognition. SAB 101 had no impact on the 1999 results of operations, however
the Company is still evaluating the potential future effects of applying SAB
101, particularly regarding future licensing and distribution upfront payments,
if any.

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.

                                       32
<PAGE>
    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 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, 1999, 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.

                                       33
<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, 1998 and 1999, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

    In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Focal, Inc. at December 31,
1998 and 1999, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States.

                                      /s/ ERNST & YOUNG LLP

Boston, Massachusetts
January 25, 2000, except for
Note 11 as to which the
date is February 25, 2000

                                       34
<PAGE>
                                  FOCAL, INC.

                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                     DECEMBER 31
                                                              -------------------------
                                                                 1998          1999
                                                              -----------   -----------
<S>                                                           <C>           <C>
ASSETS
Current assets:
  Cash and cash equivalents.................................  $ 8,516,936   $ 8,746,897
  Marketable securities.....................................   16,829,291     4,715,842
  Accrued interest receivable...............................      359,911        76,770
  Accounts receivable.......................................      587,380        52,579
  Inventories, net..........................................      937,017     1,573,934
  Prepaid expenses and other assets.........................      252,086       428,112
                                                              -----------   -----------
Total current assets........................................   27,482,621    15,594,134

Notes receivable from related parties.......................      282,442       271,753

Property and equipment......................................    7,568,435     8,241,953
Less accumulated depreciation and amortization..............    4,886,037     5,370,919
                                                              -----------   -----------
Net property and equipment..................................    2,682,398     2,871,034

Other assets................................................       13,368        14,025
                                                              -----------   -----------
Total assets................................................  $30,460,829   $18,750,946
                                                              ===========   ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................  $ 1,105,585   $   729,534
  Accrued liabilities.......................................    2,752,359     2,613,875
  Deferred revenue..........................................      550,000            --
  Current portion of capital lease obligations..............      886,517       926,041
                                                              -----------   -----------
Total current liabilities...................................    5,294,461     4,269,450

Capital lease obligations...................................    1,390,821     1,333,090

Commitments and contingent liabilities

Stockholders' equity:
  Preferred stock, $.01 par value; 5,000,000 shares
    authorized; none issued and outstanding.................           --            --
  Common stock, $.01 par value; 50,000,000 shares
    authorized; 13,367,767 and 14,234,208 shares issued and
    outstanding at December 31, 1998 and 1999,
    respectively............................................      133,678       142,342
  Additional paid-in capital................................   84,884,786    90,178,169
  Accumulated deficit.......................................  (59,327,360)  (76,168,598)
  Notes receivable from related parties.....................   (1,443,133)     (828,131)
  Deferred compensation.....................................     (464,206)     (183,713)
  Accumulated other comprehensive income....................       (8,218)        8,337
                                                              -----------   -----------
Total stockholders' equity..................................   23,775,547    13,148,406
                                                              -----------   -----------
Total liabilities and stockholders' equity..................  $30,460,829   $18,750,946
                                                              ===========   ===========
</TABLE>

                            See accompanying notes.

                                       35
<PAGE>
                                  FOCAL, INC.

                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31
                                                       -----------------------------------------
                                                          1997           1998           1999
                                                       -----------   ------------   ------------
<S>                                                    <C>           <C>            <C>
REVENUES:
Collaborative research revenues......................  $17,489,264   $  5,113,953   $  1,772,617
Product revenues.....................................  $        --   $  3,071,490   $  1,422,919
                                                       -----------------------------------------
Total revenues.......................................  $17,489,264   $  8,185,443   $  3,195,536

Costs and expenses:
  Cost of product revenues...........................           --      3,739,807      2,373,383
  Research and development...........................   15,711,504     15,590,647     14,453,371
  General and administrative.........................    3,058,424      3,815,432      3,918,917
                                                       -----------------------------------------
Total costs and expenses.............................   18,769,928     23,145,886     20,745,671
                                                       -----------------------------------------
Other income (expense):
  Interest income....................................      968,141      1,765,420        908,460
  Interest expense...................................     (129,022)      (212,323)      (199,563)
                                                       -----------------------------------------
                                                           839,119      1,553,097        708,897
                                                       =========================================
Net loss.............................................  $  (441,545)  $(13,407,346)  $(16,841,238)
                                                       =========================================
Basic and diluted net loss per share.................  $     (0.04)  $      (1.01)  $      (1.24)
                                                       =========================================
Shares used in computing basic and diluted net loss
  per share..........................................   10,410,091     13,291,182     13,551,856
                                                       =========================================
</TABLE>

                            See accompanying notes.

