SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

(Mark One)

[X]    Quarterly  report  pursuant  to  Section  13 or 15(d)  of the  Securities
       Exchange Act of 1934 for the quarterly period ended June 30, 1997 or

[ ]    Transition report  pursuant  to  Section  13 or 15(d) of the  Securities 
       Exchange Act of 1934 for the transition period from _____ to _____.

                        Commission File Number: 333-22359

                              BIONX IMPLANTS, INC.
             (Exact name of registrant as specified in its charter)

    Delaware                                                22-3458598
(State or other jurisdiction of                             (I.R.S. Employer
 incorporation or organization)                             Identification No.)

                            1777 Sentry Parkway West
                             Gwynedd Hall, Suite 400
                          Blue Bell, Pennsylvania 19422
           (Address of principal executive office, including zip code)

                                  215-643-5000
              (Registrant's telephone number, including area code)


--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last 
 report)

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 the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of the latest practicable date.

At July 31, 1997,  there were 8,916,127 shares of Common Stock, par value $.0019
per share, outstanding.


<PAGE>


                      BIONX IMPLANTS, INC. AND SUBSIDIARIES

                                      INDEX


                                                                       Page

Part I.  Financial Information

Item 1.  Consolidated Financial Statements

         Consolidated Balance Sheets at December 31, 1996
         and June 30, 1997 (Unaudited)                                   4

         Consolidated Statements of Operations for the Three
         and Six Months Ended June 30, 1996 and 1997 (Unaudited)         5

         Consolidated Statements of Cash Flows for the Six Months
         Ended June 30, 1996 and 1997 (Unaudited)                        6

         Notes to Consolidated Financial Statements (Unaudited)          7

Item 2.  Management's Discussion and Analysis of Financial               9
         Condition and Results of Operations

Part II. Other Information

Item 6.  Exhibits and Reports on Form 8-K                               25

Signatures                                                              26



<PAGE>



Item 1.  Financial Statements

<TABLE>


                      BIONX IMPLANTS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                       December 31, 1996 and June 30, 1997
                                 (in thousands)
<CAPTION>

                                                                              December 31,            June 30,
                                                                                  1996                  1997
                                                                                  ----                  ----

                                                                                                       (Unaudited)

Assets:
Current assets:
<S>                                                                             <C>                   <C>   
     Cash and cash equivalents.........................................         $1,593                22,610
     Inventory, net....................................................          1,031                 1,426
     Trade accounts receivable,  net of allowance of $97 as of December
     31, 1996 and $112 as of June 30, 1997 ............................          1,708                 2,312
     Grants receivable.................................................            123                    91
     Deferred offering costs ..........................................            195                     -
     Prepaid expenses and other current assets.........................            153                    39
                                                                                   ---                    --

Total current assets...................................................          4,803                26,478
Investments............................................................            100                    92
Deposits...............................................................             44                    44
Plant and equipment, net...............................................            483                   823
Goodwill and intangibles...............................................          3,939                 3,819
                                                                                 -----                 -----

Total assets...........................................................         $9,369                31,256
                                                                                 =====                ======

Liabilities and Stockholders' Equity
Current Liabilities:
     Trade accounts payable............................................         $  848                 1,597
     Long-term debt, current portion...................................            223                    58
     Related party.....................................................            163                    78
     Current income tax liability......................................            205                   212
     Accrued and other current liability...............................          1,317                   928
                                                                                 -----                   ---

Total current liabilities..............................................          2,756                 2,873
                                                                                 -----                 -----
Long-term debt.........................................................            590                   148
                                                                                   ---                   ---
Contingencies .........................................................
Series A mandatorily redeemable convertible preferred stock,
     par  value  $0.001  per  share;   2,000,000   shares   authorized,          5,000                     -
     2,000,000 shares issued  and outstanding at December 31, 1996.....          -----                 -----
     
Stockholders' equity:

     Preferred stock, par value $0.001 per share 8,000,000 authorized
         and none issued ..............................................
     Common stock, par value $0.0019 per share, 31,600,000 shares 
         authorized and 5,318,424 and 8,916,127 shares issued and 
         outstanding  as of  December  31, 1996 and June 30, 1997,
         respectively.................................................              10                    17
     Additional paid-in capital........................................          8,968                35,613
     Accumulated deficit...............................................         (7,686)               (7,010)
     Foreign currency translation adjustment...........................           (269)                 (385)
                                                                                  -----                 -----

Total stockholders' equity.............................................          1,023                28,235
                                                                                 -----                ------

     Total liabilities and stockholders' equity........................        $ 9,369                31,256
                                                                                ======                ======
See accompanying notes to the Consolidated Financial Statements


</TABLE>


<PAGE>



                      BIONX IMPLANTS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (in thousands, except per share data)
                                   (Unaudited)

<TABLE>
<CAPTION>

                                                              Three Months ended June 30,                 Six Months ended June 30,
                                                                      1996       1997                         1996            1997
                                                                      ----       ----                         ----            ----

Revenues:
<S>                                                               <C>             <C>                        <C>              <C>  
Product sales                                                     $   730         3,822                      1,396            7,040
License and grant revenues                                             19           108                         69              108
                                                                       --           ---                         --              ---

Total revenues                                                        749         3,930                      1,465            7,148
                                                                      ---         -----                      -----            -----

Cost of goods sold                                                    429           942                        887            1,745
                                                                      ---           ---                        ---            -----

Gross profit                                                          320         2,988                        578            5,403
                                                                      ---         -----                        ---            -----

Selling, general and administrative                                   705         2,333                      1,325            4,273
Research and development                                               97           220                        196              401
                                                                   ------           ---                        ---              ---

Total operating expenses                                              802         2,553                      1,521            4,674
                                                                   ------         -----                      -----            -----
Operating income (loss)                                              (482)          435                       (943)             729
                                                                     -----          ---                       -----             ---

Other income and expense:
  Interest income (expense)                                           (27)          172                        (55)             175
                                                                   -------         ----                        ----             ---

Income (loss) before provision for income taxes                      (509)          607                       (998)             904

Provision for income taxes                                              -           153                          -               228
                                                                   -------         ----                       -----             ---

Net income (loss)                                                $   (509)          454                       (998)             676
                                                                  ========         ====                       =====             ===

Pro forma net income (loss) per share                            $  (0.09)         0.05                      (0.18)            0.07

Weighted average common and
  dilutive equivalent shares outstanding                            5,516         9,232                      5,516            9,232
                                                                    =====         =====                      =====            =====


 See accompanying notes to the Consolidated Financial Statements

</TABLE>

<PAGE>

<TABLE>
<CAPTION>

                      BIONX IMPLANTS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)
                                 (in thousands)
                                                                                           Six Months ended June 30,
                                                                         -----------------------------------------------------------

                                                                                       1996                           1997
                                                                                       ----                           ----
Cash flows from operating activities:
<S>                                                                                <C>                                <C>
  Net income (loss)                                                                $  (998)                           676
                                                                                      -----                           ---

Adjustments  to reconcile  net income  (loss) to net cash  provided by (used in)
operating activities:
Depreciation and amortization                                                           60                            203
Change in assets and liabilities:
Increase in inventory                                                                 (105)                          (395)
Increase in accounts receivable                                                       (450)                          (604)
Decrease in grants receivable                                                            -                             32
Decrease in deferred offering costs                                                      -                            195
Decrease in prepaid expense and other current assets                                    29                            114
(Increase) decrease in investments                                                     (59)                             8
Increase in trade accounts payable                                                     298                            749
Decrease in related party                                                                -                            (85)
Increase in current tax liability                                                        -                              7
Increase (decrease) in accrued and other liabilities                                 1,417                           (389)
                                                                                     -----                           -----

                                                                                     1,190                          ( 165)
                                                                                     -----                          ------

Net cash provided by operating activities                                              192                            511
                                                                                       ---                            ---

Cash flows used in investing activities:
  Purchases of plant and equipment                                                     (91)                          (423)
                                                                                       ----                          -----

Net cash used in investing activities                                                  (91)                          (423)
                                                                                       ----                          -----

Cash flow from financing activities:
  Proceeds from initial public offering                                                  -                         24,150
  Exercise of warrants                                                                   -                            552
  Offering costs from initial public offering                                            -                         (3,050)
  Proceeds from issuance of long-term debt                                               -                              -
  Repayment of long-term debt                                                         (129)                          (607)
                                                                                      ----                           -----
Net cash (used in) provided by financing activities                                   (129)                        21,045

Net effects of foreign exchange rate differences                                       (18)                          (116)
                                                                                      -----                        -------
Net (decrease) increase in cash and cash equivalents                                   (46)                        21,017

Cash and cash equivalents at beginning of period                                        51                          1,593
                                                                                     -----                         ------

