General Surgical Innovations Inc – ‘10-K’ for 6/30/99

On:  Thursday, 9/16/99   ·   For:  6/30/99   ·   Accession #:  1047469-99-35981   ·   File #:  0-28448

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Annual Report   —   Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K        Annual Report                                         54    366K 
 2: EX-10.28    Material Contract                                     21     71K 
 3: EX-10.29    Material Contract                                      1      9K 
 4: EX-10.30    Material Contract                                      1      9K 
 5: EX-23.1     Consent of Experts or Counsel                          3     10K 
 6: EX-27.1     Financial Data Schedule (Pre-XBRL)                     2      6K 

10-K   —   Annual Report
Document Table of Contents

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 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

 FORM 10-K

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE   
ACT OF 1934 [NO FEE REQUIRED]                                         

 For the Fiscal Year Ended June 30, 1999, or

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES        
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]                                

For the Transition period from ___ to ___.

 Commission file number: 0-28448
GENERAL SURGICAL INNOVATIONS, INC.
(Exact name of Registrant as specified in its charter)

     California                     94-3160456
(State or other jurisdiction of       (I.R.S. Employer  
incorporation or organization)       Identification No.)

10460 Bubb Road, Cupertino, California 95014
(Address of principal executive offices)

 http://www.gsii.com
(Web site address)

Registrant's telephone number, including area code: (408) 863-2500

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

 Securities registered pursuant to Section 12(g) of the Act:
 Common Stock, $.001 par value

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

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

The aggregate market value of the voting stock held by non-affiliates of the    
Registrant was approximately $64,956,519 as of August 31, 1999, based upon      
the closing sale price on the NASDAQ National Market System reported for such   
date. Shares of Common Stock held by each officer and director and by each      
person who owns 5 percent of more of the outstanding Common Stock have been     
excluded in that such persons may be deemed to be affiliates. This              
determination of affiliate status is not necessarily a conclusive               
determination for other purposes.                                               

There were 13,847,025 shares of Registrant's Common Stock issued and            
outstanding as of August 31, 1999.                                              
  --------------------------------

 DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement of the Registrant for the 1999 Annual Meeting   
of Shareholders are incorporated by reference in Part III of this Form 10-K.    

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INTRODUCTORY STATEMENT

Except for the historical information contained in this Annual
Report on Form 10-K, the matters discussed herein are forward-looking           
statements that are subject to certain risks and uncertainties that could       
cause the actual results to differ materially from those projected. Factors     
that could cause actual results to differ materially include, but are not       
limited to, market demand for the Company's products, the Company's ability     
to shift market focus successfully, the timing of orders and shipments, the     
timely development and market acceptance of new products and surgical           
procedures, the impact of performance of the Company's distributors, the        
Company's ability to further expand into international markets, public policy   
relating to health care reform in the United States and other countries,        
approval of its products by government agencies such as the United States       
Food and Drug Administration, and other risks detailed below and included       
from time to time in the Company's other SEC reports and press releases,        
copies of which are available from the Company upon request. The Company        
assumes no obligation to update any forward-looking statements contained        
herein.                                                                         

References made in this Annual Report on Form 10-K to "General
Surgical Innovations, Inc.," the "Company" or the "Registrant" refer to         
General Surgical Innovations, Inc. The following General Surgical               
Innovations, Inc. trademarks are mentioned in this Annual Report:               
SPACEMAKER-Registered Trademark-, SAPHtrak-Registered Trademark-,               
GSI-Registered Trademark-, ENDOSAPH-Registered Trademark-, registered           
trademarks of the Company; SPACEMAKER-Registered Trademark- Total               
Solution-TM-, SPACEKEEPER DIRECT-TM-, SpaceSEAL-TM- and SPACEKEEPER-TM-,        
trademarks of the Company.                                                      

PART I

ITEM 1.  BUSINESS                                                               

OVERVIEW                                                                        

Since its inception in April 1992, GSI has been engaged in the
development, manufacturing and marketing of balloon dissection systems and      
related minimally invasive surgical instruments. The Company began commercial   
sales of its balloon dissection systems for hernia repair in September 1993.    
To date, the Company has received from the FDA eight 510(k) clearances for      
use of the Company's technology to perform dissection of tissue planes          
anywhere in the body using a broad range of balloon sizes and shapes. The       
Company currently sells products in the United States, Europe, South America    
and Australia for selected applications, such as hernia repair, subfascial      
endoscopic perforator surgery ("SEPS"), saphenous vein harvesting and breast    
reconstruction and augmentation surgery, and laparoscopic bladder neck          
suspension.                                                                     

Sales of the Company's products in the United States and      
internationally are currently made through both distributors and the            
Company's direct sales force. Distribution in the hernia and SUI markets is     
currently through non-exclusive relationships with Ethicon Endo-Surgery         
("EES"), United States Surgical Corporation ("USSC"), Dexterity Surgical,       
Inc. ("Dexterity") and other distributors. The Company has two non-exclusive    
agreements with USSC, a wholly owned subsidiary of Tyco International Ltd.      
("Tyco"). Under the terms of the first agreement, USSC has non-exclusive        
rights to market and distribute GSI's SPACEMAKER-Register Trademark- surgical   
balloon dissectors worldwide for use in hernia repair and stress urinary        
incontinence ("SUI") procedures. Under the terms of the second agreement,       
GSI has non-exclusive rights to market several products, including USSC's 5mm   
mesh fixation device, the ProTack, which is offered as part of GSI's            
SPACEMAKER-Registered Trademark- Total Solution-TM- hernia repair kit.          
Additionally, the Company has an exclusive agreement with Genzyme Surgical      
Products Corporation ("Genzyme") to market and distribute GSI's surgical        
balloon dissection systems for use in plastic surgery (reconstructive and       
aesthetic) procedures. Sales of devices for cardiac/vascular applications are   
made through non-exclusive agreements with distributors and through the         
Company's direct sales force.                                                   

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   During fiscal year 2000, the Company plans to extend its domestic
and international distribution networks, as well as its direct sales force.     
Any increase in the Company's direct sales force will require significant       
expenditures and additional management resources.                               

 To date, the majority of the sales of the Company's products to
distributors and by the Company's direct sales force have been for use in       
hernia repair procedures. While the Company has developed or is developing      
surgical balloon dissectors for SUI, vascular and plastic surgery, sales of     
products for hernia repair are expected to provide a majority of the            
Company's revenues at least through fiscal year 2000.                           

    The Company has acquired rights to a significant number of patents
from third parties, including rights that apply to the Company's current        
balloon dissection systems. The Company has historically paid and is            
obligated to pay in the future to such third parties royalties equal to         
between one and four percent of sales of such products, which payments are      
expected to exceed certain minimum royalty payments due under the agreements    
with such parties. Total amounts paid for royalties for the years ended June    
30, 1999, 1998 and 1997 were $187,497, $289,255 and $356,831, respectively.     
The payment of such royalty amounts will have an adverse impact on the          
Company's gross profit and results of operations.                               

The Company has experienced significant operating losses since
inception. The Company expects such operating losses to continue at least       
through fiscal 2000. The Company's sales to date have consisted primarily of    
surgical balloon dissectors for hernia repair. In order to support increased    
levels of sales in the future and to augment its long-term competitive          
position, including the development of surgical balloon dissectors for other    
applications, the Company anticipates that it will be required to make          
significant additional expenditures in sales and marketing and in research      
and development (including marketing-related clinical studies).                 

    The Company currently manufactures and ships product shortly after
the receipt of orders, and anticipates that it will do so in the future.        
Accordingly, the Company has not developed a significant backlog and does not   
anticipate that it will develop a material backlog in the future.               

RECENT DEVELOPMENTS                                                             

In August 1999, the Company and Tyco entered into a definitive
agreement pursuant to which Tyco will acquire GSI. GSI shareholders will        
receive a fraction of a Tyco common share valued at $7.50 per common share      
for each common share of GSI. The transaction is valued at approximately $100   
million. The closing of this deal is contingent upon shareholder approval of    
the Company, as well as certain regulatory approvals.                           

INDUSTRY BACKGROUND                                                             

     Open surgery is an invasive procedure that generally requires large
incisions and significant tissue manipulation in order to provide the surgeon   
with direct access to the intended surgical site. Much of the trauma suffered   
in connection with open surgery is a result of gaining access to the surgical   
site and is not caused by the surgical repair itself. For example, the          
surgeon often must make large incisions through layers of muscle and tissue,    
which may cause muscle or nerve damage, bleeding, scarring and other            
complications such as infection, temporary or permanent debilitation and        
pain. As a result, many open surgical procedures require extended operating     
times, expose the patient to the risks of general anesthesia and involve        
lengthy hospitalization and patient recovery times. In addition, because of     
the severe trauma often associated with open surgical procedures, a             
significant population of patients, including the elderly and weak, are not     
considered good candidates for these surgical procedures and are thus           
deprived of treatment.                                                          

    In order to reduce the complications associated with open surgery,
surgical techniques referred to as minimally invasive surgery ("MIS") have      
been developed. These techniques allow surgeons to access the surgical site     
through the body's natural openings (E.G. mouth, urethra or rectum) or by       
making small incisions to access body cavities such as the abdominal cavity     
(the peritoneal cavity). The performance of MIS generally involves five basic   
steps. First, a small incision (approximately 1 cm) is made for insertion of    
a trocar, a valved tube with a blunt or sharp insertion device. Next,           
additional trocars are introduced to gain increased access to the surgical      
site and permit the introduction of surgical instruments. Third, the surgeon    
creates a working space through the use of dissection tools or by               
insufflating a natural body cavity (such as the abdominal cavity) with air or   
gas. Fourth, the surgeon utilizes a device such as an endoscope or              
laparoscope to visualize the surgical field. Finally, the surgeon utilizes      
specialized MIS instruments to perform the surgical procedure.                  

  Studies published in the NEW ENGLAND JOURNAL OF MEDICINE and THE
JOURNAL OF VASCULAR SURGERY support the benefits of MIS as compared to open     
surgery, which generally include reduced patient trauma (including less         
muscle, nerve and other tissue damage), reduced blood loss, reduced             
post-operative infection, reduced scarring at the site of the incision (which   
in turn reduces reintervention requirements), shorter patient recovery time     
and ultimately lower medical costs.                                             

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  Despite the documented benefits of MIS, its adoption to date has
been limited to a select number of surgical procedures, and, in the             
aggregate, represented only an estimated 15 percent of all surgical             
procedures performed in the United States in 1997. The most widely adopted      
MIS procedure, laparoscopic cholecystectomy (removal of the gall bladder),      
has been successfully adopted and is used in an estimated 90 percent of such    
cases largely because the target surgical site lies within the abdominal        
cavity, the only natural body cavity that provides a working space when         
insufflated. Application of MIS techniques to other surgical procedures and     
the ability to exploit the clinical benefits of MIS have been limited by the    
lack of a natural body cavity proximate to the surgical site and the            
inability of the surgeon to easily and atraumatically access the surgical       
site or establish a surgical working space where no natural body cavity         
exists. MIS conducted outside of a natural body cavity requires the surgeon     
to tunnel through tissue to reach the target surgical site and to dissect a     
working space. If conventional dissection techniques are utilized, the          
resulting working space is often relatively bloody and affords only poor        
visualization.                                                                  

 As a result of these limitations, many common types of surgical
repairs cannot be effectively performed using traditional blunt dissection      
MIS techniques, including hernia repairs, and procedures performed on organs    
such as the bladder, kidney, spine, aorta or other sites that lie outside the   
abdominal cavity. For other procedures, although MIS techniques may exist for   
the performance of the repair itself, gaining access to the target surgical     
site is invasive, thereby reducing many of the clinical benefits of MIS. For    
example, currently utilized MIS for spinal fusion requires making small         
incisions at the midline of the patient's abdomen, entering the peritoneum,     
retracting bowel and other organs to one side, exiting the back of the          
peritoneum and continuing down to the front of the spine to access the          
surgical site.                                                                  

The Company believes that a significant opportunity exists for
technologies and surgical instruments that can effectively address the          
limitations of MIS and facilitate the adoption of MIS for a wider range of      
surgical procedures.                                                            

GSI SOLUTION                                                                    

  GSI's proprietary surgical balloon dissectors allow a surgeon to
rapidly access and relatively atraumatically create a working space at a        
target surgical site where none previously existed. The body is largely made    
up of tissue layers (skin, fat, and muscle, for example) with distinct planes   
between layers. The Company's surgical balloon dissectors allow the surgeon     
to exploit this anatomy using minimally invasive techniques. By following       
such a plane with a deflated and rolled balloon, and then inflating the         
balloon to dissect and separate the two adjacent layers, a new working space    
is created. Because MIS techniques are employed, there is little damage         
compared to that likely encountered with open surgery and its related long      
incisions and collateral trauma to tissues and nerves.                          

GSI provides a wide range of surgical balloon dissectors, each
having different attributes or combinations of attributes. Generally, by        
selecting one of these dissectors for the purpose at hand, the surgeon may      
quickly and easily create an accurate and predictable working space, giving     
consideration to both size and shape and with the desired proximity to the      
chosen surgical site.                                                           

The Company believes that its SPACEMAKER-Registered Trademark-
products can be deployed anywhere in the body where a natural tissue plane      
exists. For example, by creating a working space in the pre-peritoneal area     
(the space in front of the peritoneum) the Company's technology enables the     
use of MIS for hernia repair or treatment of SUI. Similarly, by creating a      
working space in the retroperitoneal area (the space behind the peritoneum)     
the Company's technology enables the use of MIS for exposure to the anterior    
spine and other structures accessible in this area. In addition, the ability    
of the Company's line of SPACEMAKER-Registered Trademark- products to create    
working spaces at different tissue levels (including subcutaneous,              
subfascial, submuscular and subglandular) enables the use of MIS for            
saphenous vein harvesting, SEPS, breast augmentation and reconstruction,        
tissue flap harvesting for reconstruction, long-bone plating and a variety of   
other medical procedures.                                                       

COMPANY STRATEGY                                                                

The Company's objective is to become the leading provider of  
surgical balloon dissectors and specialty surgical instruments for MIS. The     
key elements of the Company's strategy are as follows:                          

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  INCREASE MARKET ACCEPTANCE OF BALLOON DISSECTION TECHNIQUES. The
Company intends to increase market acceptance for its SPACEMAKER-Registered     
Trademark- products primarily by developing and maintaining relationships       
worldwide with leading general surgeons and specialists in the surgical         
fields of cardiac/vascular surgery, obstetrics, gynecology, urology, general    
and cosmetic and reconstructive surgery. The Company supports these efforts     
through surgeon training programs designed to increase surgeon familiarity      
with the advantages and applications of the Company's products. In addition,    
the Company is conducting marketing-related clinical studies to increase        
exposure of surgeons to the Company's products. The Company uses data           
collected from marketing-related clinical studies to demonstrate the            
anticipated clinical and cost advantages of the Company's products to           
patients, surgeons, hospital administrators and third-party health care         
payers.                                                                         

     CAPITALIZE ON EXISTING PROPRIETARY POSITION. GSI has established an
extensive patent portfolio, and plans to capitalize on its proprietary          
position to establish and maintain a leadership position in the balloon         
dissection market. As of June 30, 1999, GSI had 57 United States patents        
issued, and had applied for an additional 52 United States patents, 12 of       
which had been allowed. In addition, as of June 30, 1999, GSI had 10 foreign    
patents issued, and 46 in prosecution covering GSI's technology, including      
tissue dissection with balloons. In May 1996, the Company was issued a United   
States patent that contains broad claims regarding use of balloons to dissect   
along tissue planes. The Company believes that the scope of these claims        
could provide a competitive advantage for many of the Company's balloon         
dissection products, however, there can be no assurance that the Company's      
intellectual property position will yield a long-term competitive advantage.    

DEVELOP NEW BALLOON DISSECTOR PRODUCTS. The Company intends to
develop additional surgical balloon dissection products and enhancements to     
its products. GSI's SPACEMAKER-Registered Trademark- surgical balloon           
dissectors have received FDA 510(k) clearance for tissue plane dissection       
during general, endoscopic, laparoscopic or cosmetic and reconstructive         
surgery and certain vascular surgeries, using a broad range of balloon sizes    
and shapes. Accordingly, the Company believes it is well positioned to offer    
a portfolio of products for additional surgical procedures without              
significant additional United States regulatory pre-market clearance            
compliance requirements. The Company has developed or is planning to develop    
surgical balloon dissectors to facilitate access for a number of procedures     
for which MIS, without these products, is currently suboptimal, including       
chronic venous insufficiency, SUI and anterior spinal fusion and long-bone      
plating for certain fractures.                                                  

      DEVELOP NEW SURGICAL INSTRUMENTS FOR MIS. As part of its MIS product
strategy, the Company will continue to develop and/or seek to acquire or        
license surgical instruments tailored for use in the working spaces created     
by the Company's surgical balloon dissectors. To date, the Company has          
developed several instruments including its GSI Hook & Fork Dissectors and      
SPACEKEEPER-TM- retractor products and reusable clip applier with 5mm shaft     
for saphenous vein harvesting. To complete its hernia and laparoscopic          
bladder neck suspension surgical procedure offerings, GSI has developed and     
is currently selling its SpaceSEAL-TM- BTC and EPS balloon tip cannulae. The    
SpaceSEAL-TM- BTC is designed to provide a secure seal at port sites to         
prevent leakage of CO(2) during an endoscopic procedure. The SpaceSEAL-TM-      
EPS is a balloon-tip cannula specifically designed for preperitoneal surgery.   
The Company will continue to develop and/or seek to acquire or license          
specialized surgical instruments that facilitate the broader adoption of MIS    
and balloon dissection products for surgical procedures.                        

     DEVELOP AND LAUNCH COMPLETE PROCEDURAL KITS. The Company now offers
procedural kits that are configured according to customer preference. Each      
kit includes one or more surgical balloon dissectors and complementary          
ancillary instruments, such as the balloon tip cannulae. Each component is      
individually sealed to minimize waste, and for the convenience of the           
customer. In product development, the Company evaluates on a case by case       
basis whether a proposed new kit component should be developed in-house or      
purchased as an OEM product.                                                    

MARKET PRODUCTS THROUGH A DIRECT SALES FORCE AND DISTRIBUTORS.
Domestically GSI sells products through a direct sales force that it            
continues to build, as well as various distributors. In addition to their       
sales efforts, the GSI direct sales force supports the efforts of               
distributors' sales representatives in their geographical areas. For            
international sales of its products the Company has, and intends to continue    
to build, relationships with medical device companies both in the United        
States and internationally that can provide the Company access to an            
established distribution network in GSI's target markets. As of the end of      
the fiscal year 1999,                                                           

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the Company had agreements with 22 distributors domestically and                
internationally. Additionally, the Company has an exclusive agreement with      
Genzyme Surgical Products Corporation to market and distribute GSI's surgical   
balloon dissectors for use in plastic surgery (reconstructive and aesthetic)    
procedures.                                                                     

BALLOON DISSECTION SYSTEMS                                                      

   GSI's SPACEMAKER-Registered Trademark- tissue dissection systems,
based on the Company's patented balloon technology, rapidly and gently create   
surgical working spaces in the body by separating natural tissue planes         
without resorting to blunt dissection used in conventional open surgery or      
minimally invasive surgery conducted outside of a natural body cavity. In       
procedures using SPACEMAKER-Registered Trademark- balloon dissectors, a         
surgeon creates a small incision through which the balloon is inserted and      
placed between naturally occurring tissue layers such as muscle, fat, and       
skin. Subsequently, the balloon is filled to a specific volume with air or      
saline, causing the desired dissection of the tissue planes. The system is      
then deflated and removed and the dissected space can be insufflated with gas   
to create a surgical operating space.                                           

The Company's surgical balloon dissectors incorporate several 
proprietary technologies to increase the reliability, effectiveness and ease    
of use in creating working spaces during MIS. Each balloon is composed of       
nonelastomeric polyurethane material and is welded using a proprietary          
technique that allows the balloon to be inflated to a predetermined size and    
predictable shape with minimal risk of rupture. Each of the Company's           
balloons is designed to be deployed in a predictable manner that maximizes      
effectiveness and accuracy in creating the surgical working space and is        
designed to minimize unnecessary tissue trauma because of the specific and      
predictable manner in which the balloon unfurls. The Company has designed its   
dissection balloons in a variety of shapes and sizes that are tailored for      
specific procedures. For example, the Company's kidney shaped balloon is        
designed for use in hernia repair to maximize working space and visibility of   
the surgical site while minimizing the disruption of other anatomy at the       
surgical site.                                                                  

      The Company currently offers its surgical balloon dissectors in five
distinct access and deployment platforms, the SPACEMAKER-Registered             
Trademark- I platform with integral cannula, the SPACEMAKER-Registered          
Trademark- II platform with optional visualization, the SPACEMAKER-Registered   
Trademark- Plastics platform, the SAPHtrak-Registered Trademark- platform,      
and the ENDOSAPH-Registered Trademark- platform, along with several different   
balloon shapes and sizes, designed for various surgical techniques, procedure   
types and market segments. Each balloon dissection system, except the           
ENDOSAPH-Registered Trademark- system, contains three primary components: a     
guide rod and blunt tip to access the surgical site; a single use, disposable   
balloon dissector (which includes a tubing and valve apparatus to fill the      
balloon) to create a working space at the surgical site; and a balloon cover    
to protect the balloon dissector and maintain the balloon in its furled state   
prior to inflation. ENDOSAPH-Registered Trademark- dissectors contain the       
first two components. The end-user price for the Company's single surgical      
balloon dissector is approximately $250 per unit, and procedural kits range     
from approximately $350 to $850 per kit, depending upon the type of balloon     
dissector platform purchased and the ancillary instruments chosen by the        
customer to complete the procedural kit.                                        

      The key attributes of the Company's five major product platforms are
described below:                                                                

      SPACEMAKER-Registered Trademark- I (WITH INTEGRAL CANNULA) PLATFORM.
The SPACEMAKER-Registered Trademark- I platform is composed of a stainless      
steel rod with a blunt tip which is used both as the guide rod for the          
balloon and as the insertion rod for a pre-loaded integral cannula. This        
enables the surgeon to insert the cannula quickly and accurately into the       
dissected space once the balloon is removed. In addition, the balloon cover     
used with the SPACEMAKER-Registered Trademark- I platform is a strong sheath    
that maximizes its tunneling capability.                                        

SPACEMAKER-Registered Trademark- II PLATFORM. The             
SPACEMAKER-Registered Trademark- II platform has a blunt-tipped, polymeric      
guide rod for insertion of the balloon. This platform is designed to allow      
endoscopic visualization of the dissected space. Visualization enables the      
surgeon to identify anatomical features and access the dissected surgical       
site. The SPACEMAKER-Registered Trademark- II platform includes an integral     
balloon cover, which releases automatically upon inflation of the balloon,      
thus simplifying the procedure for the surgeon.                                 

