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 September 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 October 22, 1997,  there were  8,916,812  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 September 30, 1997 (Unaudited)                       3

         Consolidated Statements of Operations for the Three
                  and Nine Months Ended September 30, 1996 and 1997
                  (Unaudited)                                              4

         Consolidated Statements of Cash Flows for the Nine Months
                  Ended September 30, 1996 and 1997 (Unaudited)            5
 
         Notes to Consolidated Financial Statements (Unaudited)            6

Item 2. Management's Discussion and Analysis of Financial                  8
         Condition and Results of Operations

Part II. Other Information

Item 2.  Changes in Securities and Use of Proceeds                        27

Item 6. Exhibits and Reports on Form 8-K                                  27

Signatures                                                                28



<PAGE>


Item 1. Financial Statements
<TABLE>
<CAPTION>

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

                                                                     December 31,     September 30,
                                                                         1996             1997
                                                                                      (Unaudited)

Assets:
Current assets:

<S>                                                                      <C>               <C>   
   Cash and cash equivalents.............................                $1,593            22,463
   Inventory, net........................................                 1,031             1,555
   Trade accounts receivable, net of
      allowance of $97 as of December 31,
      1996 and $111 as of September 30, 1997.............                 1,708             2,644
   Grants receivable.....................................                   123               117
   Deferred offering costs ..............................                   195                 -
   Prepaid expenses and other current assets.............                   153               230
                                                                            ---               ---

Total current assets.....................................                 4,803            27,009
Investments..............................................                   100                90
Deposits.................................................                    44                20
Plant and equipment, net.................................                   483               832
Goodwill and intangibles, net............................                 3,939             3,759
                                                                          -----             -----

Total assets                                                             $9,369            31,710
                                                                         ======            ======

Liabilities and Stockholders' Equity
Current Liabilities:
    Trade accounts payable...............................                $  848             1,232
     Long-term debt, current portion.....................                   223                58
     Related party.......................................                   163                78
     Current income tax liability........................                   205               341
     Accrued and other current liability.................                 1,317             1,167
                                                                          -----             -----

Total current liabilities................................                 2,756             2,876

Long-term debt...........................................                   590               155

Contingencies............................................
Series A mandatorily redeemable convertible
  stock, par value $0.001 per share; 2,000,000
  shares authorized, 2,000,000 shares issued
  and outstanding at December 31, 1996...................                 5,000                 -

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 8,916,812  shares  issued and
      outstanding  as of December 31, 1996 and 
      September 30, 1997, respectively...................                    10                17
Additional paid-in capital...............................                 8,968            35,616
Accumulated deficit......................................                (7,686)           (6,527)
Foreign currency translation adjustment..................                  (269)             (427)

Total stockholders' equity...............................                 1,023            28,679
                                                                          -----            ------

   Total liabilities and stockholders' equity............              $  9,369            31,710
                                                                        =======            ======

         See accompanying notes to the Consolidated Financial Statements

</TABLE>

<PAGE>

<TABLE>
<CAPTION>


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

                                                 Three Months Ended             Nine Months Ended
                                                     September 30,                  September 30,
                                                   1996           1997           1996           1997

Revenues:
<S>                                           <C>                 <C>            <C>           <C>   
Product Sales                                 $   1,212           4,149          2,608         11,188
License and grant revenues                          135              15            204            123
                                                    ---              --            ---            ---

Total revenues                                    1,347           4,164          2,812         11,311
                                                  -----           -----          -----         ------

Cost of goods sold                                  680           1,018          1,567          2,762
                                                    ---           -----          -----          -----

Gross profit                                        667           3,146          1,245          8,549
                                                    ---           -----          -----          -----

Selling, general and administrative                 985           2,538          2,310          6,811
Research and development                            110             250            306            651
Acquired in-process research and
   development                                    2,832               -          2,832              -
                                                  -----               -          -----              -

Total operating expenses                          3,927           2,788          5,448          7,462
                                                  -----           -----          -----          -----

Operating income (loss)                          (3,260)            358         (4,203)         1,087
                                                 -------            ---         -------         -----

Other income and expense:
   Interest income (expense)                        (35)            284            (90)           459
                                                    ----            ---            ----           ---

Income (loss) before provision for               
   income taxes                                  (3,295)            642         (4,293)         1,546