Cash and cash equivalents at end of period                                         $     5                         22,610
                                                                                     ======                        =======

Supplementary cashflow information:
Cash paid for interest                                                             $    43                             28
Cash paid for taxes                                                                $     1                            221

Non-cash financing activity:
Conversion of series A preferred shares to common shares upon
consummation of the initial public offering                                        $     -                          5,000

See accompanying notes to the Consolidated Financial Statements

</TABLE>

<PAGE>


                     BIONX IMPLANTS, INC., AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                   (Unaudited)

1.     Basis of Presentation

         The  accompanying  financial  statements  have been  prepared  by Bionx
Implants,  Inc.  (the  "Company")  and  are  unaudited.  In the  opinion  of the
Company's  management,  all adjustments  (consisting  solely of normal recurring
adjustments)  necessary to present fairly the Company's  consolidated  financial
position  as of  December  31,  1996  and  June  30,  1997,  and  the  Company's
consolidated  results of operations  and cash flows for the three and six months
ended June 30, 1996 and 1997 have been made.  Certain  information  and footnote
disclosures  required under generally accepted  accounting  principles have been
condensed  or  omitted  from the  consolidated  financial  statements  and notes
thereto presented herein pursuant to the rules and regulations of the Securities
and Exchange Commission. The consolidated financial statements and notes thereto
presented  herein  should  be read in  conjunction  with the  Company's  audited
consolidated financial statements for the year ended December 31, 1996 and notes
thereto  included  in the  Company's  Registration  Statement  on Form  S-1 (No.
333-22359)  filed with the  Securities and Exchange  Commission.  The results of
operations and the cash flows for the three and six month periods ended June 30,
1997 are not necessarily  indicative of the results to be expected for any other
interim period or the entire fiscal year.

2.       Inventory

         Inventory consists of the following components (000's):

                                                  December 31,     June 30,
                                                    1996             1997


Raw materials............................         $   101              232
Finished goods...........................           1,210            1,509
                                                    -----            -----

                                                    1,311            1,741
         Less reserves...................            (280)            (315)
                                                    ------         -------
                                                  $  1,031           1,426
                                                     =====           =====



<PAGE>


3.       Initial Public Offering; Pro Forma Net Income (Loss) Per Share


         During the second quarter of 1997, the Company  consummated its initial
public  offering of Common  Stock (the "IPO").  A total of  2,300,000  shares of
Common Stock (including 300,000 shares issued upon exercise of the Underwriters'
over - allotment option) were issued pursuant to the IPO. In connection with the
IPO, all of the Company's  outstanding  shares of Series A Preferred  Stock were
automatically  converted into a total of 1,052,638 shares of Common Stock and an
additional  245,065  shares of Common Stock were issued upon the exercise of all
outstanding  warrants.  Net  proceeds  from the IPO and the exercise of warrants
were $21.7 million.

         The  unaudited  balance  sheet as of June  30,  1997  presented  herein
reflects the  above-mentioned  conversion of the Company's  preferred  stock and
exercise of warrants, and common stock issued pursuant to the IPO.

         Pro forma net income  (loss) per share is computed  using the  weighted
average  number  of  common  shares   outstanding,   giving  effect  to  certain
adjustments  described below.  Common  equivalent  shares from stock options are
excluded  from the  computation  of pro forma net  income  (loss) per share when
their effect is anti-dilutive,  except that, pursuant to Securities and Exchange
Commission (SEC) Staff Accounting  Bulletins and SEC staff policy,  common stock
and common stock  equivalent  shares issued at prices below the IPO price during
the twelve months  preceding the offering have been included in the  computation
as if they were outstanding for all periods  presented (using the treasury stock
method and the offering price).

         Pursuant  to SEC  staff  policy,  the  calculation  of  shares  used in
computing  pro  forma  net loss per share  for  periods  prior to the  Company's
initial  public  offering  also includes the weighted  average  number of common
equivalent  shares of Series A Preferred  Stock and warrants that  automatically
converted  into  shares of common  stock upon  completion  of the IPO (using the
if-converted method) from their respective original dates of issuance.

         The  weighted  average  shares used to compute the pro forma net income
per share at June 30, 1997  includes the effect of the 2.3 million shares issued
in the Company's IPO as if outstanding as of the beginning of 1997.


4.       Long Term Debt

         In April 1997,  the Company  entered  into a $2.0  million  credit line
agreement  secured  by the  personal  property  of Bionx  Implants,  Inc.  and a
subsidiary.  Amounts to be  advanced  thereunder  are  subject  to the  lender's
discretion  and  are  limited  to  specific   percentages  of  certain  domestic
receivables  and inventory.  To date, no amounts have been borrowed  pursuant to
this facility.






<PAGE>


                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Business

         Statements  regarding  future  performance in this Quarterly  Report on
Form 10-Q constitute  forward-looking  statements  under the Private  Securities
Litigation  Reform  Act of 1995.  The  Company's  actual  results  could  differ
materially from those anticipated by such forward-looking statements as a result
of certain  factors,  including those set forth under the caption "Risk Factors"
herein.

          The Company was founded in 1984 to develop certain  resorbable polymer
implants for orthopaedic  uses. The Company has incurred  substantial  operating
losses from its inception  through  December 31, 1996 and, at June 30, 1997, had
an  accumulated  deficit of  approximately  $7.0 million.  Such losses  resulted
principally  from  expenses  associated  with  the  development,  patenting  and
clinical testing of the Company's  Self-Reinforcing  technologies and resorbable
implant  designs,   preparation  of  submissions  to  the  U.S.  Food  and  Drug
Administration (the "FDA") and foreign regulatory  agencies,  the development of
sales, marketing and distribution channels, the write-off of acquired in-process
research and development, and the development of its manufacturing capabilities.
Although the Company's  revenues grew  significantly  in the second half of 1996
and in the first half of 1997,  no  assurance  can be given that this trend will
continue or that  revenues of any  magnitude  will exceed  expenses  incurred in
anticipation of future growth.  Accordingly,  the Company may incur  significant
operating losses in the future as it continues its product development  efforts,
expands  its  marketing,  sales and  distribution  activities  and scales up its
manufacturing  capabilities.  There can be no assurance that the Company will be
able to continue to  successfully  commercialize  its products or that continued
profitability will be achieved.

         The Company first introduced its polyglycolic acid ("PGA") polymer pins
in 1984 and its PGA screws in 1986. In 1987,  the Company  introduced  its first
poly-l-lactic  acid  ("PLLA")  polymer  products,  PLLA pins.  PLLA  screws were
introduced in 1989.  Since the  introduction of these products,  the Company has
expanded  its PGA and PLLA pin and screw  product  lines to  address  additional
clinical indications. The Company's PGA membrane product was introduced in 1992,
and, in 1995, the Company  launched its Meniscus Arrow,  PLLA tacks, and PGA and
PLLA urology stents. Prior to 1996, the Company derived substantially all of its
revenue from sales of its PLLA and PGA screws and pins. A substantial portion of
the  Company's  revenues  and revenue  growth in the second half of 1996 and the
first  half of 1997  resulted  from  U.S.  sales of the  Meniscus  Arrow,  which
received FDA clearance in March 1996. To date,  all products sold by the Company
have been launched first in international markets. During the three months ended
June 30, 1996 and 1997,  international  product sales  represented  51% and 15%,
respectively, of the Company's total product sales.

          The Company  typically  sells implant grade,  stainless steel surgical
instruments for use with each of its Self-Reinforced,  resorbable products.  The
margins for these instruments are typically lower than the margins applicable to
the Company's implant products.  However,  since orthopaedic companies operating
in the U.S.  have  traditionally  loaned rather than sold  instruments  to their
customers,  the Company anticipates that in the future, it will be necessary for
the Company to provide an increasing  proportion of its  instrumentation  in the
U.S. on a loan basis. Similar practices are not common in international markets.
For financial  statement  purposes,  revenues  from the sale of  instrumentation
systems  are  included  within  products  sales  and costs  associated  with the
Company's  procurement  of such systems are included  within cost of goods sold.
The Company's instrumentation systems are reusable. Accordingly, sales and loans
of such  systems  are  likely to be most  pronounced  in periods  shortly  after
product  launches and likely to be less  prevalent as  penetration of the market
increases over the long term. Thus, the negative impact on  the  Company's gross

<PAGE>

profit margins associated with sales and loans of a particular instrument system
is  expected  to  decrease  after a  substantial  market  penetration  has  been
achieved.  Similarly,  such  impact is likely to lessen to the extent that sales
and loans of instrument systems decrease as a percentage of total product sales.
However,  no  assurance  can be given as to the extent to which  instrumentation
sales will depress the Company's gross profit margins in the future.

