<PAGE>
 
                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549
                                   FORM 10-K
                                _______________

                 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                    OF THE SECURITIES EXCHANGE ACT OF 1934
                  For the fiscal year ended December 31, 1998

                         Commission File Number 1-9898
                              ORGANOGENESIS INC.
            (Exact name of registrant as specified in its charter)

          DELAWARE                                04-2871690
     (State or other jurisdiction of          (I.R.S. Employer
     incorporation or organization)          Identification No.)

                        150 DAN ROAD, CANTON, MA  02021
             (Address of principal executive offices)  (Zip Code)

      REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:  (781) 575-0775

          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

                                                  Name of Each Exchange
              Title of Each Class                  on Which Registered
              -------------------                 ---------------------
            Common Stock, $.01 value             American Stock Exchange
                                        
      SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:    NONE
                                        
     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 approximate aggregate market value of voting stock held by non-
affiliates of the registrant was $397,799,079 based on the last reported sale
price of the company's common stock on the American Stock Exchange as the close
of business on March 4, 1999. There were 30,453,518 shares of common stock
outstanding as of March 4, 1999, excluding treasury shares.

                      DOCUMENTS INCORPORATED BY REFERENCE

<TABLE>
<CAPTION>
                                                                                            Part of Form 10-K
                                                                                               into which
                                      Document                                                incorporated
                                      --------                                                ------------
<S>                                                                                         <C> 
Portions of the Registrant's Definitive Proxy Statement for its 1999 Annual Meeting
  of Stockholders..........................................................................         III
</TABLE>

     With the exception of the portions of the Definitive Proxy Statement for
the registrant's 1999 Annual Meeting of Stockholders expressly incorporated into
this Report by reference, such document shall not be deemed filed as a part of
this Annual Report on Form 10-K.
<PAGE>
 
                                    PART I
                                        
          This Form 10-K contains forward-looking statements that involve risks
and uncertainties. Forward-looking statements include information on:

     .    Our business outlook and future financial performance;
     .    Anticipated profitability, revenues, expenses and capital
          expenditures;
     .    Future funding and expectations as to any future events; and
     .    Other statements that are not historical fact and are forward-looking
          statements within the meaning of the Private Securities Litigation
          Reform Act of 1995 that involve risks and uncertainties.

     Although we believe that our plans, intentions and expectations reflected
in or suggested by such forward-looking statements are reasonable, we can give
no assurance that such plans, intentions or expectations will be achieved.  When
considering such forward-looking statements, you should keep in mind the risk
factors and other cautionary statements in this Form 10-K.  The risk and other
factors noted throughout this Form 10-K could cause our actual results to differ
materially from the results contained in any forward-looking statements.


ITEM 1.   BUSINESS

     Organogenesis Inc. designs, develops and manufactures medical therapeutics
containing living cells and/or natural connective tissue.  The company was
formed to advance and apply the emerging field of tissue engineering to major
medical needs.  Our lead product, Apligraf(R), was launched in the US - the
world's largest healthcare market - in June 1998.  Apligraf is the only mass-
manufactured product containing living human cells to show efficacy in a
controlled study and gain FDA PMA approval.  Organogenesis was organized as a
Delaware corporation in 1985, with principal offices located at 150 Dan Road,
Canton, Massachusetts 02021.  The telephone number is 781/575-0775.

     Tissue engineering and product development - We have an FDA-inspected, GMP-
     ------------------------------------------                                
compliant facility. We have experience manufacturing living, cellular products
and make Apligraf for commercial sale.  Tissue-engineered products typically
include living cells and/or natural connective tissue material such as collagen.
We have established expertise with both mammalian (e.g., human) cells and
natural connective tissue and select our product development approach based on
medical application.  Our pipeline includes both cellular and acellular
programs.

     Commercialization strategy - Our strategy is to commercialize products
     --------------------------                                            
either by ourselves or through partners with an established marketing presence.
For example, Novartis Pharma AG has global marketing rights to Apligraf and is
responsible for sales and marketing costs (see "Collaborative and Other
Agreements"). We have an active business development program related to products
and technologies in our pipeline.


PRODUCTS
--------

     Our product development program includes living tissue replacements, cell-
based organ assist devices and other tissue-engineered products.  The following
table shows products/research programs in our pipeline, potential uses and
current status.

Apligraf(R) is a registered trademark of Novartis.

                                       2
<PAGE>
 
<TABLE> 
<CAPTION>
----------------------------------------------------------------------------------------------------
PRODUCT                       POTENTIAL INDICATION/USE           STATUS
====================================================================================================
<S>                           <C>                                <C>
          CELLULAR:
----------------------------------------------------------------------------------------------------
Apligraf                      Venous leg ulcers                  Pivotal trial completed and
                                                                 published; approved and
                                                                 marketed in US and Canada
----------------------------------------------------------------------------------------------------
Apligraf                      Diabetic foot ulcers               Patient enrollment completed in
                                                                 pivotal trial; trial to
                                                                 complete 5/99
----------------------------------------------------------------------------------------------------
Apligraf                      Burns                              Study completed
----------------------------------------------------------------------------------------------------
Apligraf                      Skin surgery                       Studies completed in
                                                                 dermatologic surgery and in
                                                                 donor site wounds; cosmetic
                                                                 outcome pivotal trial underway
                                                                 in dermatologic surgery
----------------------------------------------------------------------------------------------------
Apligraf                      Epidermolysis bullosa              Study underway through
                                                                 physician IDE
----------------------------------------------------------------------------------------------------
Apligraf                      Pressure sores                     Study planned
----------------------------------------------------------------------------------------------------
Vitrix(TM)                    Dermal replacement,                Expected to enter pilot trials
                              plastic/reconstructive surgery,    in 1999
                              oral surgery
----------------------------------------------------------------------------------------------------
Bioartificial liver           Bridge-to-transplant, chronic      Research & development
                              liver disease
----------------------------------------------------------------------------------------------------
Cell therapies                Diabetes                           Research & development
----------------------------------------------------------------------------------------------------
          ACELLULAR:
====================================================================================================
GraftPatch(TM)                Soft tissue reinforcement          Cleared for marketing in US
                              (e.g., hernia repair)
----------------------------------------------------------------------------------------------------
Engineered collagen fibrils   Tissue scaffold applications       Research & development
----------------------------------------------------------------------------------------------------
Vascular graft                Peripheral and coronary bypass     Research & development
----------------------------------------------------------------------------------------------------
</TABLE>


Organogenesis also began selling TestSkin II, an in vitro testing product in
December 1998.

                                       3
<PAGE>
 
     APLIGRAF

     Product Description -  Our most advanced product is Apligraf living skin
     -------------------                                                     
construct.  Like human skin, Apligraf is living, all natural and bi-layered,
with both an upper epidermal and a lower dermal layer.  It contains living human
skin cells - epidermal keratinocytes and dermal fibroblasts. The keratinocytes
are differentiated to form the strata of the human epidermis, including the
outer stratum corneum.  Unlike human skin, Apligraf does not contain structures
such as blood vessels, hair follicles and sweat glands.


         [Photo showing structure of Apligraf compared to Human Skin]


 Under the microscope, as shown above, Apligraf shares the appearance of skin.

     Commercialization  - Apligraf was approved for marketing by the US FDA on
     -----------------                                                        
May 22, 1998. It is approved for the treatment of venous leg ulcers.  Additional
potential uses include the treatment of other chronic wounds (e.g., diabetic
ulcers, pressure sores) as well as acute wounds (e.g., skin surgery, burns).
Novartis Pharmaceuticals Corporation markets Apligraf in the US.  Novartis also
markets the product in Canada, with launches expected in Europe in 1999.
Novartis' initial marketing strategy is to establish Apligraf as the new
standard of care for venous leg ulcers.

     Current and Potential Markets  -
     -----------------------------   

<TABLE>
<CAPTION>
          ================================================================
                       CURRENT AND POTENTIAL APLIGRAF MARKETS
          ================================================================
                                                APPROXIMATE # OF 
          INDICATION                           PATIENTS/PROCEDURES 
          ----------                           -------------------
          <S>                                  <C> 
          CHRONIC WOUNDS:
           Venous leg ulcers                    1,000,000 patients
            Diabetic ulcers                       600,000 patients
             Pressure sores                    2,000,000+ patients

          SKIN SURGERY WOUNDS                600,000 procedures per year
 
          SEVERE BURNS WOUNDS                 12,000 procedures per year
          ----------------------------------------------------------------
</TABLE>

     Venous leg ulcers:  Apligraf is approved for marketing in the US for the
treatment of venous leg ulcers of greater than one month duration that have not
responded to conventional therapy.  Approximately one million people in the US
suffer from venous leg ulcers.  Over half of these patients have hard-to-heal
wounds, such as long-standing ulcers, testament to the need for more effective
therapies.  In its pivotal trial, Apligraf was shown to heal more patients,
faster, than standard care alone.  Apligraf can also be cost effective: at the
current US pricing of approximately $975 per unit, Apligraf can be the most
cost-effective option for many venous leg ulcer patients. Apligraf is currently
being reimbursed in the US on a case-by-case basis.  Novartis is working to gain
standardized reimbursement.

                                       4
<PAGE>
 
     Diabetic foot ulcers:  In 1998, patient enrollment was completed in the
diabetic foot ulcer pivotal trial, making Apligraf the most advanced living
product in development for the treatment of diabetic ulcers in the US.
Approximately 600,000 people in the US suffer from diabetic ulcers.  A major
medical need, these ulcers can frequently lead to amputation: 50,000 - 60,000
amputations occur among diabetics in the US each year.

     The diabetic ulcer study is a large, prospective, randomized, controlled
multi-center trial comparing Apligraf with current standard care for diabetic
foot ulcers.  Twenty-four centers across the US are participating in the study,
including nationally-renowned diabetes treatment centers.  The study includes
over 200 patients and is expected to yield a number of publications and
presentations beginning in 1999.

     Other potential opportunities:  Other potential uses for Apligraf include
skin surgery and burns.  Apligraf studies have been completed in dermatologic
surgery, donor site wounds and in severe burns, with publications from each
expected to be available in 1999.  For example, in February 1999, data from the
Apligraf study in burns were presented at the John A. Boswick, MD, Burn & Wound
Care Symposium.

     Traditional wound studies have often focused on frequency and time to
healing without regard to scarring.  Based on information from previous studies,
including the burn trial, in 1998 we initiated a prospective, multi-center study
specifically to assess the cosmetic outcome of wounds healed with Apligraf
versus standard care.  This study is being conducted in wounds due to skin
cancer removal, as these typically occur in cosmetically-important areas of the
body.

     A widening body of clinical data on Apligraf is expected to become
available as, now that the product is on the market, individual physicians and
Novartis can conduct and publish their own studies.  We expect to add to this
body of information with a study in pressure sores planned to begin in 1999.

  We have the ability to cryopreserve or "freeze" Apligraf.  Cryopreserved
Apligraf can be stored essentially indefinitely while maintaining greater than
90% cell viability.  In addition to the potential opportunities this provides
with Apligraf, we expect that our unique, patent-protected cryopreservation
technology could be beneficial in the development of our other cellular
products.

     With Apligraf, we have demonstrated our ability to tap the power of living
cells and natural connective tissue.   We are applying this expertise to the
development of other potentially important products.

     VITRIX

     Vitrix is a soft tissue replacement product comprised of natural collagen
and living human fibroblasts, two components of Apligraf.  We plan to initiate
pilot clinical trials with Vitrix in 1999.

     The impetus for Vitrix development was the medical need for a non-
inflammatory product that could replace soft tissue lost or damaged through
surgery, deep wounds or other injury.  Examples of potential Vitrix applications
include as a dermal replacement, for tissue bulking in various applications in
plastic/reconstructive and general surgery and for mucosal tissue repair (e.g.,
periodontal procedures).

     The profile of Vitrix leverages information and processes we have already
established with Apligraf.  For example, all components in Vitrix are included
in Apligraf.  Thus, Vitrix uses component sourcing processes and safety
information we have already established with Apligraf.  Similarly, synergies in
Vitrix manufacturing leverage Apligraf production processes and equipment.

                                       5
<PAGE>
 
     These synergies are expected to help reduce the cost of the Vitrix program,
as well as advance Vitrix development faster, and at lower risk, than typical
for many new medical products.  We hold both marketing and manufacturing rights
to Vitrix, providing options for commercialization strategies.


     BIOARTIFICIAL LIVER

     Each year in the US, approximately 250,000 people are hospitalized with
liver insufficiency and 45,000 people die from liver failure.  Currently,
transplantation is the only effective means of treating liver failure.  However,
it is not an option for many patients, and, among the severely ill patients who
do receive a liver, one in four requires a second transplant due to deteriorated
health.  Ironically, the liver is a highly regenerative organ. Some patients
would not need a transplant if there were a simpler way to receive liver
function until their own organ recovered.

     We are developing a bioartificial liver - an extracorporeal device - to
provide liver function until the patient recovers or receives a liver
transplant. We believe the key to an effective bioartificial liver is providing
healthy, highly functional liver cells.  Thus, this program leverages our proven
expertise in cell procurement, culture and optimization.  We have augmented our
internal team with additional experts in bioartificial device design.  We also
have a research collaboration with the Massachusetts General Hospital to access
their knowledge of bioartificial liver device design.  We expect to collaborate
with multiple medical institutions as the program progresses through design,
development and testing stages.

