SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                            ------------------------

                                    FORM 10-K

[X] Annual  Report  Pursuant  to Section 13 or 15(d) of the  Securities Exchange
Act of 1934 for the fiscal year ended December 31,1997.

[ ] 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 33- 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 Identification Number)
 incorporation or organization)

                1777 Sentry Parkway West, Gwynedd Hall, Suite 400
                  Blue Bell, Pennsylvania 19422 (215-643-5000)
             (Address and telephone number, including area code, of
                    registrant's principal executive office)

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

           Securities registered pursuant to Section 12(g) of the Act:

                               Title of each class

                    Common Stock, par value $.0019 per share

         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
reporting requirements for the past 90 days.

                                 Yes X  No____

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

         Aggregate  market  value of voting stock held by  non-affiliates  as of
February 2, 1998 was approximately $83,893,260.

 Number of shares of Common Stock outstanding as of February 2, 1998: 8,916,812.

         Documents incorporated by reference: Definitive proxy statement for the
registrant's 1998 annual meeting of shareholders (Part III).


<PAGE>


                              BIONX IMPLANTS, INC.

                                TABLE OF CONTENTS

                                     PART I
                                                                            Page

Item 1    Business of the Company.............................................3

Item 2    Properties..........................................................23

Item 3    Legal Proceedings...................................................23

Item 4    Submission of Matters to a Vote of Security Holders.................23

Item 4A   Executive Officers of the Registrant................................23

                                     PART II

Item 5    Market for the Registrant's Common Equity and Related Stockholder
          Matters.............................................................24

Item 6    Selected Financial Data.............................................24

Item 7    Management's Discussion and Analysis of Results of Operations and
          Financial  Condition................................................27

Item 7A   Quantitative and Qualitative Disclosures About Market Risk..........33

Item 8    Financial Statements and Supplementary Data ........................34

Item 9    Changes in and Disagreements with Accountants on Accounting and
          Financial Disclosure................................................34

                                    PART III

Item 10   Directors of the Registrant.........................................35

Item 11   Executive Compensation..............................................35

Item 12   Security Ownership of Certain Beneficial Owners and Management......35

Item 13   Certain Relationships and Related Transactions......................35

                                     PART IV

Item 14   Exhibits, Financial Statements Schedules and Reports on Form 8-K....35

Signatures    ................................................................37



<PAGE>


Item 1. Business of the Company

Introduction

         Bionx Implants,  Inc. (the  "Company") was  incorporated in Delaware in
October 1995 to coordinate the business of four related companies  controlled by
U.S.  and Finnish  investors.  In  September  1996,  the Company  consummated  a
reorganization  pursuant  to which it acquired  all of the capital  stock of the
four existing  companies  and issued in exchange a total of 5,263,160  shares of
its Common  Stock  (the  "Reorganization").  The four  existing  companies  were
Bioscience,  Ltd.  (which has been  renamed  Bionx  Implants,  Ltd. and has been
engaged in the development of resorbable  polymer products since 1984),  Biocon,
Ltd.  (which held most of the  Company's  patents and patent  applications  and,
during 1997, was merged into Bionx Implants,  Ltd.) and two companies  organized
in the U.S. to further sales, marketing and development efforts,  Biostent, Inc.
("Biostent") and Orthosorb,  Inc. ("Orthosorb").  Of the 5,263,160 shares issued
by the Company in the Reorganization, 2,578,949 shares were issued to the former
U.S.  stockholders  of the four existing  companies  and  2,684,211  shares were
issued to a Dutch  company  (Bionix,  B.V.) owned by such  stockholders  and the
former Finnish stockholders of Bionx Implants, Ltd. and Biocon, Ltd. The Company
intends to dissolve  Biostent  and  Orthosorb  in the future.  Unless  otherwise
indicated,  all references  herein to the business of the Company  include Bionx
Implants,  Inc.  and the four  entities  acquired  by Bionx  Implants,  Inc.  in
connection  with the  Reorganization.  See Note 1 of the Notes to the  Company's
Consolidated Financial Statements.

         This  Annual  Report  on Form  10-K  contains  certain  forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 ("Forward-Looking Statements"). Such Forward-Looking Statements are subject
to risks and uncertainties  that could cause actual results to differ materially
from those projected in such Forward-Looking  Statements.  Certain factors which
could materially  affect such results and the future  performance of the Company
are described in Exhibit 99.1 to this Annual Report on Form 10-K.


Overview

         The  Company  is a leading  developer,  manufacturer  and  marketer  of
Self-Reinforced, resorbable polymer implants, including screws, pins, arrows and
stents, for use in a variety of applications which include orthopaedic  surgery,
urology and  cranio-facial  surgery.  The  Company's  proprietary  manufacturing
processes self-reinforce a resorbable polymer, modifying the gel-like or brittle
polymer  structure into a  physiologically  strong  structure  with  controlled,
variable  strength  retention  (ranging from three weeks to six months depending
upon the medical indication). The Company currently markets its products through
managed  networks  of  independent  sales  agents  in the U.S.  and  independent
distributors  and  dealers in  markets  outside of the U.S.  The  Company's  ten
product lines,  representing more than 100 distinct  products,  were designed to
address recognized  clinical needs. The Company estimates that its products have
been used in over 150,000 surgeries  worldwide.  The Company has received 510(k)
clearance from the U.S. Food and Drug  Administration  (the "FDA") for the seven
product  lines  that it  currently  markets  in the U.S.  The  Company  has also
received  regulatory  approvals  for its product  lines in certain  European and
Asian markets.

Background

         The human  skeletal  system is  comprised  of bone,  connective  tissue
(ligaments  and tendons) and cartilage.  Bone,  which provides the basic support
for the body, may sustain damage by traumatic incident,  degenerative disease or
surgical  procedures  designed  to  repair  or  correct  skeletal  abnormalities
(osteotomy).  As a result of the high  vascularity  of bone, the healing of bone
requires only that the fractured  sections be in close  proximity to each other.
Bone heals through a process that involves  structural  stress,  either  through
load-bearing or use,  resulting in the replacement of old, damaged bone with new
healthy tissue.  Healing of bone in healthy individuals generally requires three
to 20 weeks, with the fastest healing occurring in children.