SPACEMAKER-Registered Trademark- PLASTICS PLATFORM. The       
SPACEMAKER-Registered Trademark- Plastics platform consists of a combined       
blunt-tipped guide rod and handle, used for insertion, and a balloon. An        
integral cover over the balloon provides protection to the balloon during       
insertion. This platform is used primarily for plastic and reconstructive       
surgery of the breast.                                                          

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 SPACEMAKER-Registered Trademark- SAPHTRAK-Registered Trademark-
PLATFORM. The SPACEMAKER-Registered Trademark- SAPHtrak platform consists of    
a malleable steel rod with a blunt tip, an eight inch balloon and a handle.     
The malleable feature of the guide rod allows the surgeon to adjust the         
curvature of the device to maneuver around challenging patient anatomy. The     
150cc capacity balloon is not removable from the guide so that it is            
redeployable at multiple sites along the course of the vein. This platform is   
used primarily for saphenous vein harvesting.                                   

    ENDOSAPH-Registered Trademark- PLATFORM. The SPACEMAKER-Registered
Trademark- ENDOSAPH-Registered Trademark- platform consists of two disposable   
devices - the SAPHfinder-TM- balloon dissector and the SPACEKEEPER-TM-          
retractor. The SAPHfinder-TM- balloon dissector consists of an open-ended tip   
on a hollow guide rod, an eight inch balloon, and a handle. The device is       
designed to accommodate a standard-length 5mm endoscope for viewing from the    
tip. The 150cc capacity balloon is not removable from the guide rod so that     
it is re-deployable at multiple sites along the course of the vein. The         
SPACEKEEPER-TM- retractor is a single-piece, polycarbonate construction         
consisting of a distal retractor, 5mm endoscope channel and handle. The         
retractor is used to hold the operating space open after removal of the         
balloon and is also designed to accommodate a standard-length 5mm endoscope.    
This platform is used primarily for saphenous vein harvesting.                  

APPLICATIONS OF BALLOON DISSECTION TECHNOLOGIES                                 

    The Company's initial market focus has been the application of its
SPACEMAKER-Registered Trademark- balloon dissection technology for hernia       
repair. More recently, the Company has begun to increase its emphasis on        
cardiac/vascular applications. The Company has completed marketing-related      
clinical studies of, and has introduced products for, saphenous vein            
harvesting, SEPS, breast augmentation and reconstruction procedures and SUI     
applications. The Company believes that its current FDA clearances provide      
coverage for many surgical applications that the Company may pursue. The        
Company has commenced commercial sales of its products in the United States,    
Europe, Australia and South America for selected applications including         
hernia repair, saphenous vein harvesting, SEPS and breast augmentation and      
reconstruction surgery.                                                         

HERNIA REPAIR                                                 

A hernia, a condition that commonly occurs in the groin, is a 
protrusion of normal abdominal contents through a muscle defect, usually in     
the tissue layers overlying the abdomen. The peritoneum and/or bowel often      
project into this defect, causing pain and potential major complications. In    
1997 over 650,000 people in the United States and approximately 1.3 million     
people worldwide underwent surgery for hernia repair.                           

   The open surgical procedure for hernia repair is a herniorrhaphy,
which involves making a 10 to 15 cm open incision in the groin over the         
muscle defect to be repaired. As in most invasive surgical procedures,          
recovery periods tend to be long, typically extending between three and six     
weeks.                                                                          

     Over the last few years, in an effort to reduce post-operative pain
and recovery times, several laparoscopic techniques have been developed to      
repair hernias. Despite these advances, there is not yet a consensus on the     
optimal method for MIS hernia repair. For example, in certain MIS hernia        
repair procedures, a surgeon first makes an incision in the abdominal wall to   
gain access to the abdominal cavity. She then makes an additional incision in   
the peritoneum in order to reach the surgical site and create the working       
space required to conduct the surgical repair. The Company believes that its    
balloon dissection technology can significantly improve the outcome of this     
laparoscopic hernia repair procedure by eliminating the need for an incision    
in the abdominal wall.                                                          

    Utilizing the Company's SPACEMAKER-Registered Trademark- products,
the surgeon tunnels the device through a small incision at the umbilicus and    
then inflates the balloon to create a large and relatively bloodless space at   
the site of the hernia, but outside the abdominal cavity. As a result, the      
surgeon is able to access the target surgical site and complete the hernia      
repair. In addition, because the surgeon never enters the peritoneum, this      
procedure reduces the risk of organ damage, adhesion formation and morbidity,   
and eliminates the requirement for general anesthesia. In a study published     
in May 1997 by the NEW ENGLAND JOURNAL OF MEDICINE, MIS hernia repair           
procedures utilizing balloon dissection resulted in fewer recurrences and       
faster recovery times as compared to traditional open surgical hernia repair    
procedures.                                                                     

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The Company believes that its SPACEMAKER-Registered Trademark-
products provide a platform for increasing the conversion of open hernia        
repair procedures to laparoscopic procedures. According to Medical Data         
International, Inc., laparoscopic hernia repair procedures represented          
approximately 104,000 or 16 percent of total hernia repair procedures in the    
United States in 1997.                                                          

     The Company commenced commercial sales of its hernia repair balloon
dissection products in the United States in late 1993 and in Europe in 1994     
and currently sells two versions: the SPACEMAKER-Registered Trademark- I        
platform, which was introduced in September 1993 and the                        
SPACEMAKER-Registered Trademark- II platform, which was introduced in October   
1995. The Company sells these products both in the United States and certain    
foreign markets, including Europe, Australia and South America, through its     
direct sales force and distributors.                                            

SUBFASCIAL ENDOSCOPIC PERFORATOR SURGERY (SEPS)               

   Chronic venous insufficiency, which results in insufficient blood
flow from the extremities, is a common and debilitating disease. A frequent     
manifestation of venous insufficiency is venous stasis ulceration (chronic      
skin ulcers), which currently affects approximately 1.25 million people in      
the United States.                                                              

The Company believes that current treatment options for venous
stasis ulceration and venous insufficiency are suboptimal. Compression          
stockings (elastic stockings that put pressure on the leg to force blood        
flow), the most common treatment, often temporarily heal the ulcers but do      
not treat the underlying venous incompetence. Compression stockings as          
treatments are also ineffective because patients often do not wear the          
stockings, the associated healing process is slow and the recurrence rate for   
the ulcers is high. Treating the incompetent vein through an open surgical      
procedure allows treatment of the underlying condition, but requires an         
incision through the ulcer wound, which is composed of diseased tissue and is   
often incapable of healing. Alternatively, a minimally invasive ligation        
procedure known as SEPS allows the surgeon to access the incompetent vein       
from an incision remote from the ulcer wound using traditional dissection       
instruments. However, because this access to the surgical site causes           
bleeding and significant tissue trauma, the procedure is difficult and time     
consuming for the surgeon to perform because of poor visualization.             

 The Company's SPACEMAKER-Registered Trademark- surgical balloon
dissectors allow the surgeon to perform SEPS to ligate incompetent veins        
endoscopically in a relatively atraumatic, bloodless manner. By utilizing the   
Company's SPACEMAKER-Registered Trademark- technology, the surgeon is able to   
deploy an elongated balloon down the length of the patient's leg to create an   
operating space for access to one or more incompetent veins. Because the        
incisions needed for this procedure are very small (approximately one cm) and   
are remote from the area of ulcerated skin, the Company believes that wounds    
will heal more rapidly and that there will be fewer complications compared to   
open surgery at or near the ulcer site. In addition, the relatively bloodless   
working space created by the Company's balloon provides the surgeon with        
improved visualization of the veins requiring ligation, making the procedure    
easier and faster for the surgeon.                                              

 The Company launched its initial product to treat venous stasis
ulceration and venous insufficiency in January 1996. Additional outcome         
studies have been completed, including the study reported in the June 1997      
JOURNAL OF VASCULAR SURGERY that supported the Company's belief that balloon    
assisted SEPS tends to produce faster healing rates, fewer complications and    
lower recurrence rates as compared to compression stockings or open surgical    
ligation. By the end of 1998, the Company's SPACEMAKER-Registered Trademark-    
I balloon dissection products had been used to treat over 1,100 patients        
suffering from venous stasis ulcers or venous insufficiency in over 250         
centers across the United States, with results indicating generally             
successful outcomes.                                                            

SAPHENOUS VEIN HARVESTING                                     

In recent years, advanced coronary artery disease has been    
increasingly treated by coronary artery bypass graft (CABG) procedures, which   
usually involve grafting a portion of a patient's vein, taken from a            
different part of the body, around an arterial blockage. An estimated 665,000   
CABG procedures were performed worldwide in 1998. About 80 percent of these     
procedures in the United States utilize the patient's saphenous vein for        
bypass grafting.                                                                

Traditional saphenous vein harvesting procedures require a    
continuous incision above the vein segment to be harvested, often from the      
ankle to the upper thigh of the patient's leg. The saphenous vein is then       
dissected and removed, and the wound is sutured closed. A study published in    
the Annals of Thoracic Surgery in 1998 involving over 112 patients indicates    
that the open surgical procedure for saphenous vein harvesting results in       
wound healing impairment in approximately 19 percent of patients. The length    
and                                                                             

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invasiveness of the leg incision also causes significant postoperative          
patient pain and discomfort. Surgeons indicate that after the CABG procedure    
patients more frequently complain about the pain caused by leg incisions than   
other aspects of the procedure.                                                 

      The Company launched its ENDOSAPH-Registered Trademark- Vein harvest
system, utilizing balloon dissection technology and ancillary instruments, in   
January 1998. By utilizing the Company's ENDOSAPH-Registered Trademark-         
balloon dissection system and hook and fork dissection tools in the saphenous   
vein harvest procedure, the surgeon can reduce the leg incisions to a total     
length of three or four centimeters, and can minimize damage to the muscles     
and nerve endings surrounding the saphenous vein. Results from clinical usage   
of the ENDOSAPH-Registered Trademark-vein harvest system indicate generally     
successful outcomes from the procedure including less postoperative pain,       
faster healing and less scarring than with traditional open procedures.         

STRESS URINARY INCONTINENCE SURGERY (SUI)                     

      SUI is the uncontrollable loss of urine due to a displacement of the
bladder neck. Depending on the severity of incontinence, there are a number     
of treatment options for SUI, including collagen injections, drugs,             
biofeedback exercises and absorbent pads. The standard treatment for severe     
SUI is a highly invasive, open surgical procedure involving suture suspension   
of the bladder neck. This method can create significant complications for the   
patient, including enterocele (a hernia within the vaginal wall) and genital    
prolapse (a descending of the uterus due to a weakness of the pelvic floor).    
Furthermore, after surgery patients may require up to six weeks or more to      
resume their preoperative lifestyle. Because of the risk, expense and           
complexity of open suture suspension, this surgical procedure is often          
performed only in conjunction with other open abdominal procedures such as      
hysterectomy.                                                                   

     The Journal of Urology September 1997 issue reported the findings
of The American Urological Association Female Stress Urinary Incontinence       
Clinical Guidelines Panel, which concluded from long-term outcomes that         
"surgical treatment of stress urinary incontinence is effective, offering a     
long-term cure in a significant percentage of women."                           

Several MIS alternatives to open surgical procedures for the  
treatment of SUI have recently been developed to suspend the bladder neck.      
These less invasive procedures have been increasingly accepted as stand-alone   
procedures and are typically less expensive and less likely to cause adverse    
side effects. Outcome studies are now becoming available which indicate         
satisfactory outcomes for MIS procedures when compared to open bladder neck     
suspension procedures in successfully treating incontinence. As in hernia       
repair, some MIS techniques involve accessing the surgical site by entering,    
traversing and then exiting the abdominal cavity. While these procedures        
offer improvements over open surgery and afford the benefits of MIS, they       
still involve the morbidity risks and difficulties associated with violating    
the peritoneum.                                                                 

     Utilizing the Company's surgical balloon dissector, the surgeon can
suspend the bladder neck laparoscopically without entering the peritoneum,      
and can do so under visualization. As in the hernia repair procedure, GSI's     
SPACEMAKER-Registered Trademark- dissection products can be deployed near the   
umbilicus to provide direct access to the bladder and bladder neck. The         
surgeon can then use conventional laparoscopic instruments to complete the      
procedure. A study published in THE JOURNAL OF THE AMERICAN ASSOCIATION OF      
GYNECOLOGIC LAPAROSCOPISTS in November 1996 shows that the SUI repair           
procedure utilizing balloon dissection can usually be performed in less than    
one hour on an outpatient basis.                                                

GSI offers a SPACEMAKER-Registered Trademark- II dissector and
SPACEMAKER-Registered Trademark- Total Solution-TM- Laparoscopic Bladder Neck   
Suspension kit to specifically to address the extraperitoneal treatment of      
SUI, which the Company believes optimizes the working space for the procedure.  

BREAST AUGMENTATION AND RECONSTRUCTIVE SURGERY                

      In 1997, approximately 150,000 women in the United States had breast
reconstruction and augmentation surgery. Traditional surgical methods for       
such procedures require making a three to five cm incision in the skin,         
finding the required tissue plane, and then using a combination of blunt and    
sharp dissection tools to create a pocket for the implant. The procedure can    
cause substantial bleeding, can sever both sensory nerves and perforating       
vessels and can leave the patient with substantial, noticeable scars.           

   In contrast to traditional breast augmentation and reconstruction
procedures, the Company's SPACEMAKER-Registered Trademark- products require     
only small incisions, create a relatively bloodless pocket, minimize            
disruption of sensory nerves and perforating vessels and minimize scarring      
and loss of mobility or sensation. In addition, because the                     
SPACEMAKER-Registered Trademark- product allows the surgeon to introduce the    
balloon dissector from a crease in the axilla (armpit), from the inframammary   
fold (below the breast), or in the periareolar (nipple) area, the surgeon can   
minimize the appearance of                                                      

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any marks or scars. The Company believes that its SPACEMAKER-Registered         
Trademark- dissection products for breast augmentation and reconstruction       
procedures enable the surgeon to create uniform, symmetrical pockets in less    
time and with much less bleeding than is possible with traditional blunt or     
sharp dissection tools.                                                         

   The Company's balloon dissection products for breast augmentation
and reconstruction were first introduced commercially in the United States in   
January 1995. The SPACEMAKER-Registered Trademark- Plastic platform is used     
for these procedures.                                                           

OTHER COSMETIC AND RECONSTRUCTIVE SURGERY                     

     In addition to the market opportunities for breast augmentation and
reconstruction, the Company has designed and developed balloon dissection       
technology for combined tissue dissection and expansion for general cosmetic    
and reconstructive surgery procedures. The Company believes that its balloon    
dissection technology is well-suited for such procedures, including limb        
reconstruction, correction of congenital deformities and scar revision.         

SPINE SURGERY                                                 

The Company believes that its products can be used to provide 
exposure in several orthopedic spinal procedures to both reduce the costs of    
the procedure and enhance patient benefits. Foremost among these procedures     
is spinal fusion, which was performed approximately 200,000 times in the        
United States in 1994. Spinal fusion is usually performed to remove a           
ruptured vertebral disc that is causing significant patient discomfort, and     
subsequently to promote fusion between the then exposed and adjacent            
vertebrae. This fusion procedure can be performed by using any of several       
prosthetic systems, by traditional bone prostheses, or by a combination of      
the two.                                                                        

    Most traditional open spinal fusion procedures have approached the
spine from the back. Several newer procedures, some currently under clinical    
investigation, approach the spine through the abdomen, which appears to         
yield better results. The open abdominal approach is highly invasive,           
however, and has led researchers to try to develop a minimally invasive,        
transperitoneal laparoscopic approach. This approach still subjects the         
patient to the same risks associated with the open abdominal approach.          

     The Company's surgical balloon dissectors have been used in several
cadaver studies in which an extraperitoneal laparoscopic approach to the        
spine has been successfully performed. In this procedure, the balloon is        
deployed in the retroperitoneal area under the rib cage and is inflated in      
order to dissect the peritoneum away from muscle layers in the back and side    
of the patient. By doing so, the surgeon can create a large working space to    
access the spine without entering the peritoneum. The Company believes the      
spinal fusion procedure is a natural extension of the aortic reconstruction     
application for balloon dissection technology because the required dissected    
space is essentially the same. The Company intends to conduct additional        
marketing-related clinical evaluations to evaluate physician preference and     
utility of the Company's SPACEMAKER-Registered Trademark- surgical balloon      
dissectors for the orthopedic spine surgery market.                             

ADDITIONAL PRODUCTS UNDER DEVELOPMENT                                           

As part of its competitive strategy, GSI continually seeks to 
leverage its core technology to develop surgical balloon dissectors for new     
surgical procedures, as well as to develop new surgical instruments for MIS.    
The Company has made a significant investment in developing its proprietary     
balloon dissection technology and believes its research and development         
commitment in this area is critical to its competitive position. Research and   
development expenses for fiscal 1999, 1998 and 1997 were approximately $3.7     
million, $2.8 million and $2.2 million, respectively. As of June 30, 1999,      
the Company employed 14 persons engaged in research and development             
activities.                                                                     

      The Company is continuing to exploit its expertise in MIS to develop
a range of instruments to maximize the surgeon's ability to perform MIS once    
an operative working space is created by the Company's surgical balloon         
dissectors. Product research and development will require substantial           
expenditures, and there can be no assurance that the Company will be            
successful in identifying products for which demand exists, in developing       
products that have the characteristics necessary to treat target indications,   
or that any new product introduced will receive regulatory approval or be       
commercially successful.                                                        

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MARKETING, SALES AND DISTRIBUTION                                               

The Company markets its products, both domestically and       
internationally, to general surgeons, urologists, gynecologists, vascular       
surgeons, orthopedic surgeons and cosmetic and reconstructive surgeons. Sales   
in the United States and internationally in the hernia and SUI markets are      
currently made through non-exclusive relationships with EES, USSC, Dexterity    
and other distributors, as well as through a direct sales force.                
Additionally, the Company has an exclusive agreement with Genzyme to market     
and distribute GSI's surgical balloon dissection systems for use in plastic     
surgery (reconstructive and aesthetic) procedures. Sales of devices for         
cardiac/vascular applications are made through non-exclusive agreements with    
distributors and through the Company's direct sales force.                      

MARKETING PROGRAMS. The Company's marketing strategy for its  
surgical balloon dissector products and procedural kits is designed to target   
surgeons who are leaders in their respective surgical specialties, and to       
promote visibility of the Company's products and awareness of the clinical      
efficacy and cost effectiveness of surgical techniques that employ the          
Company's products. For product sales in the cardiac/vascular, hernia, and      
SUI markets, the Company is using a combination of a direct sales force and     
distributors. The Company has entered into or is seeking to enter into          
agreements with independent distributors that have well-established             
distribution networks across wide geographic areas and training programs.       

The Company disseminates clinical and technical information   
worldwide to educate surgeons about the benefits of, and to encourage           
surgeons to perform procedures utilizing, the Company's products. In support    
of this program, the Company has produced and distributed to surgeons           
SPACEMAKER-Registered Trademark- dissector procedure demonstration and          
educational videos for hernia repair, bladder neck suspension, vascular         
surgery and cosmetic and reconstructive surgery. In addition, the Company has   
developed relationships with several leading surgeons in each of the            
Company's targeted major surgical specialty areas, and other surgical           
specialty areas, who provide input on clinical and product development. The     
Company has recently initiated a residency training program to give didactic,   
computer-aided and cadaver training to chief residents from several selected    
residency programs in hernia repair using GSI products. In addition, the        
Company is actively sponsoring two marketing-related clinical studies           
designed to demonstrate the utility and ease of use of the Company's products.  

SALES IN THE UNITED STATES. GSI maintains a small direct sales
organization in the United States to market its products to general surgeons    
and specialists, and to support its distributors' sales efforts. As of June     
30, 1999, the Company's direct sales force in the United States consisted of    
ten persons. As of the end of the fiscal year 1999, the Company had             
agreements with nine U.S. distributors and intends to establish additional      
distributorships in the United States. There can be no assurance that such      
efforts will be successful.                                                     

INTERNATIONAL SALES. The Company's products are currently sold
internationally to general surgeons and specialists through EES, Genzyme,       
United States Surgical Corporation and independent distributors in Europe,      
Australia and South America. The Company generally operates under written       
agreements with its international distributors, which agreements typically      
grant distributors the right to sell the Company's products within a defined    
territory and permit the distributors to sell other non-competing medical       
products. In addition, the agreements often include requirements regarding      
minimum purchases, participation in trade shows and marketing efforts on        
behalf of GSI, and training programs for end-users. The Company's               
distributors typically purchase the Company's products at discounts that vary   
by product and market.                                                          

Substantially all of the Company's revenues to date have been 
derived from hernia repair products sold to distributors. Although certain      
contractually guaranteed payments from EES accounted for 24 percent of total    
revenues in fiscal year 1998, and 54 percent of GSI's total revenues in         
fiscal year 1997, there were no guaranteed payments from EES in fiscal year     
1999. Product sales to distributors accounted for approximately 90 percent of   
the Company's total product sales for the year ended June 30, 1999 and 89       
percent for the year ended June 30, 1998. Product sales outside of the United   
States accounted for eight, three and one-half percent of the Company's total   
sales in fiscal years 1999, 1998 and 1997, respectively. The Company expects    
that international sales will represent an increasing portion of revenue in     
the future.                                                                     

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MANUFACTURING                                                                   

      The Company manufactures its products in a controlled environment in
its facility in Cupertino, California. The Company has implemented quality      
control systems as part of its manufacturing process and achieved ISO 9001      
certification status in August 1997. The FDA conducted a routine inspection     
of the Company's Cupertino facility in February 1999. The FDA reported that     
the areas inspected appeared to be in substantial compliance with the           
applicable requirements of the Federal Food, Drug and Cosmetic Act and          
implementing regulations. The Company has also been inspected in prior years    
by the California Department of Health Services ("CDHS"), on behalf of the      
CDHS and the FDA, and is registered with the State of California to             
manufacture its medical devices. Additionally, the Company successfully         
completed the first year ISO annual assessment, maintaining a valid             
certificate. The Company believes that it is in compliance with all FDA         
requirements including FDA Good Manufacturing Practices ("GMP") and Quality     
Systems Regulations for medical devices. There can be no assurance, however,    
that the Company will remain in compliance with GMP, and failure to do so       
could have a material adverse effect on the Company's business, operating       
results or financial condition.                                                 

Raw materials used in the production of the Company's surgical
balloon dissectors are purchased from various qualified suppliers, subjected    
to stringent quality specifications and assembled by the Company. Quality       
audits of suppliers are conducted, and the Company has adopted a supplier       
qualification program. The Company currently obtains certain products from      
single source suppliers. The Company believes that alternative suppliers are    
available for its raw materials and other product components and plans to       
qualify additional suppliers when sales volumes warrant. There can be no        
assurance that the single source suppliers will meet the Company's future       
requirements for timely delivery of products of sufficient quality and          
quantity. The failure of GSI's single source suppliers to provide adequate      
supplies of high quality products, or the loss of any of the Company's single   
source suppliers, could cause a delay in GSI's ability to fill orders while     
the Company attempts to identify and certify a replacement supplier, if any,    
and could have a material adverse effect upon the Company's business,           
financial condition and results of operations. See "Factors Affecting Future    
Results -- Limited Manufacturing Experience."                                   