     Our achievements to date include: defining the method for effective liver
cell isolation; evaluation of liver cell culture procedures to achieve desired
functionality; development of innovative device designs; and establishment of a
small animal model of liver failure in which prototype device designs are being
tested.

     While a significant scientific challenge, potential benefits of our
bioartificial liver program are expected to include reducing mortality among
patients awaiting a liver, improving the success rate of first transplants,
reducing the overall need for liver transplantation and assisting patients not
currently qualifying for transplantation.


     OTHER CELLULAR PROGRAMS

     We continue to leverage our cellular expertise to further expand and
strengthen our pipeline.  Examples include:

     .    In December 1998, we began selling TestSkin II, a skin-like in vitro
          testing product for use by pharmaceutical, cosmetic, drug delivery and
          academic scientists and quality control professionals in product
          development and testing.

     .    We have an early stage research program related to cell therapies,
          including culturing of islet cells, for the treatment of diabetes.

                                       6
<PAGE>
 
     VASCULAR GRAFT

     Nearly 300,000 coronary artery bypass procedures are performed in the US
alone each year. Each of these bypass procedures requires an average of 3.5
grafts. Surgeons still rely on vein harvested from the patient for graft
material. This is because patient vein provides a feature that has proven
unobtainable with synthetics: the ability to provide critical strength while
becoming populated with patient cells, thus maintaining short-term and long-term
blood flow. Use of patient vein, however, has its drawbacks. The patient may not
have sufficient healthy vein available for the grafts needed. Harvesting vein
can greatly extend the duration and thus the cost of the procedure. It also
creates a second wound site, increasing patient discomfort and the risk of
complications.

     We are developing a vascular graft intended to provide the performance of
patient vein with the advantage of being off-the-shelf. The graft, currently in
animal studies, is designed to provide the necessary physical strength of a
blood vessel while becoming converted into living tissue through inward
migration of the patient's own cells. Studies done in a small animal model show
that our vascular graft, implanted as an acellular collagen tube, is remodeled
in the body into cellularized, living tissue.

     OTHER ACELLULAR PROGRAMS

     Our research programs have spawned two additional potential licensing
opportunities - GraftPatch and engineered collagen fibrils.

     GraftPatch - GraftPatch is cleared for marketing for soft tissue
     ----------                                                      
reinforcement (e.g., hernia repair) through the FDA 510k process. Preclinical
studies have indicated that GraftPatch provides mechanical strength while
avoiding the formation of post-surgical adhesions.  To maintain our research and
manufacturing focus on more significant product opportunities, we intend to out-
license GraftPatch.

     Engineered Collagen Fibrils - Collagen injections are used to provide local
     ---------------------------                                                
tissue bulking to, for example, treat female urinary incontinence and soften
wrinkles. Available products have been found to disperse after injection,
limiting long-term benefit. We have proprietary technology to produce collagen
fibrils or "strings". These fibrils are short enough to fit through a needle,
yet long enough to intertangle and provide bulk post-injection. This technology
is also considered to be a potential out-licensing opportunity. To maintain our
research and manufacturing focus on more significant product opportunities, we
intend to out-license our engineered collagen fibrils for tissue bulking
purposes.

RISK FACTORS
------------

Our Markets Are Competitive

     We are engaged in the rapidly evolving and competitive field of tissue
engineering for the treatment of skin wounds and other medical needs. Our
competitors include tissue engineering companies, xenotransplant companies,
wound care divisions of major pharmaceutical companies and other pharmaceutical,
biotechnology and medical products companies using traditional technologies to
develop products for wound care. Some of these companies have much greater
resources, research and development staffs and facilities, experience in
conducting clinical trials and obtaining regulatory approvals and experience in
the manufacturing, marketing and distribution of products than we do. Our
competitive position is based upon our ability to (1) create and maintain
scientifically-advanced technology and proprietary products and processes, (2)
attract and retain qualified personnel, (3) obtain patent or other protection
for our products and processes, (4) obtain required government approvals on a
timely basis, (5) manufacture products on a cost-effective basis and (6)
successfully market products.  If we are not successful in meeting these goals,
our business could be hurt.  Similarly, our competitors may succeed in
developing technologies, products or procedures that are more effective than any
that we are developing or that would render our technology and products
obsolete, noncompetitive or uneconomical.

The Retention of Key Personnel Is Important to Our Competitive Position

     Because of the specialized nature of our business, our success will depend
upon our ability to attract and retain highly-qualified personnel and to develop
and maintain relationships with leading research institutions.  The competition
for those relationships and for experienced personnel amongst the biotechnology,
pharmaceutical and healthcare companies, universities and non-profit research
institutions is intense. If we are unable to continue to attract and retain such
personnel or relationships, our competitive position could be hurt.


We Rely Heavily Upon Our Patents and Proprietary Technology

     We rely upon our portfolio of patent rights, patent applications and
exclusive licenses to patents and patent applications relating to living tissue
products, organ assist treatments and other aspects of tissue engineering.  We
currently have twenty patents issued or allowed in the US, nine pan-European
patents issued and six patents issued in Japan. As part of our continuing
interest in protecting intellectual property rights, we have filed and are
prosecuting fourteen other patent applications in the US. We also license some
of our technologies under an exclusive patent license agreement with the
Massachusetts Institute of Technology. The agreement with MIT covers certain US
patents and corresponding patents in European and Far East countries.  Pursuant
to the MIT agreement, we have been granted an exclusive, worldwide license to
make, use and sell the products covered by the patents and to practice the
procedures covered by the patents.

                                       7
<PAGE>
 
     We expect to aggressively patent and protect our proprietary technologies.
However, we cannot be sure that any additional patents will be issued to us as a
result of our domestic or foreign patent applications or that any of our patents
will withstand challenges by others. Patents issued to or licensed by us may be
infringed or third parties may independently develop either the same or similar
technology.  Similarly, our patents may not provide us with meaningful
protection from competitors, including those who may pursue patents which may
prevent, limit or interfere with our products or will require licensing and the
payment of significant fees or royalties by us to such third parties in order to
enable us to conduct our business.  We may sue or be sued by third parties
regarding patents and other intellectual property rights. These suits are costly
and would divert funds and management and technical resources from our
operations.

     We also rely upon unpatented proprietary technology, know-how and trade
secrets and seek to protect them through confidentiality agreements with
employees, consultants and advisors. We request that any corporate sponsor with
which we enter into a collaborative agreement do so as well. If these
confidentiality agreements are breached, we may not have adequate remedies for
the breach. In addition, others may independently develop or otherwise acquire
substantially the same proprietary technology as our technology and trade
secrets.

     We have relationships with a number of academic consultants who are not
employed by us. Accordingly, we have limited control over their activities and
can expect only limited amounts of their time to be dedicated to our activities.
These persons may have consulting, employment or advisory arrangements with
other entities that may conflict with or compete with their obligations to us.
Our consultants typically sign agreements that provide for confidentiality of
our proprietary information and results of studies.  However, in connection with
every relationship, we may not be able to maintain the confidentiality of our
technology, the dissemination of which could hurt our competitive position and
results of operations. To the extent that our scientific consultants develop
inventions or processes independently that may be applicable to our proposed
products, disputes may arise as to the ownership of the proprietary rights to
such information, and we may not win those disputes.

Our Ability to Commercialize Our Products Depends Upon Our Compliance with
Government Regulations

     Our present and proposed activities are subject to extensive and rigorous
regulation by governmental authorities in the US and other countries.  To
clinically test, produce and market medical devices for human use, we must
satisfy mandatory procedural and safety and efficacy requirements established by
the FDA and comparable state and foreign regulatory agencies.  Typically, such
rules require that products be approved by the government agency as safe and
effective for their intended use prior to being marketed.  The approval process
is expensive, time consuming and subject to unanticipated delays. Our product
candidates may not be approved. In addition, our product approvals could be
withdrawn for failure to comply with regulatory standards or due to unforeseen
problems after the product's marketing approval.

                                       8
<PAGE>
 
     Testing is necessary to determine safety and efficacy before a submission
may be filed with the FDA to obtain authorization to market regulated products.
In addition, the FDA imposes various requirements on manufacturers and sellers
of products under its jurisdiction, such as labeling, Good Manufacturing
Practices, record keeping and reporting requirements.  The FDA also may require
post-marketing testing and surveillance programs to monitor a product's effects.
Furthermore, changes in existing regulations or the adoption of new regulations
could prevent us from obtaining, or affect the timing of, future regulatory
approvals or could negatively affect the marketing of our existing products. If
(1) the regulatory agencies find our testing protocols to be inadequate, (2) the
appropriate authorizations are not granted on a timely basis, or at all, (3) the
process to obtain authorization takes longer than expected or we have
insufficient funds to pursue such approvals, (4) we lose previously-received
authorizations or (5) we do not comply with regulatory requirements, we would
not be able to commercialize our products as planned and our operating results
would be hurt.

     Medical and biopharmaceutical research and development involves the
controlled use of hazardous materials, such as radioactive compounds and
chemical solvents.  We are subject to federal, state and local laws and
regulations governing the use, manufacture, storage, handling and disposal of
such materials and waste products. In addition, we handle and dispose of human
tissue. Although we believe that our safety procedures for handling these
materials are adequate, if accidental contamination or injury were to occur, we
could be liable for damages. 

We May Be Subject to Product Liability Suits; Our Insurance May Not Be
Sufficient to Cover Damages

          Our business exposes us to potential liability risks that are inherent
in the testing, manufacturing, marketing and sale of medical products.  The use
of our products and product candidates, whether for clinical trials or
commercial sale, may expose us to product liability claims or product recall and
possible adverse publicity. Although we have product liability insurance
coverage, the level or breadth of our coverage may not be adequate to fully
cover potential liability claims. In addition, we may not be able to obtain
additional product liability coverage in the future at an acceptable cost.  A
successful claim or series of claims brought against us in excess of our
insurance coverage, and the effect of product liability litigation upon the
reputation and marketability of our technology and products, together with the
diversion of the attention of key personnel, could negatively affect our
business.


We Must Be Able to Manufacture Our Products Successfully and Obtain Adequate
Sources of Supply

          The process of manufacturing our products is complex, requiring strict
adherence to manufacturing protocols.  We have been producing our lead product,
Apligraf, for commercial

                                       9
<PAGE>
 
sale since the second half of 1997 in adherence with these manufacturing
protocols. However, with increasing demand for Apligraf, we must further
transition from small-scale to full-scale production of our products. If we do
not make the full transition successfully, we will not be able to satisfy the
demands for our products and our results of operations will be hurt.

          We are required to maintain a manufacturing facility in compliance
with Good Manufacturing Practices.  Manufacturing facilities and processes pass
an inspection before the FDA issues any product licenses necessary to market
medical therapeutics and are subject to continual review and periodic
inspection. We may not be able to maintain the necessary regulatory approvals
for our manufacturing operations or manufacture our products in a cost-effective
manner.  If we were unable to manufacture potential products independently or
obtain or retain third party manufacturing on commercially-acceptable terms, the
submission of products for final regulatory approval and initiation of marketing
would be delayed.  This, in turn, may cause us to be unable to commercialize
product candidates as planned, on a timely basis or on a profitable basis.

          We manufacture Apligraf for commercial sale, as well as for use in
clinical trials, at our Canton, Massachusetts facility.  Among the fundamental
raw materials needed to manufacture Apligraf are keratinocyte and fibroblast
cells.  Because these cells are derived from donated infant foreskin, they may
contain human-borne pathogens. We perform extensive testing of the cells for
pathogens, including the HIV or "AIDS" virus. Our inability to obtain cells of
adequate purity, or cells that are pathogen-free, would limit our ability to
manufacture sufficient quantities of our products.

          Another major material required to produce our products is collagen, a
protein obtained from animal source tissue.  We have developed a proprietary
method of procuring our own collagen that we believe is superior in quality and
strength to collagen available from commercial sources.  We currently obtain
animal source tissue from US suppliers only. We may not be able to obtain
adequate supplies of animal source tissue to meet our future needs or on a cost-
effective basis.  The thermo-formed tray assembly that is used in the
manufacturing process of Apligraf is available to us under a supply arrangement
with only one manufacturing source.  Because the FDA approval process requires
manufacturers to specify their proposed materials of certain components in their
applications, FDA approval of a new material would be required if a currently-
approved material became unavailable from a supplier. If we are unable to obtain
adequate supplies of thermo-formed tray assemblies to meet future Apligraf
manufacturing needs or if we cannot obtain such assemblies on a cost-effective
basis, our operations would be hurt.  .

          Interruptions in our supply of materials may occur in the future or we
may have to obtain substitute vendors for these materials.  Any significant
supply interruption would adversely affect the production of Apligraf.  In
addition, an uncorrected impurity or a supplier's variation in a raw material,
either unknown to us or incompatible with our manufacturing process, could hurt
our ability to manufacture products.