         Connective tissue, which attaches bones and/or attaches bone to muscle,
can either be torn or forcibly  pulled from its point of  attachment  to bone or
muscle as a result of either trauma or surgical procedures.  Ligaments and, to a
lesser degree,  tendons are vascular  structures  that have the capacity to heal
and recreate their healthy structure. A critical factor in the proper healing of
connective tissue is in reconnection or reattachment at the anatomically correct
position to assure the return of functionality  to the connection  between bones
and/or  between bone and muscle.  Connective  tissue heals by creating a scar at
the point of injury and then  gradually  replacing  the scar tissue with healthy
connective tissue. The more vascular the tissue involved, the faster the healing
process. The healing of connective tissue generally occurs over a six to 24 week
period that requires rest and immobilization of the tissue.

         Cartilage and cartilage-like  (cartilaginous)  soft tissue, such as the
meniscus of the knee, provide cushion and articulating surfaces upon which bones
impact  during normal  activity.  These  tissues can be damaged  through  either
traumatic injury,  long-term physical stress and/or degenerative disease.  Since
cartilaginous  tissue is less vascular than either bone or connective tissue, or
is avascular, the healing process in this tissue requires an extremely long time
(and may never occur). Unlike bone and connective tissue,  damaged cartilaginous
tissue  must be  surgically  assisted  in the  healing  process.  While  damaged
articulating  cartilage has the potential to partially heal itself by generating
replacement  tissue,  this process can leave a permanent defect in the cartilage
since the substitute  tissue does not possess the same functional  properties as
the pre-injury tissue.

         Injuries   involving  skeletal  tissue  will  heal  more  rapidly  when
supplemented  by  physical   manipulation  and  anatomical   realignment.   When
attempting to repair skeletal  tissue,  orthopaedic  surgeons  perform  surgical
procedures to recreate  anatomically  correct  positions  and to maintain  these
positions.  The  techniques and tools used by surgeons  differ  according to the
skeletal tissue involved and the location in the body. However, the objective in
each instance is identical:  to reposition the tissue in its correct  anatomical
position and provide fixation systems to maintain that position during healing.

Traditional Approaches to Fixation

         To achieve proper skeletal tissue healing,  orthopaedic surgeons either
(i) use implantable devices, including screws, pins, tacks, plates and nails, to
perform  various  internal  fixation  and repair  techniques  and/or  (ii) apply
external fixators and  immobilization  systems,  such as casts. These techniques
are  designed  to  ensure  appropriate  reduction  (close  approximation  of the
separated  tissues) and compression  (pressure applied to the reduced tissues to
assure maintenance of the reduction) during the healing process.

         Rigid Internal Fixation

         Rigid internal fixation (fracture fixation) procedures are performed to
repair  bone  fractures.  These  procedures,  performed  either  through an open
incision or through percutaneous, minimally invasive techniques, are designed to
produce correct realignment of bones, to create appropriate reduction and to fix
bones in the  anatomically  correct  position  to  maximize  the  potential  for
healing.  Since the 1950's,  rigid internal  fixation  techniques  involving the
internal placement of metal implants have been the standard of care for fracture
management  and have resulted in improved  healing of fractures.  Rigid internal
fixation is intended as a temporary  measure to allow for the  initiation of the
healing  process by creating  appropriate  reduction.  In  practice,  most metal
implants  utilized  in rigid  internal  fixation  are not  removed  and become a
substitute  for the  strength  and  functionality  of bone.  Such  strength  and
functionality would return to the bone if the fixation device were removed.

         Connective Tissue Fixation

         Connective tissue fixation may involve the reattachment of ligaments or
tendons that have been torn at the point of attachment. Alternatively, ligaments
or tendons  may tear at a point  other than the point of  attachment,  requiring
reconnection to return functionality.  Connective tissue fixation techniques are
performed   either  through  open  incisions  or  through   minimally   invasive
techniques, and involve the use of tacks, screws, nails or sutures to effect the
anatomical  reattachment  as  close  to the  original  point  of  attachment  as
possible.  The same repair  options are available to the surgeon when  ligaments
are torn in areas  other than at their  point of  attachment.  In both  fracture
fixation and connective tissue repair, the affected joint or limb is immobilized
for a period of time to promote healing.  While  traditional  connective  tissue
fixation techniques have resulted in adequate repairs, metal fixation devices or
suture systems can cause long-term problems and  complications,  including local
pain and limited joint  functionality,  since the attachment  site will not heal
completely while the device remains in place.

         Cartilage and Cartilaginous Tissue Repair

         Repairs to cartilaginous  tissue typically  involve removal of the torn
tissue or difficult and  demanding  surgical  techniques.  Removal of tissue can
have  long-term  consequences  for  the  patient  and  may  lead  to  subsequent
surgeries. Since cartilage has minimal vascularity, or is avascular, the healing
of  injuries  to these  tissues  must be  surgically  assisted  through  complex
arthroscopic or open surgical techniques.  For example, suturing torn menisci is
one of the most  technically  demanding  skills in arthroscopic  surgery and may
result in surgical  complications,  including  damage to the vascular and neural
system.

Limitations of Traditional Approaches

         Metal Implants

         For more than 30  years,  stainless  steel,  titanium  and metal  alloy
screws,  tacks, pins and plates have been recognized as the standard of care for
the fixation of bone and connective tissue as a result of the implants' strength
and their  relatively  low  reactivity  rates.  The use of metal implants as the
standard of care has been reinforced  through the application of Association for
the Study of Internal Fixation ("ASIF")  techniques and the training received by
most orthopaedic surgeons. As a result, the Company believes that metal fixation
devices  are  currently  used in the vast  majority  of the  repairs of skeletal
tissue requiring internal fixation.