                                       36
<PAGE>
                                  FOCAL, INC.
                       STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                                                                                                       NOTES
                                           CONVERTIBLE                                                              RECEIVABLE
                                         PREFERRED STOCK           COMMON STOCK        ADDITIONAL                      FROM
                                     -----------------------   ---------------------     PAID-IN     ACCUMULATED      RELATED
                                       SHARES       AMOUNT       SHARES      AMOUNT      CAPITAL       DEFICIT        PARTIES
                                     -----------   ---------   ----------   --------   -----------   ------------   -----------
<S>                                  <C>           <C>         <C>          <C>        <C>           <C>            <C>
Balances at December 31, 1996......   24,345,247   $ 243,452      723,344   $  7,233   $56,303,958   $(45,478,469)  $        --
Exercise of stock options for notes
  receivable.......................                             1,494,775     14,948     1,673,109                   (1,688,057)
Net proceeds from initial public
  offering (IPO)...................                             2,500,000     25,000    22,471,550
Conversion of preferred stock upon
  IPO..............................  (24,345,247)   (243,452)   8,117,803     81,178       162,274
Exercise of stock options and
  warrants.........................           --          --       32,648        327        13,849             --            --
Deferred compensation..............           --          --           --         --       153,040             --            --
Amortization of deferred
  compensation.....................
Comprehensive income:
  Unrealized gain on marketable
    securities.....................           --          --           --         --            --             --            --
  Net loss.........................           --          --           --         --            --       (441,545)           --
Total comprehensive income.........           --          --           --         --            --             --            --
                                     -----------   ---------   ----------   --------   -----------   ------------   -----------
Balances at December 31, 1997......           --          --   12,868,570    128,686    80,777,780    (45,920,014)   (1,688,057)
Net proceeds from exercise of
  over-allotment option............                               375,000      3,750     3,545,750
Exercise of stock options..........           --          --       92,578        926       118,539             --            --
Shares repurchased and retired.....                               (24,884)      (249)      (29,675)                      29,923
Principal payments on notes
  receivable.......................                                                                                     215,001
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)   (1,443,133)
                                     -----------   ---------   ----------   --------   -----------   ------------   -----------
Exercise of stock options and
  warrants.........................           --          --       68,586        685       188,828             --            --
Shares repurchased and retired.....           --          --      (54,515)      (545)      (65,009)                      65,554
Shares issued under Employee Stock
  Purchase Plan....................           --          --       41,998        420       198,748
Net proceeds from the issuance of
  common stock.....................           --          --      810,372      8,104     4,934,566             --            --
Principal payments on notes
  receivable.......................                                                                                     549,448
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)  $  (828,131)
                                     ===========   =========   ==========   ========   ===========   ============   ===========

<CAPTION>

                                                    ACCUMULATED
                                                       OTHER          TOTAL
                                       DEFERRED        COMP.      STOCKHOLDERS'
                                     COMPENSATION     INCOME         EQUITY
                                     ------------   -----------   -------------
<S>                                  <C>            <C>           <C>
Balances at December 31, 1996......   $(934,104)     $(43,043)     $10,099,027
Exercise of stock options for notes
  receivable.......................                                         --
Net proceeds from initial public
  offering (IPO)...................                                 22,496,550
Conversion of preferred stock upon
  IPO..............................                                         --
Exercise of stock options and
  warrants.........................          --            --           14,176
Deferred compensation..............    (153,040)           --               --
Amortization of deferred
  compensation.....................     318,279                        318,279
Comprehensive income:
  Unrealized gain on marketable
    securities.....................          --        25,685           25,685
  Net loss.........................          --            --         (441,545)
                                                                   -----------
Total comprehensive income.........          --            --         (415,860)
                                      ---------      --------      -----------
Balances at December 31, 1997......    (768,865)      (17,358)      32,512,172
Net proceeds from exercise of
  over-allotment option............                                  3,549,500
Exercise of stock options..........          --            --          119,464
Shares repurchased and retired.....                                         --
Principal payments on notes
  receivable.......................                                    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......    (464,206)       (8,218)      23,775,547
                                      ---------      --------      -----------
Exercise of stock options and
  warrants.........................          --            --          189,513
Shares repurchased and retired.....                                         --
Shares issued under Employee Stock
  Purchase Plan....................                                    199,168
Net proceeds from the issuance of
  common stock.....................          --            --        4,942,670
Principal payments on notes
  receivable.......................                                    549,448
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......   $(183,713)     $  8,337      $13,148,406
                                      =========      ========      ===========
</TABLE>

                            See accompanying notes.

                                       37
<PAGE>
                                  FOCAL, INC.