                                       10
<PAGE>
 
Our Business Is Subject to the Uncertainty of Third-Party Reimbursement and
Health Care Reform Measures Which May Limit Market Acceptance

     In both domestic and foreign markets, our ability to commercialize our
product candidates will depend, in part, on upon the availability of
reimbursement from third-party payors, such as government health administration
authorities, private health insurers and other organizations.  Third-party
payors are increasingly challenging the price and cost-effectiveness of medical
products. If our products are not considered cost effective, third-party payors
may limit reimbursement. Government and other third-party payors are
increasingly attempting to contain healthcare costs by limiting both coverage
and the level of reimbursement for new therapeutic products approved for
marketing by the FDA and by refusing, in some cases, to provide any coverage for
uses of approved products for disease indications for which the FDA has not
granted marketing approval.  If government and third-party payors do not provide
adequate coverage and reimbursement levels for uses of our products, the market
acceptance of our products would be limited.

     There have been a number of federal and state proposals during the last few
years to subject the pricing of pharmaceuticals to government control and to
make other changes to the health care system of the US.  It is uncertain what
legislative proposals will be adopted or what actions federal, state or private
payors for health care goods and services may take in response to any health
care reform proposals or legislation.  We cannot predict the effect health care
reforms may have on our business.

We Depend Upon Strategic Relationships to Market Our Products

     We have limited experience in sales, marketing and distribution.  We will
need to develop long-term strategic relationships with partners, such as
Novartis, that have marketing and sales forces with technical expertise and
distribution capability.  To the extent that we enter into such relationships,
our revenues will depend upon the efforts of third parties who may or may not be
successful.  We may not be able to establish or maintain long-term strategic
relationships, and if we do, our collaborators may not be successful in gaining
market acceptance for our products.  To the extent that we choose not to or are
unable to negotiate or maintain collaborations, we will need more capital and
resources to undertake a commercialization program at our own expense.  In
addition, we may encounter significant delays in introducing our products into
certain markets or find that the commercialization of products in such markets
may be adversely affected by the absence of collaborative agreements.  We are
dependent on Novartis for the successful marketing and selling of Apligraf
worldwide. If Novartis does not succeed in marketing and selling Apligraf or
gaining international approvals for the product or if we are unable to meet the
production demand of global commercialization, our operating results will
suffer.

                                       11
<PAGE>
 
In Order to Achieve Commercial Success, Our Products Must Gain Market Acceptance

     We manufacture and market one principal product: Apligraf.  We have only
recently begun to market Apligraf through Novartis and to generate revenues from
the commercialization of this product.  Products under development will require
additional research and development efforts, including clinical testing and
regulatory approval, prior to commercial use.  Our potential products are
subject to the risks of failure inherent in the development of medical products
based on new technologies.  These risks include the possibilities that:

 .  Our approach will not be successful;
 .  Our potential products will be found to be unsafe, ineffective or otherwise
   will fail to meet applicable regulatory standards or receive necessary
   regulatory clearances;

 .  The potential products, if safe and effective, will be difficult to develop
   into commercially-viable products, will be difficult to manufacture on a
   large scale, will be uneconomical to market, or will fail to obtain
   acceptance by the medical community;
 .  Proprietary rights of third parties will preclude us from marketing such
   products; or
 .  Third parties will market superior or equivalent products.

     Our business results would be hurt if were unable to demonstrate to the
medical community the efficacy, relative safety and cost effectiveness of
treating patients with our products or if our products were not accepted as
alternatives to other existing or new therapies.


Our Stock Price Is Volatile

     The biotechnology sector seems particularly vulnerable to abrupt changes in
investor sentiment. Stock prices of companies in the biotechnology industry,
including ours, can swing dramatically, with little relationship to operating
performance.  Our stock price may be affected by a number of factors including,
but not limited to, (1) clinical trial results and other product development
events, (2) the outcome of litigation, (3) decisions relating to intellectual
property rights, (4) the entrance of competitive products into our market, (5)
changes in reimbursement policies or other practices related to the
pharmaceutical industry or (6) other industry and market changes or trends.

                                       12
<PAGE>
 
COLLABORATIVE AND OTHER AGREEMENTS
----------------------------------

     In January 1996, we entered into an agreement with Novartis Pharma AG
granting them exclusive global marketing rights to Apligraf. Under the
agreement, Novartis is responsible for Apligraf sales and marketing costs
worldwide, as well as all clinical trials, registrations and patent costs
outside the US. The agreement provides us with up to $40,000,000 in equity
investments, research support and milestone payments, of which $12,750,000 was
received during 1998, $2,500,000 in 1997 and $11,500,000 in 1996. The remaining
payments are based upon achievement of specified events. Under the agreement, we
supply Novartis' global requirements for Apligraf and receive revenue consisting
of a per unit manufacturing payment and royalty on product sales.

     In late 1998, we entered into research collaborations with Estee Lauder
Companies Inc. and with Novavax, Inc.

     In 1995, we entered into a supply arrangement with Biomet, Inc. under which
Biomet may, but is not obligated to, purchase collagen from us. Revenues under
this agreement are included in other income.

     In 1994, we signed a license agreement with Toyobo Ltd. granting Toyobo a
license to manufacture and market Testskin in Japan in exchange for royalty
payments. Additionally, Toyobo may, but is not obligated to, purchase collagen
and other products from us. Revenues under this arrangement are included in
other income.

     Additionally, we entered into an agreement effective January 1999 with the
University of British Columbia that grants us an exclusive, worldwide license to
use and sublicense certain UBC technology and to manufacture, distribute and
sell products based on that technology.

RESEARCH AGREEMENTS
-------------------

     The research agreements summarized below generally are funded over a one or
two-year period. Each agreement is reviewed at least annually and the amounts to
be funded for the next period are then determined. Either party may cancel the
agreement upon advance written notice. Total payments under these agreements
were $648,000, $571,000 and $438,000 for 1998, 1997 and 1996, respectively.
Information regarding the date entered into, the entity that the agreement is
with and the area of research or development are summarized as follows:

     .    April 1998, Medvet Science Pty. Ltd., stem cells;
     .    September 1996, Children's Hospital (Boston), graft acceptance;
     .    June 1996, Massachusetts General Hospital, bioartificial liver;
     .    December 1995, Brigham and Women's Hospital, biology of surface
          tissues (e.g., oral mucosa, skin appendages);
     .    March 1995 (contract expired without renewal in 1998), Harvard Medical
          School, extracellular matrix related therapeutics; and
     .    1995, Hebrew University, connective tissue.

RESEARCH AND DEVELOPMENT
------------------------

     We plan to continue to focus product development efforts on high-quality
cell therapy, connective tissue and other types of tissue-engineered products
for a variety of areas, including wound care, general and reconstructive
surgery, liver disease and cardiovascular medicine.

                                       13
<PAGE>
 
     Our research and development staff consists of scientists and laboratory
assistants with technical backgrounds in cell biology, matrix biology, cell
culture, immunology, cryopreservation, molecular biology and clinical medicine.

     For 1998, 1997 and 1996, research and development expenses were
$17,542,000, $13,854,000, and $10,647,000, respectively, which include
production costs and funding of the research and other agreements noted above.

EMPLOYEES
---------

     As of March 4, 1999, we had 194 full-time employees. We have established a
stock option plan providing equity incentives, an employee stock purchase plan
and a 401(k) plan for all full-time employees. We believe that, through equity
participation, attractive fringe benefit programs and the opportunity to
contribute to the development and commercialization of new products using new
technology, we will continue to be able to attract highly-qualified personnel.

SCIENTIFIC ADVISORY BOARD
-------------------------

     We have a Scientific Advisory Board composed of five physicians, professors
and scientists in various fields of medicine and science. The SAB meets from
time to time to advise and consult with management and our scientific staff.
Each member of the SAB is expected to devote only a portion of his time to us
and may have consulting or other advisory arrangements with other entities that
may conflict or compete with his obligations to us. Members of the SAB have no
formal duties, authority or management obligations.

ITEM 2.   PROPERTIES

     We lease approximately 70,000 square feet of space in Canton, Massachusetts
at an annual average base rent of approximately $562,000, plus operating
expenses. We occupy our current premises under a lease that expires on September
30, 2004. This lease has three options to extend the term for an additional five
years each option. We have provided written notice to the landlord of our intent
to lease all of the remaining space at this primary facility starting November
1, 1999. Taxes, insurance and operating expenses are our responsibility under
the terms of the lease. We also have a second lease for warehouse and office
space that expires on October 31, 1999. Additionally, in January 1999, we
entered into a noncancelable operating lease for certain office equipment.

     We plan to add a second manufacturing facility to enable further expansion.
We believe that current facilities will adequately support manufacturing needs
and research and development activities through the end of 1999 and beyond.

ITEM 3.   LEGAL PROCEEDINGS

     None

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

     None

                                       14
<PAGE>
 
                                    PART II

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

     Our common stock is traded on the American Stock Exchange under the symbol
ORG. On March 4, 1999, there were 668 shareholders of record of our common
stock. The table below lists the high and low quarterly range of reported
closing prices of our common stock during the past two years.

<TABLE>
<CAPTION>
                                                                 1998                            1997
                                                     ----------------------------    ----------------------------
                                                         High            Low             High            Low
                                                     -------------  -------------    -------------  -------------
<S>                                                  <C>            <C>              <C>            <C>
First Quarter                                         $  27   3/16     $   15 9/16    $  13   7/16    $  9   1/8
Second Quarter                                           35   3/16         19  5/8       12  13/16       8  15/16
Third Quarter                                            18  15/16          8  7/8       19    1/4      10    7/8
Fourth Quarter                                           16    3/8          9 3/16       24   1/16      18   3/16
</TABLE>

     The amounts above have been adjusted to reflect a one-for-four stock split
accounted for as a stock dividend distributed on April 29, 1998 to stockholders
of record as of April 22, 1998 and two one-for-four stock splits accounted for
as stock dividends distributed on November 28, 1997 and May 2, 1997 to
stockholders of record as of November 21, 1997 and April 25, 1997, respectively.
All related data in the consolidated financial statements reflect this stock
dividend for all periods presented, except for the Statements of Changes in
Stockholders' Equity. No cash dividends have been paid to date on our common
stock and we do not anticipate paying cash dividends in the foreseeable future.

ITEM 6.   SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE DATA AND NUMBER OF
          EMPLOYEES)

<TABLE> 
<CAPTION> 
                                                              For the Years Ended December 31,
                                 ----------------------------------------------------------------------------------------
                                         1994              1995             1996              1997              1998
                                 ----------------------------------------------------------------------------------------
<S>                                <C>                     <C>              <C>              <C>               <C>
Revenues                                  $    996          $    627          $ 7,527          $  3,531          $  8,997
Net Loss                                   (10,441)          (12,737)          (7,499)          (19,807)          (14,031)
Net Loss Per Common Share                    (0.46)            (0.52)           (0.27)            (0.70)            (0.48)
Working Capital                              8,407            12,886           11,256             4,843            15,541
Capital Expenditures                           463               319            3,311             1,069             2,464
Total Assets                                15,127            19,304           22,436            13,780            26,710
Stockholders' Equity                        13,949            17,798           18,478            11,523            23,239
Number of Employees                             94                97              115               137               186
</TABLE>

                                       15
<PAGE>
 
ITEM 7    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS

     In Management's Discussion and Analysis, we explain the general financial
condition and results of operations for Organogenesis Inc.  As you read this
MD&A, referring to our consolidated financial statements that follow may be
helpful.  Further information on the company, our lead product and our pipeline
is contained in the "Business" section of this Form 10-K.

OVERVIEW OF ORGANOGENESIS INC.
------------------------------

     Organogenesis designs, develops and manufactures medical therapeutics
containing living cells and/or natural connective tissue. The company was formed
to advance and apply the emerging field of tissue engineering to major medical
needs.  Our product development focus includes living tissue replacements, cell-
based organ assist devices and other tissue-engineered products.

OUR LEAD PRODUCT, APLIGRAF
--------------------------

     On May 22, 1998, our lead product, Apligraf living skin construct, was
approved for marketing in the US.  Apligraf is the only mass-manufactured
product containing living human cells to be approved for marketing through the
FDA PMA process.  Novartis Pharmaceuticals Corporation launched Apligraf in the
US in June 1998.  Novartis Pharma AG has global Apligraf marketing rights and
also markets Apligraf in Canada.

     Novartis' marketing strategy is to first establish Apligraf as the new
standard of care for venous leg ulcers. The next potential large market for
Apligraf is expected to be diabetic ulcers. Patient enrollment in the Apligraf
diabetic ulcer pivotal trial was completed in November 1998; we plan to submit a
PMA supplement to the FDA within the next twelve months. An Apligraf study in
burns has been completed; data from this study was presented in February 1999.
Two studies in skin surgery have been completed and their data has been or is
expected to be published. A multicenter, controlled Apligraf pivotal trial
studying the cosmetic outcome of wounds due to skin cancer removal is underway.
We also plan to initiate a study in pressure sores. A study is underway for
epidermolysis bullosa through an investigator-sponsored investigational device
exemption.

OUR PIPELINE
------------

     Our pipeline includes Vitrix soft tissue replacement product, a
bioartificial liver and a vascular graft, as well as the GraftPatch and
engineered collagen fibril technology out-licensing opportunities. We have an
active and expanding business development program related to our products and
technologies.

RESULTS OF OPERATIONS
---------------------

     With the approval and launch of Apligraf, we began a new era of operations.
We are seeing, as expected, a gradual ramp-up in sales.  We expect production
costs to exceed product sales for the near term due to start-up expenses and the
high costs associated with low volume production.  However, we expect production
volume to increase.