         The Company sells its products  through managed networks of independent
sales agents,  distributors  and dealers.  In the U.S., the Company  handles all
shipping and  invoicing  functions  directly and pays  commissions  to its sales
agents.   Outside  the  U.S.,  the  Company  sells  its  products   directly  to
distributors  and  dealers  at  discounts  that vary by  product  and by market.
Accordingly,  the  Company's  U.S.  sales  result in higher  gross  margins than
international sales. The Company anticipates that during the next few years, the
relative  percentage of its U.S.  product sales to total product sales is likely
to  continue  to  increase.  Since the Company  pays  commissions  on sales made
through its U.S.  network,  an increased  percentage of U.S. sales in the future
will  likely  result in an increase in the  percentage  of selling,  general and
administrative  expenses to total sales.  This increase will be partially offset
by the higher gross margins received on products sold in the U.S.

         Outside of the  orthopaedic  market,  the Company may seek to establish
licensing or distribution  agreements with strategic partners to develop certain
products and to market and  distribute  products that the Company  elects not to
distribute   through  its  managed   networks  of   independent   sales  agents,
distributors  and dealers.  The Company has licensed its membrane patent for use
in dental and two other  applications in Europe to Ethicon GmbH, a subsidiary of
Johnson & Johnson.  Ethicon GmbH has agreed to pay royalties to the Company upon
the initiation of commercial sales of its membrane products,  which are targeted
for commercial  release  commencing in the third quarter of 1997.  Revenues from
the Company's  sales of such products have not been  material.  Accordingly,  no
assurance can be given that royalty payments from Ethicon GmbH, when and if they
commence, will be material.

         The Company has entered into  agreements  pursuant to which the Company
is obligated  to pay  royalties  based on net sales of certain of the  Company's
products, including the Meniscus Arrow. To the extent that sales of the Meniscus
Arrow  products and other  licensed  products  increase in future  periods,  the
Company's license obligations are expected to increase.

         The Company has benefited from the research and development  activities
of Dr. Pertti Tormala,  the founder of the Company, at the Technical  University
in Tampere,  Finland.  Dr.  Tormala is  currently  an Academy  Professor  at the
Technical University and is permitted by the University to devote his efforts to
developing  products for the  Company.  Dr.  Tormala  utilizes a group of senior
researchers,  graduate  students  and  faculty at the  Technical  University  to
perform  research and development  projects  involving  resorbable  polymers and
other topics relating to the Company's  technology and manufacturing  processes.
This   arrangement,   permitted  in  Finland  as  a  means  of  encouraging  the
commercialization of technological development, has resulted in substantial cost
savings to the Company while greatly expanding its product development  efforts.
The Company has hired certain senior researchers from the University program and
anticipates  that, in the future,  more of its product  development work will be
performed and funded directly by the Company,  thereby  increasing the Company's
research and development expenses.

         The Company  currently  manufactures its implant products solely at its
Tampere,  Finland  plant.  The  Company  intends to  establish  a  manufacturing
capability in the U.S. The Company plans to establish this capability  either by
equipping and operating a leased  facility or contracting  with a third party to
provide a manufacturing  capability to the Company. The Company believes that on
an interim basis, contract  manufacturing may enable the Company to save certain

<PAGE>

staffing  costs and enable  senior  management  to focus on other aspects of its
business. However, if the Company arranges for a third party to provide contract
manufacturing  in the U.S.,  fees  payable to such  manufacturer  may exceed any
savings in  staffing  costs and  result in higher  costs of goods sold and lower
gross profit.  Ultimately,  in operating a U.S. facility, the Company will incur
certain  duplicative  manufacturing  costs which could result in higher costs of
goods sold and lower gross profit margins.

         While the  Company's  operating  losses have  resulted in net operating
loss  carryforwards  of  approximately  $2.3  million  for income tax  reporting
purposes,  the extent to which such carryforwards are available to offset future
U.S. and Finnish taxable income is significantly  limited as a result of various
ownership changes that have occurred in recent years. Additionally, because U.S.
tax laws limit the time during which these  carryforwards may be applied against
future  taxes,  the Company may not be able to take full  advantage  of the U.S.
portion of these  carryforwards  for federal  income tax purposes.  Furthermore,
income earned by a foreign subsidiary may not be offset against operating losses
of Bionx Implants,  Inc. or its U.S. subsidiaries.  As a result, the Company may
incur tax  obligations  during  periods  when it  reflects  a  consolidated  net
operating  loss.  The  statutory  tax rates  applicable  to the  Company and its
foreign  subsidiaries vary  substantially,  presently ranging from approximately
40% in the U.S. to 28% in Finland. Tax rates have fluctuated in the past and may
do so in the future.

         The Company's  results of operations  have fluctuated in the past on an
annual and quarterly basis and may fluctuate significantly from period to period
in the  future,  depending  on many  factors,  many of which are  outside of the
Company's control. Such factors include the timing of government approvals,  the
medical  community's  acceptance  of the  Company's  products,  the  success  of
competitive  products,  the  ability  of the  Company  to enter  into  strategic
alliances with corporate partners,  expenses associated with patent matters, the
results of regulatory  inspections and the timing of expenses related to product
launches.

         Product  sales trends will depend upon many factors,  including  demand
and market acceptance for the Company's existing and future products, the timing
of regulatory  approvals,  the timing and results of clinical trials, the timing
of the  introduction of new products by the Company and by competing  companies,
and the  Company's  ability to attract and retain  highly  qualified  technical,
sales and  marketing  personnel.  Accordingly,  there can be no  assurance  that
future product sales will not vary significantly from quarter to quarter.


Results of Operations

          Product  Sales.  The Company's  product  sales  increased by 424% from
$730,000  during the  quarter  ended June 30,  1996 to $3.8  million  during the
quarter ended June 30, 1997. For the first six months of 1997,  product revenues
increased  by 404% from the same period a year ago.  These  increases  primarily
resulted from the U.S.  introduction of the Company's Meniscus Arrow products in
June  of  1996;   revenues  from  the  sale  of  Meniscus  Arrow  products  were
approximately  $180,000 during the second quarter of 1996, as compared with $2.6
million during the second  quarter of 1997. In addition,  the 1997 product sales
increases  reflect  increased  utilization of the Company's  managed  network of
independent  sales  agents  in the U.S.  and  increased  sales of the  Company's
existing products in international markets.  Revenues generated from the sale of
other  products  (including  instrumentation  systems and related  loaner  fees)
increased  by 119%,  from  $550,000  during  the  second  quarter  of  1996,  to
$1,202,000 during the second quarter of 1997.  Revenues  generated from the sale
of such other  products  during the first six months of 1997  increased  by 84%,
totaling $2.2 million  during such period as compared  with $1.2 million  during
the first six months of 1996.

<PAGE>

          License  and  grant  revenues.  License  and  grant  revenues  totaled
$108,000  during the six months  ended June 30,  1997,  increasing  from $69,000
during the same period one year ago.  Revenues  generated  during  both  periods
relate to grants obtained from a Finnish government research organization, which
funds certain  research and development  projects.  Royalty  payments by Ethicon
GmbH based upon actual  sales are  expected to commence in the third  quarter of
1997,  although no assurances  can be given with respect to the timing or amount
of such  payments.  Upon the  commencement  of such sales by Ethicon  GmbH,  the
Company  will be required to cease its dental  membrane  sales in Europe,  which
historically have not been significant.

         Gross profit;  gross margin.  The Company's gross profit increased from
$320,000  during the second  quarter of 1996 to $3.0  million  during the second
quarter of 1997,  and from $578,000  during the first six months of 1996 to $5.4
million  during the first six months of 1997.  The  increases  in the  Company's
gross profit primarily  reflected the increased sales of Meniscus Arrow products
after their introduction in the U.S. in the second quarter of 1996. Overall, the
Company's gross profit margin (including the effects of grant revenue) increased
from 43% during  the second  quarter of 1996 and 39% during the first six months
of 1996 to 76% during the second  quarter of 1997,  and 76% during the first six
months  of 1997.  The  increases  in gross  margin in 1997 are  attributable  to
several  factors,  including an increase in sales of the higher margin  Meniscus
Arrow product,  an increase in grant  revenue,  an increase in the percentage of
revenues  generated  in the U.S.,  a  decrease  in the  percentage  of  revenues
generated by the lower margin instrument products, and the leveraging of certain
fixed manufacturing costs over the Company's expanded revenue base.