         Despite the nearly universal  acceptance of metal fixation devices, the
medical community has recognized several important  limitations  associated with
these products.  Most  significantly,  bone repaired with and supported by metal
devices relies upon the implant to perform the load-bearing functions previously
performed by bone.  Physicians  refer to this as stress shielding of the healing
bones.  Since bones grow and repair in  response to stress,  bones which are not
called upon to perform their natural  load-bearing  functions  tend to weaken in
the fractured areas. For example, in a study of 17 patients with ankle fractures
fixed with metal screws,  bone mineral density  decreased on average by 18.6% as
compared  to the  non-operated  ankle.  Although  it is  recommended  that metal
implants be removed to deter stress shielding,  frequently they are not removed.
Furthermore,  motion at the fracture site can cause metal implants to loosen and
to create hollow areas in cancellous  (spongy) bone.  Connective tissue fixation
techniques  using metal implants can cause long-term  problems,  including local
pain and loss of functionality due to abrasion of the surrounding  tissue by the
metal  implant.  In addition,  some patients  experience  allergic  reactions to
certain metal fixation  devices which remain  implanted for extended  periods of
time.

         First Generation Resorbable Implants

         Resorbable   fixation   devices  were  developed  in  response  to  the
limitations of metal fixation devices. The first generation of these devices was
introduced  in Europe in the  mid-1980s  and in the U.S. in the late 1980s.  The
majority of these devices are either  brittle or overly  flexible as a result of
the  processes,   such  as  injection  molding,  which  may  be  used  in  their
manufacture.  The low strength of these  implants  has lead  designers to create
overly large implants with extremely high molecular  weights,  which, in certain
instances,  may have caused local  inflammation  and  irritation  at the implant
site. In addition,  due to their large size, these implant  configurations could
be applied in only  certain  anatomical  areas,  which may limit their  clinical
utility.  For  screw-shaped  implants,  the  application  of  torque to effect a
successful  implantation  often  results in the  breaking of the implant and the
release of relatively large particles into joints or soft tissues. Implants that
do not have a  discernible  strength  are limited in their  application  because
surgeons  are familiar  with metal  implants and demand  similar  strength  from
resorbable implants. Surgeons have reported that certain of the first generation
resorbable  implants  resorb too  quickly and do not  provide  fixation  for the
period  required for proper bone or tissue  healing.  The  combination  of these
factors has lead most  surgeons  to reject the first  generation  of  resorbable
implants, leaving metal implants as the standard of care.

Self-Reinforced, Resorbable Implants

         The Company has developed a variety of proprietary  resorbable  polymer
fixation implant product lines, including screws, pins, tacks, arrows, membranes
and urology stents, which provide an alternative to currently marketed implants.
By modifying  well-characterized  resorbable polymers (e.g.,  poly-l-lactic acid
("PLLA") and polyglycolic  acid ("PGA")) through the use of several  proprietary
manufacturing  and  processing  techniques,   the  Company  is  able  to  create
Self-Reinforced,    resorbable   implants.   The   Company's    Self-Reinforcing
technologies modify a resorbable polymer's properties from a gel-like or brittle
structure  into  a  physiologically  strong  polymer  implant  with  controlled,
variable strength retention  (ranging from three weeks to six months,  depending
upon the medical  indication) which can be used safely and reliably in a variety
of  applications,  including  orthopaedic  surgery,  urology  and  cranio-facial
surgery.

         The Company's Self-Reinforcing technology also imparts to the processed
polymer a number of critical characteristics which enhance the manufacturability
of the implants and broaden the clinical  applications  for these  devices.  For
example,  the polymers can be machined  using custom metal  forming  techniques,
and,  as a result,  the Company has been able to design and develop a variety of
resorbable   implant  devices,   including  pins,   screws  and  other  profiled
(nonsmooth-surfaced)  implants of clinically  appropriate sizes that incorporate
machined features, such as ridges and barbs, for improved fixation.

         The  resorption  of PLLA and PGA  occurs in a  predictable  three  step
process. The first two steps are initiated by hydrolysis,  which breaks down the
polymer  molecules  into smaller  chains,  resulting in an initial  reduction in
molecular  weight and a slight  swelling of the  implant,  causing it to lock in
place. The third step involves degradation. Unlike first generation unreinforced
resorbable  polymers  which degraded  rapidly in an  uncontrolled  process,  the
Company's  Self-Reinforced,  resorbable  polymers  degrade in a slow  controlled
fashion.  Only when the  Self-Reinforced,  resorbable  implant has degraded into
small  particles  will they be released  into the  surrounding  tissue for final
degradation through cellular absorption.  The slow and controlled degradation of
Self-Reinforced,   resorbable  polymer  implants  causes  the  gradual  transfer
(ranging from three weeks to six months  depending upon the medical  indication)
of the weight-bearing load from the implant to the tissue.

Products

         The Company currently markets ten product lines  representing more than
100 distinct products. The Company's product lines are described below:


<PAGE>


--------------------------------------------------------------------------------
Product Lines              Targeted Indications(1)    Regulatory Status
------------------         --------------------       -----------------
Fracture Fixation:
         SR PLLA Pins      Fractures/Osteotomies      Marketed Worldwide
         SR PLLA Screws    Fractures/Osteotomies      Marketed Worldwide
         SR PGA Pins       Fractures/Osteotomies      Marketed Worldwide
         SR PGA Screws     Fractures/Osteotomies      Marketed Worldwide

Tissue Repair:
       Meniscus Arrows     Meniscus Repair            Marketed Worldwide
       SR-PLLA Tacks       Ligament Attachment        Marketed Worldwide
       SR-PLLA Bankart     Shoulder Repair            Marketed Worldwide(2)
         Tacks

Cranio-Facial Fixation
       SR-PLLA Screw       Endo-brow Lifts            Marketed Outside U.S.(3)

Urology Stents:
       SR-PGA Stents       Post Benign Prostatic      Marketed Outside U.S.
                           Hyperplasia Swelling       FDA Submission Expected
                                                        in 1998(4)
       SR-PLLA Stents      Benign Prostatic           Marketed Outside U.S.
                           Hyperplasia Prophylaxis    FDA Submission Expected
                                                        in 1999(4)
------------------

(1) As  described  herein,  FDA  clearances  for certain of the
Company's products are limited to specific indications.