Provision for income taxes                          186             158            186            387
                                                    ---             ---            ---            ---

Net income (loss)                             $  (3,481)            484         (4,479)         1,159
                                              ==========            ===         =======         =====

Pro forma net income (loss) per share         $   (0.63)           0.05          (0.81)          0.12
                                              ==========           ====          ======          ====
   

Weighted average common and
  dilutive equivalent shares
  outstanding                                     5,516           9,328          5,516          9,328
                                                  =====           =====          =====          =====

         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)
                                                                             Nine Months Ended 
                                                                               September 30,
                                                                            --------------------
                                                                              1996          1997

Cash flows from operating activities:

<S>                                                                      <C>             <C>      
         Net income (loss)                                               $   (4,479)     $   1,159
Adjustments to reconcile net income (loss)
         to net cash (used in) provided by
         operating activities
Depreciation and amortization                                                    70            367
Acquired in process research and development                                  2,832              -
Other non-cash charges                                                          106              -
Change in assets and liabilities
Inventory                                                                      (317)          (524)
Accounts receivable                                                            (839)          (936)
Grants receivable                                                                 -              6
Deferred offering costs                                                           -            195
Prepaid expense and other
     current assets                                                            (190)           (77)
Investments                                                                     (59)            10
Deposits                                                                          -             24
Trade accounts payable                                                          747            384
Related party                                                                  (198)           (85)
Current income tax liability                                                    186            136
Accrued and other liabilities                                                   651           (150)
                                                                                ---           -----
                                                                              2,989           (650)
                                                                              -----           -----
Net cash (used in) provided by operating activities                          (1,490)           509
                                                                             -------           ---
Cash flows used in investing activities
         Purchase of plant and equipment                                       (236)          (536)
                                                                               -----          -----
Net cash used in investing activities                                          (236)          (536)
                                                                               -----          -----
Cash flow from financing activities:
         Proceeds from initial public offering                                    -         24,150
         Exercise of warrants                                                     -            552
         Offering costs                                                           -         (3,050)
         Proceeds from issuance of long-term debt                               727              -
         Proceeds from exercise of employee stock
            options                                                               -              3
         Repayment of long-term debt                                                          (600)
         Net proceeds from issuance of preferred stock                        4,895              -
         Net proceeds from issuance of common stock                              50              -
                                                                                 --              -
Net cash provided by financing activities                                     5,672         21,055
Net effects of foreign exchange rate differences                                 36           (158)
                                                                                 --           -----
Net increase in cash and cash equivalents                                     3,982         20,870
Cash and cash equivalents at beginning of period                                 51          1,593
                                                                                 --          -----
Cash and cash equivalents at end of period                                    4,033         22,463

Supplementary cashflow information:
Cash paid for interest                                                          119             28
Cash paid for taxes                                                               1            251
Non-cash financing activity:
Conversion of series A preferred shares to
    common shares upon consummation
   of the initial public offering                                                 -          5,000
Issuance of common stock related to the 
    reorganization                                                            7,109              -

         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 as of September  30, 1997 and for the
three months and nine month  periods  ended  September 30, 1996 and 1997. 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 September 30, 1997,
and the  Company's  consolidated  results of  operations  and cash flows for the
three and nine months ended September 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 nine month periods ended September 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):

<TABLE>
<CAPTION>

                                                                December 31,             September 30,
                                                                    1996                     1997

<S>                                                            <C>                              <C>
                        Raw materials                          $     101                        190
                        Finished goods                             1,210                      1,930
                                                                   -----                      -----

                                                                   1,311                      2,120
                        Less reserves                               (280)                      (565)
                                                                    -----                     -----
                                                                $   1,031                     1,555
                                                                 =========                   =======

</TABLE>


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 September 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 for the periods ended September 30, 1997 include 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 September 30, 1997,
had an accumulated  deficit of approximately $6.5 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 nine 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 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 nine months 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
September 30, 1996 and 1997,  international  product sales  represented  51% and
15%, respectively, of the Company's total product sales.

         Historically, the Company typically sold implant grade, stainless steel
surgical  instruments  for  use  with  each of its  Self-Reinforced,  resorbable
products.  The margins for these  instruments were and are typically lower than 
the margins applicable  to  the  Company's  implant  products.  