         Selling,  general and  administrative  expenses.  Selling,  general and
administrative  expenses  increased  by 231% from  $705,000  during  the  second
quarter of 1996 to $2.3  million  during the second  quarter of 1997 and by 222%
from $1.3 million during the first six months of 1996 to $4.3 million during the
first six months of 1997.  Such  expenses  were 97% of product  sales during the
second  quarter of 1996 and 95% of product  sales during the first six months of
1996, as compared  with 61% of product  sales during the second  quarter of 1997
and 61% during the first six months of 1997. Selling, general and administrative
expenses  consist  primarily of  commissions  paid on product sales in the U.S.,
patent and license  related  expenses,  costs  incurred in  connection  with the
regulatory  process,  expenses  associated with supporting the Company's managed
networks of  independent  sales agents,  distributors  and dealers and, in 1997,
amortization  of goodwill and patents  associated  with the Company's  September
1996   reorganization   (such   amortization  and   depreciation   amounting  to
approximately $65,000 per quarter and expected to be approximately  $255,000 per
year through  2017).  The increase in the dollar amount of selling,  general and
administrative  expenses was  primarily  attributable  to  increased  commission
payment obligations reflecting the Company's increased product sales in the U.S.
and increased  expenses  associated with  establishing  and supporting a managed
network of  independent  sales agents in the U.S. The decrease in the percentage
relationship  of such  expenses to product  sales  reflects  the  leveraging  of
certain such expenses over the Company's expanded revenue base.

         Research and development.  Research and development  expenses increased
by 127% from $97,000  during the second  quarter of 1996 to $220,000  during the
second quarter of 1997 and by 105% from $196,000  during the first six months of
1996 to $401,000 during the first six months of 1997. These increases  reflected
an increased  volume of product  development work being performed by the Company
and increased staffing levels.

         Interest income  (expense).  In the second quarter of 1997, the Company
generated  interest  income of  $172,000,  compared  to an  interest  expense of

<PAGE>

$27,000 in the second  quarter of 1996.  Funds obtained from the proceeds of the
initial public offering in late April 1997 generated the interest income for the
quarter ended June 30, 1997.

         Income taxes.  The provision for income taxes during the second quarter
and first six months of 1997 reflects the Company's profitable operations during
the  periods  presented,  and  anticipates  partial  utilization  of certain net
operating loss carryforwards.

         Net  Income.  The Company  reported  net income of $454,000 or $.05 per
share for the second quarter of 1997, as compared with a net loss of $509,000 or
$(0.09) per share for the comparable period in 1996. Reported net income for the
six month  period  ended  June 30,  1997  totaled  $676,000  or $0.07 per share,
compared  to a net loss of  $998,000 or $(0.18) in the first six months of 1996.
No assurance can be given that the Company will continue to be profitable during
future periods.

         Per Share  Calculation.  In February  1997,  the  Financial  Accounting
Standards  Board issued  Statement of Financial  Accounting  Standards  No. 128,
Earnings per Share ("Statement No. 128"),  effective for fiscal years commencing
after December,  1997. This Statement  replaces the  presentation of primary EPS
with a presentation of basic EPS and requires the dual presentation of basic and
diluted EPS on the face of the income  statement  of all  entities  with complex
capital  structures.  Statement  128  also  requires  a  reconciliation  of  the
numerator and denominator of the diluted EPS computation.

         Had  Statement 128 been adopted for the second  quarter of 1997,  basic
and diluted EPS would have been  computed as follows (in  thousands,  except per
share amounts):

<TABLE>
<CAPTION>

                                                             Income                   Share                 Per Share
Income   Share
Per Share
                                                           (Numerator)             Denominator                Amount

<S>                                                           <C>                     <C>                     <C>   
Basic EPS                                                     $ 454                   8,671                   $ 0.05

Incremental shares from assumed exercise of
dilutive options and warrants                                   -                       561                     -
                                                                ---                     ---                     -

Diluted EPS                                                   $ 454                   9,232                   $ 0.05

</TABLE>


Had  Statement  128 been  adopted  for the first six  months of 1997,  basic and
diluted EPS would have been computed as follows (in thousands,  except per share
amounts):

<TABLE>
<CAPTION>

                                                             Income                   Share                 Per Share
Income   Share
Per Share
                                                           (Numerator)             Denominator                Amount

<S>                                                           <C>                     <C>                     <C>   
Basic EPS                                                     $ 676                   8,671                   $ 0.08

Incremental shares from assumed exercise of
dilutive options and warrants                                   -                       561                     -
                                                                ---                     ---                     -

Diluted EPS                                                   $ 676                   9,232                   $ 0.07

</TABLE>


<PAGE>

Liquidity and Capital Resources

         Historically,  the Company has relied  upon bank loans  (guaranteed  in
certain   instances   by  the   Company's   principal   stockholders),   capital
contributions by its principal  stockholders  and government  grants to fund its
operations. In September 1996, the Company completed a private placement of $5.0
million in preferred  stock (all of which was  converted  into Common Stock upon
consummation  of the  Company's  initial  public  offering  in April  1997)  and
warrants (all of which were exercised  during April 1997). The net proceeds were
used to repay  bank debt,  to pay down trade  debt,  to fund  manufacturing  and
product development efforts and for other working capital purposes. During April
1997,  the Company  consummated  its initial public  offering.  In May 1997, the
Underwriters exercised in full their over-allotment option granted in connection
with the initial public offering.  Net proceeds from the initial public offering
(including  the  exercise  of the  over-allotment  option)  and the  exercise of
warrants  during April 1997 were $21.7  million.  In addition,  the Company made
arrangements for a $2 million credit line,  secured by the personal  property of
Bionx Implants, Inc. and its Biostent,  Inc. subsidiary.  Amounts to be advanced
thereunder  are subject to the lender's  discretion  and are limited to specific
percentages of certain domestic  receivables and inventory.  To date, no amounts
have been borrowed pursuant to this facility.

         At  December  31,  1996 and June 30,  1997,  cash and cash  equivalents
totaled $1.6 million and $22.6 million,  respectively.  The increase in cash and
cash equivalents of $21.0 million is primarily  attributable to the net proceeds
received from the initial public offering transacted in April, 1997.

         As of June 30, 1997, the Company had working  capital of $23.6 million.
Long-term debt (including the current portion) was reduced by $607,000, from the
level at the beginning of the year to $206,000 as of June 30, 1997. The majority
of this debt was repaid from net  proceeds  generated  from the  initial  public
offering.  The  interest  rates on the debt  remaining as of June 30, 1997 range
from 1 - 4% per annum.

         The Company believes that existing  capital  resources from its initial
public  offering,  its  September  1996 private  placement  and its $2.0 million
credit line,  together  with cash flow from  operations  (if, and to the extent,
generated), will be sufficient to fund its operations through 2000. However, the
Company's  future capital  requirements and the adequacy of available funds will
depend on numerous  factors,  including  market  acceptance  of its existing and
future products,  the successful  commercialization  of products in development,
progress in its product  development  efforts,  the  magnitude and scope of such
efforts,   progress  with  preclinical  studies,  clinical  trials  and  product
clearances by the FDA and other agencies,  the cost and timing of its efforts to
expand  its  manufacturing  capabilities,   the  cost  of  filing,  prosecuting,
defending and enforcing  patent claims and other  intellectual  property rights,
competing  technological  and  market  developments,   and  the  development  of
strategic alliances for the marketing of certain of its products.  The Company's
operations  did not produce  positive cash flows during 1994,  1995 and 1996. To
the extent that funds generated from the Company's operations, together with its
existing  capital  resources  (including  such  credit  facility),  and  the net
interest earned thereon,  are insufficient to meet current or planned  operating
requirements,  the Company will be required to obtain  additional  funds through
equity or debt  financings,  strategic  alliances  with  corporate  partners and
others,  or through other  sources.  The terms of any equity  financings  may be
dilutive  to  stockholders  and the  terms of any debt  financings  may  contain
restrictive  covenants  which  limit the  Company's  ability  to pursue  certain
courses of action. Principal stockholders of the Company who previously provided
funding to the  Company  and  provided  guarantees  to  sources  of credit  have
indicated that they do not intend to continue  furnishing such  assistance.  The
Company does not have any committed sources of additional  financing beyond that
described  above,  and there can be no assurance  that  additional  funding,  if
necessary,  will be available on acceptable  terms, if at all. If adequate funds
are not available, the Company may be required to delay, scale-back or eliminate
certain   aspects  of 

<PAGE>

its  operations or attempt to obtain funds through  arrangements  with strategic
partners or others that may require the Company to relinquish  rights to certain
of its  technologies,  product  candidates,  products or potential  markets.  If
adequate funds are not available,  the Company's  business,  financial condition
and results of operations could be materially and adversely affected.



