Azoospermia and varicocele. First!

Normal FSH and Normal testicular size associated with azoospermia indicates obstruction. Shrunken (atrophied) testes usually is associated with high FSH levels. Therefore the shrinking you describe may be insignificant or your diagn of non-obstructive azoosp needs review. Varicocele Gr III too may cause azoospermia and testicular atrophy and prognosis for spermatogenesis post surgery is poor. Its a matter of luck. So, i opine that TESE-IVF may be a better option. However, I encourage you to take a second opinion from an andrologist associated with a fertility center, since it is a very expensive and stressful process. If you and your spouse have time at your disposal, you may try brief (3-6 months) conservative treatment without expectations.