COMPETITION                                                                     

     Competition in the market for medical devices and tissue dissection
products is intense and is expected to increase. The Company competes           
primarily with other producers of MIS tissue dissection products. Origin,       
which was a subsidiary of Guidant Corporation and has recently been purchased   
by Tyco, was previously, and will continue through November 15, 1999 (pending   
the outcome of current litigation), to be the Company's primary direct          
competition in the field of balloon dissection products. Other companies        
currently compete against the Company in the development, production and        
marketing of MIS tissue dissection instruments and technology, such as blunt    
dissectors, insufflation dissection and aqua irrigation with blunt              
dissection. To the extent that surgeons elect to use open surgical procedures   
rather than MIS, the Company also competes with manufacturers of tissue         
dissection products used in open surgical procedures, such as blunt             
dissectors or graspers. A number of companies currently compete against the     
Company in the development, production and marketing of tissue dissection       
products and technology for open surgical procedures. In addition, the          
Company competes indirectly with producers of therapeutic drugs, when such      
drugs are used as an alternative to surgery. Many of the Company's              
competitors and potential competitors have substantially greater name           
recognition and capital resources than the Company and also have greater        
resources and expertise in the areas of research and development, the           
obtaining of regulatory approvals, and in manufacturing and marketing.          

  The Company believes that the primary competitive factors in the
market for tissue dissection products include safety, efficacy, ease of use,    
quality, reliability and cost effectiveness. In addition, the length of time    
required for products to be developed and to receive regulatory approval is     
an important competitive factor. The Company believes that it competes          
favorably with respect to these factors, although there can be no assurance     
that it will continue to do so.                                                 

     The market for tissue dissection products is characterized by rapid
technical innovation. Product development involves a high degree of risk, and   
there can be no assurance that the Company's competitors and potential          
competitors will not succeed in developing and marketing technologies and       
products that are more effective than those developed and marketed by the       
Company or that would render the Company's technology and products obsolete     
or noncompetitive. The medical applications for which the Company's MIS         
tissue dissection products are used can also be addressed by other medical      
devices in either MIS or open surgical procedures, many of which are widely     
accepted in the medical community. There can be no assurance that a procedure   
using MIS balloon dissection technology will be able to                         

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replace such established products and procedures. Additionally, new surgical    
products or procedures could be developed that replace or reduce the            
importance of current procedures that use the Company's products.               

PATENTS AND PROPRIETARY RIGHTS                                                  

     The Company's success will depend on its ability to obtain patent
protection for its products and processes, to preserve its trade secrets and    
proprietary technology and to operate without infringing upon the patents or    
proprietary rights of third parties. As of June 30, 1999, GSI had 57 United     
States patents issued, and had applied for an additional 52 United States       
patents, 12 of which had been allowed. In addition, as of June 30, 1999, GSI    
had 10 foreign patents issued, and 46 in prosecution covering GSI's             
technology, including tissue dissection with balloons. In May 1996, the         
Company was issued a United States patent that contains broad claims            
regarding use of balloons to dissect along tissue planes.                       

   In May 1996, Origin Medsystems, Inc. ("Origin") a unit of Guidant
Corporation filed suit against GSI for infringement of U.S. Patent              
No. 5,520,609 in the United States District Court for the Northern District     
of California (C96-20424JW). In April 1998, GSI obtained a summary judgment     
that the patent in suit, Moll et al Patent No. 5,520,609, was unenforceable     
because it had been obtained by misleading the Patent & Trademark Office        
("PTO"), and an award of attorney's fees of $990,000. The appellate court       
subsequently vacated this decision because, in its view, there are factual      
issues which must be resolved in a trial on whether Origin misled the PTO. In   
July 1999, the case was returned to the district court for further              
proceedings.                                                                    

     In June 1996, GSI filed an action against Origin in the U.S. District
Court for the Northern District of California alleging that the use of          
Origin's products infringes GSI's U.S. Patent No. 5,514,153 (C96-20447JW).      
The case was decided in favor of GSI partly by summary judgment and partly by   
jury verdict, both during fiscal 1999. Patent 5,514,153 ("the '153 patent")     
was found to be valid, and Origin's infringement was found to be willful.       
Lost profits of approximately $12.9 million were awarded to GSI by the jury.    
Origin is appealing the infringement and willfulness findings (but not patent   
validity nor the amount of infringement damages), and GSI is appealing for      
enhanced damages, attorneys' fees and the failure to find infringement of       
additional claims. Resolution is expected in calendar year 2000. Following      
these findings, the Court has entered an injunction prohibiting sale in the     
United States of all of Origin's balloon dissection products, to become fully   
effective on November 15, 1999, and an immediate injunction against sales of    
all of Origin's balloon dissection products to any new customers in the         
United States.                                                                  

In September 1997, the Company filed an action against Origin   
alleging that the use of Origin's products infringes GSI's U.S. Patent No.      
5,667,520 (C97-20944JW). Discovery is nearly complete in this case and the      
complaint has now been amended to add a claim of infringement of GSI's patent   
number 5,860,997. This case is now stayed pending the outcome of appeals in     
the '153 case.                                                                  

     GSI is also involved in an interference proceeding in the U.S. Patent
Office against Origin to determine whether certain subject matter was first     
invented by GSI and whether the disputed matter is patentable. In November      
1998, binding arbitration determined that GSI was first to invent the           
disputed subject matter and therefore is the only party entitled to any         
patent. Additionally, the Patent Office Appeals Board found the subject         
matter to be patentable. This latter finding is being appealed by Origin to     
the Court of Appeals for the Federal Circuit. Resolution is expected in         
calendar year 2000.                                                             

   On April 9, 1999, a suit was filed against GSI in the United States
District Court for the Southern District of Illinois. This suit, brought by     
Dr. Peter M. Bonutti and by Bonutti Research, Inc., seeks a 50 percent share    
of the $12.9 million damages judgment GSI obtained in its suit against Origin   
and seeks rescission of the 1995 agreement by which GSI obtained assignment     
of certain Bonutti technology. From this assigned technology, GSI prosecuted    
patent applications which became the '153 and other patents, which credit Dr.   
Bonutti as sole inventor.  This case is in the discovery phase.                 

While the Company believes it will be successful in these       
proceedings, there can be no assurance of such success. Failure of the          
Company to prevail in such proceedings would have a material adverse effect     
on the Company's business, financial condition and results of operations.       

     Patent interference or infringement proceedings involve complex legal
and factual issues and are highly uncertain, and there can be no assurance      
that any conclusion reached by the Company regarding patent interference or     
infringement                                                                    

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will be consistent with the resolution of such issues by a court. In the event  
the Company's products are found to infringe patents held by competitors,       
there can be no assurance that the Company will be able to modify               
successfully its products to avoid infringement, or that any modified           
products will be commercially successful. Failure in such event to either       
develop a commercially successful alternative or obtain a license to such       
patent on commercially reasonable terms would have a material adverse effect    
on the Company's business, financial condition and results of operations. As    
discussed above, the Company is defending itself, and may in the future have    
to defend itself, in court against allegations of infringement of third-party   
patents. Patent litigation is expensive, requires extensive management time,    
and could subject the Company to significant liabilities, require disputed      
rights to be licensed from third parties or require the Company to cease        
selling its products.                                                           

The validity and breadth of claims in medical technology patents
involve complex legal and factual questions and, therefore, may be highly       
uncertain. No assurance can be given that any patents based on pending patent   
applications or any future patent applications will be issued, that the scope   
of any patent protection will exclude competitors or provide competitive        
advantages to the Company, that any of the Company's patents or patents to      
which it has licensed rights will be held valid under current challenges or     
if subsequently challenged or that persons or entities in addition to Origin    
will not claim rights in or ownership of the patents and other proprietary      
rights held or licensed by the Company or that the Company's existing patents   
will cover the Company's future products. Furthermore, there can be no          
assurance that others have not developed or will not develop similar            
products, duplicate any of the Company's products or design around any          
patents issued to or licensed by the Company or that may be issued in the       
future to the Company. Because patent applications in the United States are     
maintained in secrecy until patents issue, the Company also cannot be certain   
that others did not first file applications for inventions covered by the       
Company's pending patent applications, nor can the Company be certain that it   
will not infringe any patents that may issue to others on such applications.    

     The patent laws of European and certain other foreign countries
generally do not allow for the issuance of patents for methods of surgery on    
the human body. Accordingly, the ability of the Company to gain patent          
protection outside the U.S. for its methods of tissue dissection will be        
significantly limited. As a result, there can be no assurance that the          
Company will be able to develop a patent portfolio in Europe or that the        
scope of any patent protection will provide competitive advantages to the       
Company.                                                                        

GOVERNMENT REGULATION                                                           

   The Company's SPACEMAKER-Registered Trademark- surgical balloon
dissectors and other products are subject to extensive and rigorous             
regulation by the FDA and, to varying degrees, by state and foreign             
regulatory agencies. Under the federal Food, Drug, and Cosmetic Act, the FDA    
regulates the clinical testing, manufacture, labeling, packaging, marketing,    
distribution and record keeping for medical devices, in order to ensure that    
medical devices distributed in the United States are safe and effective for     
their intended use. Prior to commercialization, a medical device generally      
must receive FDA and foreign regulatory clearance or approval, which can be     
an expensive, lengthy and uncertain process. The Company is also subject to     
routine inspection by the FDA and state agencies, such as the California        
Department of Health Services ("CDHS"), for compliance with Good                
Manufacturing Practice requirements, Medical Device Reporting requirements      
and other applicable regulations. Noncompliance with applicable requirements    
can result in warning letters, import detentions, fines, civil penalties,       
injunctions, suspensions or losses of regulatory approvals, recall or seizure   
of products, operating restrictions, refusal of the government to approve       
product export applications or allow the Company to enter into supply           
contracts, and criminal prosecution. Delays in receipt of, or failure to        
obtain, regulatory clearances and approvals, or any failure to comply           
with regulatory requirements could have a material adverse effect on the        
Company's business, financial condition and results of operations.              

    Labeling and promotional activities are subject to scrutiny by the
FDA and, in certain circumstances, by the Federal Trade Commission. Current     
FDA enforcement policy prohibits the marketing of approved medical devices      
for unapproved uses. The SPACEMAKER-Registered Trademark- I platform,           
SPACEMAKER-Registered Trademark- II platform, SPACEMAKER-Registered             
Trademark- Plastics platform and SPACEMAKER-Registered Trademark-               
SAPHtrak-Registered Trademark- platform each have received 510(k) clearance     
for use during general, endoscopic, laparoscopic and plastic and                
reconstructive surgery (including aesthetic), and certain vascular surgery      
(including saphenous vein procedures) when tissue dissection is required.       
Additionally, the Company has received clearance to market these products for   
thoracoscopic procedures involving exposure and dissection of structures        
external to the parietal pleura and procedures in the extraperitoneal space.    
The Company has also received clearance to market combined tissue               
dissection/expansion products. The Company has promoted these products for      
surgical applications (E.G., hernia repair, subfascial endoscopic perforator    
surgery, breast augmentation and reconstruction, SEPS, treatment of SUI and     
saphenous vein harvesting), and may in the future promote these products for    
the dissection required for additional selected applications (E.G. tissue       
dissection/expansion and a variety of procedures                                

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which require exposure to the anterior spine or for long-bone plating). For     
any medical device cleared through the 510(k) process, modifications or         
enhancements that could significantly affect the safety or effectiveness of     
the device or that constitute a major change to the intended use of the         
device will require a new 510(k) submission. The Company has made               
modifications to its products which the Company believes do not affect the      
safety or effectiveness of the device or constitute a major change to the       
intended use and therefore do not require the submission of new 510(k)          
notices. There can be no assurance, however, that the FDA will agree with any   
of the Company's determinations not to submit a new 510(k) notice for any of    
these changes or will not require the Company to submit a new 510(k) notice     
for any of the changes made to the product. If such additional 510(k)           
clearances are required, there can be no assurance that the Company will        
obtain them on a timely basis, if at all, and delays in receipt of or failure   
to receive such approvals could have a material adverse effect on the           
Company's business, financial condition and results of operations. If the FDA   
requires the Company to submit a new 510(k) notice for any product              
modification, the Company may be prohibited from marketing the modified         
product until the 510(k) notice is cleared by the FDA.                          

    Sales of medical devices outside of the United States are subject to
foreign regulatory requirements that vary widely from country to country. The   
Company currently relies on its international distributors for the receipt of   
premarket approvals and compliance with clinical trial requirements in those    
countries that require them, and it expects to continue to rely on              
distributors in those countries where the Company continues to use              
distributors. In the event that the Company's international distributors fail   
to obtain or maintain premarket approvals or compliance in foreign countries    
where such approvals or compliance are required, the Company may be required    
to cause the applicable distributor to file revised governmental                
notifications, cease commercial sales of its products in the applicable         
countries or otherwise act so as to stop any ongoing noncompliance in such      
countries. Any enforcement action by regulatory authorities with respect to     
past or any future regulatory noncompliance could have a material adverse       
effect on the Company's business, financial condition and results of            
operations.                                                                     

 In order to continue selling its products within the European
Economic Area, in August 1997 the Company achieved compliance with the          
requirements of the Medical Devices Directive. The Company affixes CE marking   
on its products to attest to such compliance.                                   

THIRD-PARTY REIMBURSEMENT                                                       

  In the United States, hospitals, physicians and other healthcare
providers that purchase medical devices generally rely on third-party payors,   
such as private health insurance plans, to reimburse all or part of the costs   
associated with the treatment of patients.                                      

   The Company's success will depend upon the ability of surgeons to
obtain satisfactory reimbursement from healthcare payors for the Company's      
products. In the United States, hospitals, physicians and other healthcare      
providers that purchase medical devices generally rely on third-party payors,   
such as private health insurance plans, to reimburse all or part of the costs   
associated with the treatment of patients. Reimbursement in the United States   
for the Company's balloon dissection products is currently available from       
most third-party payors, including most major private health care insurance     
plans and Medicaid, under existing surgical procedure codes. The Company does   
not expect that third-party reimbursement in the United States will be          
available for use of some of its other products unless and until clearance or   
approval is received from the federal Food and Drug Administration (the         
"FDA"). However, given the efforts to control and decrease health care costs    
in recent years, there can be no assurance that any reimbursement will be       
sufficient to permit the Company to increase revenues or achieve or maintain    
profitability. The unavailability of third-party or other adequate              
reimbursement in the United States could have a material adverse effect on      
the Company's business, financial condition and results of operations.          

      Reimbursement systems in international markets vary significantly by
country, and by region within some countries, and reimbursement approvals       
must be obtained on a country-by-country basis. Many international markets      
have government-managed health care systems that govern reimbursement for new   
devices and procedures. In most markets, there are private insurance systems    
as well as government-managed systems. Large-scale market acceptance of the     
Company's surgical balloon dissectors and other products will depend on the     
availability and level of reimbursement in international markets targeted by    
the Company. Failure to obtain such approvals for reimbursement in              
international markets could have a material adverse effect on the Company's     
business, financial condition and results of operations.                        

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      Regardless of the type of reimbursement system, the Company believes
that surgeon advocacy of its products will be required to obtain                
reimbursement. There can be no assurance that surgeons will support and         
advocate reimbursement for use of the Company's systems for all applications    
intended by the Company. Failure by surgeons, hospitals and other users of      
the Company's products to obtain sufficient reimbursement from health care      
payors or adverse changes in government and private third-party payors'         
policies toward reimbursement for procedures employing the Company's products   
could have a material adverse effect on the Company's business, financial       
condition and results of operations.                                            

PRODUCT LIABILITY AND INSURANCE                                                 

 The Company's business involves an inherent risk of exposure to
product liability claims. Although the Company has not experienced any          
product liability claims to date, there can be no assurance that the Company    
will be able to avoid significant product liability claims and potential        
related adverse publicity. The Company maintains product liability insurance    
with coverage limits of $5,000,000 per occurrence and an annual aggregate       
maximum of $5,000,000, which the Company believes is comparable to that         
maintained by other companies of similar size serving similar markets.          
However, there can be no assurance that product liability claims will not       
exceed such insurance coverage limits, which could have a material adverse      
effect on the Company, or that such insurance will continue to be available     
on commercially reasonable terms, or at all.                                    

ENVIRONMENTAL MATTERS                                                           

 The Company is subject to federal, state and local laws, rules,
regulations and policies governing the use, generation, manufacture, storage,   
air emission, effluent discharge, handling and disposal of certain hazardous    
and potentially hazardous substances used in connection with the Company's      
operations. Although the Company believes that it has complied with these       
laws and regulations in all material respects and to date has not been          
required to take any action to correct any noncompliance, there can be no       
assurance that the Company will not be required to incur significant costs to   
comply with environmental regulations in the future.                            

EMPLOYEES                                                                       

   As of June 30, 1999, GSI employed 93 individuals, 29 of whom were
engaged in research, development, operations, regulatory affairs and quality    
assurance, 26 in manufacturing, 22 in marketing and sales and 16 in finance,    
customer service and administration. The Company also contracts with outside    
consultants. None of the Company's employees is covered by a collective         
bargaining agreement. GSI believes that it maintains good relations with its    
employees.                                                                      

EXECUTIVE OFFICERS OF THE COMPANY                                               

      The executive officers of the Company and their ages as of August 5,
1999 are as follows:                                                            

NAME               AGE                    POSITION                  
----               ---                    --------                  
Gregory D. Casciaro      42   President, Chief Executive Officer and Director   
James E. Jervis          63   Vice President of Research and Development        
Stephen J. Bonelli       37   Chief Financial Officer, Vice President of Finance
        & Administration & Treasurer
Ferolyn T. Powell        37   Vice President of Operations                      

     The officers of the Company are appointed by the Board of Directors
and serve at the discretion of the Board. There are no family relationships     
among the directors or officers of GSI.                                         

      GREGORY D. CASCIARO joined GSI in February 1995 as Vice President of
Sales and Marketing, was promoted to Senior Vice President in November 1996,    
President, Chief Operating Officer and Director of the Company in August 1997   
and has served as President, Chief Executive Officer and Director of the        
Company since April 1998. Prior to joining GSI, Mr. Casciaro held various       
positions at Devices for Vascular Intervention, Inc., a medical device          
manufacturer, including Vice President of Sales from June 1991 to February      
1995. Previously, Mr. Casciaro held                                             

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various sales positions at North American Instrument Corporation, a medical     
device company, from March 1983 to May 1991. Mr. Casciaro received a B.S.       
degree in Business Administration at Marquette University.                      

JAMES E. JERVIS joined GSI in March 1994, and serves as Vice  
President of Research and Development. Prior to joining GSI, Mr. Jervis had     
30 years of engineering design, development and operations experience at        
Raychem Corporation ("Raychem"). At Raychem, Mr. Jervis held various            
executive positions, including Director of New Business Development, General    
Manager - Medical Products Group and Operations Manager. Mr. Jervis holds 19    
patents and is named as inventor in over 50 other patents. Mr. Jervis holds a   
B.S. in Mechanical Engineering and an MBA from Stanford University.             

      STEPHEN J. BONELLI joined GSI in September 1994, and serves as Chief
Financial Officer, Vice President of Finance and Administration and             
Treasurer. Prior to joining GSI, Mr. Bonelli held financial management          
positions at Coactive Computing Corporation, a computer networking company,     
from November 1993 to August 1994, and Ready Systems Corporation, a software    
company, from May 1990 to October 1993. Previous to those positions, Mr.        
Bonelli held a management position with Ernst & Young. Mr. Bonelli received a   
B.S. degree in Business Administration from California Polytechnic State        
University, San Luis Obispo. Mr. Bonelli is a Certified Public Accountant.      

      FEROLYN T. POWELL joined GSI in October 1995, and has served as Vice
President of Operations since November 1996. Prior to joining GSI, Ms. Powell   
served as Director of Research and Development at Adjacent Surgical, Inc.       
from June 1995 to October 1995, and as Senior Engineer, Project Manager and     
Director at Devices for Vascular Interventions, Inc. from September 1992 to     
June 1995. Previous to those positions, Ms. Powell held technical management    
positions at Frantz Medical Development Ltd. and Life Systems, Inc. Ms.         
Powell received her M.S. degree in Engineering from the University of Akron     
and her B.S. degree in Chemical Engineering from Cleveland State University.    

ITEM 2.  PROPERTIES                                                             

     The Company occupies a facility of approximately 30,400 square feet
in Cupertino, California, which houses the Company's headquarters,              
administrative offices, research laboratories and manufacturing facilities.     

ITEM 3.  LEGAL PROCEEDINGS                                                      

   In May 1996, Origin Medsystems, Inc. ("Origin") a unit of Guidant
Corporation filed suit against GSI for infringement of U.S. Patent No.          
5,520,609 in the United States District Court for the Northern District of      
California (C96-20424JW). In April 1998, GSI obtained a summary judgment that   
the patent in suit, Moll et al Patent No. 5,520,609, was unenforceable          
because it had been obtained by misleading the PTO, and an award of             
attorney's fees of $990,000. The appellate court subsequently vacated this      
decision because, in its view, there are factual issues which must be           
resolved in a trial on whether Origin misled the PTO. In July 1999, the case    
was returned to the district court for further proceedings.                     

     In June 1996, GSI filed an action against Origin in the U.S. District
Court for the Northern District of California alleging that the use of          
Origin's products infringes GSI's U.S. Patent No. 5,514,153 (C96-20447JW).      
The case was decided in favor of GSI partly by summary judgment and partly by   
jury verdict, both during fiscal 1999. Patent 5,514,153 ("the '153 patent")     
was found to be valid, and Origin's infringement was found to be willful.       
Lost profits of approximately $12.9 million were awarded to GSI by the jury.    
Origin is appealing the infringement and willfulness findings (but not patent   
validity nor the amount of infringement damages), and GSI is appealing for      
enhanced damages, attorneys' fees and the failure to find infringement of       
additional claims. Resolution is expected in calendar year 2000. Following      
these findings, the Court has entered an injunction prohibiting sale in the     
United States of all of Origin's balloon dissection products, to become fully   
effective on November 15, 1999, and an immediate injunction against sales of    
all of Origin's balloon dissection products to any new customers in the         
United States.                                                                  

In September 1997, the Company filed an action against Origin   
alleging that the use of Origin's products infringes GSI's U.S. Patent No.      
5,667,520 (C97-20944JW). Discovery is nearly complete in this case and the      
complaint has now been amended to add a claim of infringement of GSI's patent   
number 5,860,997. This case is now stayed pending the outcome of appeals in     
the '153 case.                                                                  

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     GSI is also involved in an interference proceeding in the U.S. Patent
Office against Origin to determine whether certain subject matter was first     
invented by GSI and whether the disputed matter is patentable. In November      
1998, binding arbitration determined that GSI was first to invent the           
disputed subject matter and therefore is the only party entitled to any         
patent. Additionally, the Patent Office Appeals Board found the subject         
matter to be patentable. This latter finding is being appealed by Origin to     
the Court of Appeals for the Federal Circuit. Resolution is expected in         
calendar year 2000.                                                             

   On April 9, 1999, a suit was filed against GSI in the United States
District Court for the Southern District of Illinois. This suit, brought by     
Dr. Peter M. Bonutti and by Bonutti Research, Inc., seeks a 50 percent share    
of the $12.9 million damages judgment GSI obtained in its suit against Origin   
and seeks rescission of the 1995 agreement by which GSI obtained assignment     
of certain Bonutti technology. From this assigned technology, GSI prosecuted    
patent applications which became the '153 and other patents, which credit Dr.   
Bonutti as sole inventor.  This case is in the discovery phase.                 