                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                       YEAR ENDED DECEMBER 31
                                                              -----------------------------------------
                                                                 1997           1998           1999
                                                              -----------   ------------   ------------
<S>                                                           <C>           <C>            <C>
OPERATING ACTIVITIES
Net loss....................................................  $  (441,545)  $(13,407,346)  $(16,841,238)
Adjustments to reconcile net loss to net cash used in
  operating activities:
    Depreciation and amortization...........................    1,128,923      1,158,452        954,490
    Amortization of deferred compensation...................      318,279        304,659        316,743
    Interest accrued on notes receivable....................     (112,238)      (103,280)       (64,111)
    Loss on sale of equipment, furniture and fixtures.......           --             --            828
    Changes of operating assets and liabilities:
      Accrued interest receivable...........................      (42,790)      (158,686)       283,141
      Contract revenues receivable..........................   (2,046,641)     2,046,641             --
      Accounts receivable...................................           --       (587,380)       534,801
      Inventories...........................................     (566,989)      (370,028)      (636,917)
      Prepaid expenses and other assets.....................     (173,837)       233,632       (176,026)
      Accounts payable......................................    1,075,501       (471,520)      (376,051)
      Accrued liabilities...................................      589,712        297,657       (138,484)
      Deferred revenue......................................       94,667       (200,000)      (550,000)
      Other assets..........................................         (647)          (672)          (657)
      Notes receivable......................................       33,908        164,318         74,800
                                                              -----------   ------------   ------------
Net cash used in operating activities.......................     (143,697)   (11,093,553)   (16,618,681)

INVESTING ACTIVITIES
Purchase of marketable securities...........................   (9,589,782)   (27,762,163)    (7,774,937)
Sale and maturity of marketable securities..................    9,929,811     17,370,386     19,904,941
Purchase of property and equipment..........................   (2,326,008)    (1,130,337)    (1,143,954)
                                                              -----------   ------------   ------------
Net cash provided by (used in) investing activities.........   (1,985,979)   (11,522,114)    10,986,050

FINANCING ACTIVITIES
Proceeds from issuance of common stock, net.................   22,510,726      3,549,500      4,942,670
Proceeds from lease financing...............................    2,029,382      1,077,336      1,066,426
Principal payments on capital lease obligations.............   (1,065,126)    (1,112,432)    (1,084,633)
Principal payments on notes receivable......................           --        215,001        549,449
Proceeds from the issuance of common stock under the
  employee stock purchase plan..............................           --        472,957        199,168
Proceeds from exercise of stock options.....................           --        119,464        189,512
                                                              -----------   ------------   ------------
Net cash provided by financing activities...................   23,474,982      4,321,826      5,862,592
                                                              -----------------------------------------
Net increase (decrease) in cash and cash equivalents........   21,345,306    (18,293,841)       229,961
Cash and cash equivalents at beginning of the year..........    5,465,471     26,810,777      8,516,936
                                                              -----------   ------------   ------------
Cash and cash equivalents at end of the year................  $26,810,777   $  8,516,936   $  8,746,897
                                                              ===========   ============   ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
    Property acquired under capital lease obligations.......  $   379,639   $         --   $         --
                                                              ===========   ============   ============
    Interest paid...........................................  $   129,022   $    212,323   $    199,563
                                                              ===========   ============   ============
</TABLE>

                            See accompanying notes.

                                       38
<PAGE>
                                  FOCAL, INC.

                         NOTES TO FINANCIAL STATEMENTS

                               DECEMBER 31, 1999

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.

REVERSE STOCK SPLIT

    On October 16, 1997, the Board of Directors approved a 1 for 3.25 reverse
stock split of common shares, effected in the form of a reverse stock dividend
which became effective on December 11, 1997. All common share and per common
share amounts included in the accompanying financial statements and notes
thereto have been restated to give effect to a 1 for 3.25 reverse stock split.

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 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 determines the appropriate classification of cash equivalents
and marketable securities at the time of purchase and reevaluates such
designation as of each balance sheet date. The Company has classified such
holdings as available-for-sale securities, which are carried at fair value, with
unrealized gains and losses reported as a separate component of stockholders'
equity.

CONCENTRATION OF CREDIT RISK

    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
all accounts receivable are derived from one customer.

FAIR VALUE OF FINANCIAL INSTRUMENTS

    Carrying amounts of financial instruments held by the Company, which include
cash equivalents, 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 method) or
market.

                                       39
<PAGE>
                                  FOCAL, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 31, 1999

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 as earned
upon the incurrence of reimbursable expenses or the achievement of certain
milestones. 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 upon shipment to the customer (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."
"ACCOUNTING FOR STOCK-BASED COMPENSATION." 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 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. 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.