Risk Factors

         Statements  regarding  future  performance in this Quarterly  Report on
Form 10-Q constitute  forward-looking  statements  under the Private  Securities
Litigation  Reform  Act of 1995.  The  Company's  actual  results  could  differ
materially from those anticipated by such forward-looking statements as a result
of certain factors, including those set forth below:

         History of Operating Losses; Accumulated Deficit; Uncertainty of Future
Profitability;  Fluctuating  Results of  Operations.  The Company  has  incurred
substantial  operating  losses since its inception and, at June 30, 1997, had an
accumulated  deficit of  approximately  $7.0 million.  Such losses have resulted
principally  from  expenses  associated  with  the  development,  patenting  and
clinical testing of the Company's  Self-Reinforcing  technologies and resorbable
implant  designs,  preparation of submissions to the FDA and foreign  regulatory
bodies,  the  development of sales,  marketing and  distribution  channels,  the
write-off of acquired in-process research and development and the development of
manufacturing   capabilities.   Although  the  Company's   revenues  have  grown
significantly  during 1996 and the first six months of 1997, no assurance can be
given that this trend will  continue  or that  revenues  of any  magnitude  will
exceed expenses incurred in anticipation of future revenue growth.  Accordingly,
the Company may incur significant  operating losses in the future as the Company
continues its product  development  efforts,  expands its  marketing,  sales and
distribution activities and scales up its manufacturing capabilities.  There can
be no  assurance  that the  Company  will be able to  continue  to  successfully
commercialize  its products or that consistent  profitability  will be achieved.
The Company's results of operations have fluctuated in the past on an annual and
quarterly  basis and may  fluctuate  significantly  from period to period in the
future,  depending  upon a number of  factors,  many of which are outside of the
Company's control. Such factors include the timing of government approvals,  the
medical  community's  acceptance  of the  Company's  products,  the  success  of
competitive  products,  the  ability  of the  Company  to enter  into  strategic
alliances with corporate partners,  expenses associated with patent matters, and
the timing of expenses related to product launches.  Due to one or more of these
factors, in one or more future quarters, the Company's results of operations may
fall below the expectations of securities analysts and investors. In that event,
the market price of the Company's Common Stock could be materially and adversely
affected.

         Uncertainty of Market Acceptance.  The Company's success will depend in
part upon the acceptance of the Company's Self-Reinforced resorbable implants by
the medical  community,  including health care providers,  such as hospitals and
physicians,  and third-party  payors. Such acceptance may depend upon the extent
to which the  medical  community  perceives  the  Company's  products as a safe,
reliable and cost-effective  alternative to non-resorbable  products,  which are
widely  accepted,  have a long history of use and are  generally  sold at prices
lower than the prices of the Company's products. Such acceptance may also depend
upon the  extent to which the  medical  community  believes  that the  Company's
Self-Reinforced,  resorbable implants have overcome the strength and composition
difficulties experienced with first generation resorbable implants.  Ultimately,
for the  Company's  products  to gain wide  market  acceptance,  it will also be
necessary for the Company to convince surgeons that the benefits associated with
the Company's products justify the modification of standard surgical  techniques
in order to use the Company's  implants safely and effectively.  There can be no
assurance that the Company's products will 

<PAGE>

achieve market  acceptance on a timely basis, or at all.  Failure of some or all
of the Company's products to achieve  significant market acceptance could have a
material  adverse  effect on the  Company's  business,  financial  condition and
results of operations.

         Uncertainties  Relating  to  Licenses,   Trade  Secrets,   Patents  and
Proprietary  Rights.  The Company believes that its success is dependent in part
upon its ability to  preserve  its trade  secrets,  obtain and  maintain  patent
protection for its  technologies,  products and processes,  and operate  without
infringing  the  proprietary  rights  of  other  parties.  As a  result  of  the
substantial   length  of  time  and  expense   associated  with  developing  and
commercializing  new  medical  devices,   the  medical  device  industry  places
considerable  importance  on obtaining and  maintaining  trade secret and patent
protection for new technologies, products and processes.

         The Company's  patent  strategy has been to seek patent  protection for
the technologies that produce the Company's  Self-Reinforced  resorbable polymer
products and, in certain  instances,  for the products  themselves.  The Company
owns or has  licenses  to  patents  issued in the U.S.  and in  various  foreign
countries and has patent applications  pending at the U.S. PTO and in the patent
offices of various foreign  countries.  Provided that all requisite  maintenance
fees are paid, the Company's four principal U.S. patents (two of which are owned
by the  Company and two of which are  licensed  to the  Company on an  exclusive
basis) will expire between 2004 and 2008.  The two principal U.S.  patents owned
by the  Company  relate  to the  Company's  Self-Reinforced  resorbable  polymer
products,  the Company's  sintering  process,  and resorbable  polymer  products
produced from the Company's  controlled  drawing  process.  The Company also has
pending two  principal  U.S.  patent  applications  that relate to the Company's
resorbable stent technology. The Company's other patents and patent applications
relate to various uses for Self-Reinforced  resorbable polymers, either alone or
in combination with other resorbable  polymers or biocompatible  materials,  and
generally  involve  specific  applications or  improvements of the  technologies
disclosed  in the  Company's  principal  patents  and patent  applications.  The
Japanese counterpart to one of the two principal patents owned by the Company is
currently the subject of opposition  proceedings.  A European counterpart to one
of the Company's two principal  patents has been revoked by the European  Patent
Office for lack of novelty  based on an earlier  publication.  The  Company  has
filed an  appeal  of the  European  Patent  Office's  revocation  decision.  The
Japanese  patent  application  is  being  challenged  on  lack  of  novelty  and
inventiveness  grounds  on the basis of  disclosures  made in  patent  and other
publications.  The Company is  vigorously  defending  its  European and Japanese
patent positions in these  proceedings.  No assurance can be given as to whether
such  appeal in Europe  will be  successful  or as to the outcome of the pending
opposition proceeding. In order to clarify and confirm its U.S. patent position,
the Company has  requested  reexamination  by the U.S. PTO of the two  principal
U.S.  patents owned by the Company.  No assurance can be given as to whether the
issues raised in the reexamination proceedings will be resolved in the Company's
favor.  The  reexamination  process is expected  to take up to twelve  months or
longer.  Such reexamination could result in some or all of the patent claims set
forth in these two U.S.  patents being altered to provide  narrower  coverage or
determined  to be  unpatentable.  No assurance can be given as to the outcome of
the  reexamination   process.   Narrowing  of  the  coverage  or  a  holding  of
unpatentability  in relation to one or both of these two principal U.S.  patents
may  significantly  ease  entry  to the  U.S.  market  for the  products  of the
Company's  competitors and could have a material adverse effect on the Company's
business, financial condition and results of operations.

         The  Company  also  relies  upon trade  secret  protection  for certain
unpatented aspects of its proprietary technology, including its Self-Reinforcing
technology.  Although  the Company has taken steps to protect its trade  secrets
and know-how,  through the use of confidentiality  agreements with its employees
and certain of its business  partners and  suppliers,  there can be no assurance
that these agreements will not be breached, that the Company would have adequate
remedies for any breach, that others will not 

<PAGE>

independently develop or otherwise acquire substantially  equivalent proprietary
technology,  information  or  techniques,  that others will not  otherwise  gain
access  to or  disclose  the  Company's  proprietary  technologies  or that  any
particular  proprietary  technology  will be  regarded as a trade  secret  under
applicable  law.  There can also be no  assurance  that the  steps  taken by the
Company will prevent  misappropriation  of its trade secrets. As a result of the
reliance  that the Company  places on its trade  secrets,  loss of the Company's
trade secret protection in this area would have a material adverse effect on the
Company's business, financial condition and results of operations.

         Additionally, the Company is licensed under two principal U.S. patents.
Pursuant to this license  agreement,  the Company has the exclusive right in the
U.S. to  manufacture,  use and sell  certain  devices  for  fixation of meniscus
lesions.  This  license  agreement,  which  requires the Company to pay periodic
royalties,  has a term  expiring  in  2006,  unless  terminated  earlier  by the
licensor for breach by the Company. There can be no assurance that these patents
licensed to the Company are valid and  enforceable,  and, if  enforceable,  that
they cannot be circumvented or avoided by competitors.

         There can be no assurance that patent applications to which the Company
holds rights will result in the issuance of patents,  that any patents issued or
licensed to the Company will not be challenged  and held to be invalid or narrow
in  scope,  or that  the  Company's  present  or  future  patents  will  provide
significant  coverage  for or  protection  to the  Company's  present  or future
technologies,  products or processes. Since patent applications are secret until
patents are issued in the U.S., or  corresponding  applications are published in
foreign  countries,  and since  publication  of discoveries in the scientific or
patent  literature often lags behind actual  discoveries,  the Company cannot be
certain that it was the first to make its  inventions,  or that it was the first
to file patent applications for such inventions.