While the Company believes it will be successful in these     
proceedings, there can be no assurance of such success. Failure of the          
Company to prevail in such proceedings would have a material adverse effect     
on the Company's business, financial condition and results of operations.       

    From time to time the Company may be exposed to litigation arising
out of its products or operations. The Company is not engaged in any legal      
proceedings that are expected, individually or in the aggregate, to have a      
material adverse effect on the Company, except for the patent interference      
and infringement proceedings discussed herein.                                  

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                    

Not Applicable.                                               

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 PART II

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

MARKET INFORMATION                                                              

    The Company completed its initial public offering on May 15, 1996,
and the Company's common stock is traded on the NASDAQ National Market under    
the symbol GSII. As of August 31, 1999 the Company had approximately 129        
shareholders of record, including several holders who are nominees for an       
undetermined number of beneficial owners. On August 31, 1999, the closing       
price of the Company's common stock was $7.03.                                  

     The following table shows the Company's high and low selling prices
for the periods indicated as reported by NASDAQ:                                

                                                                [Download Table]
                                                                             
Quarters Ended                                       High              Low   
June 30, 1999.................................     $    4.31        $    2.84
March 31, 1999...............................      $    5.00        $    3.50
December 31, 1998...........................       $    3.75        $    1.44
September 30, 1998...........................      $    4.56        $    1.88
June 30, 1998.................................     $    4.62        $    3.50
March 31, 1998...............................      $    6.00        $    3.87
December 31, 1997...........................       $    6.00        $    3.37
September 30, 1997...........................      $    5.81        $    3.31

DIVIDEND POLICY                                                                 

   The Company has not paid dividends on its common stock and has no
present plans to do so. Provisions of the Company's bank line of credit         
prohibit the payment of dividends without the bank's permission.                

ITEM 6.  SELECTED FINANCIAL DATA                                                

STATEMENT OF OPERATIONS DATA:                                                   

                                                        [Enlarge/Download Table]

                                                                   YEARS ENDED JUNE 30,                          
                                           ----------------------------------------------------------------------
                                              1999            1998          1997          1996           1995    
                                           ------------    -----------    ----------    ----------     ----------
                                                           (IN THOUSANDS, EXCEPT PER SHARE DATA)                 
                                                                                                                 
Sales                                          $ 6,876       $  5,193      $  4,090       $ 6,165        $ 2,437 
Guaranteed payments                                  -          1,635         4,896             -              - 
                                           ------------    -----------    ----------    ----------     ----------
Total revenue                                    6,876          6,828         8,986         6,165          2,437 
Cost of sales                                    5,212          3,565         2,385         2,772          1,262 
                                           ------------    -----------    ----------    ----------     ----------
              Gross profit                       1,664          3,263         6,601         3,393          1,175 
                                           ------------    -----------    ----------    ----------     ----------
Operating expenses:                                                                                              
      Research and development                   3,695          2,825         2,231         1,306            975 
      Selling, general and administrative       15,581         11,843         8,784         5,204          4,258 
      Write-off of acquired in-process                                                                           
         research and development                    -              -             -         2,791              - 
                                           ------------    -----------    ----------    ----------     ----------
         Total operating expenses               19,276         14,668        11,015         9,301          5,233 
                                           ------------    -----------    ----------    ----------     ----------
              Operating loss                   (17,612)       (11,405)       (4,414)       (5,908)        (4,058)
Interest and other income, net                   1,541          2,263         2,538           443              7 
                                           ------------    -----------    ----------    ----------     ----------
              Net loss                        $(16,071)      $ (9,142)     $(1,876)       $(5,465)       $(4,051)
                                           ------------    -----------    ----------    ----------     ----------
                                           ------------    -----------    ----------    ----------     ----------

Net loss per common share and per                                                                                
      common share-assuming dilution          $  (1.19)      $  (0.68)     $  (0.14)      $ (0.74)       $ (0.62)
                                           ------------    -----------    ----------    ----------     ----------
                                           ------------    -----------    ----------    ----------     ----------
Shares used in computing net loss per                                                                            
      common share and per common                                                                                
      share-assuming dilution                   13,461         13,373        13,197         7,411          6,496 
                                           ------------    -----------    ----------    ----------     ----------
                                           ------------    -----------    ----------    ----------     ----------

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BALANCE SHEET DATA:                                                             

                                                        [Enlarge/Download Table]

                                                                          JUNE 30,                                
                                            ----------------------------------------------------------------------
                                               1999           1998           1997           1996          1995    
                                            -----------    -----------    ------------    ----------    ----------
                                                                       (IN THOUSANDS)                             
                                                                                                                  
Cash, cash equivalents and                                                                                        
    available-for-sale securities                                                                                 
    (including non-current portion)........  $ 19,298       $ 37,469       $ 43,731        $49,790       $ 4,541  
Working capital............................    20,105         29,414         46,835         50,068         4,457  
Total assets...............................    28,237         42,824         51,062         52,767         6,245  
Convertible redeemable preferred stock.....         -              -              -              -        13,225  
Accumulated deficit........................   (40,906)       (24,835)       (15,693)       (13,817)       (8,352) 
Shareholders' equity (deficit).............  $ 24,435       $ 40,238       $ 48,987        $50,474       $(8,316) 

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS                                                 

OVERVIEW                                                                        

Since its inception in April 1992, GSI has been engaged in the  
development, manufacturing and marketing of balloon dissection systems and      
related minimally invasive surgical instruments. The Company began commercial   
sales of its balloon dissection systems for hernia repair in September 1993.    
To date, the Company has received from the FDA eight 510(k) clearances for      
use of the Company's technology to perform dissection of tissue planes          
anywhere in the body using a broad range of balloon sizes and shapes. The       
Company currently sells products in the United States, Europe, South America    
and Australia for selected applications, such as hernia repair, subfascial      
endoscopic perforator surgery, saphenous vein harvesting and breast             
reconstruction and augmentation surgery, and laparoscopic bladder neck          
suspension.                                                                     

Sales of the Company's products in the United States and        
internationally are currently made through both distributors and the            
Company's direct sales force. Distribution in the hernia and SUI markets is     
currently through non-exclusive relationships with Ethicon Endo-Surgery         
("EES"), United States Surgical Corporation ("USSC"), Dexterity Surgical,       
Inc. ("Dexterity") and other distributors. The Company has two non-exclusive    
agreements with USSC, a wholly owned subsidiary of Tyco International Ltd.      
("Tyco"). Under the terms of the first agreement, USSC has non-exclusive        
rights to market and distribute GSI's SPACEMAKER-Registered Trademark-          
surgical balloon dissectors worldwide for use in hernia repair and stress       
urinary incontinence ("SUI") procedures. Under the terms of the second          
agreement, GSI has non-exclusive rights to market several products, including   
USSC's 5mm mesh fixation device, the ProTack, which is offered as part of       
GSI's SPACEMAKER-Registered Trademark- Total Solution-TM- hernia repair kit.    
Additionally, the Company has an exclusive agreement with Genzyme Surgical      
Products Corporation ("Genzyme") to market and distribute GSI's surgical        
balloon dissection systems for use in plastic surgery (reconstructive and       
aesthetic) procedures. Sales of devices for cardiac/vascular applications are   
made through non-exclusive agreements with distributors and through the         
Company's direct sales force.                                                   

     During fiscal year 2000, the Company plans to extend its domestic and
international distribution networks, as well as its direct sales force. Any     
increase in the Company's direct sales force will require significant           
expenditures and additional management resources.                               

 To date, the majority of the sales of the Company's products to
distributors and by the Company's direct sales force have been for use in       
hernia repair procedures. While the Company has developed or is developing      
surgical balloon dissectors for stress urinary incontinence, vascular and       
plastic surgery, sales of products for hernia repair are expected to provide    
a majority of the Company's revenues at least through fiscal year 2000.         

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    The Company has acquired rights to a significant number of patents
from third parties, including rights that apply to the Company's current        
balloon dissection systems. The Company has historically paid and is            
obligated to pay in the future to such third parties royalties equal to         
between one and four percent of sales of such products, which payments are      
expected to exceed certain minimum royalty payments due under the agreements    
with such parties. Total amounts paid for royalties for the years ended June    
30, 1999, 1998 and 1997 were $187,497, $289,255 and $356,831, respectively.     
The payment of such royalty amounts will have an adverse impact on the          
Company's gross profit and results of operations.                               

The Company has experienced significant operating losses since
inception. The Company expects such operating losses to continue at least       
through fiscal 2000. The Company's sales to date have consisted primarily of    
surgical balloon dissectors for hernia repair. In order to support increased    
levels of sales in the future and to augment its long-term competitive          
position, including the development of surgical balloon dissectors for other    
applications, the Company anticipates that it will be required to make          
significant additional expenditures in sales and marketing and in research      
and development (including marketing-related clinical studies).                 

    The Company currently manufactures and ships product shortly after
the receipt of orders, and anticipates that it will do so in the future.        
Accordingly, the Company has not developed a significant backlog and does not   
anticipate that it will develop a material backlog in the future.               

RECENT DEVELOPMENTS                                                             

In August 1999, the Company and Tyco entered into a definitive
agreement pursuant to which Tyco will acquire GSI. GSI shareholders will        
receive a fraction of a Tyco common share valued at $7.50 per common share      
for each common share of GSI. The transaction is valued at approximately $100   
million. The closing of this deal is contingent upon shareholder approval of    
the Company, as well certain regulatory approvals.                              

RESULTS OF OPERATIONS                                                           

The following table sets forth certain data from the Company's
statements of operations, expressed as a percentage of total revenue:           

AS A PERCENTAGE OF TOTAL REVENUE:                                               

                                                        [Enlarge/Download Table]

                                                                            YEARS ENDED JUNE 30,               
                                                                   ---------------------------------------     
                                                                   1999             1998              1997     
                                                                   ----             ----              ----     
                                                                                                               
Sales.........................................................    100.0%             76.1%             45.5%   
Guaranteed payments...........................................      -                23.9              54.5    
                                                               -------------    -------------     -------------
Total revenue.................................................    100.0%            100.0%            100.0%   
Cost of sales.................................................     75.8              52.2              26.5    
                                                               -------------    -------------     -------------
       Gross profit...........................................     24.2              47.8              73.5    
                                                               -------------    -------------     -------------
Operating expenses:                                                                                            
  Research and development....................................     53.7              41.4              24.8    
  Selling, general and administrative.........................    226.6             173.4              97.8    
                                                               -------------    -------------     -------------
    Total operating expenses..................................    280.3             214.8             122.6    
                                                               -------------    -------------     -------------
       Operating loss.........................................   (256.1)           (167.0)            (49.1)   
Interest and other income, net................................     22.4              33.1              28.2    
                                                               -------------    -------------     -------------
       Net loss...............................................   (233.7)%          (133.9)%           (20.9)%  
                                                               -------------    -------------     -------------
                                                               -------------    -------------     -------------

YEARS ENDED JUNE 30, 1999 AND 1998                            

      REVENUE. Revenue totaled $6.9 million in fiscal 1999, an increase of
$0.1 million or one percent over revenue of $6.8 million in fiscal 1998.        
During fiscal 1999, no guaranteed payments were received from EES versus $1.6   
million during fiscal 1998. Product sales accounted for all of the fiscal       
1999 revenue, which represents a 32 percent increase over fiscal 1998 product   
sales. The increase in product sales is due to an increase in product demand,   
primarily for SPACEMAKER-Registered Trademark- Total Solution-TM- hernia        
kits, as well as expanded product distribution in the fourth quarter.           

    COST OF SALES. Cost of sales at $5.2 million in 1999 increased 46%
as compared to $3.6 million in 1998 due to increased product sales and          
production capacity ramp-up. Direct product costs were 76 percent of total      
product sales in fiscal 1999, an increase of seven percent from fiscal 1998,    
as a result of increasing costs related to ramping up production capacity in    
anticipation of the court injunction against Origin Medsystems, Inc.            
("Origin"). In addition, the                                                    

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Company's product costs have increased relative to sales dollars as             
additional OEM products are offered as part of the SPACEMAKER-Registered        
Trademark- Total Solution-TM- hernia and laparoscopic bladder neck suspension   
kits. The Company expects cost of sales as a percentage of product sales to     
decrease as the Company's sales volume increases.                               

     RESEARCH AND DEVELOPMENT EXPENSES. Research and Development ("R&D")
expenses for fiscal 1999 increased 31 percent to $3.7 million versus $2.8       
million for the year ended June 30, 1998. Increases over the prior year are     
mainly due to increased expenditures on new general surgery product design      
work in conjunction with expanding SPACEMAKER-Registered Trademark- Total       
Solution-TM- hernia and laparoscopic bladder neck suspension kit offerings,     
as well as an increase in the number of employees in R&D. The Company expects   
to continue to increase R&D expenses as it pursues additional market            
opportunities.                                                                  

    SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, General and
Administrative ("SG&A") expenses were $15.6 million in fiscal year 1999, an     
increase of 32 percent as compared to $11.8 million in fiscal 1998. This        
increase is primarily related to litigation expenses related to the Origin      
matters and are expected to decrease in the future. In addition,                
sales and marketing expenses increased as the Company devoted more resources    
to physician training programs as well as increased exposure at relevant        
industry trade shows. GSI expects increases in SG&A expenses as the             
Company's level of sales increases and the Company continues to                 
administratively support growth, and expects SG&A to be impacted by its         
ongoing litigation matters.                                                     

 INTEREST AND OTHER INCOME AND EXPENSE (NET). Interest and other
income and expense (net) totaled $1.5 million in fiscal 1999 compared to $2.3   
million in fiscal 1998, and consisted mainly of interest income, primarily      
from interest earned on available-for-sale securities. Interest income          
decreased 32% from $2.3 million in 1998 to $1.6 million in 1999, due to         
overall lower cash balances in connection with funding ongoing operating        
activities.                                                                     

     NET LOSS. The Company had a net loss of approximately $16.1 million
in fiscal 1999 compared to a $9.1 million net loss in fiscal 1998, primarily    
due to the increased operating expenses as the Company prepared for             
anticipated sales growth and aggressively defended its patent positions.        

YEARS ENDED JUNE 30, 1998 AND 1997                            

      SALES AND GUARANTEED PAYMENTS. Sales and guaranteed payments totaled
$6.8 million in fiscal 1998, a decrease of $2.2 million or 24 percent from      
sales and guaranteed payments of $9.0 million in fiscal 1997. This decrease     
in revenue is in connection with the conversion of EES to a non-exclusive       
distributor, which eliminated future guarante ed payments. During fiscal        
1998, $1.6 million in guaranteed payments was received from EES versus $4.9     
million during fiscal 1997. Product sales accounted for $5.2 million of total   
revenue in fiscal 1998, which represents a 27 percent increase over fiscal      
1997. This increase was a result of rapid growth in sales of the Company's      
vascular surgery products and plastic surgery products.                         

      COST OF SALES. Direct product costs were 69 percent of total product
sales in fiscal 1998, an increase of 11 percent from fiscal 1997, as a result   
of underutilized manufacturing capacity in fiscal 1998.                         

 RESEARCH AND DEVELOPMENT EXPENSES. R&D expenses for fiscal 1998
increased 27 percent to $2.8 million versus $2.2 million for the year ended     
June 30, 1997, as the Company continued to develop products for its vascular    
and hernia markets. The Company expects to continue to increase R&D expenses    
as it pursues additional market opportunities.                                  

  SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses were
$11.8 million in fiscal year 1998, an increase of 35 percent as compared to     
$8.8 million in fiscal 1997. This increase is primarily related to increased    
litigation expenses related to the Origin infringement case.                    

 INTEREST AND OTHER INCOME AND EXPENSE (NET). Interest and other
income and expense (net) totaled $2.3 million in fiscal 1998 compared to $2.5   
million in fiscal 1997, and consisted mainly of interest income, primarily      
from interest earned on available-for-sale securities. Interest income          
decreased 10% from $2.6 million in 1997 to $2.3 million in 1998, due to         
overall lower cash balances in connection with funding ongoing operating        
activities.                                                                     

    NET LOSS. The Company had a net loss of approximately $9.1 million
in fiscal 1998 compared to a $1.9 million net loss in fiscal 1997, primarily    
due to the decrease in guaranteed payments from EES and increased operating     
expenses as the Company prepared for anticipated sales growth and               
aggressively defended its patent positions.                                     

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LIQUIDITY AND CAPITAL RESOURCES                                                 

     Since inception, the Company's cash expenditures have significantly
exceeded its sales, resulting in an accumulated deficit of $40.9 million at     
June 30, 1999. The Company has funded its operations primarily through the      
sale of equity securities. From its inception through June 30, 1999, the        
Company raised approximately $15.5 million through the private placement of     
equity securities, and approximately $46.9 million (net of underwriting         
discounts and commissions) in an initial public offering.                       

 Net cash used in operating activities in 1999 was approximately
$16.1 million which consisted mainly of the Company's net loss for the year     
of $16.1 million offset slightly by increases in gross accounts receivable      
and inventory of $3.3 million. Net cash provided by investing activities totaled
approximately $8.0 million. Proceeds from sales and maturities of               
available-for-sale securities of $13.5 million was somewhat offset by           
purchases of available-for-sale securities of $3.8 million and acquisition of   
property and equipment of $1.7 million. Net cash used in financing              
activities was approximately $258,000, which consisted of $157,000 in proceeds  
from the issuance of common stock, offset by a $300,000 outflow for a related   
party loan, as well as $117,000 in payments on capital lease obligations and    
bank borrowings.                                                                

  As of June 30, 1999, the Company's principal source of liquidity
consists of cash, cash equivalents and investments of $19.3 million. The        
Company has an equipment loan outstanding with a balance of approximately       
$82,000. The Company expects to spend approximately $2.1 million on capital     
equipment purchases in fiscal year 2000.                                        

    The Company expects to incur additional costs over the next fiscal
year, including costs related to increased sales and marketing activities,      
increased research and development, additional marketing-related clinical       
studies, and litigation costs. The Company believes that its current cash       
balances and short-term investments along with cash generated from the future   
sales of products will be sufficient to meet the Company's operating and        
capital requirements through calendar year 2000. The Company may seek           
additional equity or debt financing to address its working capital needs or     
to provide funding for capital expenditures. There can be no assurance that     
additional financing, if sought, will be available on satisfactory terms or     
at all.                                                                         

MANAGEMENT INFORMATION SYSTEMS                                                  

     The Year 2000 ("Y2K") issue arises from computer programs using two
digits rather than four to define the applicable year. Such software may        
recognize a date using "00" as the year 1900 rather than the year 2000. This    
could result in system failures or miscalculations leading to disruptions or    
delays in the Company's activities and operations. If the Company, its key      
customers or suppliers fail to make necessary modifications to their            
information technology or non-information technology systems on a timely        
basis, the year Y2K issue could have a material adverse effect on Company       
operations. However, the impact cannot be quantified at this time.              

In January 1998 the Company began to evaluate and assess the  
Company's information technology and non-information technology systems for     
compliance with the Y2K issue. The Company intends to fix or replace            
noncompliant software and systems by November 30, 1999, but there can be no     
assurance that such fixes or replacements will occur by such date. The          
Company is currently conducting testing and remediation activities on its       
systems, and intends to survey major customers and suppliers to assess their    
systems' compliance as well as their systems' compatibility with the            
Company's existing or projected compliant systems. There can be no assurance    
that there will not be an adverse material effect on the Company's business,    
financial condition or results of operations if the Company or its suppliers    
or customers do not convert or replace their systems in a timely manner to      
comply with the Y2K issue.                                                      

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 The Company's costs related to the Y2K issue are funded through
operating cash flows. Through fiscal 1999, the Company expended approximately   
$20,000 in evaluating and planning and fixing and replacing noncompliant        
systems, including the cost of new software and modifying the applicable code   
of existing software. The Company estimates total costs to be approximately     
$25,000 to achieve Y2K compliance. The Company currently believes that the      
total cost of achieving Y2K compliant systems will not be material to its       
business, financial condition or results of operations. In the event that the   
Company will be unable to achieve Y2K compliance in a timely manner with        
existing personnel, as a contingency the Company expects to hire outside Y2K    
solution providers to assist in achieving such compliance. We have not yet      
developed a complete contingency plan for dealing with the most likely          
worst-case scenario, as this scenario has not yet been clearly identified. We   
currently plan to complete such contingency planning by November 30, 1999.      
There can be no assurance that such contingency plan will adequately address    
the Company's Y2K compliance issues.                                            

Time and cost estimates are based on currently available      
information. Factors that could affect these estimates include, but are not     
limited to, the availability and cost of trained personnel to evaluate and      
implement the changes, the ability to locate and correct all noncompliant       
systems, and the ability of the Company's customers and suppliers to            
successfully implement Y2K compliant systems or fixes.                          

RECENT ACCOUNTING PRONOUNCEMENTS                                                

In June 1998, the Financial Accounting Standards Board issued   
Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting   
for Derivative Instruments and Hedging Activities," which establishes           
accounting and reporting standards for derivative instruments and hedging       
activities. It requires that an entity recognize all derivatives as either      
assets or liabilities in the statement of financial position and measure        
those instruments at fair value. To date, the Company has not engaged in        
derivative and hedging activities. SFAS 133 will be effective for fiscal        
years beginning after June 15, 2000.                                            

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                      

Market risk represents the risk of loss that may impact the   
Company's financial position, operating results or cash flows due to changes    
in financial and commodity market prices and rates. The Company's exposure to   
market risk for changes in United States interest rates relates primarily to    
its investment portfolio and bank borrowings. The Company does not use          
derivative financial instruments in its investment portfolio, and its           
investment portfolio only includes highly liquid instruments with original      
maturity dates ranging between September 24, 1999 and October 30, 2000. The     
Company has primarily entered into debt obligations for capital expenditures.   

The Company is subject to fluctuating interest rates that may 
impact, adversely or otherwise, its results of operations or cash flows for     
our variable rate bank borrowings, available-for -sale securities and cash      
and cash equivalents.                                                           

 The table below presents principal amounts and related weighted
average interest rates by period of maturity for our investment portfolio and   
debt obligations:                                                               

                                                                [Download Table]

                                     Twelve Months       Twelve Months              
                                        Ending               Ending                 
                                     June 30, 2000       June 30, 2001       Total  
                                   ------------------  -------------------  ------- 
                                                                                    
Assets                                                                              
    Cash and cash equivalents        $      9,600                  -        $ 9,600 
    Average interest rate                    4.86%                 -           4.86%
    Available-for-sale securities    $      8,699        $       999        $ 9,698 
    Average interest rate                    6.05%              5.46%          5.99%

Liabilities                                                                         
    Bank borrowings                  $         82                  -        $    82 
    Average interest rate                    9.00%                 -           9.00%
    Capital leases                   $         12                  -        $    12 
    Average interest rate                    8.00%                 -           8.00%

FACTORS AFFECTING FUTURE RESULTS                                                

 The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto included herein.            