                                       40
<PAGE>
                                  FOCAL, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 31, 1999

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 Financial Accounting Standards Board Statement No. 137, which
deferred the adoption of FAS 133 until fiscal years beginning after June 15,
2000. Focal does not expect the implementation of this statement to have a
significant impact on its results of operations or financial position.

    In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101 (SAB 101), Revenue Recognition in Financial Statements,
which provides interpretative guidance on various matters concerning revenue
recognition. SAB 101 had no impact on the 1999 results of operations, however,
the Company is still evaluating the potential future effects of applying SAB
101, particularly regarding future licensing and distribution upfront payments,
if any.

2. MARKETABLE SECURITIES

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

<TABLE>
<CAPTION>
                                                                  DECEMBER 31, 1998
                                                 ---------------------------------------------------
                                                                 GROSS        GROSS
                                                               UNREALIZED   UNREALIZED    ESTIMATED
                                                    COST         GAINS        LOSSES     FAIR VALUE
                                                 -----------   ----------   ----------   -----------
<S>                                              <C>           <C>          <C>          <C>
U.S. government securities due within one
  year.........................................  $ 1,000,000     $  490      $      0    $ 1,000,490
Corporate notes due within one year............   15,837,508      5,384       (14,091)    15,828,801
                                                 -----------     ------      --------    -----------
Total debt securities included in marketable
  securities...................................  $16,837,508     $5,874      $(14,091)   $16,829,291
</TABLE>

<TABLE>
<CAPTION>
                                                                   DECEMBER 31, 1999
                                                   -------------------------------------------------
                                                                  GROSS        GROSS
                                                                UNREALIZED   UNREALIZED   ESTIMATED
                                                      COST        GAINS        LOSSES     FAIR VALUE
                                                   ----------   ----------   ----------   ----------
<S>                                                <C>          <C>          <C>          <C>
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
                                                   ==========     ======        ====      ==========
</TABLE>

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

3. INVENTORIES

    Inventories consist of the following at December 31:

<TABLE>
<CAPTION>
                                                          1998        1999
                                                        --------   ----------
<S>                                                     <C>        <C>
Purchased parts and subassemblies.....................  $219,298   $  146,906
Work in process.......................................   672,928    1,265,623
Finished goods........................................    44,791      161,405
                                                        --------   ----------
                                                        $937,017   $1,573,934
                                                        ========   ==========
</TABLE>

                                       41
<PAGE>
                                  FOCAL, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 31, 1999

4. PROPERTY AND EQUIPMENT

    Property and equipment consist of the following at December 31:

<TABLE>
<CAPTION>
                                                          1998         1999
                                                       ----------   ----------
<S>                                                    <C>          <C>
Leasehold improvements...............................  $1,118,916   $1,187,801
Laboratory equipment.................................   4,678,566    5,530,008
Office equipment, computers and software.............   1,157,125      897,351
Furniture and fixtures...............................     613,828      626,793
                                                       ----------   ----------
                                                       $7,568,435   $8,241,953
Less accumulated depreciation and amortization.......  (4,886,037)  (5,370,919)
                                                       ----------   ----------
                                                       $2,682,398   $2,871,034
                                                       ==========   ==========
</TABLE>

5. ACCRUED LIABILITIES

ACCRUED LIABILITIES CONSIST OF THE FOLLOWING AT DECEMBER 31:

<TABLE>
<CAPTION>
                                                          1998         1999
                                                       ----------   ----------
<S>                                                    <C>          <C>
Accrued university research funding and outside
  scientific services................................  $1,022,264   $  687,167
Accrued payroll and related expenses.................     669,140      620,145
Accrued professional fees............................     217,900      250,492
Accrued other........................................     843,055    1,056,071
                                                       ----------   ----------
                                                       $2,752,359   $2,613,875
                                                       ==========   ==========
</TABLE>

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 priveleges 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

                                       42
<PAGE>
                                  FOCAL, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 31, 1999

6. STOCKHOLDERS' EQUITY (CONTINUED)
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
Corporation will not trigger the exercisability of the Rights under the Rights
Plan.

    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, 1999, 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.

    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

                                       43
<PAGE>
                                  FOCAL, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 31, 1999

6. STOCKHOLDERS' EQUITY (CONTINUED)
such options over the aggregate exercise price of such options. In connection
with these grants, $36,250 of deferred compensation was recorded in the year
ended December 31, 1999. This compensation expense is being amortized over the
vesting period of each option.

    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. Under certain conditions, the shares are subject to a
repurchase option by the Company according to the original vesting schedule. At
December 31, 1999, a total of 75,777 shares issued under the 1992 Plan are
subject to the Company's repurchase option and $828,131 of notes receivable are
outstanding and included in the stockholders' equity section of the accompanying
financial statements.