(2) FDA clearance was received in January 1998; accordingly
marketing efforts in the U.S. are at an early stage.

(3) Marketing efforts in Europe commenced in March 1998.

(4) FDA  submission  dates reflect the Company's  current plans
and  are  subject  to  delay  or  cancellation  depending  upon
contingencies  that may arise in the development  process.  See
Exhibit 99.1 to this Annual  Report on Form 10-K -  "Regulatory
Submission   Dates   Subject   to   Change"   and   "Government
Regulation."

--------------------------------------------------------------------------------


<PAGE>

         PLLA and PGA Pins

         Fracture  fixation pins are indicated for the  management of cancellous
bone  fractures and  osteotomies  in the  non-loadbearing  areas of the skeletal
system,  including  fractures of the ankle,  knee, wrist,  elbow, hand and foot.
Fractures  in these  anatomical  areas are most  commonly  the result of trauma.
Osteotomies  in these areas are normally  used to correct  congenital or induced
bone  malformation.  The use of metal pins often results in pins protruding from
the  body to  allow  for  their  removal.  This is  especially  true in  certain
pediatric  fractures  where the  current  technique  is to leave the metal  pins
protruding  from the  joint or bone,  with  the limb  awkwardly  positioned,  to
facilitate  the  removal of the pins.  This  technique  is  inconvenient  to the
patient,  is  associated  with  increased  levels of  infection  and  results in
additional trauma and expense when the pins are removed.

         The Company's  resorbable  pins, which range in diameter from 1.1 mm to
4.5 mm and in length from 10 mm to 70 mm, can be cut by a surgeon to the precise
length  required  for an  individual  patient,  thereby  reducing  the  risk  of
discomfort  and  infection.  The pins are  designed to improve  the  fixation of
fractures through two design innovations: (i) the pins are slightly oversized as
compared to the drill channel and slightly oval in shape,  providing an improved
friction fit as compared with round metal pins; and (ii) the pins swell slightly
when exposed to the moisture in the surgical site,  locking the pin in the drill
channel within hours after implantation.  The Company's pins can be used in open
surgical  procedures and  percutaneous and endoscopic  techniques.  In the U.S.,
while  the  Company's   PLLA  pins   currently  are  cleared  only  for  use  in
bunionectomies,  the  Company's  PGA pins may be used in a variety of cancellous
bone fixations.

         PLLA and PGA Screws

         Although  management of fractures in the cancellous areas of bones with
metal  screws  and  plates  is the  standard  of care,  the  procedures  present
orthopaedic surgeons with several problems. The inherent difference in stiffness
between  the  metal  screw  and the  bone  can  cause  complications,  including
inducement of relative motion at the fracture site. Such motion can cause screws
to loosen  and can  result in local  bone  degradation.  Metal  screws  can also
protrude  from the bone surface  after  implantation  or break under the healing
stresses  of bone and cause  irritation  in areas of the body where the skin and
muscle covering of the fracture site is thin and contains high concentrations of
nerves.

         The  Company's  screws range in diameter  from 2.0 mm for delicate hand
and foot  procedures to 4.5 mm for use in ankle  fractures.  The Company's screw
threads  were  specifically  designed  for  use  in  cancellous  fractures.  The
Company's  screws are designed to take  advantage of the swelling  properties of
Self-Reinforced  materials to achieve optimum fixation with minimal bone damage.
In areas where skin is thin,  surgeons may shape the head of the Company's screw
to conform to the bone  contour in order to prevent  irritation.  In  anatomical
situations  where  breakage will occur after  healing,  the use of the Company's
screws  avoids the  complications  that result from the removal of broken  metal
implants.  In the U.S., the Company's  screws currently are cleared only for use
in treating ankle fractures.

         Meniscus Arrows

         Tears of the cartilage pads in the knee, known as the menisci,  are the
most common knee injuries  treated by orthopaedic  surgeons in the U.S. Prior to
the  introduction  of  the  Company's  Meniscus  Arrow,  the  treatment  options
available to surgeons were limited to either the removal of the damaged  section
(meniscectomy)   or  surgical  repair  using  a  variety  of  complex   suturing
techniques.  The efficacy of meniscetomy,  historically  the preferred  approach
given the  complex  and  lengthy  nature of the  suture  repair  procedure,  has
recently been questioned in peer-reviewed and published  studies.  These studies
have shown that meniscus removal may be detrimental to the long-term  outcome of
the surgery and may lead to  complications  requiring  further,  more  invasive,
surgeries.  The  suturing  alternative  requires  surgeons  to tie secure  knots
arthroscopically,  which  is one of the most  technically  demanding  skills  in
arthroscopic surgery.  Surgical complications,  including damage to the vascular
and neural system, can arise during this time-consuming suturing process, due in
part to the  necessity  of  creating a small  opening at the back of the knee to
allow for the passing of sutures and the tying of knots.