<PAGE>
However,  since orthopaedic  companies  operating in the U.S. have traditionally
loaned rather than sold instruments to their customers,  it has become 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 product 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
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 were released
for commercial  use  commencing in the third quarter of 1997;  royalties on such
sales are payable to the Company in the  following  quarter.  Revenues  from the
Company's  domestic  or  international  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.

<PAGE> 
        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
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 several  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.

<PAGE>

         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 242% from $1.2
million  during the quarter ended  September 30, 1996 to $4.1 million during the
quarter  ended  September 30, 1997.  For the first nine months of 1997,  product
revenues  increased  by 329% from the same  period a year ago.  These  increases
primarily  resulted from the U.S.  introduction of the Company's  Meniscus Arrow
products in the second quarter of 1996; revenues from the sale of Meniscus Arrow
products worldwide were approximately $670,000 during the third quarter of 1996,
as  compared  with  $2.9  million  during  the  third  quarter  of 1997 and were
approximately $1.0 million during the first nine months of 1996 as compared with
$7.8 million during the first nine months 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  all other  implants,  instrumentation  systems  and
related loaner fees)  increased by 123%,  from $540,000 during the third quarter
of 1996, to $1.2 million,  during the third quarter of 1997.  Revenues generated
from the sale of such  other  products  during  the  first  nine  months of 1997
increased by 110%,  totaling  $3.4 million  during such period as compared  with
$1.6 million during the first nine months of 1996.

     License and grant revenues.  License and grant revenues totaled $15,000 and
$123,000   during  the  three  and  nine  months  ended   September   30,  1997,
respectively,  decreasing from $135,000 and $204,000 during the same periods 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
initiated  during the third  quarter of 1997 are  expected to be made during the
fourth quarter of 1997; however,  such royalty payments are not expected to be a
material  component of the Company's  total  revenues and no  assurances  can be
given with  respect to the timing or amount of such  payments.  The  Company has
been  required  by Ethicon  GmbH 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
$667,000  during  the third  quarter  of 1996 to $3.1  million  during the third
quarter of 1997,  and from $1.2 million  during the first nine months of 1996 to
$8.5  million  during  the first  nine  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 50% during the third 

<PAGE>
quarter of 1996 and 44%  during the first nine  months of 1996 to 76% during the
third  quarter  of 1997 and 76%  during  the  first  nine  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
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 158% from $985,000 during the third quarter
of 1996 to $2.5 million  during the third  quarter of 1997 and by 195% from $2.3
million  during the first nine months of 1996 to $6.8  million  during the first
nine months of 1997.  Such  expenses  were 81% of product sales during the third
quarter of 1996 and 89% of product  sales  during the first nine months of 1996,
as compared  with 61% of product  sales during the third  quarter and during the
first nine 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
increases in the dollar amount of selling,  general and administrative  expenses
were  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  decreases  in  the   percentage
relationship of such expenses to product sales reflect the leveraging of certain
such expenses over the Company's expanded revenue base.

         Research and development.  Research and development  expenses increased
by 127% from $110,000  during the third  quarter of 1996 to $250,000  during the
third quarter of 1997 and by 113% from $306,000  during the first nine months of
1996 to $651,000 during the first nine months of 1997. These increases reflected
an increased  volume of product  development work being performed by the Company
and increased staffing levels.

         Acquired in-process research and development.  During the third quarter
of 1996, the Company incurred $2.8 million in research and development  expenses
relating to a write-off of certain  research and development  work in connection
with the Company's 1996 reorganization.

         Interest  income  (expense).  In the third  quarter  and the first nine
months of 1997, the Company generated  interest income of $284,000 and $459,000,
respectively,  compared  to  interest  expense  of  $35,000  and  $90,000 in the
comparable  periods of 1996.  Funds  obtained  from the  proceeds of the initial
public  offering in late April 1997  generated  the interest  income in the 1997
periods.

         Income  taxes.  The provision for income taxes during the third quarter
and first nine  months of 1997  reflects  the  Company's  profitable  operations
during the periods presented, and anticipates partial utilization of certain net
operating  loss  carryforwards.  The  provision for income taxes during the 1996
periods reflects the income generated by the Company's Finnish subsidiaries.

         Net  income.  The Company  reported  net income of $484,000 or $.05 per
share for the third quarter of 1997, as compared with a net loss of $3.5 million
or  $(0.63)  per share for the  comparable  period in 1996.  For the nine  month
period ended  September 30, 1997,  net income  totaled $1.2 million or $0.12 per
share, compared to a net loss of $4.5 million or $(0.81) per share, in the first
nine months of 1996. No assurance can be given that the Company will continue to
be profitable during future periods.