    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 be 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.

                                       44
<PAGE>
                                  FOCAL, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 31, 1999

6. STOCKHOLDERS' EQUITY (CONTINUED)

    The following table presents the activity of all of the Company's stock
plans for the years ended December 31, 1997, 1998 and 1999:

<TABLE>
<CAPTION>
                                            1997                         1998                         1999
                                 ---------------------------   -------------------------   --------------------------
                                                 WEIGHTED                    WEIGHTED                     WEIGHTED
                                                 AVERAGE                     AVERAGE                      AVERAGE
                                  OPTIONS     EXERCISE PRICE   OPTIONS    EXERCISE PRICE    OPTIONS    EXERCISE PRICE
                                 ----------   --------------   --------   --------------   ---------   --------------
<S>                              <C>          <C>              <C>        <C>              <C>         <C>
Outstanding at beginning of
  year.........................   1,712,650        $1.14       497,267         $4.42         780,362        $7.55
Granted........................     313,058         6.40       394,778          9.87       1,171,392         4.40
Exercised......................  (1,510,287)        1.13       (92,578)         1.26         (53,675)        1.66
Canceled.......................     (18,154)        2.01       (19,105)         4.66        (174,805)        8.18
                                 ----------        -----       -------         -----       ---------        -----
Outstanding at end of year.....     497,267        $4.42       780,362         $7.55       1,723,274        $5.53
                                 ==========        =====       =======         =====       =========        =====
Options exercisable at end of
  year.........................     184,052        $2.74       189,439         $5.07         310,721        $6.27
                                 ==========        =====       =======         =====       =========        =====
Weighted average fair value per
  share of options granted
  during the year..............                    $3.69                       $5.84                        $2.55
                                                   =====                       =====                        =====
</TABLE>

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

<TABLE>
<CAPTION>
                                   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
---------------------   -----------   ----------------   --------   -----------   --------
<S>                     <C>           <C>                <C>        <C>           <C>
   $  0.00-$3.875          449,022          9.1           $ 3.46       96,405      $ 2.16
   $4.0625-$4.375          697,046          9.8             4.35       23,886        4.06
   $   4.75-$8.25          454,786          8.7             7.44      152,236        7.52
   $ 8.625-$18.00          122,420          8.4            12.71       38,194       13.01
                         ---------                                    -------
                         1,723,274                                    310,721
                         =========                                    =======
</TABLE>

                                       45
<PAGE>
                                  FOCAL, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 31, 1999

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 1997, 1998 and 1999, consistent
with the provisions of FAS 123, the pro forma net loss and net loss per share
for 1997, 1998 and 1999, would be as follows (in thousands except per share
amounts):

<TABLE>
<CAPTION>
                                               1997                      1998                      1999
                                      -----------------------   -----------------------   -----------------------
                                      AS REPORTED   PRO FORMA   AS REPORTED   PRO FORMA   AS REPORTED   PRO FORMA
                                      -----------   ---------   -----------   ---------   -----------   ---------
<S>                                   <C>           <C>         <C>           <C>         <C>           <C>
Net loss............................     $ (442)     $ (792)      $(13,407)   $(14,121)     $(16,841)   $(17,914)
Basic and diluted net loss per
  share.............................     $(0.04)     $(0.08)      $  (1.01)   $  (1.06)     $  (1.24)   $  (1.32)
</TABLE>

    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:

<TABLE>
<CAPTION>
                                                                     OPTIONS GRANTED
                                                              ------------------------------
                                                                1997       1998       1999
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
Expected life (years).......................................    5.0        5.0        5.0
Interest rate...............................................    6.0        4.5        6.4
Volatility..................................................     60%        66%        60%
</TABLE>

    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 1997, 1998 and 1999 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 one, two and three years,
respectively, of option grants under the Company's plans.

COMMON STOCK RESERVED FOR ISSUANCE

    At December 31, 1999, the Company has reserved 3,868,782 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, 1998
and 1999, respectively, were assets with a cost basis of $7,253,337 and
$7,994,045 acquired under capital leases. Accumulated amortization as of
December 31, 1998 and 1999, respectively, related to these assets was $4,742,226
and $5,229,830.