         The Meniscus Arrow,  commercially introduced by the Company in the U.S.
during the second  quarter of 1996, was the first  resorbable,  arthroscopically
implanted  fixation  device  designed  for use in the  repair  of  longitudinal,
vertical  ("bucket  handle")  tears of the  medial  and  lateral  meniscus.  The
Meniscus  Arrow is a thin,  pointed,  barbed shaft with a t-shaped  head that is
driven  across  the  meniscal  tear,  fixing  the torn  pieces  of the  meniscus
together.  The Meniscus  Arrow may be implanted in a  straightforward  procedure
that has been demonstrated to reduce operating room time by approximately 50% as
compared with suturing and does not require substantial  additional training for
its use.  This  resorbable  implant  avoids both the long-term  consequences  of
meniscus  removal and  complications to the arterial and nervous system that can
arise from the suturing  approach.  The Company  believes that surgeons who were
unwilling to perform  meniscus repairs in the past may now attempt such repairs,
thereby potentially increasing the available market.

         PLLA Tacks

         Management of ruptures of the ligaments of the thumb,  including  ulnar
collateral  ligaments  ("skier's thumb" or "gamekeeper's  thumb"),  is typically
performed  using either bone to ligament  suturing  techniques  or metal anchors
designed  for use in  small  bones.  These  techniques  are  dependent  upon the
surgeon's skill at achieving good fixation and approximation of the torn section
of the ligament without damaging the affected  ligament in the suturing process.
Even when suturing is successful,  damage to the repaired  ligament may occur at
the site of the  repair,  since the  sutures  remain in place  after the healing
process is complete. Since suturing is performed without direct visualization of
both sides of the wound, damage to nerves and vessels may also occur.

         The Company developed its PLLA tack to provide the surgeon with an easy
to use implant  designated to reduce the risk of long-term  and  intra-operative
tissue damage that may occur in traditional suturing  techniques.  The insertion
procedure  for  the  Company's  tack  involves  the  use  of  standard  surgical
techniques  to first  create a channel in the ligament and a small drill hole in
the bone,  and then attaching the ligament with manual  pressure.  The Company's
tack is  designed  to swell in the  drill  hole in  order to  provide  immediate
fixation and to withstand  stresses in the thumb.  The  degradation  of the tack
after  healing of the  reattachment  site reduces the risk of  long-term  tissue
damage. In the U.S., the Company's PLLA tacks currently are cleared only for use
in repairing ligaments of the thumb.

         PLLA Bankart Tacks

          Forward  dislocations  of the shoulder joint involve the separation of
the  ligaments  from the bones  that form the  shoulder  socket.  Open  surgical
procedures to repair the damaged  ligaments are the standard of care in treating
patients with recurrent forward shoulder  dislocations.  However, more recently,
minimally invasive procedures have also been developed to repair these injuries.
Initially,  metal screws were used to reattach  the  ligament to the bone.  This
approach proved unsatisfactory,  however, because the screws often became loose,
causing pain. Resorbable sutures have also been used to reattach the soft tissue
to the bone.  However,  while they proved  effective,  the sutures are sometimes
difficult  to insert  and  present  a risk of nerve  injury.  Resorbable  tacks,
staples or plugs were  subsequently  developed to avoid the problems  associated
with metal screws and resorbable  sutures.  The advantages of resorbable  tacks,
staples  or  plugs  are  that  they  can be  easily  inserted  into the bone for
reattachment  of soft  tissue and,  because  they are  biogradable,  they do not
require  surgical  removal.  In  addition,  unlike metal  screws,  biodegradable
staples or plugs do not cause tissue irritation due to metal corrosion.

         The Bionx  Bankart  Tack was cleared by FDA in January  1998 for use in
reattaching  soft  tissue to bone to repair a certain  type of forward  shoulder
dislocation. It is a high-strength, biocompatible, resorbable tack-type product,
which can be used in either  open or  minimally  invasive  surgery.  The SR-PLLA
material  enables the device to retain  sufficient  strength  to  maintain  soft
tissue reattachment  throughout the healing period, while its gradual resorption
eliminates the need to remove the device at a later point in time.

         BioSorb PDLA Fixation System

          Metallic  fixation  of the facial  skeleton  has  become the  accepted
standard of care in craniomaxillofacial  trauma and reconstruction over the past
15 years.  Titanium  has  become  the  material  of  surgical  choice due to its
strength,  malleability,  and tissue  compatibility.  However,  implant  removal
remains an open long-term clinical question. Most metallic plates and screws are
not removed. As a result, foreign body metallic properties continue to remain in
the  body.  At  present,  there  are no  absolute  answers  regarding  long-term
(25-year)  viability.  This  environment  creates a  surgical  receptiveness  to
resorbable  fixation  implants  in  pediatric  and adult  craniofacial  surgery,
provided  the  products  are  comparable  to  titanium in  mechanical  strength,
biocompatability and cost.

         The Company's initial product submitted for FDA clearance (submitted in
August  1997)  in the  BioSorb  family  of  resorbable  screws  and  plates  for
craniofacial cosmetic, trauma, and reconstruction surgery is the Endobrow Screw.
This screw has a "mushroom"  head design for use in  endoscopic  browlifts.  The
Endobrow Screw obviates the need for implant removal.

          Additional  submission  of  craniofacial  products  are planned by the
Company to expand the product  line  offering  into  trauma,  orthognathic,  and
reconstructive surgery. The Company recently commenced marketing efforts for the
Endobrow  Screw   internationally.   The  Company's  Endobrow  Screw  and  other
craniofacial  products  cannot be marketed or sold in the U.S. until approval is
obtained from the FDA. See "Government Regulation."

         PGA Urology Stents

         Benign prostatic  hyperplasia ("BPH"), a common condition in older men,
is characterized by the enlargement of the prostrate gland,  which can block the
normal flow of urine.  Treatment of BPH typically  involves a number of invasive
surgical techniques and/or drug therapies. Such techniques, including the use of
lasers,  RF energy and other cutting  mechanisms to open an enlarged prostate to
allow for free urine  flow,  have the side  effect of rebound due to edema after
surgery. In order to respond to this problem,  surgeons either catheterize their
patients  with a  catheter  for a  period  of time  after  surgery  or  insert a
temporary  stent.  Both approaches  have drawbacks.  Removal of a Foley catheter
requires a return to the hospital or surgical  center and may cause  significant
discomfort  for the patient.  Also,  the infection  rate for patients with Foley
catheters has historically  been high.  Experience with  conventional  metal and
non-resorbable  polymer urology stents  demonstrates  that tissue begins to grow
over these implants shortly after surgery is completed.  As a result, removal of
temporary stents can be difficult and painful.