         In the event  that a third  party has also  filed a patent  application
relating to an invention  claimed in a Company patent  application,  the Company
may be required to participate  in an  interference  proceeding  declared by the
U.S. PTO to determine  priority of invention,  which could result in substantial
uncertainties  and  cost  for the  Company,  even  if the  eventual  outcome  is
favorable to the Company.  In  addition,  there can be no assurance  that others
will not obtain access to the Company's  know-how or that others will not be, or
have not been,  issued  patents  that may prevent the sale of one or more of the
Company's products or the practice of one or more of the Company's processes, or
require  licensing  and the  payment of  significant  fees or  royalties  by the
Company to third parties in order to enable the Company to conduct its business.
There can be no assurance  that the Company would be able to obtain a license on
terms  acceptable  to  the  Company  or  that  the  Company  would  be  able  to
successfully redesign its products or processes to avoid such patents. In either
such case, such inability could have a material  adverse effect on the Company's
business, financial condition and results of operations.

         Legal  standards  relating  to the scope of claims and the  validity of
patents in the medical device field are still evolving,  and no assurance can be
given as to the degree of  protection  any patents  issued to or licensed to the
Company would provide.  The medical device  industry has been  characterized  by
extensive litigation  regarding patents and other intellectual  property rights,
and companies in the medical device industry have employed intellectual property
litigation  to  gain  competitive  advantage.   The  Company  has  initiated  an
opposition  in the  European  Patent  Office  challenging  the  grant of a third
party's  European  patent  relating  to  a  drawing  process  for  manufacturing
resorbable  polymer products.  Subsequently,  another company has instituted its
own  opposition  against  that  patent.  No  assurance  can be given  that these
oppositions will result in either the revocation of that patent or the narrowing
of its claims.  If neither  opposition is  successful,  then no assurance can be
given that the third party will not assert that its European patent 

<PAGE>

is  infringed  by  sales  of one or more  of the  Company's  products  or by the
practice of one or more of the Company's processes in any of the eight countries
identified in the European patent.  Moreover, there can be no assurance that the
Company  will not be  subject  to  claims  that one or more of its  products  or
processes  infringe  other  patents or violate the  proprietary  rights of third
parties.  Defense and  prosecution  of patent  claims can be expensive  and time
consuming,  regardless  of whether the outcome is favorable to the Company,  and
can result in the  diversion  of  substantial  financial,  management  and other
resources from the Company's other activities.  An adverse outcome could subject
the Company to significant  liability to third  parties,  require the Company to
obtain licenses from third parties,  or require the Company to cease any related
product  development  activities  or product  sales.  In  addition,  the laws of
certain  countries may not protect the Company's  patent rights,  trade secrets,
inventions, products or processes to the same extent as in the U.S.

         The Company has certain  trademark  registrations and pending trademark
applications  in the U.S.  and in various  countries.  The  Company's  U.S.  and
foreign  trademark  registrations  have 5-20 year  terms and are  renewable  for
additional terms for as long as the Company uses the registered trademark in the
manner recited in the registration and makes the appropriate filings to maintain
and  renew  registrations.  There  can  be  no  assurance  that  any  particular
registration, or the mark that is the subject of that registration,  will not be
held to be invalid,  narrow in scope or not owned exclusively by the Company. In
the past, the Company has agreed with third-parties that it will not use certain
trademarks in connection  with certain  devices.  There can be no assurance that
the  Company  will not  enter  into  other  arrangements  to avoid or  terminate
infringement,  opposition,  cancellation  or  other  proceedings,  or to  induce
third-parties  to give up or limit the use of their  trademarks,  trade names or
other designations.

         Uncertainties  Relating  to Product  Development.  Product  development
involves  a high  degree of risk.  There  can be  assurance  that the  Company's
products under development will prove to be safe and effective, will receive the
necessary  regulatory  approvals or will ultimately be commercially  successful.
These  products  will  require  substantial  additional  investment,  laboratory
development,   clinical   testing  and  regulatory   approvals  prior  to  their
commercialization.  There  can  be  no  assurance  that  the  Company  will  not
experience  difficulties that could delay or prevent the successful development,
introduction  and  marketing  of  new  products.   The  Company's  inability  to
successfully  develop and introduce products under development on a timely basis
or at all, or achieve market acceptance of such products,  could have a material
adverse  effect on the Company's  business,  financial  condition and results of
operations.

         FDA Submission Dates Subject to Change.  Regulatory  submissions can be
delayed,  or plans to submit proposed products can be canceled,  for a number of
reasons,  including the receipt of  unanticipated  preclinical or clinical study
reports,  a  determination  by the FDA that PMA approval (as  described  herein)
rather than 501(k) clearance (as described herein) is required with respect to a
particular submission, changes in regulations, adoption of new, or unanticipated
enforcement of existing, regulations, technological developments and competitive
developments.  Accordingly,  no  assurances  can be  given  that  the  Company's
anticipated  regulatory  submissions  will be made on their target dates,  or at
all.  Delays in such  submissions  could have a material  adverse  effect on the
Company's business, financial condition and results of operations.

         Dependence  on  Key  Personnel  and  Relationship  with  the  Technical
University at Tampere.  The Company's ability to operate successfully depends in
significant  part  upon  the  continued   service  of  certain  key  scientific,
technical,  managerial  and finance  personnel,  and its  continuing  ability to
attract and retain additional highly qualified scientific, technical, managerial
and finance personnel.  Competition for such personnel is intense, and there can
be no assurance that the Company will be able to retain  existing  personnel and
to attract or retain  additional  highly qualified  employees in the future.  At
present,  the Company  does not  maintain  key man life  insurance on any of its
employees and only has employment agreements with two of it employees.  The loss
of key personnel and the inability to hire and retain qualified 

<PAGE>

personnel in key positions could have a material adverse effect on the Company's
business, financial condition and results of operations.

         Government Regulation.  The Company's products are subject to extensive
regulation by the FDA and certain foreign regulatory  agencies.  Pursuant to the
Federal  Food,  Drug,  and  Cosmetic  Act,  as  amended,   and  the  regulations
promulgated  thereunder  (the "FDC Act"),  the FDA regulates the preclinical and
clinical testing, manufacture,  labeling,  distribution and promotion of medical
devices.  Noncompliance with applicable  requirements can result in, among other
things,  warning  letters,  fines,  injunctions,  civil  penalties,  recalls  or
seizures of products, total or partial suspension of production,  failure of the
government  to grant  premarket  clearance  or  premarket  approval for devices,
withdrawal of marketing  clearances or approvals and criminal  prosecution.  The
FDA also has the authority to request repair,  replacement or refund of the cost
of any device manufactured or distributed by the Company.

         The Company is prohibited  from marketing new devices in the U.S. until
it obtains clearance from the FDA under the premarket notification provisions of
Section  510(k) of the FDC Act  ("Section  510(k)")  or  approval of a Premarket
Approval  Application  ("PMA")  from the  FDA.  A  510(k)  submission  generally
requires  supporting  data,  which may  include  clinical  data.  The process of
obtaining  PMA  approval  is much more  costly,  lengthy  and  uncertain.  A PMA
application  requires extensive clinical data and other supporting  information.
When  clinical  data  is  required  for  either  a  510(k)  submission  or a PMA
application,   the  process  of  compiling   the  data  can  be  expensive   and
time-consuming,  and there can be no assurance  that any clinical study proposed
by the  Company  will be  permitted  by the  FDA,  will  be  completed,  or,  if
completed,  will provide  data and  information  that will support  clearance or
approval.  The Company believes that it usually takes from four to twelve months
from  submission to obtain 510(k)  clearance,  although it can take longer,  and
that the FDA's review of a PMA  application  after it is accepted for filing can
last from one to three  years,  or even  longer.  In all cases,  there can be no
assurance that 510(k) clearance or PMA approval will ever be obtained. Moreover,
regulatory  clearances  or  approvals,   if  granted,  may  include  significant
limitations on the indicated uses for which a product may be marketed.

         To date,  all of the Company's  products sold in the U.S. have received
510(k) clearance. However, the FDA recently advised the Company that its urology
stent will require PMA approval. There can be no assurance that the FDA will not
determine that other products  currently in development by the Company or future
products  must also undergo the more costly,  lengthy and uncertain PMA approval
process.

         Current FDA  enforcement  policy  prohibits  the  marketing of approved
medical devices for unapproved uses. The Company's PGA pins have received 510(k)
clearance  for the general  intended use of  "maintenance  of alignment of small
fragments of fractured  non-load  bearing  bones in the presence of  appropriate
immobilization."  The Company has promoted  this  product for numerous  specific
indications within the general framework of the language quoted above.  Although
the Company  believes that these specific  indications are covered by the 510(k)
clearance  already received for its PGA pins, there can be no assurance that the
FDA would not consider promotion of this product for the specific indications to
be a change to the intended use of the device requiring a new 510(k) submission.