                                       46
<PAGE>
                                  FOCAL, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 31, 1999

7. COMMITMENTS (CONTINUED)
    As of December 31, 1999, the Company's future minimum lease payments under
capital and operating leases are as follows:

<TABLE>
<CAPTION>
                                                                     BUILDING
                                                        CAPITAL     OPERATING
                                                         LEASES       LEASE
                                                       ----------   ----------
<S>                                                    <C>          <C>
2000.................................................  $1,065,569   $1,147,974
2001.................................................     808,956    1,147,974
2002.................................................     459,640    1,147,974
2003.................................................     181,500    1,147,974
2004.................................................          --      860,980
Thereafter...........................................          --           --
                                                       ----------   ----------
Total minimum lease payments.........................   2,515,665   $5,452,876
                                                                    ==========
Less interest........................................     256,534
                                                       ----------
Present value of minimum lease payments..............   2,259,131
Less capital lease obligations due within one year...     926,041
                                                       ----------
Capital lease obligations--long-term portion.........  $1,333,090
                                                       ==========
</TABLE>

    Total rent expense was $1,090,332, $1,114,389 and $1,126,917 in 1997, 1998,
and 1999, 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, 1999, there were $1,066,000 in outstanding borrowings under this
financing arrangement. There are no financial covenants in connection with this
lease financing.

8. RESEARCH AND DEVELOPMENT, LICENSING AND MARKETING AND DISTRIBUTION AGREEMENTS

    In October 1999, the Company entered into a Marketing and Distribution
Agreement with Genzyme Surgical Products ("Genzyme Surgical"), a division of
Genzyme Corporation. Genzyme Surgical 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 Surgical'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
Surgical meets certain minimum performance standards.

    In addition to the Marketing and Distribution Agreement, in October 1999
Focal and Genzyme Surgical also entered into a Stock Purchase Agreement, with up
to $20 million in purchases of the Company's common stock being committed by
Genzyme Surgical over an eighteen month period, subject

                                       47
<PAGE>
                                  FOCAL, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 31, 1999

8. RESEARCH AND DEVELOPMENT, LICENSING AND MARKETING AND DISTRIBUTION AGREEMENTS
(CONTINUED)
to certain specified conditions. In November 1999, Genzyme Surgical purchased
810,000 shares of the Company's common stock for $5 milion, representing a 25%
premium to the ten day average trading price of the Company's common stock
immediately prior to the purchase. An additional purchase of $5 million may be
made in April 2000, subject to the satisfaction of specified conditions. The
purchase will be priced at (i) a 25% premium to the twenty day average trading
price of the Company's common stock prior to closing if the trading average is
less than $6.40, (ii) at $8.00 per share if the trading average is between $6.40
and $8.00 and (iii) at the twenty day trading average if such trading average
exceeds $8 per share. The final two purchases of $5 million each are both
contingent on, among other things, the Company receiving FDA approval of its PMA
for FocalSeal-L surgical sealant for lung surgery indications. These final two
investments will be priced based upon the then current market value of the
common stock and are at the Company's option.

    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 after January 2000
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.

    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, 1997, 1998,
and 1999, totaled $144,000, $150,000, and $268,000, respectively. In connection
with these agreements, the Company has research funding commitments totaling
approximately $134,000 at December 31, 1999.

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, 1999, the
Company had tax net operating loss carryforwards of approximately $72.1 million
and federal and state research and development tax credit carryforwards of
approximately $4.1 million which expire at various times through 2019.

                                       48
<PAGE>
                                  FOCAL, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                               DECEMBER 31, 1999

9. INCOME TAXES (CONTINUED)
    Significant components of the Company's deferred tax assets as of
December 31 are as follows:

<TABLE>
<CAPTION>
                                                                 1998          1999
                                                              -----------   -----------
<S>                                                           <C>           <C>
Deferred tax assets:
  Net operating losses......................................  $22,468,000   $27,418,000
  Research and development tax credits......................    3,290,000     4,067,000
  Other.....................................................      885,000       709,000
                                                              -----------   -----------
                                                               26,643,000    32,194,000
  Valuation allowance.......................................  (26,643,000)  (32,194,000)
                                                              -----------   -----------
Net deferred tax assets.....................................  $        --   $        --
                                                              ===========   ===========
</TABLE>

    For financial reporting purposes, a valuation allowance has been provided
since realization of such deferred tax assets is uncertain at this time. The
valuation allowance increased by $5,551,000 during 1999, 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.

    Certain participants in the Company's preferred stock financing transactions
include venture capital funds affiliated with members of the Company's board of
directors.

11. SUBSEQUENT EVENT

    On February 25, 2000, the board of directors voted to increase the number of
shares reserved for issuance under the 1999 Stock Incentive Plan (the "1999
Plan") from 875,000 shares to 1,525,000 shares. The increase is subject to
approval of the Company's shareholders at the May 2000 annual meeting.

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.

                                       49
<PAGE>
                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

    Except as set forth below, 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 2000 Annual Meeting of Stockholders
(the "Proxy Statement") to be held May 24, 2000.