         The Company has developed the first  resorbable,  self-expanding  stent
for use in urological procedures.  The Company's resorbable urinary tract stents
are used to prevent  postsurgical  urine retention  after thermal  treatment for
BPH. The design of the  Company's  stent allows it to be easily  inserted  under
direct vision with a cystoscope  and to have its location  checked by the use of
ultrasound.  The  self-expanding  property  of the  Company's  stent  allows the
urologist to place a stent of reasonable diameter into the prostatic urethra and
then to have  the  stent  swell  and  lock  itself  into  position  without  the
application of other devices, such as a balloon catheter.

         In studies conducted by the Company,  the Company's PGA stent enabled a
substantial  percentage  of  patients  to void on the first or second  day after
implantation  following  laser  treatment  of BPH. In  contrast,  the study data
indicated that indwelling  catheters do not enable patients to void on their own
for an average of six days after surgery is performed. The Company believes that
its stent provides the patient with immediate  relief of  post-operative  edema,
avoids the necessity for return to the clinic for catheter  removal,  avoids the
potential  inconvenience  associated  with the use of an  indwelling  system and
reduces  the  potential  for  infection  associated  with use of a catheter in a
sensitive  area of the body.  The FDA has advised  the Company  that its urology
stent will require approval under the FDA's Premarket  Approval ("PMA") process,
which  process is generally  more  expensive and  time-consuming  than the FDA's
510(k) Premarket  Notification  process. The Company's stents cannot be marketed
or sold in the U.S.  until  approval is obtained  from the FDA. See  "Government
Regulation."

         Instrumentation

         The Company, with the assistance of certain contract manufacturers, has
developed a series of instrumentation  systems designed for use with each of the
Company's  product lines.  The Company  distributes its  instruments  both on an
instrument-by-instrument  basis or in kits.  The implant grade  stainless  steel
instruments are manufactured by third-parties  and are designed  specifically to
enable implantation of a particular product  manufactured by the Company. All of
the  Company's  currently  distributed  instrumentation  systems  are  reusable.
Accordingly,  instrumentation  system sales are directed to new customers and to
existing  customers  who are  planning to  initiate  usage of one or more of the
Company's new or existing products.

Product Development

         The Company's product  development efforts focus upon expanding the use
of the Company's  platform  technology to address the limitations of traditional
surgical  techniques  and  existing  implants.  To  date,  all of the  Company's
implants  sold in the U.S.  have  been  cleared  through  the  510(k)  Premarket
Notification process. However, lengthier and more costly PMA submissions will be
required  in order to  obtain  approval  to sell  urological  stents  and may be
required for other new products in the U.S.

         The  Company is engaged in a number of studies  designed  to enable the
Company to increase the  applications of existing  products and to introduce new
products. The following table summarizes recently completed, ongoing and planned
clinical trials for key products currently marketed or in development.



<PAGE>

<TABLE>
<CAPTION>

                                         Clinical                                 Estimated              Clinical/Regulatory
        Product                         Indication                  Patients       Duration                   Status(1)
        --------                        ----------                  --------      ---------                   ----------
      ORTHOPAEDICS
      ------------
<S>                       <C>                                         <C>         <C>            <C>

PLLA Screws               Colles fracture (wrist)                      28          complete       510(k) clearance received 3/98(2)
                          Endo-brow lifts (face)                       50          complete       510(k) clearance received 3/98(2)
                          Acetabular cup fixation (hip)                25           18-30         First patients enrolled
                                                                                                    7/96
                          Femoral neck fixation (pediatric hip)        40          complete       510(k) submitted 8/97

PGA Screw                 Salter osteotomies (pediatric hip)           25           36-48         Commenced in 1997

PLLA Nail                 Osteochondritis dessicans (knee)             25          complete       Enrollment commenced 10/96

PLLA Wedge                High tibial osteotomy (leg)                  25            6-8          Commenced in 1997
                          ACL fixation (knee)                          20            6-12         Commenced in 1997

PLLA Screw/Washer         Rotator cuff repair (shoulder)               25           12-30         To commence in 1998

PLLA/PDLA Anchor          Bankart tears and rotator cuff                *             *           510(k) submitted 7/97

-------------------
*Clinical data not meaningful.

          UROLOGY
          -------

PGA Stent                    Lumen support post BPH treatment         121           36-48         FDA submission in 1998

PLLA Stent                   Urethral stricture                        60           24-36         Enrollment commenced pre-1996

PLLA Stent                   Use with finasteride                      60            TBD          Enrollment commenced 9/96

      GENERAL SURGERY
      ---------------

PLLA Stent                   Bile duct blockage                        10           18-30         Enrollment commenced 1/96

                             Pancreatic duct blockage                  10           18-30         Enrollment commenced pre-1996

     CRANIO-FACIAL SURGERY
     ---------------------

PDLA Screw and Plate         Mid-face corrections                      50           3-12          First patients enrolled 11/96

PLLA Plate                   Cranial-facial fractures                  26           12-24         Enrollment commenced 1997
</TABLE>

---------------------
(1) Regulatory  submission  dates reflect the Company's plans and are subject to
    delay or  cancellation  depending upon  contingencies  that may arise in the
    development  process.  See Exhibit  99.1 to this Annual  Report on Form 10-K
    "Regulatory Submission Dates Subject to Change."
(2) FDA clearance was received in March 1998; accordingly marketing  efforts  in
    the U.S. are at an early stage.