         Any products manufactured or distributed by the Company pursuant to FDA
clearances or approvals are subject to pervasive  and  continuing  regulation by
the FDA. Changes in existing  requirements or adoption of new requirements could
adversely  affect the  ability of the  Company to be in  regulatory  compliance.
Failure to comply with  regulatory  requirements  could have a material  adverse
effect on the Company's business, financial condition and results of operations.
There  can be no  assurance  that  the  Company  will not be  required  to incur
significant costs to comply with laws and regulations in the 

<PAGE>


future or that laws or regulations  will not have a material adverse effect upon
the Company's business, financial condition and results of operations.

         The FDC Act requires devices to be manufactured in accordance with good
manufacturing   practices   ("GMPs")   which  impose   certain   procedural  and
documentation  requirements  upon the  Company  with  respect to  manufacturing,
quality  assurance  and  other  matters.  Enforcement  of  GMP  regulations  has
increased  significantly  in the last  several  years,  and the FDA has publicly
stated that compliance will be more strictly  scrutinized.  The FDA has recently
finalized changes to the GMP regulations,  including design controls, which will
likely increase the cost of compliance with GMP requirements.

         In October 1994, the Company's facility in Finland was inspected by the
FDA. The inspector made several observations related to GMP's, which resulted in
a Warning  Letter being issued to the Company on February 23, 1995.  The Company
then began an exchange of  correspondence  with the FDA, which concluded with an
October  10,  1995 letter from the FDA  stating,  among other  things,  that the
Company's  responses to the Warning  Letter were  "adequate" and that during the
next  inspection,   the  FDA  would  "verify  that  the  corrections  have  been
implemented." During April 14 through 17, 1997, the Company was inspected by the
FDA and received  four  observations  related to GMP's,  including  one that was
deemed a recurring  observation from the 1994 inspection.  The Company responded
to  the  FDA in  writing  on  April  17,  1997.  In its  response,  the  Company
acknowledged  the  observations  and  indicated  that  three had been  corrected
(including the recurring observation) and that the correction for the fourth was
underway.  No  assurance  can be  given  that the FDA  will  determine  that the
Company's responses are satisfactory.

         In  addition,   international   regulatory   bodies   often   establish
regulations  governing  product  standards,  packaging  requirements,   labeling
requirements,   import   restrictions,   tariff  regulations,   duties  and  tax
requirements.  As a result of the  Company's  sales in  Europe,  the  Company is
required to receive a "CE" marking  certification,  an  international  symbol of
quality and compliance with the applicable European medical device directive. In
January 1997, the Company  received an EC Design  Examination  and an EC Quality
System  Certificate from a European Notified Body, which entitles the Company to
affix a CE  marking on all of its  currently  marketed  orthopaedic,  dental and
maxillo-facial  products.  Submission  of the  required  design  dossier for the
Company's  stent  products  is  scheduled  for late  1997.  Failure to obtain CE
marking for the  Company's  stent  products by June 14, 1998 would  prohibit the
Company  from selling such  products in the  European  Economic  Area unless and
until compliance is achieved. There can be no assurance that the Company will be
able to achieve and/or  maintain  compliance  required for CE marking for any or
all of its  products or that it will be able to produce its products in a timely
and profitable manner while complying with applicable requirements.

         The Company is also subject to numerous  environmental  and safety laws
and  regulations,  including  those  governing use of hazardous  materials.  Any
violation of, and the cost of compliance  with, these  regulations  could have a
material  adverse  effect on the  Company's  business,  financial  condition and
results of operations.

         Competition.   The  medical  device  industry  is  subject  to  intense
competition in the U.S. and abroad. The Company's products compete against metal
implants  and  other  resorbable  products  for  orthopaedic  surgery,  urology,
dentistry and maxillo-facial surgery applications.  Potential competitors may be
able to develop  technologies  that are as  effective  as, or more  effective or
easier to use than,  those  offered  by the  Company,  which  could  render  the
Company's products  noncompetitive or obsolete.  Moreover, many of the Company's
existing  and  potential   competitors  have  substantially  greater  financial,
marketing,  sales,  distribution and  technological  resources than the Company.
Such  existing and  potential  

<PAGE>

competitors  may be in the process of seeking FDA approval for their  respective
products  or may  possess  substantial  advantages  over the Company in terms of
research and development  expertise,  experience in conducting  clinical trials,
experience in regulatory matters,  manufacturing  efficiency,  name recognition,
sales  and  marketing  expertise  or  distribution  channels.  There  can  be no
assurance that the Company will be able to compete  successfully against current
or future  competitors  or that  competition  will not have a  material  adverse
effect on the Company's business, financial condition and results of operations.

         Dependence Upon Independent Sales Agents, Distributors and Dealers. The
Company markets and sells its products  through managed  networks of independent
sales agents in the U.S.  and  independent  distributors  and dealers in foreign
countries.  As a result,  a substantial  portion of the  Company's  revenues are
dependent upon the sales efforts of such sales agents, distributors and dealers.
The  Company  may  also  rely on its  distributors  to  assist  it in  obtaining
reimbursement and regulatory approvals in certain international  markets.  There
can be no assurance that the Company's sales agents,  distributors  and dealers,
certain  of which  operate  relatively  small  businesses,  have  the  financial
stability to assure their continuing presence in their markets. The inability of
a sales  agent,  distributor  or  dealer  to  perform  its  obligations,  or the
cessation of business by a sales agent,  distributor or dealer, could materially
and adversely affect the Company's business,  financial condition and results of
operations. There can be no assurance that the Company will be able to engage or
retain  qualified  sales  agents,  distributors  or  dealers  in each  territory
targeted by the Company. The failure to engage such entities in such territories
would  have a  material  adverse  effect on the  Company's  business,  financial
condition and results of operations.

         Risks Relating to International  Operations.  Approximately  32% of the
Company's  sales during the year ended December 31, 1996 and 14% of sales in the
first six months of 1997 were generated in  international  markets.  A number of
risks  are  inherent  in  international  operations.   International  sales  and
operations may be limited or disrupted by the imposition of government controls,
export license requirements,  political instability, trade restrictions, changes
in  tariffs,   difficulties  in  managing   international   operations,   import
restrictions  and   fluctuations  in  foreign   currency   exchange  rates.  The
international   nature  of  the   Company's   business   subjects   it  and  its
representatives,  agents and  distributors  to the laws and  regulations  of the
foreign jurisdictions in which they operate, and in which the Company's products
are sold. The regulation of medical  devices in a number of such  jurisdictions,
particularly  in the  European  Union,  continues to develop and there can be no
assurance that new laws or regulations  will not have a material  adverse effect
on the Company's business, financial condition and results of operations.

         Product  Liability Risks;  Limited  Insurance  Coverage.  The Company's
business is subject to product liability risks in the testing, manufacturing and
marketing  of its  products.  There can be no assurance  that product  liability
claims will not be asserted against the Company,  its strategic  partners or its
licensees. While the Company maintains product liability insurance, there can be
no assurance that this coverage will be adequate to protect the Company  against
future product  liability claims.  In addition,  product liability  insurance is
expensive and there can be no assurance that, in the future,  product  liability
insurance will be available to the Company on terms satisfactory to the Company,
if at all. A  successful  product  liability  claim or series of claims  brought
against  the  Company in excess of its  coverage  could have a material  adverse
effect on the Company's business, financial condition and results of operations.

         No Assurance of Ability to Manage Growth.  The Company has  experienced
substantial growth in product sales during the second half of 1996 and the first
half of 1997.  Although  there  can be no  assurance  that  such  growth  can be
sustained, products in development may potentially lead to further growth. There
can be no assurance  that the Company will be able to (i) develop the  necessary
manufacturing  capability,  (ii) manage an expanded sales and marketing network,
(iii)  attract,  retain  and  integrate  the  required  key  personnel,  or (iv)
implement  the  financial,  accounting  and  management  systems to meet growing

<PAGE>



demand for its products should it occur.  Failure of the Company to successfully
manage  its  growth  could  have a  material  adverse  effect  on the  Company's
business, financial condition and results of operations.