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The Company desires to take advantage of the "safe harbor"  
provisions of the Private Securities Litigation Reform Act of 1995.             
Specifically the Company wishes to alert readers that, except for the           
historical information contained in this Annual Report on Form 10-K, the        
matters discussed herein are forward-looking statements that are subject to     
certain risks and uncertainties that could cause the actual results to differ   
materially from those projected. Factors that could cause actual results to     
differ materially include, but are not limited to, outcomes in litigation       
proceedings, market demand for the Company's products, the timing of orders     
and shipments, the timely development and market acceptance of new products     
and surgical procedures, the impact of performance of the Company's             
distributors and direct sales force, the Company's ability to further expand    
into international markets, public policy relating to health care reform in     
the United States and other countries, approval of its products by government   
agencies such as the United States Food and Drug Administration, and other      
risks detailed below and included from time to time in the Company's other      
SEC reports and press releases, copies of which are available from the          
Company upon request. The Company assumes no obligation to update any           
forward-looking statements contained herein. The factors listed under           
"Factors Affecting Future Results," as well as other factors, have in the       
past affected, and could in the future affect, the Company's actual results     
and could cause the Company's results for future periods to differ materially   
from those expressed in any forward-looking statements contained in the         
following discussion.                                                           

  HISTORY OF LOSSES AND ANTICIPATED FUTURE LOSSES. The Company has
experienced significant operating losses since inception. As of June 30,        
1999, the Company had an accumulated deficit of $40.9 million. The Company's    
net operating losses for the fiscal years ending June 30, 1999, 1998 and 1997   
were $16.1 million, $9.1 million and $1.9 million, respectively. The Company    
expects to continue to incur operating losses on a quarterly and annual basis   
through at least fiscal 2000. There can be no assurance that the Company will   
ever generate substantial revenue or achieve profitability. Failure by the      
Company to generate substantial revenues would have material adverse effect     
on the Company's business, financial conditions and results of operations.      
See "Management's Discussion and Analysis of Financial Condition and Results    
of Operations" and "Business -- Company Strategy."                              

    DEPENDENCE UPON BALLOON DISSECTION PRODUCTS; RISK OF TECHNOLOGICAL
OBSOLESCENCE. Nearly all of the Company's sales since inception have been       
derived from sales of its balloon dissection products, with a substantial       
portion derived from sales for hernia repair procedures. The success of the     
Company's products depends on the market acceptance of and demand for the       
Company's products and related procedures, the nature of the technological      
advances inherent in the product designs, reduction in patient trauma or        
other benefits provided by such products, continued adoption of minimally       
invasive surgery ("MIS") procedures by surgeons, reimbursement for the          
Company's products by health care payors and the Company's receipt of           
regulatory approvals. There can be no assurance that the Company's products     
will have the required technical characteristics, that the Company's products   
will provide adequate patient benefits, that clinical studies results will be   
favorable, that surgeons will continue to adopt MIS procedures, that            
recently-introduced products or future products of the Company or procedures    
using the Company's products will gain market acceptance, or that required      
regulatory approvals will be obtained. The failure to achieve any of the        
foregoing could have a material adverse effect on the Company's business,       
financial condition and results of operations. To the extent demand for the     
Company's surgical balloon dissectors for hernia repair declines and the        
Company's newly-introduced products are not commercially accepted or its        
existing products are not developed for new procedures, there could be a        
material adverse effect on the Company's business, financial condition and      
results of operations. See "Management's Discussion and Analysis of Financial   
Condition and Results of Operations" and "Business -- Applications of Balloon   
Dissection Technology," and "- Additional Products Under Development."          

DEPENDENCE ON KEY DISTRIBUTORS. In February 1998, the Company 
entered into a non-exclusive distribution agreement with EES. Unlike the        
prior EES OEM Agreement, this new agreement does not provide for any minimum    
payments from EES to the Company. In December 1997, the Company entered into    
a distribution agreement with Genzyme. Under the agreement, Genzyme has         
exclusive rights to market and distribute GSI's surgical balloon dissectors     
worldwide for use in plastic surgery (reconstructive and aesthetic)             
procedures. In September 1998, the Company signed a non-exclusive, three-year   
agreement with USSC, a wholly-owned subsidiary of Tyco. Under the terms of      
the agreement, USSC has obtained non-exclusive rights to market and             
distribute GSI's SPACEMAKER-Registered Trademark-surgical balloon dissectors    
worldwide for use in hernia repair and incontinence procedures.                 

In May 1999, the Company signed a distribution agreement with 
Dexterity Surgical, Inc. ("Dexterity"). The terms of the agreement give         
Dexterity rights to market and distribute GSI's SPACEMAKER-Registered           
Trademark- balloon dissector products for hernia repair and laparoscopic        
bladder neck suspension repair procedures in all or parts of 28 states.         

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  In June 1997, GSI entered into an exclusive agreement with Japan
Lifeline to market and distribute in Japan GSI's surgical balloon dissectors    
for use in vascular procedures. Distribution of the GSI surgical balloon        
dissectors is expected to begin following final receipt of the Japanese         
Ministry of Health and Welfare approval, which the Company expects to occur     
in fiscal year 2000.                                                            

  Although the Company intends to continue to establish additional
distributorships in the United States and internationally, there can be no      
assurance that its distributors will be successful, or that efforts to          
establish additional distributors will be successful. Failure of current        
distributors to succeed, or failure to add additional distributors to its       
distribution network, could have a material adverse effect on the Company's     
business, financial condition and results of operations.                        

     LIMITED MARKETING AND DIRECT SALES EXPERIENCE. The Company has only
limited experience marketing and selling its products through its direct        
sales force. The Company intends to establish relationships with additional     
distribution partners, and there can be no assurance that the Company will be   
successful in establishing such relationships on commercially reasonable        
terms, if at all. The failure to establish and maintain an effective            
distribution channel for the Company's products, or to hire and retain          
qualified and effective direct sales personnel to support commercial sales of   
the Company's products, could have a material adverse effect on the Company's   
business, financial condition and results of operations. See "Management's      
Discussion and Analysis of Financial Condition and Results of Operations,"      
and "Business --Marketing, Sales and Distribution."                             

UNCERTAINTY OF MARKET ACCEPTANCE; NO ASSURANCE OF CLINICAL    
ADVANTAGE. The Company's success is substantially dependent upon the success    
of its SPACEMAKER-Registered Trademark- balloon dissection products. The        
Company believes that market acceptance of the Company's products will depend   
on the adoption of laparoscopic techniques generally and the conversion of      
non-balloon dissection techniques to balloon dissection techniques              
specifically. To date, the Company has limited long-term outcomes data          
regarding successful balloon dissection procedures. If the Company is not       
able to demonstrate consistent clinical benefits resulting from the use of      
its products (including reduced procedure time, reduced patient trauma and      
lower costs) or to the extent that laparoscopic techniques are adopted          
slowly, that surgical balloon dissectors are not incorporated into              
laparoscopic techniques or that surgeons are unwilling or unable to develop     
the skills necessary to utilize surgical balloon dissectors, the Company's      
business, financial condition and results of operations could be materially     
adversely affected. See "Business -Marketing, Sales and Distribution."          

The Company further believes that the ability of health care  
providers to obtain adequate reimbursement for procedures using the Company's   
SPACEMAKER-Registered Trademark- balloon dissection products and related        
instruments will be critical to market acceptance of the Company's products.    
Although the Company believes that procedures using its balloon dissection      
products currently may be reimbursed in the United States under certain         
existing procedure codes, there can be no assurance that such procedure codes   
will remain available or that reimbursement under these codes will be           
adequate. The failure to obtain reimbursement for some or all of its products   
could have a material adverse effect on the Company's business, financial       
condition and results of operations. See "Business -Third-Party                 
Reimbursement."                                                                 

FLUCTUATIONS IN QUARTERLY RESULTS. Results of the Company's     
operations may fluctuate significantly from quarter to quarter and will         
depend on numerous factors, including (i) fluctuations in purchases of the      
Company's products by its distributors and direct sales force, (ii) the         
ability of the Company's distributors to effectively promote and sell the       
Company's products, (iii) the rate of adoption by surgeons of balloon           
dissection technology in markets targeted by the Company, (iv) the mix of       
sales among distributors and the Company's direct sales force, (v) new          
product introductions by the Company and its competitors, (vi) fluctuations     
in revenues among different product lines and markets, (vii) timing of patent   
and regulatory approvals, if any, (viii) litigation, (ix) timing and growth     
of operating expenses and (x) general market conditions.                        

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    In addition, announcements or expected announcements by the Company,
its competitors or its distributors of new products, new technologies or        
pricing changes could cause existing or potential customers of the Company to   
defer purchases of the Company's existing products and could alter the mix of   
products purchased from the Company, which could have a material adverse        
effect on the Company's business, financial condition and results of            
operations. There can be no assurance that future products or product           
enhancements will be successfully introduced or that such introductions will    
not adversely affect the demand for existing products. As a result of these     
and other factors, the Company's quarterly operating results have fluctuated    
in the past, and the Company expects that such results may fluctuate in the     
future. Due to such quarterly fluctuations in operating results,                
quarter-to-quarter comparisons of the Company's operating results are not       
necessarily meaningful and should not be relied upon as indicators of likely    
future performance or annual operating results. The Company's limited           
operating history makes accurate prediction of future operating results         
difficult or impossible to make. There can be no assurance that in the future   
the Company will achieve sales growth or become profitable on a quarterly or    
annual basis, if at all, or that its growth, if any, will be consistent with    
predictions by securities analysts and investors. In such event, the price of   
the Company's common stock would likely be materially and adversely affected.   

     RELIANCE ON PATENTS AND PROPRIETARY TECHNOLOGY. The Company's success
will depend on its ability to obtain patent protection for its products and     
processes, to preserve its trade secrets and proprietary technology and to      
operate without infringing upon the patents or proprietary rights of third      
parties.                                                                        

   In May 1996, Origin Medsystems, Inc. ("Origin") a unit of Guidant
Corporation filed suit against GSI for infringement of U.S. Patent No.          
5,520,609 in the United States District Court for the Northern District of      
California (C96-20424JW). In April 1998, GSI had obtained a summary judgment    
that the patent in suit, Moll et al Patent No. 5,520,609, was unenforceable     
because it had been obtained by misleading the Patent & Trademark Office, and   
an award of attorney's fees of $990,000. The appellate court subsequently       
vacated this decision because, in its view, there are factual issues which      
must be resolved in a trial on whether Origin misled the PTO. In July 1999,     
the case was returned to the district court for further proceedings.            

     In June 1996, GSI filed an action against Origin in the U.S. District
Court for the Northern District of California alleging that the use of          
Origin's products infringes GSI's U.S. Patent No. 5,514,153 (C96-20447JW).      
The case was decided in favor of GSI partly by summary judgment and partly by   
jury verdict, both during fiscal 1999. Patent 5,514,153 ("the '153 patent")     
was found to be valid, and Origin's infringement was found to be willful.       
Lost profits of approximately $12.9 million were awarded to GSI by the jury.    
Origin is appealing the infringement and willfulness findings (but not patent   
validity nor the amount of infringement damages), and GSI is appealing for      
enhanced damages, attorneys' fees and the failure to find infringement of       
additional claims. Resolution is expected in calendar year 2000. Following      
these findings, the Court has entered an injunction prohibiting sale in the     
United States of all of Origin's balloon dissection products, to become fully   
effective on November 15, 1999, and an immediate injunction against sales of    
all of Origin's balloon dissection products to any new customers in the         
United States.                                                                  

In September 1997, the Company filed an action against Origin   
alleging that the use of Origin's products infringes GSI's U.S. Patent No.      
5,667,520 (C97-20944JW). Discovery is nearly complete in this case and the      
complaint has now been amended to add a claim of infringement of GSI's patent   
number 5,860,997. This case is now stayed pending the outcome of appeals in     
the '153 case.                                                                  

     GSI is also involved in an interference proceeding in the U.S. Patent
Office against Origin to determine whether certain subject matter was first     
invented by GSI and whether the disputed matter is patentable. In November      
1998, binding arbitration determined that GSI was first to invent the           
disputed subject matter and therefore is the only party entitled to any         
patent. Additionally, the Patent Office Appeals Board found the subject         
matter to be patentable. This latter finding is being appealed by Origin to     
the Court of Appeals for the Federal Circuit. Resolution is expected in         
calendar year 2000.                                                             

   On April 9, 1999, a suit was filed against GSI in the United States
District Court for the Southern District of Illinois. This suit, brought by     
Dr. Peter M. Bonutti and by Bonutti Research, Inc., seeks a 50 percent share    
of the $12.9 million damages judgment GSI obtained in its suit against Origin   
and seeks rescission of the 1995 agreement by which GSI obtained assignment     
of certain Bonutti technology. From this assigned technology, GSI prosecuted    
patent applications which became the '153 and other patents, which credit Dr.   
Bonutti as sole inventor.  This case is in the discovery phase.                 

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     Patent interference or infringement proceedings involve complex legal
and factual issues and are highly uncertain, and there can be no assurance      
that any conclusion reached by the Company regarding patent interference or     
infringement will be consistent with the resolution of such issue by a court.   
In the event the Company's products are found to infringe patents held by       
competitors, there can be no assurance that the Company will be able to         
modify successfully its products to avoid infringement, or that any modified    
products will be commercially successful. Failure in such event to either       
develop a commercially successful alternative or obtain a license to such       
patent on commercially reasonable terms would have a material adverse effect    
on the Company's business, financial condition and results of operations. As    
discussed above, the Company is defending itself, and may in the future have    
to defend itself, in court against allegations of infringement of third-party   
patents. Patent litigation is expensive, requires extensive management time,    
and could subject the Company to significant liabilities, require disputed      
rights to be licensed from third parties or require the Company to cease        
selling its products.                                                           

While the Company believes it will be successful in these       
proceedings, there can be no assurance of such success. Failure of the          
Company to prevail in such proceedings would have a material adverse effect     
on the Company's business, financial condition and results of operations.       

The validity and breadth of claims in medical technology patents
involve complex legal and factual questions and, therefore, may be highly       
uncertain. No assurance can be given that any patents based on pending patent   
applications or any future patent applications will be issued, that the scope   
of any patent protection will exclude competitors or provide competitive        
advantages to the Company, that any of the Company's patents or patents to      
which it has licensed rights will be held valid under current challenges or     
if subsequently challenged or that persons or entities in addition to Origin    
will not claim rights in or ownership of the patents and other proprietary      
rights held or licensed by the Company or that the Company's existing patents   
will cover the Company's future products. Furthermore, there can be no          
assurance that others have not developed or will not develop similar            
products, duplicate any of the Company's products or design around any          
patents issued to or licensed by the Company or that may be issued in the       
future to the Company. Since patent applications in the United States are       
maintained in secrecy until patents issue, the Company also cannot be certain   
that others did not first file applications for inventions covered by the       
Company's pending patent applications, nor can the Company be certain that it   
will not infringe any patents that may issue to others on such applications.    

     The patent laws of European and certain other foreign countries
generally do not allow for the issuance of patents for methods of surgery on    
the human body. Accordingly, the ability of the Company to gain patent          
protection for its methods of tissue dissection will be significantly           
limited. As a result, there can be no assurance that the Company will be able   
to develop a patent portfolio in Europe or that the scope of any patent         
protection will provide competitive advantages to the Company.                  

 ROYALTY PAYMENT OBLIGATIONS. The Company has acquired rights to
patents from third parties, including rights that apply to the Company's        
current surgical balloon dissectors. The Company has historically paid and is   
obligated to pay in the future to such third parties royalties equal to         
between one and four percent of sales of such products, which payments are      
expected to exceed minimum royalty payments due under agreements with such      
parties. The payment of such royalty amounts will have an adverse impact on     
the Company's gross profit and other results of operations. There can be no     
assurance that the Company will be able to continue to satisfy such royalty     
payment obligations in the future, and a failure to do so could have a          
material adverse effect on the Company's business, financial condition and      
results of operations.                                                          

      COMPETITION; UNCERTAINTY OF TECHNOLOGICAL CHANGE. Competition in the
market for medical devices and tissue dissection products is intense and is     
expected to increase. The Company competes primarily with other producers of    
MIS tissue dissection products. Origin, which was a subsidiary of Guidant       
Corporation and has recently been purchased by Tyco, was previously, and will   
continue through November 15, 1999 (pending the outcome of current              
litigation), to be the Company's primary direct competition in the field of     
balloon dissection products. Other companies currently compete against the      
Company in the development, production and marketing of MIS tissue dissection   
instruments and technology, such as blunt dissectors, insufflation dissection   
and aqua irrigation with blunt dissection. To the extent that surgeons elect    
to use open surgical procedures rather than MIS, the Company also competes      
with producers of tissue dissection products used in open surgical              
procedures, such as blunt dissectors or graspers. A number of companies         
currently compete against the Company in the development, production and        
marketing of tissue dissection products and technology for open surgical        
procedures. In addition, the Company competes indirectly with producers of      
therapeutic drugs, when such drugs are used as an alternative to surgery.       
Many of the Company's competitors and potential competitors have substantially  

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greater name recognition and capital resources than the Company and also have   
greater resources and expertise in the areas of research and development, the   
obtaining of regulatory approvals, and in manufacturing and marketing.          

  The Company believes that the primary competitive factors in the
market for tissue dissection products include safety, efficacy, ease of use,    
quality, reliability and cost effectiveness. In addition, the length of time    
required for products to be developed and to receive regulatory approval is     
an important competitive factor. The Company believes that it competes          
favorably with respect to these factors, although there can be no assurance     
that it will continue to do so.                                                 

     The market for tissue dissection products is characterized by rapid
technical innovation. Product development involves a high degree of risk, and   
there can be no assurance that the Company's competitors and potential          
competitors will not succeed in developing and marketing technologies and       
products that are more effective than those developed and marketed by the       
Company or that would render the Company's technology and products obsolete     
or noncompetitive. The medical applications for which the Company's MIS         
tissue dissection products are used can also be addressed by other medical      
devices in either MIS or open surgical procedures, many of which are widely     
accepted in the medical community. There can be no assurance that a procedure   
using MIS balloon dissection technology will be able to replace such            
established products and procedures. Additionally, new surgical products or     
procedures could be developed that replace or reduce the importance of          
current procedures that use the Company's products.                             

    UNCERTAIN AVAILABILITY OF THIRD-PARTY REIMBURSEMENT. The Company's
success will depend upon the ability of surgeons to obtain satisfactory         
reimbursement from healthcare payors for the Company's products. In the         
United States, hospitals, physicians and other healthcare providers that        
purchase medical devices generally rely on third-party payors, such as          
private health insurance plans, to reimburse all or part of the costs           
associated with the treatment of patients. Reimbursement in the United States   
for the Company's balloon dissection products is currently available from       
most third-party payors, including most major private health care insurance     
plans and Medicaid, under existing surgical procedure codes. The Company does   
not expect that third-party reimbursement in the United States will be          
available for use of some of its other products unless and until clearance or   
approval is received from the federal Food and Drug Administration (the         
"FDA"). However, given the efforts to control and decrease health care costs    
in recent years, there can be no assurance that any reimbursement will be       
sufficient to permit the Company to increase revenues or achieve or maintain    
profitability. The unavailability of third-party or other adequate              
reimbursement in the United States could have a material adverse effect on      
the Company's business, financial condition and results of operations.          

      Reimbursement systems in international markets vary significantly by
country, and by region within some countries, and reimbursement approvals       
must be obtained on a country-by-country basis. Many international markets      
have government-managed health care systems that govern reimbursement for new   
devices and procedures. In most markets, there are private insurance systems    
as well as government-managed systems. Large-scale market acceptance of the     
Company's surgical balloon dissectors and other products will depend on the     
availability and level of reimbursement in international markets targeted by    
the Company. Failure to obtain such approvals for reimbursement in              
international markets could have a material adverse effect on the Company's     
business, financial condition and results of operations.                        

      Regardless of the type of reimbursement system, the Company believes
that surgeon advocacy of its products will be required to obtain                
reimbursement. There can be no assurance that surgeons will support and         
advocate reimbursement for use of the Company's systems for all applications    
intended by the Company. Failure by surgeons, hospitals and other users of      
the Company's products to obtain sufficient reimbursement from health care      
payors or adverse changes in government and private third-party payors'         
policies toward reimbursement for procedures employing the Company's products   
could have a material adverse effect on the Company's business, financial       
condition and results of operations. See "Business -- Third-Party               
Reimbursement."                                                                 

GOVERNMENT REGULATION. The Company's products are subject to  
extensive and rigorous regulation by the FDA and, to varying degrees, by        
state and foreign regulatory agencies. Under the federal Food, Drug, and        
Cosmetic Act, the FDA regulates the clinical testing, manufacture, labeling,    
packaging, marketing, distribution and record keeping for medical devices, in   
order to ensure that medical devices distributed in the United States are       
safe and effective for their intended use. Prior to commercialization, a        
medical device generally must receive FDA and foreign regulatory clearance or   
approval, which can be an expensive, lengthy and uncertain process. The         
Company is also subject to routine inspection by the FDA and state agencies,    
such as the California Department of Health Services ("CDHS"), for compliance   
with Good Manufacturing Practice requirements, Medical Device Reporting         
requirements and other applicable regulations. Noncompliance with applicable    
requirements can result in warning letters, import detentions, fines, civil     
penalties, injunctions, suspensions or losses of regulatory approvals, recall   
or seizure of products, operating                                               

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restrictions, refusal of the government to approve product export               
applications or allow the Company to enter into supply contracts, and           
criminal prosecution. Delays in receipt of, or failure to obtain, regulatory    
clearances and approvals, if obtained, or any failure to comply with            
regulatory requirements could have a material adverse effect on the Company's   
business, financial condition and results of operations.                        

    Labeling and promotional activities are subject to scrutiny by the
FDA and, in certain circumstances, by the Federal Trade Commission. Current     
FDA enforcement policy prohibits the marketing of approved medical devices      
for unapproved uses. The SPACEMAKER-Registered Trademark- I platform,           
SPACEMAKER-Registered Trademark- II platform, SPACEMAKER-Registered             
Trademark- Plastics platform and SPACEMAKER-Registered Trademark-               
SAPHtrak-Registered Trademark- platform each have received 510(k) clearance     
for use during general, endoscopic, laparoscopic and plastic and                
reconstructive surgery (including aesthetic), and certain vascular surgery      
(including saphenous vein procedures) when tissue dissection is required.       
Additionally, the Company has received clearance to market these products for   
thoracoscopic procedures involving exposure and dissection of structures        
external to the parietal pleura and procedures in the extraperitoneal space.    
The Company has also received clearance to market combined tissue               
dissection/expansion products. The Company has promoted these products for      
surgical applications (E.G., hernia repair, SEPS, breast augmentation and       
reconstruction, treatment of SUI and saphenous vein harvesting), and may in     
the future promote these products for the dissection required for additional    
selected applications (E.G. tissue dissection/expansion and a variety of        
procedures which require exposure to the anterior spine or for long-bone        
plating). For any medical device cleared through the 510(k) process,            
modifications or enhancements that could significantly affect the safety or     
effectiveness of the device or that constitute a major change to the intended   
use of the device will require a new 510(k) submission. The Company has made    
modifications to its products which the Company believes do not affect the      
safety or effectiveness of the device or constitute a major change to the       
intended use and therefore do not require the submission of new 510(k)          
notices. There can be no assurance, however, that the FDA will agree with any   
of the Company's determinations not to submit a new 510(k) notice for any of    
these changes or will not require the Company to submit a new 510(k) notice     
for any of the changes made to the product. If such additional 510(k)           
clearances are required, there can be no assurance that the Company will        
obtain them on a timely basis, if at all, and delays in receipt of or failure   
to receive such approvals could have a material adverse effect on the           
Company's business, financial condition and results of operations. If the FDA   
requires the Company to submit a new 510(k) notice for any product              
modification, the Company may be prohibited from marketing the modified         
product until the 510(k) notice is cleared by the FDA.                          