<PAGE>


The Company is also actively  involved in other  development  projects that have
not yet entered into full human  clinical  trials.  These  projects  include the
following:

          Suture  Anchors (PLLA and PDLA).  Commercially  available bone anchors
are designed to be deployed in bone and to secure soft tissue, such as ligaments
and  tendons,  to the bone.  While a  majority  of bone  anchors  used today are
sufficiently strong to reattach torn ligaments,  most are difficult to remove as
a result of permanently  deployed barbs or self-tapping  screw heads. If removal
is not possible,  the presence of the first implanted  anchor makes it difficult
to deploy revision bone anchors or sequential  devices in close proximity to the
first  device.  As  a  result,   surgeons  may  be  unable  to  achieve  precise
reattachment  of the  tissue to  locations  in the bone which are  critical  for
effective  repair.  In addition,  certain  metal anchors do not fit in the drill
hole flush with the surface of the bone and leave a metal surface upon which the
ligament is sutured.  Long term contact between the metal anchor surface and the
ligament  reduces  the area  available  for  reattachment  on the bone  surface,
creates an area of potential local  irritation and, because the anchor is not at
the same level as the surrounding bone, may create an area of raised tissue that
can be felt post-operatively by the patient. Furthermore,  existing anchors hold
the tied  sutures  extremely  tightly  against  the bone,  which  may  result in
long-term tissue damage.

         The Company has designed a resorbable  anchor to address the  principal
shortcomings  of existing  metal  anchors.  The design of the  Company's  anchor
enables it to be inserted without the use of a bone tap, to be easily removed if
misplaced  or if the  suture  breaks,  and to  accommodate  any type of  suture.
Biomechanical  tests have  demonstrated  the  pull-out  (the force  necessary to
remove  the  anchor  from the  bone) of the  Company's  anchor to be equal to or
greater than that of certain currently approved products.

         Intramedullary  Nails. To treat fractures of the forearm and humerus in
children,  pediatric  surgeons  currently use flexible stainless steel wire as a
substitute for nails in order to avoid damaging the growth plates in either bone
of the forearm.  While these wires are less  invasive  and do not  stress-shield
growing  bones as do metal  plates and  screws,  they may be  difficult  for the
pediatric  surgeon to  manipulate  in the small bones of a child and may require
removal in the future. To respond to the needs of pediatric surgeons for a fast,
easy to use and safe  procedure  to manage  forearm  and  humeral  fractures  in
children  while  avoiding  the need to remove  metal  implants,  the Company has
developed and tested in  preclinical  studies a resorbable  intramedullary  nail
made of  poly-dl-lactic  acid ("PDLA").  The Company believes that PDLA implants
were chosen due to their greater  tortional  strength,  higher  flexibility  and
faster absorption rates than PLLA implants.  These performance  characteristics,
particularly rapid, safe absorption,  are important in children because of their
rapid  growth  and the  traumatic  impact on  children  of  surgically  removing
permanent  implants.  Based on the elimination of the need for removal  surgery,
the Company believes that its intramedullary nails are a superior alternative to
current  techniques  for the  fixation of displaced  fractures in the  pediatric
forearm.  Preclinical  studies have  demonstrated  that the use of the Company's
resorbable implants in the intramedullary canal do not create local inflammation
or interfere with the normal healing process.  The Company expects to commence a
multi-center clinical trial of its intramedullary nails in children in 1998.

          Small Joint Prostheses. There is a growing need for the replacement of
arthritic  joints in the  fingers  and toes.  The only  current  options for the
surgeon  are  silicone  implants  which have begun to show  long-term  problems,
including degradation of silicone; and fusion of the joint, which eliminates the
pain but also limits the functional use of the particular  digit.  Utilizing its
membrane  and screw  technologies,  the Company has created a new system for the
repair of joints in the fingers and toes. The Company's small joint  replacement
prosthesis  consists of flexible pins that penetrates a mesh of reinforced PDLA.
The  prosthesis is used as a system to reconnect  finger and/or toe joints after
the removal of a diseased joint. The mesh provides the patient with a temporary,
flexible joint that does not interfere with the natural healing  process.  Fixed
in place with a pin, the joint is designed to be functional and  load-bearing at
an earlier stage than has been demonstrated with silicone implants and to create
a pseudo-joint after resorption.

         Product  development  involves a high  degree of risk.  There can be no
assurance  that the Company's new product  candidates in various early stages of
development  will prove to be safe and  effective,  will  receive the  necessary
regulatory  approvals  or will  ultimately  be  commercially  successful.  These
product candidates will require substantial  additional  investment,  laboratory
development,  clinical  testing and FDA or other agency  approval prior to their
commercialization. The Company's inability to successfully develop and introduce
these  product  candidates  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.

Sales, Marketing and Distribution

          The  Company  sells  its  products   through  a  managed   network  of
independent sales agents in the U.S. and independent distributors and dealers in
markets outside of the U.S. In the U.S., the Company manages a network of agents
who are  responsible for particular  orthopaedic  products and  territories.  In
managing its U.S. network,  the Company maintains a direct relationship with its
medical  community  customers by handling all invoicing  functions  directly and
paying  commissions to its sales agents.  The Company  supports its U.S. managed
network of sales  agents with an in-house  staff of trainers  and  managers  who
supplement  the work of the sales  agents,  providing  training  to  orthopaedic
surgeons  with respect to the features and  modalities  applicable to particular
resorbable  implant products.  In Europe, the Company sells its products through
networks of independent distributors and dealers that purchase products from the
Company at  discounts  that vary by product and by market.  These  international
distributors and dealers have the primary  relationships with the physicians and
hospitals that are using the Company's products.  The Company typically operates
under  written  agreements  with its domestic and  international  sales  agents,
distributors  and dealers.  These agreements grant the dealers the right to sell
the Company's products within a defined territory and permit the distributors to
sell other medical products.