    The executive officers, who are elected by the board of directors, and other
key employees of the Company, are as follows:

<TABLE>
<CAPTION>
NAME                                          AGE                       POSITION
----                                        --------   ------------------------------------------
<S>                                         <C>        <C>
Robert J. DePasqua........................     51      President, Chief Executive Officer and
                                                       Director

S. Jack Herman............................     51      Vice President, New Product Development
                                                       and Technical Services

Mary Lou Mooney...........................     43      Vice President, Clinical and Regulatory
                                                       Affairs & Quality

Ronald S. Rudowsky........................     51      Vice President, Sales & Marketing

W. Bradford Smith.........................     44      Vice President, Finance and Administration
                                                       and Chief Financial Officer

Peter K. Jarrett, Ph.D....................     43      Senior Director, Materials Research and
                                                       Development

Thomas Bromander..........................     42      Director, Manufacturing
</TABLE>

    ROBERT J. DEPASQUA has been President, Chief Executive Officer and a
Director since joining Focal in December 1999. From 1998 to 1999, he served as
President and Chief Executive Officer at Biolink, a medical device company. From
1994 to 1998, Mr. DePasqua was self-employed as a private investor and Board
member of several companies. From 1989 to 1994 , he served as President and
Chief Executive Officer at Spectranetics, a medical device company. From 1979 to
1989, Mr. DePasqua held a variety of positions at Boston Scientific Corporation,
a medical device company, including President of the Microvasive division.
Mr. DePasqua received his B.S. in Engineering from Northeastern University.

    S. JACK HERMAN joined the Company as Vice President, Operations in
August 1992. He had been Vice President, New Product Development and Technical
Services since January 2000. From March 1990 to May 1992, Mr. Herman served as
President and Chief Executive Officer of Cardiopulmonary Corporation, a medical
equipment development company. From 1982 to 1990, he held various positions with
C. R. Bard, Inc., a medical device company, most recently as President of its
Critical Care Division. Mr. Herman previously held product development
management positions with Cobe Laboratories. Mr. Herman holds an M.B.A. from the
University of Colorado and a B.S. in Mechanical Engineering from the University
of Missouri.

    MARY LOU MOONEY, Vice President, Clinical Affairs, Regulatory Affairs and
Quality, joined the Company in June 1993 as Director, Regulatory Affairs. In
January 1997, Ms. Mooney was promoted to her current position. From March 1991
to June 1993, she held various positions with C.R. Bard Inc., a medical device
company, most recently as Director, Regulatory Affairs and Quality Assurance for
its ventures division. Ms. Mooney has also held regulatory positions with
Cardiac Pacemakers, Inc., Biometric Research Institute, Inc. and Cordis
Corporation. Ms. Mooney holds an M.S. in Biomedical Science from Drexel
University.

                                       50
<PAGE>
    RONALD S. RUDOWSKY, Vice President, Sales & Marketing, joined the Company in
January 1994 as Director, Procedure Development. In January 1997, Mr. Rudowsky
was promoted to his current position. 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.

    W. BRADFORD SMITH, Vice President, Finance and Administration and Chief
Financial Officer, joined the Company as Director of Finance in May 1993. In
March 1994, Mr. Smith was appointed to his current position. From June 1990 to
May 1993, he served as Director of Finance for CytoTherapeutics, Inc., a
biotechnology company. Prior to that, he was Director of Finance at ImmuCell
Corporation, a biotechnology company, a Financial Analyst for a division of
Lockheed Corporation and a Senior Accountant with Coopers & Lybrand. Mr. Smith
holds an M.B.A. from the University of New Hampshire and a B.S. from Tufts
University.

    PETER K. JARRETT, Ph.D., Senior Director of Materials Research and
Development, 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, Director of Manufacturing, 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.

ITEM 11. EXECUTIVE COMPENSATION

    The information required by this item is incorporated by reference from the
information under the captions "Election of Directors--Compensation for
Directors," "--Compensation for Executive Officers," "--Report of the
Compensation Committee" and "--Compensation Committee Interlocks and Insider
Information" 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.

                                    PART IV

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

    (a) The following financial statements are included in Item 8 of this Annual
       Report on Form 10-K.

                                       51
<PAGE>
    1.  Financial Statements:

<TABLE>
<CAPTION>
                                                              PAGE NO.
                                                              --------
<S>                                                           <C>
Report of Independent Auditors..............................       34
Balance Sheets as of December 31, 1998 and 1999.............       35
Statements of Operations for the Years Ended December 31,
  1997, 1998 and 1999.......................................       36
Statements of Stockholders' Equity for the Years Ended
  December 31, 1997, 1998 and 1999..........................       37
Statements of Cash Flows for the Years Ended December 31,
  1997, 1998 and 1999.......................................       38
Notes to Financial Statements...............................       39
</TABLE>

    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:

    1.  A Current Report on Form 8-K was filed on November 5, 1999 to report,
       pursuant to Item 5, the issuance of a press release relating to the
       Company entering into an agreement with Genzyme Corporation.