                                       16
<PAGE>
 
     REVENUE

     Total revenues for fiscal years 1996, 1997 and 1998 were $7,527,000,
$3,531,000 and $8,997,000, respectively.  These amounts consist of:

<TABLE>
<CAPTION>
     ----------------------------------------------------------------------------------------------------
                                                                1996            1997            1998     
                                                                ----            ----            ----     
     ----------------------------------------------------------------------------------------------------
     <S>                                                   <C>             <C>             <C>           
     R&D support and milestone payments                        $6,500,000      $2,500,000      $6,750,000
     ----------------------------------------------------------------------------------------------------
     Product sales, royalties, and other income                $   42,000      $  529,000      $1,189,000
     ----------------------------------------------------------------------------------------------------
     Interest income                                           $  985,000      $  502,000      $1,058,000
     ---------------------------------------------------------------------------------------------------- 
</TABLE>

     The year-over-year increase in product sales, royalties and other income is
mainly due to sale of product to Novartis, including product to support the
Canadian and US launches of Apligraf.  Apligraf commercial sales for the 1998
fourth quarter increased 80% from the third quarter.  We expect Apligraf
commercial sales to continue to increase.  Novartis expects to launch Apligraf
in selected European countries in 1999.  R&D support payments are recognized
when earned.  The year-over-year changes in interest income are primarily due to
the difference in funds available for investment.

     EXPENSES

     Research and development expenses:  Our R&D expenses consist of costs
     ---------------------------------                                    
associated with research, development, clinical, quality systems and operations.
R&D expenses increased to $17,542,000 for 1998 from $13,854,000 in 1997 and
$10,647,000 in 1996. The increase in 1998 was primarily due to clinical trials
activity, including the Apligraf diabetic ulcer pivotal trial and non-recurring
expenses related to FDA approval; progressing preclinical programs, including
the Vitrix soft tissue replacement product; and investing in manufacturing
operations, including personnel additions.  The increase in 1997 was primarily
due to personnel additions, mainly in operations and clinical research;
expansion of facilities, resulting in higher non-cash depreciation charges and
increased occupancy costs; and other activities supporting our research and
development programs, including the Apligraf diabetic ulcer pivotal trial and
the engineered collagen fibrils and bioartificial liver research programs.  We
expect to continue to expand Apligraf manufacturing operations and to advance
our pipeline during the next 12 months.  The majority of our funding continues
to be used for R&D and operating activities.

     General and administrative expenses:  Our G&A expenses include the costs of
     -----------------------------------                                        
our corporate, investor/public relations, finance, information technology and
human resource functions.  G&A expenses increased to $5,486,000 for 1998 from
$3,929,000 in 1997 and $4,379,000 in 1996.  The 1998 increase is primarily due
to adding support staff and higher consulting and professional services,
partially relating to regulatory-related activities that are nonrecurring.  The
1997 decrease was primarily due to a reduction in the use of outside services.
This decrease was partially offset by an increase in personnel costs.
Additionally, in May 1997, we incurred a one-time, non-cash compensation charge
of $5,555,000 relating to the extension of the term of a stock option held by an
officer.  We continue to manage G&A expenses at a relatively steady to
decreasing percent of total expenditures and expect the growth in G&A expenses
to increase at a slower rate.

                                       17
<PAGE>
 
                             [CHART APPEARS HERE]



     NET INCOME

     We incurred a net loss of $14,031,000, or $.48 per share - basic and
diluted for 1998, compared to a net loss of $19,807,000, including the
$5,555,000 non-cash charge, or $.70 per share - basic and diluted for 1997 and
a net loss of $7,499,000, or $.27 per share - basic and diluted for 1996.  We
may incur additional losses as expenditures continue to increase due to
expansion of operations and research programs.

CAPITAL RESOURCES AND LIQUIDITY
-------------------------------

     FUNDS USED IN OPERATIONS

     At December 31, 1998, we had cash, cash equivalents and investments in the
aggregate amount of $17,841,000 and working capital of $15,541,000, compared to
$6,145,000 and $4,843,000, respectively, at December 31, 1997.  Cash equivalents
consist of money market funds, which are highly liquid and have original
maturities of less than three months.  Investments consist of securities that
have an A or A1 rating or better with a maximum maturity of two years.  Cash
used in operating activities was $11,587,000 in 1998 and $14,473,000 in 1997,
primarily for financing our ongoing research, development and manufacturing
operations.

     CAPITAL SPENDING

     Capital expenditures were $2,464,000 and $1,069,000 during 1998 and 1997,
respectively, primarily related to further build-out of the current facilities
to support Apligraf manufacturing and the acquisition of laboratory equipment
for expanded research and development programs.  We will continue to utilize
funds during 1999 to expand our current facility in the areas of Apligraf
manufacturing, quality systems labs and packaging.  We also plan to add a second
facility in the future to enable further expansion.

     NOVARTIS SUPPORT

     The collaborative agreement with Novartis provides us with up to
$40,000,000 in equity investments, research support and milestone payments, of
which $12,750,000 was received during 1998, $2,500,000 in 1997 and $11,500,000
in 1996.  The remaining payments are based upon achievement of specified events.
Under the agreement, we supply Novartis' global requirements for Apligraf and
receive revenue consisting of a per unit manufacturing payment and royalties on
product sales.

                                       18
<PAGE>
 
     TAXES

     At December 31, 1998, we had federal net operating loss and tax credit
carryforwards of approximately $101,500,000 and $2,668,000, and state net
operating loss and tax credit carryforwards of approximately $74,127,000 and
$1,676,000.  These losses and tax credits are available to reduce federal and
state taxable income and income taxes, respectively, in future years, if any.
However, the realizability of deferred tax assets is not assured as it depends
upon future taxable income. Accordingly, we have recorded a 100% valuation
allowance against these assets. We are required to recognize all or a portion of
net deferred tax assets, with corresponding increases to net income, when we
believe, given the weight of all available evidence, that it is more likely than
not that all or a portion of the benefits of net operating loss carryforwards
and other credits will be realized.  However, there can be no assurance that we
will ever realize any future cash flows or benefits from these losses and tax
credits. Ownership changes may result in future limitations on the utilization
of net operating losses and research and development tax credit carryforwards.

     FINANCING

     From inception, we have financed our operations substantially through
private and public placements of equity securities, as well as receipt of
research support and contract revenues, interest income from investments, sale
of products and receipt of royalties. During 1998, financing activities provided
additional cash and working capital from:  the sale of 200 shares of Series C
convertible preferred stock that generated net proceeds of approximately
$19,117,000; equity investments totaling $6,000,000 from Novartis; and the
exercise of stock options of $1,021,000, partially offset by the purchase of
treasury stock totaling $391,000.  The repurchased stock will provide us with
treasury shares for general corporate purposes.  Financing activities provided
cash of approximately $7,247,000 during 1997 from the exercise of stock options
and warrants.

     At December 31, 1998, we had approximately 62 shares of Series C
convertible preferred stock outstanding.  In the event that any Series C
preferred stock are outstanding on the mandatory conversion date of March 26,
2000, we have the option of redeeming any such outstanding Series C preferred
stock by: (1) paying cash equal to the product of the number of Series C
preferred stock outstanding multiplied by the stated value of $100,000 per
share; (2) issuing common stock equal to 1.15 of the stated value divided by the
average of the closing bid prices for the 20 consecutive trading days prior to
the mandatory conversion date; or (3) any combination of these methods.

     On March 30, 1999, we closed a financing of $15,000,000 through the private
placement of five year convertible debentures and 300,000 warrants to purchase
common stock. We may raise up to approximately $5,000,000 additional under this 
placement. The debentures are convertible at a fixed price of $15.00 per share
at any time on or after March 30, 2000. Interest on the debentures accrues at 7%
annually, payable in cash, common stock (at the average trading price for the
twenty trading days preceding the due date) or any combination thereof, at our
option, semi-annually on September 30 and March 31 or on the date any of the
principal outstanding under the notes has been converted into common stock. At
our option, at any time on or after March 30, 2002, the debentures may be
prepaid by conversion of the principal into common stock at the conversion price
of $15, cash or any combination thereof and payment of any accrued interest as
described above, provided that the average per share market value for the twenty
consecutive trading days immediately preceding the date of prepayment equals or
exceeds $40 per share. The notes mature on March 29, 2004 and are payable in
cash. The warrants grant the right to purchase one share of common stock at the
exercise price of $22.50 for each $50.00 in face value of the convertible notes
at any time before March 30, 2004. We expect to register the warrants and
underlying common stock for conversion of the debentures, payment of interest
and exercise of the warrants.

                                       19
<PAGE>
 
     LIQUIDITY AND OTHER RISK FACTORS

     Based upon our current plans, we believe that the convertible debt
financing completed subsequent to December 31, 1998, together with existing
working capital and future funds from Novartis, including product and royalty
revenue, will be sufficient to finance operations into 2000. However, this
statement is forward-looking and changes may occur that would significantly
decrease available cash before such time. Factors that may change our cash
requirements include:

  .  Time required to obtain regulatory approvals of products in different
     countries, if needed, and subsequent timing of product launches;
  .  Commercial acceptance and reimbursement when product launches occur;
  .  Progress of research and development programs; Resources devoted to outside
     research collaborations or projects, self-funded projects, proprietary
     manufacturing methods and advanced technologies; and
  .  Acquisition of a second manufacturing plant.

     Any of these events could adversely impact our capital resources, requiring
us to raise additional funds. Additional funds may not be available when
required on acceptable terms. If adequate funds are not available when needed,
we would need to delay, scale back or eliminate certain research and development
programs or license to third parties certain products or technologies that we
would otherwise undertake ourselves, resulting in a potential material adverse
effect on our financial condition and results of operations.

YEAR 2000
---------

     The Year 2000 issue ("Y2K") refers to potential problems with computer
systems or any equipment with computer chips or software that use dates where
the year has been stored as just two digits (e. g., 98 for 1998). On January 1,
2000, any clock or date recording mechanism incorporating date sensitive
software which uses two digits to represent the year may recognize a date using
00 as the year 1900 rather than the year 2000.  This could result in a system
failure or miscalculations causing disruption of operations, including, among
other things, a temporary inability to manufacture product or process
transactions, send invoices or engage in similar business activities.

     STATE OF READINESS

     In order to address this situation, we conducted an assessment to identify
and determine the Y2K readiness of our systems.  This assessment program focused
on three main functional areas, including:

  .  Information technology which addresses data, phone and administrative
     systems;
  .  Embedded chip technology which addresses manufacturing systems, laboratory
     instruments and plant maintenance systems with programmable logic
     controllers with date functions; and
  .  Material suppliers, vendors and other third parties that address areas that
     are critical to the manufacturing process, distribution of product or other
     business processes.

                                       20
<PAGE>
 
     The task of assessment from a Y2K readiness perspective is 100% complete.
Some of our systems are Y2K compliant, whereas other systems have been
identified as not being Y2K compliant and remedial action is underway.  Remedial
plans have been developed for the remaining software and systems to bring them
into Y2K compliance in time to minimize any detrimental effects on operations.
In addition to the assessment of systems, key vendors, suppliers and other third
parties were identified and a survey form was sent to each of these business
entities to determine if their systems are Y2K compliant.  We are monitoring
responses as they are received.  Y2K issues with our vendors, suppliers or other
third parties could delay the shipment and receipt of critical supplies,
potentially impacting production and operations. We are proactively addressing
the Y2K issue with vendors, suppliers and other third parties to minimize risk
from these external factors.

     COST OF YEAR 2000 COMPLIANCE AND CONTINGENCY PLANS

     While our Y2K project is not yet complete, we currently estimate that costs
associated with the Y2K issue will be no more than $250,000, which includes the
use of internal resources.  Working capital will be used to fund these costs.
To date, costs consist primarily of payroll costs for existing employees,
including the information technology group, which are not separately tracked, as
well as certain software upgrade and training costs.  However, certain aspects
of the Y2K assessment are still ongoing.  If we or key third parties such as
suppliers and customers are not Y2K ready, there could be an adverse effect on
our business, results of operations and financial condition.    We believe that
with the implementation of the Y2K program the risk of significant interruptions
of normal operations is reduced.  We are developing a contingency plan to
address a situation in which Y2K problems do cause an interruption in normal
business activities. Once developed, contingency plans and related cost
estimates will be continually refined as additional information becomes
available.

ACCOUNTING PRONOUNCEMENTS
-------------------------

     In March of 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use."  SOP 98-1 requires computer
software costs associated with internal use software to be charged to operations
as incurred until certain capitalization criteria are met.  SOP 98-1 is
effective beginning January 1, 1999.  We do not expect adoption of this
statement to have a material effect on consolidated financial position or
results of operations.

     In June of 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities."  SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. SFAS No. 133
is effective for fiscal years beginning December 15, 1999.  We do not expect
adoption of this statement to have a material impact on consolidated financial
position or results of operations.

                                       21
<PAGE>
 
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                              ORGANOGENESIS INC.