         Per Share  Calculations.  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 third quarter of 1997, basic and
diluted EPS would have been computed as follows (in thousands,  except per share
amounts):

                                          Income          Share        Per Share
                                         (Numerator)   (Denominator)    Amount


Basic EPS                                $   484           8,916       $   0.05

Incremental shares from assumed
exercise of dilutive options and
warrants                                      -              412             -
                                              -              ---             -

Diluted EPS                              $   484           9,328          0.05
                                         =======           =====       =========

Had  Statement  128 been  adopted for the first nine  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
                                          (Numerator)        (Denominator)          Amount

<S>                                          <C>                 <C>                 <C> 
Basic EPS                                    1,159               8,916               0.13

Incremental shares from assumed
exercise of dilutive options and
warrants                                       -                   412               -
                                               -                   ---                 -

Diluted EPS                                  1,159               9,328               0.12
                                             =====               =====               =====

</TABLE>

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 September 30, 1997, cash and cash  equivalents
totaled $1.6 million and $22.5 million,  respectively.  The increase in cash and
cash equivalents of approximately  $21 million is primarily  attributable to the
net proceeds  received  from the initial  public  offering  transacted in April,
1997.

         As of  September  30,  1997,  the Company had working  capital of $24.1
million. Long-term debt (including the current portion) was reduced by $600,000,
from the level at the  beginning  of the year to  $213,000 as of  September  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
September 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

<PAGE>

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 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 September 30, 1997, had
an accumulated deficit of approximately $6.5 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 nine 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 

<PAGE>
capabilities.  There  can be no  assurance  that  the  Company  will  be able to
successfully  commercialize  its products or that  profitability  will  continue
beyond the first three  quarters of 1997.  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  continued
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 continued acceptance of the Company's  Self-Reinforced  resorbable
implants,  particularly its Meniscus Arrow products,  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 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 

<PAGE>

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.  European
counterparts to the two principal U.S. patents that are owned by the Company and
the  Japanese  counterpart  to one such  patent  are  currently  the  subject of
opposition  proceedings.  The Company is  vigorously  defending its European and
Japanese patent  positions in these  proceedings.  One of these European patents
has been revoked by the European  Patent  Office for lack of novelty based on an
earlier publication. The Company filed an appeal of the European Patent Office's
revocation  decision.  The appellaate board has allowed the Company to amend the
claims of the revoked patent and to present these amended claims to the European
Patent Office for a new determination of their  patentability.  No assurance can
be given as to whether  such  determination  in Europe will be  successful.  The
other European patent and the Japanese patent  application are being  challenged
on lack of novelty and inventiveness grounds on the basis of disclosures made in
patent and other  publications.  The  validity of the  European  patent has been
recently  upheld by the European  Patent Office.  No assurance can be given that
this  favorable  decision  will not be  appealed  or  that,  if  appealed,  this
favorable decision will not be reversed.  Further,  no assurance may be given as
to the  outcome  of the  pending  Japanese  opposition  proceeding.  In order to
clarify and confirm its U.S. patent  position,  the Company  recently  requested
reexamination  by the U.S. PTO of the two  principal  U.S.  patents owned by the
Company.  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 whether  the
issues raised in the reexamination proceedings will be resolved in the Company's
favor  or 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 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.

<PAGE>

         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 is infringed
by sales of one or more of the  Company's  products or by the practice of one or

<PAGE>

more of the Company's processes in any of the eight countries  identified in the
European  patent.  The Company has also  initiated an opposition in the European
Patent Office  challenging the grant of a third party's European patent relating
to a bioabsorbable membrane. No assurance can be given that this opposition will
result in either the  revocation  of this patent or the narrowing of its claims.
If this  opposition is not  successful,  then no assurance can be given that the
third party will not assert that its  European  patent 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 countries  identified in this 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 

<PAGE>

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 three of its employees.  The
loss of key personnel and the inability to hire and retain  qualified  personnel
in key positions could have a material adverse effect on the Company's business,
financial condition and results of operations.