         Uncertainties   Regarding   Manufacturing.    The   Company   currently
manufactures  its implant  products  solely in Finland.  The Company  intends to
develop  a  manufacturing  capability  in the  U.S.  in order  to  increase  its
manufacturing  capacity for its existing and new implant  products.  The Company
anticipates  that it will establish this capability  either by (i) equipping and
operating a leased facility in the eastern U.S. or (ii) contracting with a third
party  to  provide  a  manufacturing  capability  to the  Company.  The  Company
presently  is  exploring  both of these  alternatives.  If the  Company  pursues
contract  manufacturing,  it will  solicit  bids from  reliable  medical  device
manufacturers,  including a subsidiary  of Vital Signs,  Inc.  ("Vital  Signs").
Certain  of  the  directors  and  principal  stockholders  of  the  Company  are
directors,  officers  and  stockholders  of Vital  Signs.  If the Company uses a
contract manufacturer, the Company would equip the manufacturer's facility, with
the objective of ultimately  transitioning  to a  neighboring  Company-owned  or
Company-leased facility. There can be no assurance that the Company will be able
to enter into a contract manufacturing  agreement or otherwise secure the use of
suitable  facilities in the U.S. on  commercially  reasonable  terms, or at all.
Furthermore,  regardless of the  alternative  selected,  the  integration of the
Company's   existing   operations   with  the  U.S.   facility   may  result  in
inefficiencies and delays,  especially as a result of the technical requirements
necessary to produce  products in accordance with the Company's  specifications.
There can be no assurance  that the Company will not encounter  difficulties  in
scaling up production,  including problems involving  production yield,  quality
control and assurance,  and shortages of qualified personnel.  In addition,  the
U.S. facility will be subject to GMP regulations,  international quality control
standards and other  regulatory  requirements.  Difficulties  encountered by the
Company in  manufacturing  scale-up,  or the failure by the Company to establish
and maintain the U.S. facility in accordance with such regulations, standards or
other  regulatory  requirements,  could  have a material  adverse  effect on the
Company's business,  financial condition and results of operations.  The Company
has  experienced  occasional  periods of delay in filling  product orders due to
increases in demand beyond forecasted levels. The Company is currently upgrading
its  production  machinery and processes to address this  increased  demand.  No
assurance  can be  given  that  the  integration  of  these  machines  into  the
production process will occur within the scheduled time frame or will not result
in  difficulties in scale-up that could lead to further delays in filling orders
in the future.  Difficulties  experienced  in  integrating  such  machinery on a
timely basis could have a material  adverse  effect on the  Company's  business,
financial condition and results of operations.

         Limited Sources of Supply;  Lack of Contractual  Arrangements.  The raw
materials for the Company's PLLA products are currently available to the Company
from  three  qualified  sources,  while  the  Company's  PGA raw  materials  are
available from two qualified sources. The Company's raw materials have been used
in  products  cleared by the FDA and the  Company's  suppliers  maintain  Device
Master  Files  at the  FDA  that  contain  basic  toxicology  and  manufacturing
information.  The Company does not have long-term  supply  contracts with any of
its suppliers,  although it is currently negotiating a supply agreement with its
principal  PLLA  supplier.  In the event  that the  Company  is unable to obtain
sufficient quantities of raw materials on commercially reasonable terms, or in a
timely manner,  the Company would not be able to  manufacture  its products on a
timely and cost-competitive  basis which, in turn, would have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, if any of the raw materials for the Company's PGA and PLLA products
are no longer  available  in the  marketplace,  the  Company  would be forced to
further  modify its  Self-Reinforcing  processes to  incorporate  alternate  raw
materials.  The  incorporation of new raw materials into the Company's  existing
products would likely require the Company to seek clearance or approval from the
FDA.  There can be no assurance  that such  development  would be  successful or
that,  if  developed  by the Company or licensed  

<PAGE>

from third parties, products containing such alternative materials would receive
regulatory approvals on a timely basis, or at all.

         Ability to Maintain  Third-Party  Reimbursement.  In the U.S. and other
markets, health care providers, such as hospitals and physicians,  that purchase
medical devices, such as the Company's products, generally rely upon third-party
payors,  including  Medicare,  Medicaid and private health  insurance  plans, to
reimburse all or part of the cost of the procedures in which the medical devices
are being used. The Company  believes that, to date,  U.S. health care providers
have  been  reimbursed  in full for the cost of  procedures  which  utilize  the
Company's  products.  However,  there  can  be  no  assurance  that  third-party
reimbursement  for  such  procedures  will  be  consistently  available  for the
Company's  products or that such  third-party  reimbursement  will be  adequate.
There  is  significant  uncertainty  concerning  third-party  reimbursement  for
procedures  which  utilize  any medical  device  incorporating  new  technology.
Reimbursement  by a  third-party  payor  may  depend  on a  number  of  factors,
including the payor's  determination  that the use of the Company's  products is
clinically useful and  cost-effective,  medically necessary and not experimental
or  investigational.  Since  reimbursement  approval is required from each payor
individually,  seeking such approvals can be a time consuming and costly process
which,  in  the  future,   could  require  the  Company  to  provide  supporting
scientific,  clinical and  cost-effectiveness  data for the use of the Company's
products to each payor separately.  Federal and state governmental  agencies are
increasingly  considering  limiting health care expenditures.  For example,  the
United  States   Congress  is  currently   considering   various   proposals  to
significantly  reduce Medicaid and Medicare  expenditures.  Such  proposals,  if
enacted,  could  have a  material  adverse  effect  on the  Company's  business,
financial  condition and results of  operations.  Outside the U.S.,  the Company
relies on distributors to establish  reimbursement  from  third-party  payors in
their  respective  territories.  Health  care  reimbursement  systems  vary from
country to country and, accordingly,  there can be no assurance that third-party
reimbursement  available  under any one system will be available for  procedures
utilizing the Company's products under any other  reimbursement  system. Lack of
or inadequate  reimbursement  by governmental and other  third-party  payors for
procedures utilizing the Company's products would have a material adverse effect
on the Company's business, financial condition and results of operations.

         Uncertainties  Relating to Strategic Partners.  The Company anticipates
that it may be  necessary  for it to  enter  into  arrangements  with  corporate
partners,  licensees  or  others,  in  order  to  efficiently  market,  sell and
distribute  certain of its products.  Such strategic partners may also be called
upon to assist in the  support of such  products,  including  support of certain
product development functions.  As a result, the success of such products may be
dependent  in part upon the  efforts  of such third  parties.  The  Company  has
negotiated  one such  agreement  with Ethicon  GmbH,  a subsidiary  of Johnson &
Johnson,  pursuant  to which  Ethicon  GmbH has the right to market  and sell in
Europe certain products,  based upon the Company's membrane patent, in dentistry
and two other unrelated field of use. There can be no assurance that the Company
will be able to negotiate  additional  acceptable  arrangements  with  strategic
partners or that the Company will realize any  meaningful  revenues  pursuant to
such arrangements.

         Volatility of Stock Price. The stock markets have experienced price and
volume   fluctuations  that  have  particularly   affected  medical   technology
companies,  resulting  in  changes  in the  market  prices of the stocks of many
companies  that have not been directly  related to the operating  performance of
these  companies.  Such broad market  fluctuations  may materially and adversely
affect  the  market  price  of the  Company's  Common  Stock.  Factors  such  as
variations  in the  Company's  results of  operations,  comments  by  securities
analysts,   underperformance  against  analysts'  estimates,   announcements  of
technological  innovations  or new  products by the Company or its  competitors,
changing government  regulations and developments with respect to FDA or foreign
regulatory  submissions,   the  results  of  regulatory  inspections,

<PAGE>

patents,  proprietary rights or litigation may have a material adverse effect on
the market price of the Company's Common Stock.



<PAGE>



Part II. Other Information

Item 6. Exhibits and Reports on Form 8-K

         (a) The following exhibits are filed as part of the Quarterly Report on
Form 10-Q

          No. 11.1 Computation of Primary and Fully Diluted Earnings per Share
          No. 27.1 Financial Data Schedule


         (b) The  Registrant  filed one  Current  Report on Form 8-K  during the
quarter  ended June 30, 1997.  Such Current  Report on Form 8-K was filed on May
20, 1997 and listed, under Item 5 Other Events, that the Registrant sold 300,000
shares  of its  Common  Stock  upon  the  exercise  by the  underwriters  of the
over-allotment  option  in  connection  with  the  Registrant's  initial  public
offering.




<PAGE>



                                   SIGNATURES

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

                                               BIONX IMPLANTS, INC.

                                               By: /s/ David W. Anderson
                                               -----------------------
                                               David W. Anderson
                                               President and Chief Executive 
                                               Officer



                                               By: /s/ Michael J. O'Brien
                                               -----------------------
                                               Michael J. O'Brien
                                               Vice President
                                               Chief Financial Officer and
                                               Chief Accounting Officer

Dated: August 14, 1997




<PAGE>



                                  EXHIBIT INDEX

Exhibit No.       Exhibit

No. 11.1 Computation of Primary and Fully Diluted Earnings per Share
No. 27.1 Financial Data Schedule