                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN ITEM 8:

<TABLE>
<S>                                                                                                     <C>
Report of Independent Accountants.....................................................................  23
Consolidated Balance Sheets as of December 31, 1997 and 1998..........................................  24
Consolidated Statements of Operations for the years ended December 31, 1996, 1997 and 1998............  25
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998............  26
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1996,
 1997 and 1998........................................................................................  27
Notes to Consolidated Financial Statements............................................................  28
</TABLE>

                                       22
<PAGE>
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
                                        
To the Board of Directors and Stockholders of Organogenesis Inc.:

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, cash flows, and changes in stockholders'
equity present fairly, in all material respects, the financial position of
Organogenesis Inc. at December 31, 1998 and 1997, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1998, 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

Boston, Massachusetts
March 30, 1999

                                       23
<PAGE>
 
                              ORGANOGENESIS INC.
                                        
                          CONSOLIDATED BALANCE SHEETS
                       (In thousands, except share data)
                                        
<TABLE>
<CAPTION>
                                                                      At December 31,
                                                            ------------------------------------
                                                                  1997               1998
                                                            -----------------  -----------------
<S>                                                         <C>                <C>
ASSETS

   Current assets:
         Cash and cash equivalents                              $    333          $   5,052
         Investments                                               5,812             12,789
         Other current assets                                        927              1,171
                                                                --------          ---------
                                                                   7,072             19,012
   Property and equipment, net                                     6,615              7,605
   Other assets                                                       93                 93
                                                                --------          ---------
                                                                $ 13,780          $  26,710
                                                                ========          =========
 
Liabilities
   Current liabilities:
         Accounts payable                                       $    643          $   1,036
         Accrued expenses                                          1,586              2,435
                                                                --------          ---------
                                                                   2,229              3,471
   Deferred rent payable                                              28                  -
 
   Commitments (see Notes)
 
Stockholders' Equity
   Preferred stock, par value $1.00; authorized 1,000,000 shares:
         Series C convertible preferred; designated 200 shares;
         62 shares issued and outstanding as of December 31, 1998
   Common stock, par value $.01; authorized 40,000,000 shares:
         issued and outstanding 28,950,400 and 30,479,719 shares
         as
         of December 31, 1997 and 1998, respectively                 290                305
   Additional paid-in capital                                     98,219            124,342
   Accumulated deficit                                           (86,986)          (101,017)
   Treasury stock at cost, 40,000 shares at December 31, 1998          -               (391)
                                                                --------          ---------
         Total stockholders' equity                               11,523             23,239
                                                                --------          ---------
                                                                $ 13,780          $  26,710
                                                                ========          =========
</TABLE> 
 
  The accompanying notes are an integral part of the consolidated financial 
                                  statements.

                                       24
<PAGE>
 
                               ORGANOGENESIS INC.
                                        
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                       (In thousands, except share data)

<TABLE>
<CAPTION>
                                                                    For the Years Ended December 31,
                                                                ----------------------------------------
                                                                    1996          1997          1998
                                                                ------------  ------------  ------------
<S>                                                             <C>           <C>           <C>
Revenues:
  Research and development support from related party           $     6,500   $     2,500   $     6,750
  Product sales to related party, royalties and other income             42           529         1,189
  Interest income                                                       985           502         1,058
                                                                -----------   -----------   -----------
     Total revenues                                                   7,527         3,531         8,997
                                                                -----------   -----------   -----------
 
 
Costs and Expenses:
  Research and development                                           10,647        13,854        17,542
  General and administrative                                          4,379         3,929         5,486
  Non-cash charge for stock option extension                              -         5,555             -
                                                                -----------   -----------   -----------
     Total costs and expenses                                        15,026        23,338        23,028
                                                                -----------   -----------   -----------
 
Net loss                                                        $    (7,499)  $   (19,807)  $   (14,031)
                                                                ===========   ===========   ===========
 
Net loss per common share - basic and diluted                   $      (.27)  $      (.70)  $      (.48)
                                                                ===========   ===========   ===========
 
Weighted average number of common shares
  outstanding - basic and diluted                                27,513,069    28,360,485    29,453,104
                                                                ===========   ===========   ===========
</TABLE>



   The accompanying notes are an integral part of the consolidated financial
                                  statements.

                                       25
<PAGE>
 
                              ORGANOGENESIS INC.
                                        
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (In thousands)

<TABLE>
<CAPTION>
                                                     For the Years Ended December 31,
                                                    -----------------------------------
                                                       1996         1997        1998
                                                    -----------------------------------
<S>                                                 <C>          <C>         <C>
Cash flows from operating activities:
  Net loss                                          $   (7,499)  $ (19,807)  $  (14,031)
  Adjustments to reconcile net loss to
   cash flows used in operating activities:
     Depreciation                                        1,049       1,658        1,474
     Issuance of stock options                              62          50            -
     Non-cash charge for stock option extension              -       5,555            -
  Changes in assets and liabilities:
   Other current assets                                   (146)       (224)        (244)
   Other assets                                             (5)         (4)           -
   Accounts payable                                        615        (577)         393
   Accrued expenses                                      1,880      (1,081)         849
   Deferred rent payable                                   (43)        (43)         (28)
                                                    ----------   ---------   ----------
Cash used in operating activities                       (4,087)    (14,473)     (11,587)
 
Cash flows from investing activities:
  Capital expenditures                                  (3,311)     (1,069)      (2,464)
  Purchases of investments                             (13,870)     (5,000)     (16,224)
  Sales/maturities of investments                       10,981      13,229        9,247
                                                    ----------   ---------   ----------
Cash provided by (used in) investing activities         (6,200)      7,160       (9,441)
 
Cash flows from financing activities:
  Proceeds from sale of preferred stock - net                -           -       19,117
  Proceeds from sale of common stock - net               5,000           -        6,000
  Proceeds from exercise of warrants                     2,316       4,571            -
  Proceeds from exercise of stock options                  801       2,676        1,021
  Purchase of treasury stock                                 -           -         (391)
                                                    ----------   ---------   ----------
Cash provided by financing activities                    8,117       7,247       25,747
                                                    ----------   ---------   ----------
 
Increase (decrease) in cash and cash equivalents        (2,170)        (66)       4,719
Cash and cash equivalents, beginning of year             2,569         399          333
                                                    ----------   ---------   ----------
 
Cash and cash equivalents, end of year              $      399   $     333   $    5,052
                                                    ==========   =========   ==========
</TABLE>


   The accompanying notes are an integral part of the consolidated financial
                                  statements.

                                       26
<PAGE>
 
                              ORGANOGENESIS INC.
                                        
          CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
          ----------------------------------------------------------
                                (In thousands)
<TABLE>
<CAPTION>
                                                               For the Years Ended December 31, 1996, 1997 and 1998             
                           -------------------------------------------------------------------------------------------------------
                            Series C Convertible                          Additional                                         Total
                                 Preferred Stock         Common Stock      Paid-in     Accumulated    Treasury Stock  Stockholders'
                            --------------------      ------------------                             ----------------              
                            Shares        Amount       Shares    Amount    Capital       Deficit      Shares  Amount        Equity 
----------------------------------------------------------------------------------------------------------------------------------
<S>                         <C>           <C>         <C>        <C>      <C>          <C>            <C>     <C>      <C>
Balance, December 31, 1995       -             -      13,732     $   137  $  77,341    $ (59,680)          -       -   $  17,798
----------------------------------------------------------------------------------------------------------------------------------
Issuance of common
  stock upon exercise
  of stock options and
  in connection with
  employee stock
  purchase plan                                          112           1        800                                          801
Issuance of common
 stock upon exercise
 of warrants                                             234           3      2,313                                        2,316
Sale of common stock to
 related party                                           214           2      4,998                                        5,000
Issuance of stock options                                                        62                                           62
Net loss                                                                                  (7,499)                         (7,499)
----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996       -             -      14,292         143     85,514      (67,179)          -       -      18,478
----------------------------------------------------------------------------------------------------------------------------------
Issuance of common
  stock upon exercise
  of stock options and
  in connection with
  employee stock
  purchase plan                                          297           3      2,673                                        2,676
Issuance of common
 stock upon exercise
 of warrants                                             357           4      4,567                                        4,571
Two, one-for-four
  common stock dividends                               8,214          82        (82)                                           -
Issuance of stock options                                                        50                                           50
Non-cash charge for stock
  option extension                                                            5,555                                        5,555
Net loss                                                                                 (19,807)                        (19,807)
----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997       -             -      23,160         232     98,277      (86,986)          -       -      11,523
----------------------------------------------------------------------------------------------------------------------------------
Issuance of common
  stock upon exercise
  of stock options and
  in connection with
  employee stock
  purchase plan                                          146           2      1,019                                        1,021
One-for-four
  common stock dividend                                5,826          58        (58)                                           -
Sale of preferred stock - net    -             -                             19,117                                       19,117 
Conversion of preferred stock    -             -       1,136          11        (11)                                           - 
Sale of common stock to
  related party                                          212           2      5,998                                        6,000
Purchase of treasury stock                                                                                40    (391)       (391)
Net loss                                                                                 (14,031)                        (14,031)
----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998       -             -      30,480     $   305  $ 124,342    $(101,017)         40  $ (391)  $  23,239
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
   The accompanying notes are an integral part of the consolidated financial
                                  statements.

                                       27
<PAGE>
 
                              ORGANOGENESIS INC.
                                        
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                        
NATURE OF BUSINESS
-------------------

     Organogenesis designs, develops and manufactures medical therapeutics
containing living cells and/or natural connective tissue. The company was formed
to advance and apply the emerging field of tissue engineering to major medical
needs.  Our product development focus includes living tissue replacements, cell-
based organ assist devices and other tissue-engineered products.

     On May 22, 1998, our lead product, Apligraf living skin construct, was
approved for marketing in the US.  Apligraf is the only mass-manufactured
product containing living human cells to be approved for marketing through the
FDA PMA process.  Novartis Pharmaceuticals Corporation launched Apligraf in the
US in June 1998.  Novartis Pharma AG has global Apligraf marketing rights and
also markets Apligraf in Canada.

     We have a wholly owned subsidiary, ECM Pharma/TM/, Inc.  ECM Pharma was
established to discover, develop and commercialize human therapeutics based on
the extracellular matrix.  We also have a wholly owned investment subsidiary,
Dan Capital Corporation, which holds a substantial portion of our cash, cash
equivalents and investments.

     We are subject to risks common to entities in the biotechnology industry,
including, but not limited to, the following uncertainties:

  .  Market acceptance of our products, if and when approved, and successful
     marketing and selling of Apligraf by Novartis;
  .  FDA approval of Apligraf for other indications and successful registrations
     of Apligraf outside the US;
  .  Risk of failure of clinical trials for future indications of Apligraf and
     other products;
  .  Compliance with FDA regulations and similar foreign regulatory bodies;
  .  Manufacture and sale of products in sufficient volume to realize a
     satisfactory margin;
  .  Continued availability of raw material for products;
  .  Availability of sufficient product liability insurance;
  .  Ability to recover the investment in property and equipment;
  .  Protection of proprietary technology through patents;
  .  Development by competitors of new technologies or products that are more
     effective than ours;
  .  Adequate third-party reimbursement for products;
  .  Dependence on and retention of key personnel;
  .  Year 2000 issues; and
  .  Availability of additional capital on acceptable terms, if at all.

                                       28
<PAGE>
 
     Our ultimate success is dependent upon sale of products, research and
development funding under licensing agreements, our ability to raise capital and
interest income on invested capital.  However, our funding requirements may
change depending upon numerous factors, including:

  .  Time required to obtain regulatory approvals of products in different
     countries, if needed, and subsequent timing of product launches;
  .  Commercial acceptance and reimbursement when product launches occur;
  .  Progress of research and development programs;
  .  Resources devoted to outside research collaborations or projects, self-
     funded projects, proprietary manufacturing methods and advanced
     technologies; and
  .  Acquisition of a second manufacturing plant.

     While we believe that future capital composed of manufacturing payments and
royalty revenue, research and development support payments and debt and equity
financings will be sufficient to fund future operations, there can be no
assurance that these or any additional funds will be available when required on
acceptable terms.  Refer to "Convertible Debt" note for debt financing
subsequent to year-end.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------

     PRINCIPLES OF CONSOLIDATION AND USE OF ESTIMATES
     The consolidated financial statements include the accounts of the company
and its wholly owned subsidiaries.  All intercompany activity has been
eliminated.  We prepare our financial statements under generally accepted
accounting principles that require us to make estimates and assumptions that
affect amounts reported and the related disclosures.  Actual results could
differ from those estimates.

     REVENUE RECOGNITION
     Research and development support revenue under the collaborative agreement
with Novartis is recognized as related expenses are incurred or contractual
obligations are met.  Revenue from Apligraf sales is recognized upon shipment
or, in certain cases, after fulfillment of firm purchase orders in accordance
with the Manufacturing and Supply Agreement with Novartis.  Other product
revenues are recognized upon shipment.  Royalty revenue is recorded as earned.
Deferred revenue arises from the difference between cash received and revenue
recognized in accordance with these policies.

     RESEARCH AND DEVELOPMENT COSTS
     All research and development costs are expensed as incurred and currently
include costs of production.

     PATENTS
     As a result of our research and development programs, we have a proprietary
portfolio of patent rights and patent applications for a number of patents in
the US and abroad.  Such patent rights are of significant importance to protect
our products and processes.  For financial reporting purposes, all costs in
connection with patent rights and patent applications have been expensed as
incurred.