         The Company's  product  development  efforts are dependent  upon Pertti
Tormala, Ph.D., and the Technical University in Tampere, Finland. Dr. Tormala, a
founder,  director and executive officer of the Company, is currently an Academy
Professor at the Technical  University  and has been permitted by the University
to devote his efforts to developing  new 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  technologies 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.  There can be no assurance that the University  will allow
Dr.  Tormala to continue to devote his efforts and  University  resources to the
Company's product development  efforts. Any failure by the Company to obtain the
continued  services of Dr.  Tormala,  or any  requirement  that the Company fund
research at the Technical  University at a substantially  increased level, 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.

<PAGE>

         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 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 practice requirements ("GMPs") which impose certain procedural and
documentation  requirements  upon the  Company  with  respect to  manufacturing,
quality  assurance  and  other

<PAGE>

matters. Enforcement of GMP requirements 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
requirements,  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  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 and May 29, 1997,  acknowledging  the  observations
and indicating that they had been corrected.  On July 11, 1997, the FDA informed
the  Company  in  writing  that  the  observations  did not  appear  to  warrant
regulatory follow-up at that time.

         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

<PAGE>

resources than the Company.  Such existing and potential  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 15% of sales in the
first nine 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 

<PAGE>

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
nine months 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
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  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 requirements, 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
is  currently  upgrading  its  production  machinery  and  processes  to address
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 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 

<PAGE>

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
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 have utilized 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.

<PAGE>

     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
fields  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.

         Possible  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,   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 2.  Changes in Securities and Use of Proceeds

         The Company's initial public  offering  was  effected   pursuant  to  a
registration  statement on Form S-1 (No.  333-22359)  declared  effective by the
Securities and Exchange  Commission  (the "SEC") on April 24, 1997. The offering
commenced  on April 25,  1997 and  terminated  after all  securities  were sold.
Pursuant to Rule 463 promulgated by the SEC, the Company  provides the following
information regarding its initial public offering:

         (a) The managing  underwriters  were UBS  Securities  LLC,  Hambrecht &
Quist LLC and Volpe Brown Whelan & Company, LLC.

         (b) The title of the class of stock  registered  was Common Stock,  par
value  $.0019  per  share.  The  Company  sold all  2,300,000  shares  that were
registered (i.e., there were no selling securityholders). The aggregate price of
the offering amount registered and sold was $24.2 million.

         (c)  From April 25, 1997 through  September  30,  1997,  the  Company's
reasonable estimate of the amount of expenses incurred for the Company's account
in connection with the issuance and  distribution  of the securities  registered
for underwriting  discounts and commissions was $1.7 million,  for finders' fees
was $ 0, for expenses paid to or for underwriters was $ 0 and for other expenses
was $1.3 million.  Thus,  the total amount of such expenses was $3.0 million and
the net  proceeds to the Company was $21.2  million.  Except as set forth in the
immediately following sentence, none of the above-mentioned expenses represented
direct or  indirect  payments to  directors  or officers of the Company or their
associates,  to  persons  owning  ten  percent  or more of any  class of  equity
security of the Company or to  affiliates  of the  Company.  As set forth in the
above-mentioned registration statement, one of the Company's directors (David H.
MacCallum)  is a  Managing  Director  at UBS  Securities,  one  of the  managing
underwriters of the Company's initial public offering.

         (d) From April 25, 1997 through  September  30,  1997,  the Company has
used the  following  amount of such net  proceeds for the  following  categories
enumerated by the SEC:

                                                     Reasonable Estimated
                Categor                                  Amount
                                                     (in thousands)

               Construction of plant, building 
               and facilities                                   -

               Purchase and  installation  of  
               machinery and equipment                        $225

               Purchases of real estate                         -

               Acquisition of other businesses                  -

               Repayment of indebtedness                       600

               Working capital                                  -

               Short term investments                       20,375

               Other  purposes  for  which 
               at least  $100,000 has been used                 -

None of the  above-mentioned  uses of  proceeds  represented  direct or indirect
payments to directors or officers of the Company or their associates, to persons
owning ten percent or more of any class of equity  security of the Company or to
affiliates of the Company.  Such uses do not represent a material  change in the
use of proceeds described in the above-mentioned registration statement.


Item 6. Exhibits and Reports on Form 8-K

         (a) The following exhibits are filed as part of this 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  did not file any Current Report on Form 8-K during the
quarter ended September 30, 1997.



<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: November 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