    THE FOLLOWING TRADEMARKS OF THE COMPANY ARE MENTIONED IN THIS ANNUAL REPORT
ON FORM 10-K: FocalSeal-TM- and Focal-TM-.

                                       52
<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.

<TABLE>
<S>                                                    <C>  <C>
Date: March 29, 2000                                   FOCAL, INC.

                                                       By:           /s/ ROBERT J. DEPASQUA,
                                                            -----------------------------------------
                                                                       Robert J. DePasqua,
                                                              PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>

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

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

<TABLE>
<CAPTION>
                      SIGNATURE                                   TITLE                   DATE
                      ---------                                   -----                   ----
<C>                                                    <S>                          <C>
                                                       President, Chief Executive    March 29, 2000
               /s/ ROBERT J. DEPASQUA                  Officer and Director
     -------------------------------------------       (Principal Executive
                 Robert J. DePasqua                    Officer)

                                                       Vice President, Finance and   March 29, 2000
                /s/ W. BRADFORD SMITH                  Chief Financial Officer
     -------------------------------------------       (Principal Financial and
                  W. Bradford Smith                    Accounting Officer)

                /s/ HENRY BREM, M.D.                   Director                      March 29, 2000
     -------------------------------------------
                  Henry Brem, M.D.

                  /s/ JANET EFFLAND                    Director                      March 29, 2000
     -------------------------------------------
                    Janet Effland

              /s/ ROBERT LANGER, PH.D.                 Director                      March 29, 2000
     -------------------------------------------
                Robert Langer, Ph.D.
</TABLE>

                                       53
<PAGE>

<TABLE>
<CAPTION>
                      SIGNATURE                                   TITLE                   DATE
                      ---------                                   -----                   ----
<C>                                                    <S>                          <C>
                  /s/ JESSE I. TREU                    Director                      March 29, 2000
     -------------------------------------------
                Jesse I. Treu, Ph.D.

                  /s/ DONALD GRILLI                    Director                      March 29, 2000
     -------------------------------------------
                    Donald Grilli
</TABLE>

                                       54
<PAGE>
                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
       EXHIBIT
       NUMBER
---------------------
<C>                        <S>
        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.

       10.3  (1)*          1997 Directors' Option Plan and forms of agreements
                           thereunder.

       10.4  (1)           Restated Investors Rights Agreement dated April 12, 1996
                           among the Company and certain stockholders of the Company.

       10.5  (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.

       10.6  (1)           Master Lease Agreement dated October 30, 1992 between the
                           Company and Comdisco, Inc.

       10.7  (1)           Master Lease Agreement dated February 28, 1994 between the
                           Company and MMC/GATX Limited Partnership I.

       10.8  (1)           Master Loan and Security Agreement dated April 18, 1997
                           between the Company and Transamerica Leasing.

       10.9  (1)+          Patent and Technology License Agreement dated June 11, 1992
                           between the Company and University of Texas.

       10.10 (1)+          Exclusive License Agreement dated August 7, 1992 among the
                           Company, Marvin Slepian, M.D. and Endoluminal Therapeutics,
                           Inc.

       10.11 (1)+          Distribution, License and Supply Agreement dated January 2,
                           1997 between the Company and Ethicon, Inc.

       10.12 (1)           Agreement for Consulting Services dated November 15, 1991
                           between the Company and Robert Langer, Ph.D.

       10.13 (1)           Agreement for Consulting Services dated August 7, 1992
                           between the Company and Marvin Slepian, M.D.

       10.14 (1)           Form of Restricted Stock Purchase Agreement and schedule of
                           current officers and directors party thereto.

       10.15 (1)           Form of Preferred Shares Rights Agreement between the
                           Company and Norwest Bank Minnesota N.A.

       10.18+              Marketing and Distribution Agreement between Focal and
                           Genzyme Surgical Products dated October 21, 1999.

       10.19               Stock Purchase Agreement between Focal and Genzyme
                           Corporation dated October 21, 1999.
</TABLE>

                                       55
<PAGE>

<TABLE>
<CAPTION>
       EXHIBIT
       NUMBER
---------------------
<C>                        <S>
       10.20               Registration Rights Agreement between Focal and Genzyme
                           Corporation dated October 21, 1999.

       23.1                Consent of Ernst & Young LLP, independent auditors.

       27.1                Financial Data Schedule.
</TABLE>

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

(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.

*   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.

                                       56