     INCOME TAXES
     Research and development and other tax credits are recognized for financial
reporting purposes when they are realized.  Deferred taxes are determined based
on the difference between the financial reporting and the tax bases of assets
and liabilities using enacted income tax rates in effect in the years in which
the differences are expected to reverse.  However, the realizability of these
deferred tax assets is not assured as it depends upon future taxable income.
Accordingly, we have recorded a 100% valuation allowance against these assets.
Tax credits will be recorded as a reduction in income taxes when utilized.

                                       29
<PAGE>
 
     NET LOSS PER COMMON SHARE
     Net loss per common share - basic and diluted is based on the weighted
average number of common shares outstanding during each period.  Potentially
dilutive securities at December 31, 1998 include stock options outstanding to
purchase 6,006,138 common shares, warrants to purchase 400,000 common shares and
approximately 62 shares of convertible preferred stock; however, such securities
have not been included in the net loss per common share calculation because
their effect would be antidilutive.  For 1997 and 1996, the net loss per common
share - basic and diluted and weighted average number of common shares
outstanding were adjusted for a one-for-four stock split accounted for as a
stock dividend distributed on April 29, 1998.

     CASH AND CASH EQUIVALENTS
     Cash and cash equivalents consist of cash and money market funds that are
convertible into a known amount of cash and carry an insignificant risk of
change in value.  These investments are highly liquid and have original
maturities of less than three months.

     PROPERTY AND EQUIPMENT
     Equipment, furniture and fixtures, office equipment and leasehold
improvements are stated at cost. Depreciation is provided using the straight-
line method over three to ten years.  Leasehold improvements are being amortized
using the straight-line method over the term of the lease.

     Maintenance and repairs are charged to expense as incurred and betterments
are capitalized.  Upon retirement or sale, the cost of assets disposed of and
their related accumulated depreciation are removed from the accounts.  Any
resulting gain or loss is credited or charged to operations.

     CONSTRUCTION-IN-PROGRESS
     At December 31, 1996, construction-in-progress was approximately $1,902,000
due to the expansion of our facilities that was put into service during 1997.
As of December 31, 1998, construction-in-progress was approximately $933,000
relating to further build-out of our facilities for manufacturing, quality
systems labs and packaging.

     STOCK-BASED COMPENSATION
     Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation," allows us to continue to account for stock-based
compensation arrangements under the provisions of Accounting Principles Board
No. 25, "Accounting for Stock Issued to Employees," and disclose in a footnote
the pro forma effects to net loss and net loss per share assuming the fair value
accounting method of SFAS 123 was adopted.  Accordingly, no compensation cost
has been recognized in income from stock-based employee awards.

     ACCOUNTING PRONOUNCEMENTS
     In March of 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use."  SOP 98-1 requires computer
software costs associated with internal use software to be charged to operations
as incurred until certain capitalization criteria are met.  SOP 98-1 is
effective beginning January 1, 1999.  We do not expect adoption of this
statement to have a material effect on consolidated financial position or
results of operations.

     In June of 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities."  SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. SFAS No. 133
is effective for fiscal years beginning December 15, 1999.  We do not expect
adoption of this statement to have a material impact on consolidated financial
position or results of operations.

                                       30
<PAGE>
 
     RECLASSIFICATIONS
     Certain reclassifications have been made to the 1996 and 1997 financial
statements to conform to the 1998 classifications.  These reclassifications have
no impact on financial position or results of operations.

INVESTMENTS
------------

     We determine the appropriate classifications of debt securities at the time
of purchase.  The investments held are classified as available-for-sale and are
carried at cost plus accrued interest, which approximates fair market value and,
accordingly, there was no adjustment to stockholders' equity.  We also classify
investments in accordance with their intended use.  At December 31, 1998, the
intended use of all investments is to fund working capital and plant expansion.
We invest excess cash in securities that have an A or A1 rating or better with a
maximum maturity of two years.

     The aggregate cost and fair market value of investments are as follows (in
thousands):

<TABLE>
<CAPTION>
                                                December 31, 1997                   December 31, 1998
                                        -----------------------------      -------------------------------
                                           Amortized           Market          Amortized            Market
               Maturity                         Cost            Value               Cost             Value
----------------------------------------------------------------------------------------------------------
<S>                                     <C>                  <C>               <C>              <C>
Less than one year:
  US Government and Agency bonds           $  1,307          $  1,310          $  1,034         $   1,036
  Time deposits                                 304               304                 -                 -
  Corporate and other debt securities         3,754             3,761             5,019             5,019
  Certificates of deposit                       197               197               693               693
Between one and two years:
  US Government and Agency bonds                250               251             3,106             3,110
  Corporate and other debt securities             -                 -             2,937             2,957
                                           --------          --------          --------          --------
Total Investments                          $  5,812          $  5,823          $ 12,789          $ 12,815
                                           ========          ========          ========          ========
</TABLE>
                                                                                
Other Current Assets
---------------------

     Included in other current assets is a net receivable due from Novartis of
approximately $170,000 and $213,000 as of December 31, 1997 and 1998,
respectively.

PROPERTY AND EQUIPMENT
-----------------------

     Property and equipment consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                  Estimated Useful                                 December 31,
                                                                            -----------------------------------
                                                       Life (years)                   1997                 1998
---------------------------------------------------------------------------------------------------------------
<S>                                               <C>                       <C>                    <C>
Equipment                                                     5-10             $     9,110           $   10,235 
Furniture, fixtures and office equipment                       3-5                   1,624                1,954 
Leasehold improvements                                  Lease term                   3,746                3,822 
Construction-in-progress                                                                 -                  933 
                                                                               -----------           ---------- 
                                                                                    14,480               16,944 
Less accumulated depreciation                                                       (7,865)              (9,339)
                                                                               -----------           ---------- 
                                                                               $     6,615           $    7,605 
                                                                               ===========           ==========  
</TABLE>
                                                                                

                                       31
<PAGE>
 
ACCRUED EXPENSES
-----------------

     Accrued expenses consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                            December 31,
                                                                         -------------------------------
                                                                               1997               1998
--------------------------------------------------------------------------------------------------------
<S>                                                                      <C>                <C>
Compensation and employee benefits                                       $       880        $     1,121          
Professional services                                                            226                535          
Other                                                                            480                779          
                                                                         -----------        -----------          
                                                                         $     1,586        $     2,435          
                                                                         ===========        ===========           
</TABLE>
                                                                                
COMMITMENTS
-----------

     Lease Obligations
     We occupy our current premises under a lease that expires on September 30,
2004.  This lease has three options to extend the term for an additional five
years each option.  We have provided written notice to the landlord of our
intent to lease all of the remaining space at this primary facility starting
November 1, 1999.  Taxes, insurance and operating expenses are our
responsibility under the terms of the lease.  We also have a second lease for
warehouse and office space that expires on October 31, 1999.  Additionally, in
January 1999, we entered into a noncancelable operating lease for certain office
equipment.

     Future minimum lease payments are as follows (in thousands):

<TABLE>
<S>                                                                    <C>
1999                                                                   $    642
2000                                                                        798
2001                                                                        818
2002                                                                        838
2003                                                                        824
Thereafter                                                                  627
                                                                       --------
                                                                       $  4,547
                                                                       ========
</TABLE>
                                                                               
     Rent of approximately $394,000, $491,000 and $562,000 was charged to
expense during the years ended December 31, 1996, 1997 and 1998, respectively.

     CONSTRUCTION-IN-PROGRESS
     At December 31, 1998, we had approximately $933,000 in construction in
progress relating to expansion of our main facility.  Additionally, we have
committed approximately $4.1 million for this build-out.  The total project cost
is estimated at about $5.9 million.

     SERIES C PREFERRED STOCK COMMITMENT
     At December 31, 1998, we had approximately 62 shares of Series C
convertible preferred stock outstanding.  In the event that any Series C
preferred stock are outstanding on the mandatory conversion date of March 26,
2000, we have the option of redeeming any such outstanding Series C preferred
stock by: (1) paying cash equal to the product of the number of Series C
preferred stock outstanding multiplied by the stated value of $100,000 per
share; (2) issuing common stock equal to 1.15 of the stated value divided by the
average of the closing bid prices for the 20 consecutive trading days prior to
the mandatory conversion date; or (3) any combination of these methods.

                                       32
<PAGE>
 
INCOME TAXES
-------------

     At December 31, 1998, we had federal and state net operating loss
carryforwards of approximately $101,500,000 and $74,127,000, respectively, of
which $5,577,000 relate to disqualifying dispositions of qualified incentive
stock options and exercise of nonqualified stock options.  The tax benefit of
$2,231,000 related to the stock options will be credited to equity when
realized.  At December 31, 1998, we had federal and state tax credit
carryforwards of approximately $2,668,000 and $1,676,000, respectively.  The
federal and state net operating loss carryforwards expire beginning in 2000 and
1999, respectively.  The federal and state research and development tax credits
expire beginning in 2001 and 2006, respectively.

     The approximate tax effect of each type of temporary difference and
carryforward is reflected in the following table. The effective tax rate is
expected to be 40% combined federal and state (in thousands):

<TABLE>
<CAPTION>
                                                                                            December 31,
                                                                              --------------------------
                                                                                1997              1998
--------------------------------------------------------------------------------------------------------
<S>                                                                           <C>           <C>
Deferred tax assets and (liabilities):
    Net operating loss carryforwards                                          $   34,975    $   37,062
    Research and development credits and other credits                             3,373         3,774
    Depreciation                                                                    (529)         (349)
    Other                                                                          2,237         2,455
                                                                              ----------    ----------
Net deferred tax assets before valuation allowance                                40,056        42,942
Valuation allowance                                                              (40,056)      (42,942)
                                                                              ----------    ----------
Net deferred assets after valuation allowance                                 $        0    $        0
                                                                              ==========    ==========
</TABLE>
                                                                                
     These losses and tax credits are available to reduce federal and state
taxable income and income taxes, respectively, in future years, if any.  The
realizability of deferred tax assets is not assured as it depends upon future
taxable income.  Accordingly, we have recorded a 100% valuation allowance
against these assets.  We are required to recognize all or a portion of net
deferred tax assets, with corresponding increases to net income, when we
believe, given the weight of all available evidence, that it is more likely than
not that all or a portion of the benefits of net operating loss carryforwards
and other credits will be realized.  However, there can be no assurance that we
will ever realize any future cash flows or benefits from these losses and tax
credits.  Ownership changes may result in future limitations on the utilization
of net operating losses and research and development tax credit carryforwards.

COLLABORATIVE AND OTHER AGREEMENTS
-----------------------------------

     In January 1996, we entered into an agreement with Novartis Pharma AG
granting them exclusive global marketing rights to Apligraf.  Under the
agreement, Novartis is responsible for Apligraf sales and marketing costs
worldwide, as well as all clinical trials, registrations and patent costs
outside the US.  The agreement provides us with up to $40,000,000 in equity
investments, research support and milestone payments, of which $12,750,000 was
received during 1998, $2,500,000 in 1997 and $11,500,000 in 1996.  The remaining
payments are based upon achievement of specified events. Under the agreement, we
supply Novartis' global requirements for Apligraf and receive revenue consisting
of a per unit manufacturing payment and royalties on product sales.

     In late 1998, we entered into research collaborations with Estee Lauder
Companies Inc. and with Novavax, Inc.

     In 1995, we entered into a supply arrangement with Biomet, Inc. under which
Biomet may, but is not obligated to, purchase collagen from us.  Revenues under
this agreement are included in other income.

                                       33
<PAGE>
 
     In 1994, we signed a license agreement with Toyobo Ltd. granting Toyobo a
license to manufacture and market Testskin in Japan in exchange for royalty
payments.  Additionally, Toyobo may, but is not obligated to, purchase collagen
and other products from us.  Revenues under this arrangement are included in
other income.

RESEARCH AGREEMENTS
--------------------

     The research agreements summarized below generally are funded over a one or
two-year period.  Each agreement is reviewed at least annually and the amounts
to be funded for the next period are then determined.  Either party may cancel
the agreement upon advance written notice.   Total payments under these
agreements were $648,000, $571,000 and $438,000 for 1998, 1997 and 1996,
respectively.  Information regarding the date entered into, the entity that the
agreement is with and the area of research or development are summarized as
follows:

  .  April 1998, Medvet Science Pty. Ltd., stem cells;
  .  September 1996, Children's Hospital (Boston), graft acceptance;
  .  June 1996, Massachusetts General Hospital, bioartificial liver;
  .  December 1995, Brigham and Women's Hospital, biology of surface tissues
     (e.g., oral mucosa, skin appendages);
  .  March 1995 (contract expired without renewal in 1998), Harvard Medical
     School, extracellular matrix related therapeutics; and
  .  1995, Hebrew University, connective tissue.

LICENSE AGREEMENT
------------------

     Certain of our technologies are licensed under an exclusive patent license
agreement with the Massachusetts Institute of Technology.  The agreement with
MIT covers certain US patents and corresponding patents in European and Far East
countries.  Pursuant to the MIT agreement, we have been granted an exclusive,
worldwide license to make, use and sell the products covered by the patents and
to practice the procedures covered by the patents.  The MIT agreement requires
us to pay to MIT a royalty on the cumulative net sales of licensed products
ranging from 3% to 4.5% of annual sales.