      Sales of medical devices outside of the United States are subject to
foreign regulatory requirements that vary widely from country to country. The   
Company currently relies on its international distributors for the receipt of   
premarket approvals and compliance with clinical trial requirements in those    
countries that require them, and it expects to continue to rely on              
distributors in those countries where the Company continues to use              
distributors. In the event that the Company's international distributors fail   
to obtain or maintain premarket approvals or compliance in foreign countries    
where such approvals or compliance are required, the Company may be required    
to cause the applicable distributor to file revised governmental                
notifications, cease commercial sales of its products in the applicable         
countries or otherwise act so as to stop any ongoing noncompliance in such      
countries. Any enforcement action by regulatory authorities with respect to     
past or any future regulatory noncompliance could have a material adverse       
effect on the Company's business, financial condition and results of            
operations.                                                                     

LIMITED MANUFACTURING EXPERIENCE. The Company has only limited
experience in manufacturing its products in commercial quantities.              
Manufacturers often encounter difficulties in scaling up production of new      
products, including problems involving production yields, quality control and   
assurance, component supply and shortages of qualified personnel.               
Difficulties experienced by the Company in manufacturing scale-up and           
manufacturing difficulties could have a material adverse effect on its          
business, financial condition and results of operations. There can be no        
assurance that the Company will be successful in scaling up or that it will     
not experience manufacturing difficulties or product recalls in the future.     

DEPENDENCE ON SINGLE SOURCE SUPPLIERS; LACK OF CONTRACTUAL    
ARRANGEMENTS. The Company currently relies upon single source suppliers for     
several components of its balloon dissection products, and in most cases        
there are no formal contracts with such suppliers. There can be no assurance    
that the component materials obtained from single source suppliers will         
continue to be available in adequate quantities or, if required, that the       
Company will be able to locate alternative sources of such component            
materials on a timely basis to market its products, if at all. In addition,     
there can be no assurance that the single source suppliers will meet the        
Company's future requirements for timely delivery of products of sufficient     
quality and quantity. The failure to obtain sufficient quantities and           
qualities of such component materials, or the loss of any of the Company's      
single source suppliers, could cause a delay in GSI's ability to fulfill        
orders while it attempts to identify and certify a replacement supplier and     
could have a material adverse effect on the Company's business, financial       
condition and results of operations. See "Business --Manufacturing."            

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PRODUCT LIABILITY RISK AND PRODUCT RECALL; LIMITED INSURANCE  
COVERAGE. The Company's business exposes it to potential product liability      
risks or product recalls that are inherent in the design, development,          
manufacture and marketing of medical devices, in the event the use of the       
Company's products cause or are alleged to have caused adverse effects on a     
patient or such products are believed to be defective. The Company's products   
are designed to be used in certain procedures where there is a high risk of     
serious injury or death. Such risks will exist even with respect to those       
products that have received, or may in the future receive, regulatory           
clearance for commercial sale. As a result, there can be no assurance that      
the Company's product liability insurance is adequate or that such insurance    
coverage will continue to be available on commercially reasonable terms or at   
all. Particularly given the lack of data regarding the long-term results of     
the use of balloon dissection products, there can be no assurance the Company   
will avoid significant product liability claims. Consequently, a product        
liability claim or other claim with respect to uninsured or underinsured        
liabilities could have a material adverse effect on the Company's business,     
financial condition and results of operations. See "Business -- Product         
Liability and Insurance."                                                       

  DEPENDENCE ON MANAGEMENT AND OTHER KEY PERSONNEL. The Company is
dependent upon a limited number of key management and technical personnel.      
The loss of the services of one or more of such key employees could have a      
material adverse effect on the Company's business, financial condition, and     
results of operations. In addition, the Company's success will be dependent     
upon its ability to attract and retain additional highly qualified sales,       
management, manufacturing and research and development personnel. The Company   
faces intense competition in its recruiting activities and there can be no      
assurance that the Company will be able to attract and/or retain qualified      
personnel.                                                                      

POTENTIAL VOLATILITY OF STOCK PRICE. The market prices of the 
Company's common stock and the stock of many other publicly held medical        
device companies have in the past been, and can in the future be expected to    
be, especially volatile. Announcements regarding competitive developments,      
product sales, clinical marketing trial results, release of reports by          
securities analysts, developments or disputes concerning patents or             
proprietary rights, regulatory developments, changes in regulatory or medical   
reimbursement policies, economic and other external factors, as well as         
period-to-period fluctuations in the Company's financial results, may have a    
significant impact on the market price of the common stock. In addition, the    
securities markets have from time to time experienced significant price and     
volume fluctuations that are unrelated to the operating performance of          
particular companies.                                                           

YEAR 2000 COMPLIANCE. The Year 2000 ("Y2K") issue arises from 
computer programs using two digits rather than four to define the applicable    
year. Such software may recognize a date using "00" as the year 1900 rather     
than the year 2000. This could result in system failures or miscalculations     
leading to disruptions or delays in the Company's activities and operations.    
If the Company, its key customers or suppliers fail to make necessary           
modifications to their information technology or non-information technology     
systems on a timely basis, the Y2K issue could have a material adverse effect   
on Company operations. However, the impact cannot be quantified at this time.   

In January 1998 the Company began to evaluate and assess the  
Company's information technology and non-information technology systems for     
compliance with the Y2K issue. The Company intends to fix or replace            
noncompliant software and systems by November 30, 1999, but there can be no     
assurance that such fixes or replacements will occur by such date. The          
Company is currently conducting testing and remediation activities on its       
systems, and intends to survey major customers and suppliers to assess their    
systems' compliance as well as their systems' compatibility with the            
Company's existing or projected compliant systems. There can be no assurance    
that there will not be an adverse material effect on the Company's business,    
financial condition or results of operations if the Company or its suppliers    
or customers do not convert or replace their systems in a timely manner to      
comply with the Y2K issue. See "Management's Discussion and Analysis of         
Financial Condition and Results of Operations --Year 2000 Compliance".          

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ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                            

     The Company's financial statements as of June 30, 1999 and 1998 and
for each of the three years ending June 30, 1999, June 30, 1998 and June 30,    
1997 are included in this Form 10-K starting at page 39.                        

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

Not applicable.                                               

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PART III

      Certain information required by Part III is omitted from this report
because the Company will file a definitive Proxy Statement within 120 days      
after the end of its fiscal year pursuant to Regulation 14A (the "Proxy         
Statement") for its Annual Meeting of Shareholders to be held December 16,      
1999, and the information included therein is incorporated herein by            
reference to the extent detailed below.                                         

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY                       

     The information regarding the Company's directors will be set forth
under the caption "Election of Directors -- Nominees" in the Company's proxy    
statement and is incorporated herein by reference. The Proxy Statement will     
be filed with the Securities and Exchange Commission within 120 days after      
the end of the Company's fiscal year.                                           

ITEM 11.  EXECUTIVE COMPENSATION                                                

    The information required by this item is incorporated by reference
into this Form 10-K from the information set forth under the caption            
"Compensation of Executive Officers" in the Company's Proxy Statement.          

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT        

    The information required by this item is incorporated by reference
into this Form 10-K from the information set forth under the caption "Common    
Stock Ownership of Certain Beneficial Owners and Management" in the Company's   
Proxy Statement.                                                                

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.                       

         The information required by this item is incorporated by reference into
this Form 10-K from the information set forth under the caption "Certain        
Relationships and Related Transactions" in the Company's Proxy Statement.       

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 PART IV

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

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                                                                                            Page
                                                                                            ----
(a)  (1)  Financial Statements:                                                                 
          Report of Independent Accountants.................................................. 38
          Balance Sheets..................................................................... 39
          Statements of Operations and Comprehensive Loss.................................... 40
          Statements of Shareholders' Equity ................................................ 41
          Statements of Cash Flows........................................................... 42
          Notes to Financial Statements...................................................... 43
     (2)  Financial Statement Schedule:                                                         
          Independent Accountants' Report on Schedule........................................ S1
          Schedule II-Valuation and Qualifying Accounts...................................... S2

All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes    
thereto.                                                              

(3)     Exhibits included herein (numbered in accordance with Item 601
of Regulation S-K)                                    

Exhibit                                                                         
Number          Description                                                     
---------       ------------                                                    

3.2 (1)         Amended and Restated Articles of Incorporation of Company.      

3.4 (1)         By-laws of  Company, as amended.                                

4.2 (2)         Shareholder Rights Plan.                                        

10.1 (1)        Form of Indemnification Agreement.                              

10.2 (1)        1992 Stock Option Plan and form of Agreement.                   

10.3 (1)        1996 Employee Stock Purchase Plan and form of Subscription      
Agreement.                                      

10.4 (1)        1995 Directors' Stock Option Plan and form of Option Agreement. 

10.5 (1)        Third Amended and Restated Registration Rights Agreement among  
                the Company and certain security holders of the Company dated as
of March 21, 1996.                              

10.6 (1)        Commercial Security Agreement and Promissory Note dated as of   
              December 15, 1994 between Silicon Valley Bank and the Company.

10.7 (1)        Sublease dated July 13, 1994, Sublease Amendment dated          
              November 4, 1995 and Sublease Second Amendment dated March 15,
  1996 between the Company and CV Therapeutics, Inc.

10.8 (1)(3)     Agreement and Plan of Reorganization dated as of October 1,     
            1995, by and among the Company, General Surgical Acquisition
Corporation and Adjacent Surgical, Inc.         

10.9 (1)        Merger Agreement dated February 12, 1996 by and among Adjacent  
              Surgical, Inc., Thomas J. Fogarty, Fogarty Engineering and the
Company.                                        

10.10 (1)(3)    Exclusive License Agreement dated as of February 12, 1996 by and
         among Adjacent Surgical, Inc., Thomas J. Fogarty, Fogarty
Engineering and the Company.                    

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10.11 (1)(3)    Assignment Agreement dated as of March 9, 1995 between Apogee   
Medical Products, Inc., and the Company.        

Exhibit                                                                         
Number          Description                                                     

10.12 (1)(3)    Hernia Repair Device Agreement dated as of April 29, 1992 by and
              among Maciej Kieturakis, Thomas J. Fogarty and the Registrant,
as amended on April 18, 1995.                   

10.14 (1)       Professional Services Agreement dated June 16, 1992 between the 
Company and Thomas J. Fogarty.                  

10.15 (1)       Professional Services Agreement dated June 16, 1992 between the 
Company and Mark A. Wan.                        

10.16 (1)       Bill of Sale and Instrument of Assignment and Grantback License 
               Agreement dated June 16, 1992 between the Company and Thomas J.
Fogarty.                                        

10.17 (1)       Bill of Sale and Instrument of Assignment dated June 16, 1992,  
between the Company and Mark Wan.               

10.18 (1)       Loan Modification Agreement dated as of March 25, 1996, by and  
between the Company and Silicon Valley Bank.    

10.20 (4)       OEM Supply Agreement (Expanded Field) dated December 20, 1996   
   between Ethicon Endo-Surgery, Inc. and the Company.

10.21 (4)       Modification and Termination Agreement and Mutual Release dated 
             November 12, 1996, between United States Surgical Corporation
and the Company.                                

10.22 (4)       Real Estate Lease between Berg & Berg Developers and the        
Company.                                        

10.23 (5)       Form of change of Control Agreement between the Company and     
Executive Officers dated January 20, 1998.      

10.24 (5)       Termination, Release and Distribution Agreement between the     
               Company and Ethicon Endo-Surgery, Inc. dated February 23, 1998.

10.25 (6)       Consulting Agreement between the Company and Roderick A. Young  
dated Nov. 1, 1998.                             

10.26 (6)       Promissory Note and Bonus Agreement between the Company and     
Greg Casciaro dated September 3, 1998.          

10.27 (7)       Written Compensation Agreement dated April 6, 1998.             

10.28           Distribution Agreement between the Company and Dexterity        
Surgical, Inc. dated May 6, 1999.               

10.29           Second Amendment to Full Recourse Promissory Note between the   
Company and James Jervis dated May 3, 1999.     

10.30           Amendment to Full Recourse Promissory Note between the Company  
and Gregory Casciaro dated May 3, 1999.         

23.1            Consent of  PricewaterhouseCoopers LLP, Independent Accountants.

25.1            Power of Attorney (see p. 54).                                  

27.1            Financial Data Schedule.                                        
--------------------------------------------------------------------------------

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(1)    Incorporated by reference to identically numbered exhibits filed in      
response to Item 16(a), "Exhibits," of the Company's Registration 
     Statement on Form S-1 and Amendments thereto (File No. 333-2774), which
became effective on May 10, 1996.                                 

(2)    Incorporated by reference to identically numbered exhibits filed in      
     response to item 2, "Exhibits," of the Company's Registration Statement
    on Form 8-A (File No. 000-28448), filed with the Commission on May 13,
1997.                                                             

(3)    Confidential treatment has been granted with regard to certain portions  
of this exhibit.                                                  

(4)    Incorporated by reference to identically numbered exhibits filed in      
     response to Item 6(a), "Exhibits," of the Company's Quarterly Report on
 Form 10-Q, filed with the Commission on February 14, 1997 (File no.
000-28448).                                                       

(5)    Incorporated by reference to identically numbered exhibits filed in      
     response to Item 6(a), "Exhibits," of the Company's Quarterly Report on
Form 10-Q, filed with the Commission on May 14, 1998 (File no.    
000-28448).                                                       

(6)    Incorporated by reference to identically numbered exhibits filed in      
      response to Item 6 (a), "Exhibits", of the Company's Quarterly Report on
 Form 10-Q, Filed with the Commission on November 16, 1998 (file no.
000-28448).                                                       

(7)    Incorporated by reference to identically numbered exhibits filed in      
   response to Item 6 (a), "Exhibits", of the Company's Quarterly Report
    on Form 10-Q, filed with the Commission on November 16, 1998 (File no.
000-28448).                                                       

(b)   REPORTS ON FORM 8-K: The Company filed no reports on form 8-K during the
quarter ended June 30, 1999.                                                    

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 REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of                                   
General Surgical Innovations, Inc.:                                             

In our opinion, the accompanying balance sheets and the related     
statements of operations and comprehensive loss, of shareholders' equity and    
of cash flows present fairly, in all material respects, the financial           
position of General Surgical Innovations, Inc. at June 30, 1999 and 1998, and   
the results of its operations and its cash flows for each of the three years    
in the period ended June 30, 1999, in conformity with generally accepted        
accounting principles. These financial statements are the responsibility of     
the Company's management; our responsibility is to express an opinion on        
these financial statements based on our audits. We conducted our audits of      
these statements in accordance with generally accepted auditing standards       
which require that we plan and perform the audit to obtain reasonable           
assurance about whether the financial statements are free of material           
misstatement. An audit includes examining, on a test basis, evidence            
supporting the amounts and disclosures in the financial statements, assessing   
the accounting principles used and significant estimates made by management,    
and evaluating the overall financial statement presentation. We believe that    
our audits provide a reasonable basis for the opinion expressed above.          

                      PricewaterhouseCoopers LLP

San Jose, California                                                            
July 23, 1999                                                                   

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                                    GENERAL SURGICAL INNOVATIONS, INC.
                                    BALANCE SHEETS
                                   (IN THOUSANDS, EXCEPT PER SHARE DATA)

                                                        [Enlarge/Download Table]

                                                                                      JUNE 30,        
                                                                             -------------------------
                                                                                 1999         1998    
                                                                             -----------   -----------
                                                                                                      
                                     ASSETS                                                           
Current assets:                                                                                       
     Cash and cash equivalents ............................................  $    9,600    $   17,954 
     Available-for-sale  securities .......................................       8,699        10,743 
     Accounts receivable, net of allowances of $350 in 1999 and $72 in 1998       2,550         1,043 
     Inventories ..........................................................       2,532         1,284 
     Prepaid expenses and other current assets ............................         489           733 
                                                                             -----------   -----------
        Total current assets ..............................................      23,870        31,757 

     Available-for-sale  securities, non-current ..........................         999         8,772 
     Property and equipment, net ..........................................       3,052         2,101 
     Intangible and other assets, net .....................................         316           194 
                                                                             -----------   -----------
        Total assets ......................................................    $ 28,237      $ 42,824 
                                                                             -----------   -----------
                                                                             -----------   -----------

                                   LIABILITIES                                                        
Current liabilities:                                                                                  
     Accounts payable .....................................................  $    2,231    $      910 
     Accrued liabilities ..................................................       1,440         1,316 
     Capital leases .......................................................          12            14 
     Bank borrowings ......................................................          82           103 
                                                                             -----------   -----------
        Total current liabilities .........................................       3,765         2,343 

Other long-term liabilities ...............................................          37           149 
Capital leases, less current portion ......................................        --              12 
Bank borrowings, less current portion .....................................        --              82 
                                                                             -----------   -----------
             Total liabilities ............................................       3,802         2,586 
                                                                             -----------   -----------
Commitments and Contingencies (Note 5)                                                                

                              SHAREHOLDERS' EQUITY                                                    
Preferred stock, $.001 par value:                                                                     
     Authorized: 2,000 shares; issued and outstanding: none ...............        --            --   
Common stock, $.001 par value:                                                                        
     Authorized: 50,000 shares; issued and outstanding:                                               
        13,504 on June 30, 1999, and 13,435 on June 30, 1998 ..............          14            13 
Additional paid-in capital ................................................      65,446        65,290 
Notes receivable from shareholders ........................................         (85)          (87)
Deferred compensation, net ................................................         (22)         (159)
Accumulated other comprehensive income (loss) .............................         (12)           16 
Accumulated deficit .......................................................     (40,906)      (24,835)
                                                                             -----------   -----------
     Total shareholders' equity ...........................................      24,435        40,238 
                                                                             -----------   -----------
        Total liabilities and shareholders' equity ........................    $ 28,237      $ 42,824 
                                                                             -----------   -----------
                                                                             -----------   -----------

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

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GENERAL SURGICAL INNOVATIONS, INC.
 STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
 (IN THOUSANDS, EXCEPT PER SHARE DATA)

                                                        [Enlarge/Download Table]

                                                                                       YEARS ENDED JUNE 30,             
                                                                           ---------------------------------------------
                                                                               1999             1998            1997    
                                                                           ------------    -------------    ------------
                                                                                                                        
Sales....................................................................   $    6,876      $     5,193      $    4,090 
Guaranteed payments......................................................            -            1,635           4,896 
                                                                           ------------    -------------    ------------
Total revenue............................................................        6,876            6,828           8,986 
Cost of sales............................................................        5,212            3,565           2,385 
                                                                           ------------    -------------    ------------
           Gross profit..................................................        1,664            3,263           6,601 
                                                                           ------------    -------------    ------------

Operating expenses:                                                                                                     
       Research and development..........................................        3,695            2,825           2,231 
       Sales and marketing...............................................        6,523            4,911           4,906 
       General and administrative........................................        9,058            6,932           3,878 
                                                                           ------------    -------------    ------------
          Total operating expenses.......................................       19,276           14,668          11,015 
                                                                           ------------    -------------    ------------
           Operating loss................................................      (17,612)         (11,405)         (4,414)
                                                                           ------------    -------------    ------------

Interest income..........................................................        1,574            2,308           2,572 
Interest expense.........................................................          (19)             (38)            (47)
Other income (expense), net..............................................          (14)              (7)             13 
                                                                           ------------    -------------    ------------
           Net loss......................................................      (16,071)          (9,142)         (1,876)

Other comprehensive income (loss):                                                                                      
       Change in unrealized gain or loss on available-for-sale securities          (28)              54             (39)
                                                                           ------------    -------------    ------------
          Comprehensive loss.............................................   $  (16,099)     $    (9,088)     $   (1,915)
                                                                           ------------    -------------    ------------
                                                                           ------------    -------------    ------------

Net loss per common share and per common share-assuming                                                                 
       dilution..........................................................   $    (1.19)     $     (0.68)     $    (0.14)
                                                                           ------------    -------------    ------------
                                                                           ------------    -------------    ------------

Shares used in computing net loss per common share and per                                                              
       common share-assuming dilution....................................       13,461           13,373          13,197 
                                                                           ------------    -------------    ------------
                                                                           ------------    -------------    ------------

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

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                GENERAL SURGICAL INNOVATIONS, INC.
                STATEMENTS OF SHAREHOLDERS' EQUITY
                (IN THOUSANDS)

                                                        [Enlarge/Download Table]

                                                                                              Notes                 
                                                                            Additional     Receivable               
                                                      Common Stock            Paid-in         From        Deferred  
                                                 Shares         Amount        Capital     Shareholders  Compensation
                                                --------       --------       --------      --------      --------  
                                                                                                                    
Balances, June 30, 1996.......................    13,133       $     13       $ 64,885     $    (112)     $   (496) 
   Exercise of stock options..................       148             --             67            --            --  
   Exercise of stock options with notes                                                                             
       receivable.............................        23             --             11           (11)           --  
   Issuance of common stock in connection                                                                           
       with employee stock purchase plan......        18             --            135            --            --  
   Repurchase of common stock.................       (31)            --             (9)            9            --  
   Amortization of deferred compensation              --             --             --            --           199  
   Change in unrealized loss on available-                                                                          
       for-sale securities....................        --             --             --            --            --  
   Payment of shareholders' notes receivable..        --             --             --            27            --  
   Net loss...................................        --             --             --            --            --  
                                                --------       --------       --------      --------      --------  
Balances, June 30, 1997.......................    13,291             13         65,089           (87)         (297) 
   Exercise of stock options..................       128             --            129            --            --  
   Issuance of common stock in connection                                                                           
       with employee stock purchase plan......        16             --             72            --            --  
   Amortization of deferred compensation......        --             --             --            --           138  
   Change in unrealized gain on available-for-                                                                      
       sale securities........................        --             --             --            --            --  
   Net loss...................................        --             --             --            --            --  
                                                --------       --------       --------      --------      --------  
Balances, June 30, 1998.......................    13,435             13         65,290           (87)         (159) 
   Exercise of stock options..................        33             --             42            --            --  
   Issuance of common stock in connection                                                                           
       with employee stock purchase plan......        36              1            114            --            --  
   Amortization of deferred compensation......        --             --             --            --           137  
   Payment on shareholder notes receivable....                                                     2                
   Change in unrealized gain on available-for-                                                                      
       sale securities .......................        --             --             --            --            --  
   Net loss ..................................        --             --             --            --            --  
                                                --------       --------       --------      --------      --------  
Balances, June 30, 1999 ......................    13,504       $     14       $ 65,446      $    (85)     $    (22) 
                                                --------       --------       --------      --------      --------  
                                                --------       --------       --------      --------      --------  


                                                 Accumulated                                                        
                                                    Other                                                           
                                                Comprehensive                                                       
                                                    Income     Accumulated                                          
                                                    (Loss)       Deficit         Total                              
                                                 ------------  -----------      -------                             
                                                                                                                    