     Additionally, we entered into an agreement effective January 1999 with the
University of British Columbia that grants us an exclusive, worldwide license to
use and sublicense certain UBC technology and to manufacture, distribute and
sell products based on that technology.

CONVERTIBLE DEBT
-----------------

     On March 30, 1999, we closed a financing of $15,000,000 through the private
placement of five year convertible debentures and 300,000 warrants to purchase
common stock. We may raise up to approximately $5,000,000 additional under this 
placement. The debentures are convertible at a fixed price of $15.00 per share
any any time on or after March 30, 2000. Interest on the debentures accrues at
7% annually, payable in cash, common stock (at the average trading price for the
twenty trading days preceding the due date) or any combination thereof, at our
option, semi-annually on September 30 and March 31 or on the date any of the
principal outstanding under the notes has been converted into common stock. At
our option, at any time on or after March 30, 2002, the debentures may be
prepaid by conversion of the principal into common stock at the conversion price
of $15, cash or any combination thereof and payment of any accrued interest as
described above, provided that the average per share market value for the twenty
consecutive trading days immediately preceding the date of prepayment equals or
exceeds $40 per share. The notes mature on March 29, 2004 and are payable in
cash. The warrants grant the right to purchase one share of common stock at the
exercise price of $22.50 for each $50.00 in face value of the convertible notes
at any time before March 30, 2004. We expect to register the warrants and
underlying common stock for conversion of the debentures, payment of interest
and exercise of the warrants.

                                       34
<PAGE>
 
STOCKHOLDERS' EQUITY
---------------------

     PREFERRED STOCK
     We have authorized 1,000,000 shares of preferred stock at December 31,
1998, comprised of the following designations:

  .  250,000 shares Series A convertible preferred stock;
  .  50,000 shares Series B Junior participating preferred stock;
  .  200 shares Series C convertible preferred stock; and
  .  699,800 shares authorized and unissued.

     The Series A convertible preferred stock that was previously issued was
subsequently converted into 312,500 shares of common stock in October 1995.  No
shares of Series A or Series B  preferred stock were issued and outstanding as
of December 31, 1996, 1997 and 1998.

     In March 1998, we completed a placement of 200 shares of Series C
convertible preferred stock and warrant financing with two institutional
investors at a price of $100,000 per share. Proceeds from the offering, net of
placement agent fees and expenses, were approximately $19,117,000. The Series C
preferred stock pay no dividends, have no voting rights, and are convertible
into common stock on a scheduled basis over two years based on market price at
time of conversion (up to $28.80 per share). We may call for conversion of all
or part of the shares of Series C preferred stock under certain conditions based
on continued improvement in the price of our common stock. Conversions by the
investors are subject to certain limits; no limits exist for conversions on
redemption or upon a major transaction. Mandatory conversion is March 26, 2000,
at which time we have the option to redeem any outstanding Series C preferred
shares in cash or by issuing common stock. In addition, the investors received
three-year warrants to purchase an aggregate of 200,000 shares of common stock
at $31.20 per share. The warrants may be exercised at any time prior to April
2001. In July 1998, the investors exercised their right to receive additional
warrants to purchase 150,000 shares of common stock at $17.45 per share with an
expiration date of March 26, 2001. We also issued a warrant to purchase an
aggregate of 50,000 shares of common stock at $28.80 per share to the placement
agent that expires March 25, 2001. The total fair value of all warrants was
estimated to be approximately $2,509,000 and is included in additional paid-in
capital. No further warrants may be issued under the Series C preferred stock
placement.

     In April 1998, we filed a registration statement for 1,800,000 shares of
common stock, the maximum number of shares that may be acquired relating to this
transaction; except for mandatory conversion where the common share limit does
not apply.  All shares have been reserved for issuance.  The SEC declared this
registration statement effective in May 1998.

     In May, September and November 1998, an aggregate of $13,800,000 face
amount of the Series C preferred stock was converted into common stock resulting
in the issuance of approximately 1,136,000 shares of common stock.  These
conversions are non-cash transactions.

     COMMON STOCK

     We have authorized 40,000,000 shares of common stock, of which there were
28,950,400 and 30,479,719 shares issued and outstanding as of December 31, 1997
and 1998, respectively.

                                       35
<PAGE>
 
     The following one-for-four stock splits accounted for as stock dividends
were declared by the Board of Directors during the past three years:

<TABLE>
<CAPTION>
       Stock Dividend              Record Date             Payable Date         Common Shares Issued        
       --------------              -----------             ------------         --------------------        
       <S>                   <C>                      <C>                       <C>                               
                  25%           April 22, 1998           April 29, 1998                    5,826,000
                  25%        November 21, 1997        November 28, 1997                    4,618,000   
                  25%           April 25, 1997              May 2, 1997                    3,596,000   
</TABLE>

     All related share and per share data in the consolidated financial
statements reflect all stock dividends for all periods presented, except for the
Statements of Changes in Stockholders' Equity.

     We received $6,000,000 from Novartis in 1998 relating to milestone equity
investments for approximately 212,000 shares of common stock.  As a result of
these equity investments and a prior equity investment of $5,000,000 made in
January 1996, Novartis holds approximately 2.2% of outstanding shares as of
December 31, 1998.

     In July 1995, we completed a public offering of 230,000 units, at a unit
price of $66.25, resulting in net proceeds of approximately $14,774,000.  Each
unit in the offering consisted of five shares of common stock and one common
stock purchase warrant to purchase one share of common stock.  On July 21, 1997,
we gave notice of redemption with respect to all outstanding common stock
purchase warrants issued.  All common stock purchase warrants were exercised
during 1997 for 357,000 shares of common stock, resulting in proceeds of
approximately $4,571,000.

     In November 1991, we completed a public offering of 1,650,000 shares of
common stock.  This offering resulted in net proceeds of approximately
$36,144,000.  In connection with this offering, the underwriter was issued a
warrant to purchase 187,500 shares of common stock, exercisable at any time
during a four-year period.  During 1996, these warrants were exercised for
187,500 shares of common stock resulting in proceeds of approximately
$1,828,000.

     In April 1991, we received net proceeds of approximately $924,000 from the
sale of 125,000 shares of common stock and warrants to purchase common stock
exercisable at any time during a five-year period.  The warrants allowed for the
purchase of 31,250 shares of common stock at $9.60 per share and 15,625 shares
at $12.00 per share.  During 1996, these warrants were exercised for 46,875
shares of common stock, resulting in proceeds of $488,000.

TREASURY STOCK
--------------

     In September 1998, the Board of Directors authorized a common stock
repurchase program.  Repurchases are allowed through open-market transactions
for up to 500,000 shares that will provide us with treasury shares for general
corporate purposes.  At December 31, 1998, we had repurchased 40,000 shares of
common stock for an aggregate purchase price of $391,000.  The stock repurchase
program may be discontinued at any time.

                                       36
<PAGE>
 
STOCKHOLDER RIGHTS PLAN
------------------------

     In August 1995, the Board of Directors adopted a Stockholder Rights Plan
and declared a dividend of one right for each outstanding share of common stock
to stockholders of record on September 1, 1995.  After adjusting for two one-
for-four stock dividends distributed during 1997 and one one-for-four stock
dividend distributed during 1998, there is approximately .51 of a right for each
outstanding share of common stock.  Each right only becomes exercisable and
transferable apart from the common stock at the earlier of: (1) ten days after a
person or group acquires beneficial ownership of 15% or more of outstanding
common stock; or (2) ten business days following an announcement of a tender or
exchange offer of 30% or more of outstanding stock.

     Initially, each right, upon becoming exercisable, would entitle the holder
to purchase one-thousandth of a share of Series B Junior participating preferred
stock at an exercise price of $85, subject to adjustment.  If a person or group
acquires beneficial ownership of 15% or more of the outstanding shares of common
stock, then each holder of a right (other than rights held by the acquiring
person or group) would have the right to receive that number of shares of common
stock which equals the exercise price of the right divided by one-half of the
current market price of the common stock.

     The rights may be redeemed for $0.01 per right at any time until the tenth
day following the stock acquisition date.  The rights will expire on September
1, 2005.

STOCK-BASED COMPENSATION
-------------------------

     At December 31, 1998, we had four stock-based compensation plans
(collectively, Stock Option Plans), as described below.  Consistent with the
optional disclosure method prescribed by SFAS 123, the following are the pro
forma net loss and net loss per common share - basic and diluted for the years
ended December 31, 1996, 1997 and 1998, respectively, had compensation cost for
the Stock Option Plans been determined based on the fair value at the grant date
for grants made in 1996, 1997 and 1998 (in thousands, except share data):

<TABLE>
<CAPTION>
                                               1996                      1997                      1998
                           ------------------------  ------------------------  ------------------------
                           As Reported   Pro Forma   As Reported   Pro Forma   As Reported   Pro Forma
------------------------------------------------------------------------------------------------------
<S>                        <C>           <C>         <C>           <C>         <C>           <C>
Net loss                   $  (7,499)    $  (8,696)  $   (19,807)  $  (18,686) $  (14,031)   $ (17,985)
Net loss per common
share - basic and diluted  $   (0.27)    $   (0.32)  $     (0.70)  $    (0.66) $    (0.48)   $   (0.61)
</TABLE>

     The effects on 1996, 1997 and 1998 pro forma net loss and net loss per
common share - basic and diluted of expensing the estimated fair value of stock
options may not be representative of the effects on reporting pro forma results
for future years as the periods presented include only two, three and four
years, respectively, of fair value expense for options granted under the Stock
Option Plans because the method prescribed by SFAS 123 has not been applied to
options granted prior to January 1, 1995.

     The weighted average fair value of options granted under the Stock Option
Plans was estimated using the Black-Scholes option-pricing model. The Black-
Scholes option-pricing model was developed for use in estimating the fair value
of traded options that have no vesting restrictions and are fully transferable.
In addition, option-pricing models require the input of highly subjective
assumptions, including expected stock price volatility. Because our employee
stock options have characteristics significantly different from those of traded
options and changes in the subjective input assumptions may materially affect
the fair value estimate, in our opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of employee stock options.

                                       37
<PAGE>
 
     The assumptions used to calculate the weighted average fair value of
options granted during 1996, 1997 and 1998 are as follows:

<TABLE>
<CAPTION>
                                                                                       1996         1997          1998
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                                   <C>          <C>           <C>
Assumed life for options issued to employees (years)                                     6.2           5.0          5.0
Assumed life for options issued to directors and officers (years)                        7.7           7.0          7.0
Risk-free interest rate                                                                  6.2%          6.3%         5.3%
Volatility                                                                              61.0%         61.0%        65.0%
Dividend yield                                                                            -             -            -
Weighted average fair value per common share of options granted during the year       $ 5.36        $ 7.85      $ 14.48
</TABLE>

     In May 1997, the Board of Directors voted to extend the term of an option
granted to an officer in 1987 for an additional five years. The option allows
for the purchase of 732,423 shares of common stock at an exercise price of
$3.072.  The extension of this option requires a new measurement date for
valuing the option, resulting in a non-cash compensation charge of $5,555,000
recorded in the second quarter of 1997.  The option is fully exercisable and the
shares have been reserved for issuance.

THE STOCK OPTION PLANS
-----------------------

     In May 1995, a stock option plan was approved by shareholders providing for
the issuance of up to 2,929,688 shares of common stock options to enable us to
attract and retain key employees and consultants. Under the 1995 Plan, we may
grant incentive and non-qualified stock options to officers, employees,
consultants and advisors.  The 1995 Plan, which took effect upon the expiration
of the 1986 Stock Option Plan in August 1996, is administered by a committee of
the Board of Directors.  This committee selects the individuals to whom options
are granted and determines: (1) the type of option to be granted; (2) the number
of shares of common stock covered by the option; (3) when the option becomes
exercisable; and (4) the duration of the option which, in the case of incentive
stock options, may not exceed ten years.  Vesting generally occurs ratably over
a five-year period beginning one year from the date of grant.  No one person may
be issued options to purchase more than 500,000 shares of common stock in any
one calendar year.  Stock options granted under the 1995 Plan may not be granted
at an exercise price less than 100% of the fair market value of the common stock
on the date of grant (or 110% of fair market value in the case of incentive
stock options granted to employees holding 10% or more of voting stock).  The
aggregate fair market value (determined at the time of grant) of shares issuable
pursuant to incentive stock options which first become exercisable in any
calendar year by an employee may not exceed $100,000.

     Our 1986 Stock Option Plan provided for the issuance of an aggregate of
4,882,812 shares of common stock for the granting of incentive and non-qualified
stock. The 1986 Plan was also administered by a committee of the Board of
Directors and had substantially the same terms and conditions as described under
the 1995 Plan.  In August 1996, the 1986 Plan expired and no further grants were
made.  All options outstanding on the expiration date remain in effect.

     In 1994, a stock option plan for non-employee directors was approved by
shareholders.  Under the 1994 Director Plan, stock options to purchase up to
488,281 shares of common stock may be granted to non-employee directors.  The
1994 Director Plan provides that the option price per share be at fair market
value and vest ratably over a five-year period beginning one year from the date
of grant, with a duration not to exceed ten years.

     The 1991 Director Stock Option Plan provided for the granting of options to
purchase 244,141 shares of common stock by non-employee directors and terminated
upon the adoption of the 1994 Director Plan.  The options were granted at fair
market value and were immediately exercisable, subject to repurchase, at the
option price, in the event the optionee ceased to be a director.  This
repurchase right terminates and the shares vest ratably over a five-year period
beginning one year from the date of grant.  All options outstanding on the
termination date remain in effect.

                                       38
<PAGE>
 
     In 1987, we granted to an officer an option to purchase 732,423 shares
of common stock at an exercise price of $3.072 per share.  The shares have been
reserved for issuance and are fully vested and exercisable.

     The following table presents the combined activity of all Stock Option
Plans for the years ended December 31, 1996, 1997 and 1998:

<TABLE>
<CAPTION>
                                                           1996                        1997                       1998
                                        -----------------------             ---------------       --------------------
                                                       Weighted                    Weighted                   Weighted     
                                                        Average                     Average                    Average     
                                                       Exercise                    Exercise                   Exercise     
                                        Shares            Price        Shares         Price       Shares         Price      
----------------------------------------------------------------------------------------------------------------------
<S>                                     <C>            <C>          <C>            <C>          <C>           <C>
Outstanding at beginning of period      4,028,204        $ 4.42     5,019,005      $  5.56      5,320,206     $   6.83   
Granted                                 1,360,010          8.60     1,041,795        12.47        954,889        22.00   
Exercised                                (210,836)         3.60      (467,666)        5.60       (148,413)        6.39   
Canceled                                 (158,373)         5.39      (272,928)        7.51       (120,544)       12.56   
                                        ---------                   ---------                   ---------              
Outstanding at end of period            5,019,005          5.56     5,320,206         6.83      6,006,138         9.10   
                                        =========                   =========                   =========              
Exercisable at year end                 2,476,371          4.09     2,729,631         4.47      3,297,005         5.18   
                                        =========                   =========                   =========               
 
Shares available for granting
  of options at end of period           2,144,873                   1,234,883                     371,105
                                        =========                   =========                   =========
</TABLE>

     The following table presents weighted average price and life information
about significant option
groups outstanding at December 31, 1998 for the Stock Option Plans:

<TABLE>
<CAPTION>
                                      Options Outstanding                                  Options Exercisable
                  ------------------------------------------------------------         ---------------------------
                                         Weighted Average                                                 Weighted            
                                                Remaining    Weighted Average                              Average            
Range of                 Number               Contractual            Exercise               Number        Exercise            
Exercise Prices     Outstanding               Life (Years)              Price          Exercisable           Price              
------------------------------------------------------------------------------------------------------------------
<S>                 <C>                  <C>                 <C>                    <C>               <C>
$ 2.457  -  3.738     1,706,661                        3.8   $           3.15            1,638,298          $ 3.13 
  3.891  -  6.144       825,968                        4.9               5.05              635,748            4.95 
  6.604  -   9.92     1,484,104                        6.3               7.96              799,108            7.65 
  10.00  -  14.84     1,145,861                        8.4              11.56              208,946           11.44 
  15.06 -   21.28       172,105                        9.2              19.29               13,343           20.34 
  24.00 -   31.00       671,439                        9.2              24.92                1,562           24.64 
                    -----------                                                         ----------                 
                      6,006,138                        6.2               9.10            3,297,005            5.18  
                    ===========                                                         ==========
</TABLE>

THE 1991 EMPLOYEE STOCK PURCHASE PLAN
--------------------------------------

     Under the 1991 Employee Stock Purchase Plan, a total of 366,211 shares of
common stock are reserved for issuance (up to 25,000 shares may be issued in any
one year). The purchase plan allows eligible employees the option to purchase
common stock during two six-month periods of each year at 85% of the lower of
the fair market value of the shares at the time the option is granted or is
exercised.  The term of this plan ends December 31, 1999.  During 1996, 1997 and
1998, we issued a total of 6,986, 6,507 and 5,046 shares of common stock,
respectively, under this purchase plan.  Remaining shares available under this
purchase plan were 320,335 as of December 31, 1998.

                                       39
<PAGE>
 
EMPLOYEE SAVINGS PLAN
----------------------

     We have a 401(k) savings plan covering full-time employees who are eligible
to participate upon hire.  Under this savings plan, we may match employee
contributions at management's discretion. Contributions made under the savings
plan were approximately $41,000, $53,000 and $62,000 as of December 31, 1996,
1997 and 1998, respectively.


ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
           FINANCIAL DISCLOSURE
     None.

                                       40
<PAGE>
 
                                   PART III


ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information required by this item is contained in our Proxy Statement
for the 1999 Annual Meeting of Stockholders under the captions "Information
About the Board of Directors", "Information About Executive Officers" and
"Election of Directors" and is incorporated herein by reference.

ITEM 11.    EXECUTIVE COMPENSATION

     The information required by this item is contained under the caption
"Information About Executive Officers" in our 1999 Proxy Statement and
is incorporated herein by reference.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
            MANAGEMENT

     The information required by this item is contained in our 1999 Proxy
Statement under the captions, "Information About Principal Stockholders" and
"Information About Executive Officers" and is incorporated herein by reference.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by this item is contained under the caption
"Certain Transactions" in our 1999 Proxy Statement and is incorporated herein by
reference.

                                       41
<PAGE>
 
                                    PART IV


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

(A)  3. EXHIBITS

     The exhibits filed as a part of this Annual Report on Form 10-K are
listed in the Exhibit Index immediately preceding the exhibits.  The Registrant
has identified in the Exhibit Index each management contract and compensatory
plan filed as an exhibit to this Form 10-K in response to Item 14(c) of Form
10-K.

(B)  REPORTS ON FORM 8-K

     None

                                       42
<PAGE>
 
                                  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.

                                         ORGANOGENESIS INC.

                                         BY: /s/ HERBERT M. STEIN
                                             --------------------------------
                                                 HERBERT M. STEIN

                                         Chairman and Chief Executive Officer

                                         Date:  March 30, 1999

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


<TABLE>
<CAPTION>
                SIGNATURE                                      TITLE                             DATE
                ---------                                      -----                             ----
 <S>                                                 <C>                                    <C>  
           /s/ HERBERT M. STEIN                      Chairman, Chief Executive              March 30, 1999
------------------------------------------
             Herbert M. Stein                        Officer and Director
                                                     (Principal executive officer)
 
            /s/ DAVID T. ROVEE                       President, Chief Operating             March 30, 1999
------------------------------------------
              David T. Rovee                         Officer and Director
 
          /s/ RICHARD S. CRESSE                      Director                               March 30, 1999
------------------------------------------
              Richard S. Cresse
 
            /s/ ALBERT ERANI                          Director                              March 30, 1999
------------------------------------------
             Albert Erani
 
       /s/ KENNETH J. NOVACK                         Director                               March 30, 1999
------------------------------------------
          Kenneth J. Novack
 
        /s/ BJORN R. OLSEN                           Director                               March 30, 1999
------------------------------------------
          Bjorn R. Olsen
 
      /s/ MARGUERITE A. PIRET                        Director                               March 30, 1999
------------------------------------------
        Marguerite A. Piret
 
      /s/ ANTON E. SCHRAFL                           Director                               March 30, 1999
------------------------------------------
        Anton E. Schrafl
 
     /s/ DONNA ABELLI LOPOLITO                       Vice President, Chief                  March 30, 1999
------------------------------------------  
      Donna Abelli Lopolito                          Financial Officer,
                                                     Treasurer and Secretary
</TABLE>

                                       43
<PAGE>
 
                                 EXHIBIT INDEX
 

Exhibit No.                         Description of Exhibit
-----------                         ----------------------
  (3)(a)       Restated Certificate of Incorporation of the Company.(1)
    (b)        Certificate of Amendment to the Restated Certificate of
               Incorporation of the Company.(8)
    (c)        Certificate of Stock Designation, Number, Voting Powers,
               Preferences and Rights of the Series of the Preferred Stock of
               Organogenesis Inc. to be Designated Series A Convertible
               Preferred Stock.(9)
    (d)        Certificate of Designation, filed with the Secretary of State of
               the State of Delaware on August 29, 1995. (12)
    (e)        Bylaws of the Company, as amended.(2)
    (f)        Rights Agreement, dated as of September 1, 1995, between the
               Company and American Stock Transfer & Trust Company. (12)
    (g)        Form of Unit Warrant Agreement.(13)
    (h)        Form of Investment Agreement.(13)
  (4)(a)       Form of Warrant Agreement with respect to Warrants included as
               part of the Units of the Company's securities.(1)
    (b)        Notice of Redemption of the Company's Redeemable Common Stock
               Purchase Warrants.(3)
    (c)        Form of Unit Purchase Option, dated December 18, 1986, issued to
               each of the Company's Unit Purchase Option holders.(4)
    (d)        Form of Stock Registration Rights Agreement, dated February 23,
               1990, between the Company and certain security holders.(4)
    (e)        Form of Common Stock Purchase Warrant, dated February 23, 1990,
               issued to certain security holders.(9)
 (10)(a)       1986 Stock Option Plan of the Company, as amended.*(10)
    (b)        1991 Director Stock Option Plan of the Company, as amended.*(10)
    (c)        1991 Employee Stock Purchase Plan of the Company, as
               amended.*(10)
    (d)        1994 Director Stock Option Plan of the Company, as amended.*(11)
    (e)        License Agreement among the Company, Eugene Bell and
               Massachusetts Institute of Technology dated December 16, 1985
               ("MIT License Agreement").(1)
    (f)        Amendment to MIT License Agreement, dated October 22, 1986.(1)
    (g)        Second Amendment to MIT License Agreement, dated as of March 31,
               1988.(6)
    (k)        Subscription Agreement between the Company and a purchaser of the
               Series A Convertible Preferred Stock and 10% Subordinated
               Promissory Notes dated as of July 3, 1986, with a schedule of
               additional purchasers.(1)
    (l)        Indenture of Lease between Canton Commerce Center Limited
               Partnership and the Company, dated as of July 10, 1989, as
               amended.(7)
    (q)        Non-Statutory Stock Option Agreement between the Company and
               Herbert M. Stein dated April 7, 1987.*(5)
    (r)        Manufacturing and Supply Agreement between the Company and
               Novartis Pharma AG, dated as of August 11, 1997**(15)
    (s)        Letter Agreement between the Company and Dr. David T. Rovee dated
               September 23, 1991.*(14)
    (u)        1995 Stock Option Plan, as amended.*(14)
    (v)        The License and Supply Agreement between the Company and Sandoz
               Pharma Ltd., dated as of January 17, 1996. **(16)
    (w)        The Stock Purchase Agreement between the Company and Sandoz
               Pharma Ltd., dated as of January 17, 1996. **(16)
    (x)        1999 Non-qualified Stock Option Plan.  

                                      44
<PAGE>
 
                                 EXHIBIT INDEX
 
Exhibit No.                   Description of Exhibit
-----------                   ----------------------
  (21)         Subsidiaries of the Company, filed herewith.
  (23)         Consent of PricewaterhouseCoopers L.L.P., filed herewith.
 
______________
(1)  Incorporated herein by reference to the exhibits to the Company's
     Registration Statement on Form S-1 (File No. 33-9832).
(2)  Incorporated herein by reference to the exhibits to the Company's Annual
     Report on Form 10-K, filed March 31, 1987.
(3)  Incorporated herein by reference to the exhibits to the Company's Current
     Report on Form 8-K, filed February 18, 1987.
(4)  Incorporated herein by reference to the exhibits to the Company's
     Registration Statement on Form S-3 (File No. 33-33914).
(5)  Incorporated herein by reference to the exhibits to the Company's Annual
     Report on Form 10-K, filed March 30, 1988.
(6)  Incorporated herein by reference to the exhibits to the Company's Annual
     Report on Form 10-K, filed March 31, 1989.
(7)  Incorporated herein by reference to the exhibits to the Company's Annual
     Report on Form 10-K, filed April 2, 1990.
(8)  Incorporated herein by reference to Exhibit 3(a) to the Company's Form 
     10-K, filed April 1, 1991.
(9)  Incorporated by reference to Exhibit 4 to the Company's Quarterly Report on
     Form 10-Q, filed August 13, 1991.
(10) Incorporated herein by reference to the exhibits to the Company's Annual
     Report Form 10-K, filed March 31, 1993.
(11) Incorporated herein by reference to Appendix A of the Company's Definitive
     Proxy Statement filed April 19, 1994.
(12) Incorporated herein by reference to the exhibits to the Company's Current
     Report on Form 8-K, filed August 29, 1995
(13) Incorporated herein by reference to the exhibits to the Company's Amended
     Registration Statement on Form S-3, filed July 5, 1995.
(14) Incorporated herein by reference to Appendix A of the Company's Definitive
     Proxy Statement filed April 14, 1995.
(15) Incorporated herein by reference to the exhibits to the Company's Annual
     Report Form 10-K, filed March 30, 1998.
(16) Incorporated herein by reference to the exhibits to the Company's Annual
     Report Form 10-K, filed March 29, 1996. 
_______________
* Management contract or compensatory plan identified pursuant to Item 14(a)3.
**Confidential Treatment requested.

                                      45