Balances, June 30, 1996.......................       $   1      $(13,817)       $50,474                             
   Exercise of stock options..................          --            --             67                             
   Exercise of stock options with notes                                                                             
       receivable.............................          --            --             --                             
   Issuance of common stock in connection                                                                           
       with employee stock purchase plan......          --            --            135                             
   Repurchase of common stock.................          --            --             --                             
   Amortization of deferred compensation                --            --            199                             
   Change in unrealized loss on available-                                                                          
       for-sale securities....................         (39)           --            (39)                            
   Payment of shareholders' notes receivable..          --            --             27                             
   Net loss...................................          --        (1,876)        (1,876)                            
                                                     -----      --------       --------                             
Balances, June 30, 1997.......................         (38)      (15,693)        48,987                             
   Exercise of stock options..................          --            --            129                             
   Issuance of common stock in connection                                                                           
       with employee stock purchase plan......          --            --             72                             
   Amortization of deferred compensation......          --            --            138                             
   Change in unrealized gain on available-for-                                                                      
       sale securities........................          54            --             54                             
   Net loss...................................          --        (9,142)        (9,142)                            
                                                     -----      --------       --------                             
Balances, June 30, 1998.......................          16       (24,835)        40,238                             
   Exercise of stock options..................          --            --             42                             
   Issuance of common stock in connection                                                                           
       with employee stock purchase plan......          --            --            115                             
   Amortization of deferred compensation......          --            --            137                             
   Payment on shareholder notes receivable....                                        2                             
   Change in unrealized gain on available-for-                                                                      
       sale securities .......................         (28)           --            (28)                            
   Net loss ..................................          --       (16,071)       (16,071)                            
                                                     -----      --------       --------                             
Balances, June 30, 1999 ......................       $ (12)     $(40,906)      $ 24,435                             
                                                     -----      --------       --------                             
                                                     -----      --------       --------                             

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

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                      GENERAL SURGICAL INNOVATIONS, INC.
                      STATEMENTS OF CASH FLOWS
                    (IN THOUSANDS)

                                                        [Enlarge/Download Table]

                                                                                   YEARS ENDED JUNE 30,             
                                                                       ---------------------------------------------
                                                                          1999             1998            1997     
                                                                       ------------    -------------    ------------
                                                                                                                    
CASH FLOWS FROM OPERATING ACTIVITIES:                                                                               
Net loss..............................................................  $ (16,071)      $   (9,142)       $  (1,876)
Adjustments to reconcile net loss to net cash used in operating                                                     
   activities:                                                                                                      
       Amortization of deferred compensation..........................        137              138              199 
       Depreciation and amortization..................................        880            1,049              889 
       Provision for uncollectable accounts and sales returns.........        659               25              (31)
       Loss on write-off of fixed assets..............................         20                7               38 
       Provision for excess and obsolete inventory....................        417               43               57 
       Forgiveness of related party note receivable...................        107                -                - 
       Changes in operating assets and liabilities:                                                                 
           Accounts receivable........................................     (2,166)           1,064           (1,227)
           Inventory..................................................     (1,665)             390           (1,074)
           Prepaid expenses and other current assets..................        244              238             (533)
           Intangible and other assets................................        (1)              (5)             (69) 
           Accounts payable...........................................      1,321              406             (110)
           Accrued and other liabilities..............................         12              246              127 
           Deferred revenue...........................................          -                -             (100)
                                                                       ------------    -------------    ------------
                Net cash used in operating activities.................    (16,106)          (5,541)          (3,710)
                                                                       ------------    -------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES:                                                                               
Purchases of available-for-sale  securities...........................     (3,811)         (22,766)         (54,335)
Proceeds from sales and maturities of available-for-sale securities...     13,500           38,792           39,467 
Acquisition of property and equipment.................................     (1,679)            (450)          (2,018)
Disposal of fixed assets..............................................          -                -               63 
                                                                       ------------    -------------    ------------
                Net cash provided by (used in) investing activities...      8,010           15,576          (16,823)
                                                                       ------------    -------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES:                                                                               
Proceeds from issuance of common stock, net of issuance costs.........        157              201              202 
Proceeds from payment on shareholders' notes receivable...............          2                -               27 
Payments on capital lease obligations.................................        (14)             (15)               - 
Principal payments on bank borrowings.................................       (103)            (167)            (135)
Related party note receivable.........................................       (300)               -                - 
                                                                       ------------    -------------    ------------
                Net cash provided by(used in) financing activities....       (258)              19               94 
                                                                       ------------    -------------    ------------
Net increase (decrease) in cash and cash equivalents..................     (8,354)          10,054          (20,439)
Cash and cash equivalents, beginning of year..........................     17,954            7,900           28,339 
                                                                       ------------    -------------    ------------
Cash and cash equivalents, end of year................................ $    9,600      $    17,954      $     7,900 
                                                                       ------------    -------------    ------------
                                                                       ------------    -------------    ------------
Cash paid during the period for:                                                                                    
       Interest....................................................... $       19      $        38      $        51 
       Taxes.......................................................... $        -      $         -      $         1 

NONCASH INVESTING AND FINANCING ACTIVITIES:                                                                         
Issuance of common stock for notes receivable......................... $        -      $         -      $        11 
Repurchase of common stock for notes receivable....................... $        -      $         -      $         9 
Change in unrealized gain or loss in available-for-sale  securities... $      (28)     $        54      $        39 
Property acquired under capital leases................................ $        -      $        40      $         - 

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

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GENERAL SURGICAL INNOVATIONS, INC.

 NOTES TO FINANCIAL STATEMENTS

1.   FORMATION AND BUSINESS OF THE COMPANY:                                     

     General Surgical Innovations, Inc. ("the Company") was incorporated
on April 13, 1992, to engage in the development, manufacturing and marketing    
of medical device surgical balloon dissectors which create new working spaces   
between natural tissue planes in the human body. The Company sells products     
in the United States, Europe, Australia and South America, through its direct   
sales force and key distributors. While the Company has developed or is         
developing surgical balloon dissectors for stress urinary incontinence,         
vascular and plastic surgery, sales of products for hernia repair are           
expected to provide a majority of the Company's revenues at least through       
fiscal 2000.                                                                    

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:                                

USE OF ESTIMATES:                                             

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

CASH AND CASH EQUIVALENTS:                                    

        The Company considers investments with an original maturity of 90 days
or less as of the date of purchase to be cash equivalents.                      

AVAILABLE-FOR SALE  SECURITIES:                               

     The Company has classified its investments as "available-for-sale."
Such investments are recorded at fair value, and unrealized holding gains and   
losses are recorded net of related taxes as a separate component of             
shareholders' equity. Interest income is recorded using an effective interest   
rate, with associated premium or discount amortized to "investment income."     
Realized gains and losses on sales of all such securities are reported in       
earnings and computed using the specific identification cost method. All        
investments with maturity dates greater than 365 days are classified as         
non-current.                                                                    

INVENTORIES:                                                  

         Inventories are stated at the lower of cost or market. Cost is based on
actual costs computed on a first-in, first-out basis.                           

PROPERTY AND EQUIPMENT:                                       

Property and equipment are stated at cost, net of accumulated 
depreciation and amortization. Furniture, fixtures, equipment and tooling are   
depreciated on a straight-line basis over their estimated useful lives of three 
to five years. Leasehold improvements are amortized over the lesser of their    
estimated useful lives or the term of the lease.                                

INTANGIBLE ASSETS:                                            

  Intangible assets include patents which are being amortized on a
straight-line basis over five years. The Company periodically assesses the      
recoverability of intangible assets by determining whether amortization of the  
asset                                                                           

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GENERAL SURGICAL INNOVATIONS, INC.

 NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)                    

balance over the remaining life can be recovered through undiscounted future    
operating cash flows of the acquired operation. The amount of impairment, if    
any, is measured based on projected discounted future operating cash flows and  
is recognized as a write down of the asset to net realizable value.             

EMPLOYEE STOCK PLANS:                                         

        The Company accounts for its stock option plans and its employee stock
purchase plan in accordance with the provisions of the Accounting Principles    
Board's Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees."  
In 1995, the Financial Accounting Standards Board issued Statement of Financial 
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based          
Compensation." SFAS 123 establishes a fair value based method of accounting for 
stock-based plans and is effective for fiscal years beginning after December 15,
1995. The Company is continuing to account for its employee stock plans in      
accordance with the provisions of APB 25, and has provided pro forma disclosure 
in Note 6 as if the measurement provisions of SFAS 123 had been adopted.        

REVENUE RECOGNITION:                                          

    The Company recognizes revenue from product sales upon shipment of
product and when title passes to its customer. Allowances are provided for      
estimated returns. Revenue from guaranteed payments is recognized in the period 
received according to the terms and conditions of a distributor agreement.      

RESEARCH AND DEVELOPMENT:                                     

Research and development expenses are charged to operations as
incurred.                                                                       

BUSINESS RISKS AND CREDIT CONCENTRATION:                      

     A substantial portion of the Company's sales have been derived from
sales of its surgical balloon dissectors for hernia repair procedures. Failure  
of the Company to successfully develop and commercialize surgical balloon       
dissector products for applications other than hernia repair could have a       
material adverse effect on the Company's business, financial condition and      
results of operations.                                                          

  In March 1994, the Company entered into a distribution agreement
with United States Surgical Corporation ("USSC") providing USSC with limited    
exclusive rights to distribute the Company's surgical balloon dissectors in     
the hernia repair market in both the United States and certain other            
countries. In fiscal 1997 and 1996, sales to USSC, which include sales to       
Autosuture, Inc., a subsidiary of USSC, represented approximately 27 percent    
and 92 percent, respectively, of the Company's sales. In November 1996, the     
Company terminated its distribution agreement with USSC; there were no sales    
to USSC in fiscal 1998. In September 1998, the Company signed two               
non-exclusive, three-year agreements with USSC. Under the terms of the first    
agreement, USSC has obtained non-exclusive rights to market and distribute      
GSI's SPACEMAKER(R) surgical balloon dissectors worldwide for use in hernia     
repair and stress urinary incontinence ("SUI") procedures. Under the terms of   
the second agreement, GSI has non-exclusive rights to market and distribute     
several products, including USSC's 5 mm mesh fixation device, the               
ProTack(TM), which is offered with GSI's balloon dissectors in the              
SPACEMAKER(R)Total Solution(TM) hernia repair kit. Sales to USSC in fiscal      
1999 represented approximately three percent of the Company's total sales.      

   In December 1996, the Company entered into a five year OEM supply
agreement (the "EES Agreement") with Ethicon Endo-Surgery ("EES"), pursuant     
to which GSI granted EES exclusive worldwide sales and marketing rights to      
sell the SPACEMAKER(R) surgical balloon dissectors in the laparoscopic hernia   
repair and stress urinary incontinence ("SUI") markets. EES made guaranteed     
payments pursuant to the EES Agreement of $4.9 million in fiscal year 1997,     
and additional payments in lieu of product purchases pursuant to a mutual       
agreement in the amount of $1.6 million in fiscal year 1998. In February        
1998, the Company and EES replaced the exclusive EES Agreement                  

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GENERAL SURGICAL INNOVATIONS, INC.

 NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)                    

with a non-exclusive distribution agreement for the laparoscopic hernia repair  
and SUI markets. In fiscal year 1999, EES made no guaranteed payments or        
payments in lieu of product purchases. Sales and guaranteed payments from EES   
represented approximately 21 percent, 74 percent and 65 percent of the Company's
1999, 1998 and 1997 revenues, respectively.                                     

         In May 1999, the Company signed a distribution agreement with Dexterity
Surgical, Inc. ("Dexterity"). The terms of the agreement gave Dexterity rights  
to market and distribute GSI's SPACEMAKER(R) balloon dissector products for     
hernia repair and laparoscopic bladder neck suspension repair procedures in all 
or parts of 28 states. In fiscal year 1999, sales to Dexterity represented      
approximately 23 percent of total company sales.                                

      The Company maintains its cash balances in demand accounts primarily
with one financial institution. For its accounts receivable, management of the  
Company performs ongoing credit evaluations of its customers and maintains      
allowances for doubtful accounts. Historically the Company has not experienced  
significant losses related to individual customers or groups of customers in any
particular geographic area. At June 30, 1998 and 1997, one distributor accounted
for approximately 46 percent and 93 percent, respectively, of accounts          
receivable. At June 30, 1999, another distributor accounted for approximately 46
percent of accounts receivable.                                                 

FAIR VALUE OF FINANCIAL INSTRUMENTS:                          

   Carrying amounts of the Company's financial instruments including
cash and cash equivalents, accounts receivable and accounts payable             
approximate fair values due to their short maturities. Based on the borrowing   
rates currently available to the Company for loans with similar terms, the      
carrying values of the equipment loan and line of credit approximate fair       
values. Estimated fair values for available-for-sale securities, which are      
separately disclosed elsewhere, are based on quoted market prices for the       
same or similar instruments.                                                    

INCOME TAXES:                                                 

         The Company accounts for income taxes under the liability method. Under
the liability method, deferred tax assets and liabilities are determined based  
on differences between financial reporting and tax bases of assets and          
liabilities and are measured using the enacted tax rates and laws that will be  
in effect when the differences are expected to reverse. The Company is required 
to adjust deferred tax liabilities in the period when tax rates or the          
provisions of the income tax laws change. Valuation allowances are established  
when necessary to reduce deferred tax assets to the amounts expected to be      
realized.                                                                       

COMPREHENSIVE INCOME:                                         

  The Company has adopted the provisions of Statement of Financial
Accounting Standards No. 130 ("SFAS 130"), "Comprehensive Income." SFAS 130     
establishes standards for reporting and display of comprehensive income and its 
components for general-purpose financial statements. Comprehensive income is    
defined as net income plus all revenues, expenses, gains and losses from        
non-owner sources that are excluded from net income in accordance with generally
accepted accounting principles.                                                 

        COMPUTATION OF NET LOSS PER COMMON SHARE AND PER COMMON SHARE-ASSUMING
DILUTION:                                                                       

      Net loss per common share and per common share-assuming dilution are
computed using the weighted average number of shares of common stock            
outstanding. Common equivalent shares from stock options are excluded from      
the computation of net loss per common share-assuming dilution as their         
effect is antidilutive.                                                         

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GENERAL SURGICAL INNOVATIONS, INC.

 NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)                

     Stock options to purchase 2,245,655, 1,816,906 and 1,363,447 shares
of common stock at prices ranging from $0.09 to $9.75 per share were            
outstanding at June 30, 1999, 1998 and 1997, respectively, but were not         
included in the computation of net loss per common share-assuming dilution      
because they were antidilutive. The aforementioned stock options could          
potentially dilute earnings per share in the future.                            

RECENT PRONOUNCEMENTS:                                        

In June 1998, the Financial Accounting Standards Board issued 
Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting   
for Derivative Instruments and Hedging Activities," which establishes           
accounting and reporting standards for derivative instruments and hedging       
activities. It requires that an entity recognize all derivatives as either      
assets or liabilities in the statement of financial position and measure        
those instruments at fair value. To date, the Company has not engaged in        
derivative and hedging activities. SFAS 133 will be effective for fiscal        
years beginning after June 15, 2000.                                            

3.   BALANCE SHEET DETAIL:                                                      

AVAILABLE-FOR-SALE  SECURITIES:                               

     As of June 30, 1999, available-for-sale securities consisted of the
following (IN THOUSANDS):                                                       

                                                        [Enlarge/Download Table]

                                                 AMORTIZED      UNREALIZED     ESTIMATED     MATURITY 
                                                    COST      GAINS (LOSSES)   FAIR VALUE     DATES   
                                                 -----------  --------------   -----------  ----------
                                                                                                      
Obligations of federal government agencies,                                                           
     short-term.................................  $   8,698     $      1       $   8,699    7/99-6/00 
Corporate obligations, principally commercial                                                         
     paper and corporate notes, long-term.......      1,012          (13)            999    7/00-4/01 
                                                 -----------   -----------    -----------             
                                                  $   9,710     $    (12)      $   9,698              
                                                 -----------   -----------    -----------             
                                                 -----------   -----------    -----------             

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    GENERAL SURGICAL INNOVATIONS, INC.

     NOTES TO FINANCIAL STATEMENTS (CONTINUED)

3.   BALANCE SHEET DETAIL: (CONTINUED)                                          

     As of June 30, 1998, available-for-sale securities consisted of the
following (IN THOUSANDS):                                                       

                                                        [Enlarge/Download Table]

                                                    AMORTIZED       UNREALIZED       ESTIMATED    
                                                      COST            GAINS          FAIR VALUE   
                                                  --------------  ---------------  ---------------
                                                                                                  
Corporate obligations, principally commercial                                                     
     paper and corporate notes, short-term.......  $     10,729    $          14    $      10,743 
Corporate obligations, principally commercial                                                     
     paper and corporate notes, long-term........         8,770                2            8,772 
                                                  --------------  ---------------  ---------------
                                                   $     19,499    $          16    $      19,515 
                                                  --------------  ---------------  ---------------
                                                  --------------  ---------------  ---------------

     During 1999 and 1998, there were no realized gains or losses on the
disposal of available-for-sale securities.                                      

PROPERTY AND EQUIPMENT:                                       

Property and equipment comprise (IN THOUSANDS):               

                                                        [Enlarge/Download Table]

                                                                              JUNE 30,              
                                                                 -----------------------------------
                                                                      1999               1998       
                                                                 ---------------    ----------------
                                                                                                    
Equipment.......................................................  $       1,612      $        1,238 
Furniture and fixtures..........................................            380                 437 
Tooling.........................................................          1,546                 457 
Leasehold improvements..........................................          1,233               1,192 
                                                                 ---------------    ----------------
                                                                          4,771               3,324 
Less accumulated depreciation and amortization..................         (1,719)             (1,223)
                                                                 ---------------    ----------------
                                                                  $       3,052      $        2,101 
                                                                 ---------------    ----------------
                                                                 ---------------    ----------------

INVENTORIES:                                                  

Inventories comprise (IN THOUSANDS):                          

                                                        [Enlarge/Download Table]

                                                                              JUNE 30,              
                                                                 -----------------------------------
                                                                      1999               1998       
                                                                 ---------------    ----------------
                                                                                                    
Raw materials...................................................  $       1,358      $          910 
Work in progress................................................             78                   - 
Finished goods..................................................          1,096                 374 
                                                                 ---------------    ----------------
                                                                  $       2,532      $        1,284 
                                                                 ---------------    ----------------
                                                                 ---------------    ----------------

INTANGIBLE AND OTHER ASSETS:                                  

Intangible and other assets comprise (IN THOUSANDS):          

                                                        [Enlarge/Download Table]

                                                                              JUNE 30,              
                                                                 -----------------------------------
                                                                      1999               1998       
                                                                 ---------------    ----------------
                                                                                                    
Patents.........................................................  $         360      $          360 
Related party note receivable...................................            193                   - 
Other...........................................................             81                  80 
                                                                 ---------------    ----------------
                                                                            634                 440 
Less accumulated amortization...................................           (318)               (246)
                                                                 ---------------    ----------------
                                                                  $         316      $          194 
                                                                 ---------------    ----------------
                                                                 ---------------    ----------------

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GENERAL SURGICAL INNOVATIONS, INC.

 NOTES TO FINANCIAL STATEMENTS (CONTINUED)

3.   BALANCE SHEET DETAIL: (CONTINUED)                                          

ACCRUED LIABILITIES:                                          

Accrued liabilities comprise (IN THOUSANDS):                  

                                                        [Enlarge/Download Table]


                                                                              JUNE 30,              
                                                                 -----------------------------------
                                                                      1999               1998       
                                                                 ---------------    ----------------
                                                                                                    
Accrued payroll and related expenses............................  $         463      $          391 
Accrued legal expenses..........................................            536                 660 
Accrued other...................................................            421                 265 
                                                                 ---------------    ----------------
                                                                  $       1,440      $        1,316 
                                                                 ---------------    ----------------
                                                                 ---------------    ----------------

4.   BANK BORROWINGS:                                                           

     On March 25, 1996, the Company entered into a loan agreement with a
financial institution which provides for an equipment loan of $700,000 with     
interest at the bank's prime rate plus 1.25 percent (9.00 percent at June 30,   
1999). The note matures on June 30, 2000. Future minimum payments under the     
loan are $82,000 in the fiscal year ending June 30, 2000.                       

    The bank borrowings are collateralized by substantially all of the
Company's assets. In addition, the Company is required to maintain certain      
restrictive financial covenants including minimum tangible net worth and a      
minimum quick ratio.                                                            

5.   COMMITMENTS AND CONTINGENCIES:                                             

OPERATING LEASE AGREEMENTS:                                   

      The Company leases its facilities under a non-cancelable operating
lease that expires on April 1, 2004. The lease contains two options to extend   
the lease term, with each extended term to be for a period of five years. The   
Company is responsible for certain taxes, maintenance costs and insurance under 
the lease. Future minimum rental payments under the lease are as follows (IN    
THOUSANDS):                                                                     

YEAR ENDING JUNE 30,                                                          
2000.....................................           740           
2001.....................................           997           
2002.....................................         1,024           
2003.....................................         1,052           
2004.....................................           805           
                                    ----------
                                     $ 4,618
                                    ----------
                                    ----------

   Rent expense for the years ended June 30, 1999, 1998 and 1997 was
$635,244, $625,488, and $600,645, respectively.                                 

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GENERAL SURGICAL INNOVATIONS, INC.

 NOTES TO FINANCIAL STATEMENTS (CONTINUED)

5.   COMMITMENTS AND CONTINGENCIES: (CONTINUED)                                 

CAPITAL LEASE AGREEMENTS:                                     

    The Company has two capital lease agreements for office equipment.
Amounts financed under these leases total approximately $41,000, with           
associated accumulated depreciation of $29,000. Future minimum lease payments   
under these capital leases are $12,000 in the fiscal year ending June 30,       
2000.                                                                           

OTHER COMMITMENTS:                                            

   The Company has entered into certain royalty agreements to obtain
technology which provide for royalties ranging from one to four percent of the  
sales price for products which utilize this technology. Amounts charged to      
operations for the years ended June 30, 1999, 1998 and 1997 were $187,497,      
$289,255 and $356,831, respectively.                                            

     Also, in 1994 in conjunction with obtaining technology, the Company
entered into a royalty agreement that provides for royalties of four percent of 
net sales for products which utilize this technology through 2001. Minimum      
royalties under the agreement are $75,000, $87,500 and $50,000 for the years    
ending June 30, 2000, 2001 and 2002, respectively.                              

CONTINGENCIES:                                                

   In May 1996, Origin Medsystems, Inc. ("Origin") a unit of Guidant
Corporation filed suit against GSI for infringement of U.S. Patent No.          
5,520,609 in the United States District Court for the Northern District of      
California (C96-20424JW). In April 1998, GSI obtained a summary judgment that   
the patent in suit, Moll et al Patent No. 5,520,609, was unenforceable          
because it had been obtained by misleading the Patent & Trademark Office, and   
an award of attorney's fees of $990,000. The appellate court subsequently       
vacated this decision because, in its view, there are factual issues which      
must be resolved in a trial on whether Origin misled the PTO. In July 1999,     
the case was returned to the district court for further proceedings.            

     In June 1996, GSI filed an action against Origin in the U.S. District
Court for the Northern District of California alleging that the use of          
Origin's products infringes GSI's U.S. Patent No. 5,514,153 (C96-20447JW).      
The case was decided in favor of GSI partly by summary judgment and partly by   
jury verdict, both during fiscal 1999. Patent 5,514,153 ("the '153 patent")     
was found to be valid, and Origin's infringement was found to be willful.       
Lost profits of approximately $12.9 million were awarded to GSI by the jury.    
Origin is appealing the infringement and willfulness findings (but not patent   
validity nor the amount of infringement damages), and GSI is appealing for      
enhanced damages, attorneys' fees and the failure to find infringement of       
additional claims. The Company has not recorded a receivable for this gain      
contingency. Resolution is expected in calendar year 2000. Following these      
findings, the Court has entered an injunction prohibiting sale in the United    
States of all of Origin's balloon dissection products, to become fully          
effective on November 15, 1999, and an immediate injunction against sales to    
any new customers.                                                              

      In September 1997, the Company filed an action against Origin alleging
that the use of Origin's products infringes GSI's U.S. Patent No. 5,667,520     
(C97-20944JW). Discovery is nearly complete in this case and the complaint has  
now been amended to add a claim of infringement of GSI's patent number          
5,860,997. This case is now stayed pending the outcome of appeals in the '153   
case.                                                                           

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GENERAL SURGICAL INNOVATIONS, INC.

 NOTES TO FINANCIAL STATEMENTS (CONTINUED)

5.   COMMITMENTS AND CONTINGENCIES: (CONTINUED)                                 

     GSI is also involved in an interference proceeding in the U.S. Patent
Office against Origin to determine whether certain subject matter was first     
invented by GSI and whether the disputed matter is patentable. In November      
1998, binding arbitration determined that GSI was first to invent the           
disputed subject matter and therefore is the only party entitled to any         
patent. Additionally, the Patent Office Appeals Board found the subject         
matter to be patentable. This latter finding is being appealed by Origin to     
the Court of Appeals for the Federal Circuit. Resolution is expected in         
calendar year 2000.                                                             

   On April 9, 1999, a suit was filed against GSI in the United States
District Court for the Southern District of Illinois. This suit, brought by     
Dr. Peter M. Bonutti and by Bonutti Research, Inc., seeks a 50 percent share    
of the $12.9 million damages judgment GSI obtained in its suit against Origin   
and seeks rescission of the 1995 agreement by which GSI obtained assignment     
of certain Bonutti technology. From this assigned technology, GSI prosecuted    
patent applications which became the '153 and other patents, which credit Dr.   
Bonutti as sole inventor.  This case is in the discovery phase.                 

While the Company believes it will be successful in these       
proceedings, there can be no assurance of such success. Failure of the          
Company to prevail in such proceedings would have a material adverse effect     
on the Company's business, financial condition and results of operations.       

6.   SHAREHOLDERS' EQUITY:                                                      

PREFERRED STOCK:                                              

        Under the Company's Articles of Incorporation, the Company's preferred
stock is issuable in series and the Company's Board of Directors is authorized  
to determine the rights, preferences and terms of each series.                  

   During 1996, the Company amended its Articles of Incorporation to
authorize 2,000,000 shares of undesignated preferred stock. Preferred stock may 
be issued from time to time in one or more series. As of June 30, 1999, the     
Company had no shares issued and outstanding.                                   

COMMON STOCK:                                                 

    The Company has issued through June 30, 1999, shares of its common
stock to the founders and key employees of the Company under stock purchase     
agreements. Certain stock purchase agreements (the "Agreements") contain        
provisions for the repurchase of common stock by the Company in the event of    
termination of employment during the vesting period following the date of       
employment. Generally, 25 percent of the shares of common stock purchased under 
the Agreements are released from the Company's repurchase option at the end of  
twelve months from a participant's hiring date with the remaining shares being  
released from repurchase ratably over the next 36 months. At June 30, 1999,     
14,897 shares are subject to repurchase under the Agreements. Each share of     
common stock has the right to one vote. The holders of common stock are also    
entitled to receive dividends whenever funds are legally available and when     
declared by the Board of Directors, subject to the prior rights of holders of   
any class of outstanding stock having priority rights as to dividends.          

STOCK OPTION PLANS:                                           

1992 Stock Option Plan                                        

   The Company has an Incentive Stock Option Plan (the "Plan") under
which 1,715,895 shares of common stock were originally reserved for issuance.   
An additional 500,000 and 400,000 shares were reserved in November 1997 and     
November 1996, respectively, bringing the aggregate number of shares of         
common stock reserved for issuance to 2,615,895 as of June 30, 1998. In         
November 1998, the Plan was amended to: (i) increase the number of shares of    
common stock reserved for issuance thereunder on the date of each annual        
meeting of the shareholders during the period beginning on and including        
November 19, 1998 and ending September 14, 2002 (the date the 1992 Plan         
terminates) by an amount equal to the lesser of (x) four percent (four          
percent) of the total number of shares of the Company's common stock issued     
and outstanding as of the last business day immediately preceding the date of   
such annual meeting, or (y) 600,000 shares, and (ii) increase the total         
maximum number of shares subject to options that may be issued to any one       
employee during a fiscal year to 1,000,000                                      

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GENERAL SURGICAL INNOVATIONS, INC.

 NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6.       SHAREHOLDERS' EQUITY: (CONTINUED)                                      

(effective as of July 1, 1998). The maximum aggregate number of shares of common
stock that may be issued under the 1992 Plan is 5,015,895. At this time, an     
additional 438,773 shares were reserved, bringing the aggregate number of shares
of common stock reserved for issuance to 3,054,668 as of June 30, 1999.         

      Under the Plan, incentive options may be granted at prices not lower
than fair market value at the date of grant or 110 percent of the fair market   
value if the optionee, immediately prior to the grant, owns stock representing  
10 percent or more of the voting power or value of all securities. Nonstatutory 
options may be granted at prices not lower than 85 percent of fair market value 
at the date of grant as determined by the Board of Directors. Options granted   
under the Plan are exercisable and vest at such times and under such conditions 
as determined by the Board. The options generally expire from five years to ten 
years from date of grant.                                                       

1995 Directors' Stock Option Plan                             

        In November 1995, the Company adopted the Directors' Stock Option Plan
("the Directors' Plan"), under which 164,726 shares of common stock have been   
reserved for issuance. The Directors' Plan provides for the grant of            
nonstatutory stock options to non-employee directors of the Company. The        
Directors' Plan provides an initial option to purchase 27,454 shares of common  
stock, which vests annually over four years, and beginning with the 1997 annual 
meeting, provides an additional annual option to purchase 6,864 shares of common
stock.                                                                          

      The exercise price of all stock options granted under the Directors'
Plan shall be equal to the fair market value of the Company's common stock on   
the date of grant of the option. Options granted under the Directors' Plan have 
a term of ten years.                                                            

    An additional 25,000 shares have been granted outside of the above
stock options plans.                                                            

    Stock option activity is set forth below (IN THOUSANDS, EXCEPT PER
SHARE DATA):                                                                    

                                                        [Enlarge/Download Table]

                                                                     OUTSTANDING OPTIONS                    
                                                   ---------------------------------------------------------
                                                                                 WEIGHTED                   
                                                     SHARES                      AVERAGE         AGGREGATE  
                                                   AVAILABLE      NUMBER OF      PRICE PER        PRICE IN  
                                                   FOR GRANT        SHARES         SHARE          DOLLARS   
                                                   -----------    -----------    -----------     -----------
                                                                                                            
Balances, June 30, 1996...........................       696          1,096         $ 1.21         $ 1,322  
     Increase in shares reserved..................       400              -              -               -  
     Options granted..............................      (497)           497           8.65           4,299  
     Options exercised............................         -           (172)           .45             (78) 
     Options terminated...........................        58            (58)          2.21            (128) 
                                                   -----------    -----------                    -----------
Balances, June 30, 1997...........................       657          1,363           3.97           5,415  
     Increase in shares reserved..................       525              -              -               -  
     Options granted..............................    (1,153)         1,153           4.47           5,159  
     Options exercised............................         -           (128)          1.00            (129) 
     Options terminated...........................       571           (571)          6.40          (3,655) 
                                                   -----------    -----------                    -----------
Balances, June 30, 1998...........................       600          1,817           3.74           6,790  
     Increase in shares reserved..................       439              -              -               -  
     Options granted..............................    (1,757)         1,757           2.29           4,031  
     Options exercised............................         -            (33)          1.26             (42) 
     Options terminated...........................     1,295         (1,295)          4.69          (6,077) 
                                                   -----------    -----------    -----------     -----------
Balances, June 30, 1999...........................       577          2,246        $  2.09         $ 4,702  
                                                   -----------    -----------    -----------     -----------
                                                   -----------    -----------    -----------     -----------

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GENERAL SURGICAL INNOVATIONS, INC.

 NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6.   SHAREHOLDERS' EQUITY: (CONTINUED)                                          

At June 30, 1999, stock options outstanding are as follows (IN
THOUSANDS, EXCEPT PER SHARE DATA):                                              

                                                        [Enlarge/Download Table]

                              OPTIONS OUTSTANDING                      OPTIONS EXERCISABLE       
                                   WEIGHTED AVERAGE     WEIGHTED                     WEIGHTED    
    RANGE OF         NUMBER             REMAINING        AVERAGE      NUMBER          AVERAGE    
EXERCISE PRICES      OF SHARES     CONTRACTUAL LIFE  EXERCISE PRICE  OF SHARES     EXERCISE PRICE
                                                                                                 
$ 0.0874 - $ 1.5600       584             5.8           $0.94            550          $0.92      
$ 1.5601 - $ 4.0000     1,552             8.7           $2.25             73          $2.39      
$ 4.0001 - $ 9.7500       110             8.6           $5.96             22          $8.02      
                     --------                                            ---                     
                        2,246             7.9           $2.09            645          $1.33      
                     --------                                            ---                     
                     --------                                            ---                     

    At June 30, 1998 and 1997, options to purchase 679,327 and 434,609
shares were exercisable at a weighted average exercise price of $2.49 and $1.60 
per share, respectively.                                                        

     Compensation of approximately $600,000 has been attributed to stock
options granted after May 1995 and prior to the sale of the Company's common    
stock in an initial public offering. The deferred compensation is being         
recognized as a charge to income over the period for which the related stock    
options become exercisable, which is generally four years. Amortization of the  
deferred compensation was approximately $137,000, $138,000 and $199,000 during  
the years ended June 30, 1999, 1998 and 1997, respectively.                     

     On August 5, 1997, the Company repriced 357,034 options, ranging in
price from $5.63 to $22.25 per share, to the fair market value on that date     
of $4.38 per share.                                                             

   The Company implemented a stock option exchange program effective
October 6, 1998, pursuant to which all holders of options issued under the      
1992 Plan may surrender for cancellation all options granted after May 10,      
1996 (the date of the Company's initial public offering) with a price above     
$1.5601, the fair market value on the effective date. The Company cancelled     
1,127,876 options, ranging in price from $2.00 to $9.75, and reissued the       
same number of new options for an exercise price of $1.5601. The new options    
were subject to a nine month restriction on exercise (until July 6, 1999),      
subject to certain exceptions. All executive officers of the Company were       
eligible to participate in the option exchange program.                         

PRO FORMA INFORMATION:                                        

     Had compensation costs for options awarded in fiscal 1999, 1998 and
1997 been determined based on the fair value at the grant date consistent with  
the provisions of SFAS 123, the Company's net loss and net loss per share would 
have resulted in the pro forma amounts indicated in the following (IN THOUSANDS,
EXCEPT PER SHARE data):                                                         

                                                                [Download Table]

                                                 JUNE 30,                     
                              ----------------------------------------------- 
                                 1999               1998            1997      
                              ------------      -------------    ------------ 
                                                                              
Actual net loss               $(16,071)          $    (9,142)     $    (1,876)
Pro forma net loss            $(18,819)          $   (10,511)     $    (2,661)
Actual net loss per share     $  (1.19)          $      (.68)     $      (.14)
Pro forma net loss per share  $  (1.40)          $      (.79)     $      (.20)

       The above pro forma disclosures are not necessarily representative of
the effects on reported net income (loss) in future years.                      

       In fiscal 1999, 1998 and 1997, the weighted-average fair value of options
granted during the year was $1.74, $2.61 and $5.12, respectively. The fair value
of each option grant is estimated on the date of grant using the Black-Scholes  
option-pricing model with the following weighted-average assumptions used for   
grants:                                                                         

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GENERAL SURGICAL INNOVATIONS, INC.

 NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6.   SHAREHOLDERS' EQUITY: (CONTINUED)                                          

                                                                [Download Table]

                                                  June 30,                
                                ------------------------------------------
                                  1999            1998              1997  
                                -------         -------           ------- 
                                                                          
Dividend yield                    0.00%           0.00%             0.00% 
Expected volatility              97.00%          62.00%            62.00% 
Risk-free interest rate           5.58%           5.93%             6.69% 
Expected term                   5 Years         5 Years           5 Years 

EMPLOYEE STOCK PURCHASE PLAN:                                 

       In March 1996, the Board of Directors adopted the 1996 Employee Stock
Purchase Plan (the "ESPP") and reserved 274,543 shares of common stock for      
issuance. The purpose of the ESPP is to provide eligible employees of the       
Company with a means of acquiring common stock of the Company through payroll   
deductions. The purchase price of such stock under the ESPP cannot be less than 
85 percent of the lower of the fair market value on the specified purchase date 
or at the beginning of the offering period. At June 30, 1999, 69,670 shares had 
been issued under the ESPP.                                                     

COMMON STOCK PURCHASE RIGHTS:                                 

 In May 1997, the Company distributed a dividend to shareholders
comprised of a right to purchase one share of common stock (a "Right") for each 
outstanding share of common stock of the Company they hold. These Rights do not 
become exercisable or transferable apart from the common stock until the        
Distribution Date which is the tenth day after a person or group either (a)     
acquires beneficial ownership of 15 percent or more of the Company's common     
stock or (b) announces a tender or exchange offer, the consummation of which    
would result in ownership by a person or group of 15 percent or more of the     
Company's common stock. After the Distribution Date, each Right will entitle the
holder to purchase from the Company one share of common stock at a price of $35 
per share.                                                                      

      If the Company is acquired in a merger or other business combination
transaction, or if 50 percent or more of its assets or earnings power is sold,  
each Right will entitle the holder to purchase at the exercise price that number
of shares of the acquiring company having a then current market value of two    
times the exercise price of the Right. In the event that the Company is the     
surviving corporation in a merger and the Company's common stock remains        
outstanding, or in the event that an acquiring party engages in certain         
self-dealing transactions, each Right not owned by the acquiring party will     
entitle the holder to purchase at the exercise price that number of shares of   
the Company's common stock having a then current market value of two times the  
exercise price of the Right.                                                    

      The Rights are redeemable at the Company's option for $.01 per Right
prior to becoming exercisable, may be amended at the Company's option on or     
prior to the Distribution Date and expire on May 8, 2007.                       

7.  EMPLOYEE BENEFIT PLAN:                                                      

        The Company has a qualified 401(k) plan available to substantially all
employees over the age of 21. Participants may contribute up to 20 percent of   
their annual compensation to the plan, limited to a maximum amount set by the   
Internal Revenue Service. The Company may make contributions to the 401(k) plan 
at the discretion of the Board of Directors. No Company contributions have been 
made to the plan since inception.                                               

8.  INCOME TAXES:                                                               

        At June 30, 1999, the Company had federal and state net operating loss
carryforwards of $37.3 million and $11.5 million, respectively, which expire in 
the years 1999 - 2019.                                                          

         As a result of a change in ownership, as defined, federal and state net
operating loss carryforwards are subject to an annual limitation of $400,000.   

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GENERAL SURGICAL INNOVATIONS, INC.

 NOTES TO FINANCIAL STATEMENTS (CONTINUED)

8.   INCOME TAXES: (CONTINUED)                                                  

Temporary differences and carryforwards that gave rise to significant 
portions of deferred tax assets and liabilities are as follows (IN THOUSANDS):  

                                                        [Enlarge/Download Table]

                                                                     JUNE 30,           
                                                           -----------------------------
                                                               1999            1998     
                                                           -------------    ------------
                                                                                        
Deferred tax assets:                                                                    
       Net operating loss carryforwards...................   $  13,364        $  7,657  
       Capitalized research expenses......................         433             370  
       Research and development credit carryforward.......         665             421  
       Accrued liabilities and other......................         335             240  
       Valuation allowance................................     (14,797)         (8,688) 
                                                           -------------    ------------
                                                           $       ---      $       --- 
                                                           -------------    ------------
                                                           -------------    ------------

  In accordance with generally accepted accounting principles, a valuation
allowance must be established for a deferred tax asset if it is more likely     
than not that a tax benefit will not be realized from the asset in the          
future. The Company has established a valuation allowance to the extent of      
its deferred tax assets since it is more likely than not that a benefit will    
not be realized in the future due to the Company's recurring operating losses.  

The Company's effective tax rate differs from the statutory federal   
income tax rate as shown in the following schedule:                             

                                                        [Enlarge/Download Table]

                                                                             JUNE 30,                    
                                                           ----------------------------------------------
                                                               1999            1998             1997     
                                                           -------------    ------------     ------------
                                                                                                         
Income tax benefit at statutory rate......................        (34)%           (34)%            (34)% 
Net operating loss not benefited..........................         34              34               34   
                                                           -------------    ------------     ------------
Effective tax rate........................................        --- %           --- %            --- % 
                                                           -------------    ------------     ------------
                                                           -------------    ------------     ------------

9.   RELATED PARTY TRANSACTIONS:                                                

The Company entered into certain product development arrangements and 
royalty agreements with a sole proprietorship which is owned by a director of   
the Company. Under these agreements, the Company pays royalties of one to       
four percent of the sales price for products which utilize the technology       
obtained. The Company has paid this sole proprietorship $88,030, $111,536 and   
$190,485 in fiscal years 1999, 1998 and 1997, respectively.                     

The Company has a note receivable for $300,000 from an officer of the 
Company. The note accrues interest at 5.42% per annum. The principal and        
accrued interest will be forgiven monthly in the form of bonus payments of      
$68,750 on September 3, 1998 and monthly over a 53 month period thereafter      
provided the officer is an employee of the Company. In the event of termination 
of the officer's employment with the Company without cause, the aggregate amount
of all bonus payments that would have been otherwise received will be paid by   
the Company in one bonus payment. At June 30, 1999, the note receivable from    
related party was $193,405.                                                     

10.  SEGMENT INFORMATION:                                                       

The Company, which operates in a single industry segment, designs,    
manufactures and markets balloon dissection systems and related minimally       
invasive surgical instruments and sells its products globally. The following    
is a summary of the Company's geographic operations (IN THOUSANDS):             

                                                                [Download Table]

                      1999         1998        1997 
                     ------       ------      ------
                                                    
Domestic...........  $6,328       $6,618      $8,944
International......     548          210          42
                     ------       ------      ------
   Total revenue     $6,876       $6,828      $8,986
                     ------       ------      ------
                     ------       ------      ------

 The Company's assets are located in the United States. The Company does
not segregate information related to operating income generated by its export   
sales.                                                                          

11.  SUBSEQUENT EVENTS (Unaudited):                                             

TYCO MERGER:                                                  

  In August 1999, the Company and Tyco International Ltd. ("Tyco")
entered into a definitive agreement pursuant to which TYCO will acquire GSI.    
GSI shareholders will receive a fraction of a TYCO common share valued at       
$7.50 per common share for each common share of GSI. The transaction is         
valued at approximately $100 million. The closing of this deal is contingent    
upon shareholder approval of the Company, as well as certain regulatory         
approvals.                                                                      

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SIGNATURES

       Pursuant to the requirements of Section 13 or 15(d) 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.                       

 GENERAL SURGICAL INNOVATIONS, INC

Date: September 16, 1999     By: /s/ Gregory D. Casciaro                        
          ------------------------
     Gregory D. Casciaro
                                 President, Chief Executive Officer and Director

 POWER OF ATTORNEY

     KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature
appears below constitutes and appoints Gregory D. Casciaro and Stephen J.       
Bonelli his attorneys-in-fact, each with the power of substitution, for him 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 substitute or        
substitutes, may do or cause to be done by virtue hereof.                       

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

                                                        [Enlarge/Download Table]

         Signature                                            Title                              Date             
------------------------------------------------------------------------------------------------------------------
                                                                                                                  
/s/ Roderick A. Young                          Chairman of the Board of Directors         September  16, 1999     
---------------------                                                                                             
(Roderick A. Young)                                                                                               

/s/ Gregory D. Casciaro                                    President,                     September  16, 1999     
-----------------------                       Chief Executive Officer and Director                                
(Gregory D. Casciaro)                                                                                             

/s/ Stephen J. Bonelli                              Chief Financial Officer,              September  16, 1999     
-----------------------                      Vice President of Finance and Treasurer                              
(Stephen J. Bonelli)                                                                                              

                                                            Director                                              
---------------------                                                                                             
(David W. Chonette)                                                                                               

/s/ Thomas A. Fogarty                                       Director                      September  16, 1999     
---------------------                                                                                             
(Thomas A. Fogarty)                                                                                               

 /s/ Paul Goeld                                             Director                      September  16, 1999     
(Paul Goeld)                                                                                                      

/s/ James  Sulat                                            Director                      September  16, 1999     
(James Sulat)                                                                                                     

/s/ Mark A. Wan                                             Director                      September  16, 1999     
----------------                                                                                                  
(Mark A. Wan)                                                                                                     

                    -54-

Dates Referenced Herein   and   Documents Incorporated by Reference

				Referenced-On Page
This ‘10-K’ Filing		Date		First		Last			Other Filings
		5/8/07		52
		4/1/04		47
		9/14/02		49
		6/30/02		48
		6/30/01		24		48
		10/30/00		24
		6/30/00		24		48
		6/15/00		24		45
		12/16/99		33
		11/30/99		23		31
		11/15/99		12		48
		9/24/99		24
Filed on:		9/16/99		54
		8/31/99		1		19
		8/5/99		16
		7/23/99		37
		7/6/99		51
For Period End:		6/30/99		1		53			10-K/A
		5/6/99		35
		5/3/99		35
		4/9/99		13		49
		3/31/99		19					10-Q
		12/31/98		19					10-Q
		11/19/98		49					DEF 14A
		11/16/98		36					10-Q
		11/1/98		35
		10/6/98		51
		9/30/98		19					10-Q
		9/3/98		35		53
		7/1/98		50
		6/30/98		3		51			10-K405,  S-8 POS
		5/14/98		36					10-Q
		4/6/98		35
		3/31/98		19					10-Q
		2/23/98		35
		1/20/98		35
		12/31/97		19					10-Q
		9/30/97		19					10-Q
		8/5/97		51
		6/30/97		3		51			10-K,  10-K/A
		5/13/97		36					10-Q,  8-A12G
		2/14/97		36					10-Q,  SC 13G,  SC 13G/A
		12/20/96		35
		11/12/96		35
		6/30/96		40		50			10-K/A,  10-K405
		5/15/96		19
		5/10/96		36		51			424B4
		3/25/96		35		47
		3/21/96		34
		3/15/96		34
		2/12/96		34
		12/15/95		43
		11/4/95		34
		10/1/95		34
		4/18/95		35
		3/9/95		35
		12/15/94		34
		7/13/94		34
		6/16/92		35
		4/29/92		35
		4/13/92		42
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