Manufacturing

          The Company currently  manufactures all of its implant products in its
Tampere, Finland facility. All finished goods production,  packaging and testing
are  conducted  in a  validated  clean room with  physically  separate  areas of
varying  types  of air  quality  designed  specifically  for the  production  of
resorbable  polymeric  materials and products.  Substantially all aspects of the
manufacturing process are subject to, and are designed to comply with, the FDA's
Good Manufacturing  Practices ("GMP")  requirements.  The facility is subject to
inspection by the FDA and European regulatory agencies. The Company has received
a  European  Community  ("EC")  Design  Examination  and  an EC  quality  system
Certificate  and is  entitled  to  affix a CE  marking  on all of its  currently
marketed  orthopaedic,   dental  and  cranio-facial  products.  See  "Government
Regulation."

         The   Company   employs   two   separate   processes   to  produce  its
Self-Reinforced  polymers.  The sintering  process,  used only for PGA products,
involves the  compression of polymer threads laid in molds to permit the bonding
of such threads without melting the materials. The die drawing process, used for
PLLA,  PGA and PDLA  products,  runs  polymers  through a die in order to create
reinforcing  elements or fibrils.  Both  processes are supervised by experienced
personnel  and are  subjected to quality  control  checks until final  sterility
testing and batch control paperwork has been completed. Microbial testing of the
final product is contracted  to an  FDA-registered  facility in the U.S. Much of
the machinery  utilized by the Company in the  manufacturing  process was either
created by the  Company's  technical  team or has been  modified by that team to
meet the Company's requirements.

         The raw  materials  for the  Company's  PLLA  materials  are  currently
available from three qualified sources.  The raw materials for the Company's PGA
products are currently provided to the Company by two qualified  sources.  These
raw  materials  have  been  utilized  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 accessible to the FDA. The Company does
not have long-term supply  contracts with any of such 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 such 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 PLLA products are no longer available in the
marketplace,  the Company would be forced to further  develop its  technology to
incorporate  alternate  components.  The incorporation of new raw materials into
the Company's  existing products would likely require 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,  devices
containing  such  alternative  materials would receive FDA clearance on a timely
basis, or at all.

          The Company  intends to establish  manufacturing  capabilities  in the
U.S. in order to increase  its  manufacturing  capacity for its existing and new
products.  The Company  anticipates  that it will either (i) equip and operate a
leased  facility in the  eastern  U.S.  or (ii)  contract  with a third party to
provide a  manufacturing  capability  to the Company.  The Company  presently is
exploring both of these  alternatives.  If the Company chooses to use a contract
manufacturer,  the Company would likely equip the manufacturer's  facility, with
the objective of ultimately  transitioning to a Company-owned or  Company-leased
facility.  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,  savings  in
staffing  costs may be outweighed by fees payable to the contract  manufacturer.
Regardless  of the  approach  to be  utilized,  the Company  currently  plans to
commence  packaging  and  sterilization  functions  in the  U.S.  in 1998 and to
commence  the  balance of the  manufacturing  process in the U.S.  by 2000.  The
foregoing   statement   regarding  such  plans   constitutes  a  Forward-Looking
Statement.  Actual timing could differ materially from such plans as a result of
a number of  factors,  including  the  availability  of trained  personnel,  the
availability of necessary  resources,  space location  factors and other factors
cited in this  paragraph.  While the  Company's  plans may  change,  the Company
anticipates that once full  manufacturing  commences in the U.S.  facility,  the
Company  will  seek to  manufacture  the  Company's  entire  product  line  both
domestically  and abroad.  There can be no  assurance  that the Company will not
encounter  difficulties in scaling up production in the U.S., including problems
involving  production  yield,  quality  control and  assurance,  and shortage of
qualified  personnel.  In  addition,  the U.S.  facility  will be subject to GMP
regulations,  international  quality  control  standards  and  other  regulatory
requirements.  Difficulties encountered by the Company in manufacturing scale-up
or the failure by the Company to establish  and  maintain  the U.S.  facility in
accordance with such  regulations,  standards or other  regulatory  requirements
could entail a delay or termination  of production,  which could have a material
adverse  effect on the Company's  business,  financial  condition and results of
operations.  The Company  continues  to upgrade  its  production  machinery  and
processes in Finland 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.

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  secrets  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, when available,  for the products themselves.  The Company owns or
has  licenses  to  patents  issued in the United  States and in various  foreign
countries and has patent applications  pending at the U.S. PTO and in the patent
offices of various foreign countries.  The Company's four principal U.S. patents
(two of which are owned by the  Company  and two of which  are  licensed  to the
Company on an  exclusive  basis)  will  expire  between  2004 and 2008.  The two
principal   U.S.   patents  owned  by  the  Company   relate  to  the  Company's
Self-Reinforced  resorbable polymer products,  the Company's  sintering process,
and resorbable  polymer products produced from the Company's  controlled drawing
process.  The Company has  received a notice of  allowance  for its U.S.  patent
application  that relates 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.  In addition,  the Japanese counterpart to another of the Company's
U.S. patent applications is being opposed.  The Company is vigorously  defending
its European and Japanese patent  positions in these  proceedings.  One of these
European  patents was revoked by the European  Patent Office for lack of novelty
based on an earlier publication.  The Company successfully appealed the European
Patent  Office's  revocation  decision and has had that patent  reinstated.  The
other European patent and the Japanese patent  applications 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  proceedings.  In order to
clarify  and  confirm  its U.S.  patent  position,  the  Company  has  requested
reexamination  by the U.S. PTO of the two  principal  U.S.  patents owned by the
Company.  No  assurance  can be given as to  whether  the  issues  raised in the
reexamination   proceedings  will  be  resolved  in  the  Company's  favor.  The
reexamination  process is  expected  to  continue  at least  through  the fourth
quarter of 1998 and could  extend  beyond that date.  Such  reexamination  could
result in some or all of the patent  claims set forth in these two U.S.  patents
being altered to provide narrower coverage or determined to be unpatentable.  No
assurance can be given as to the outcome of the reexamination process. Narrowing
of the  coverage or a holding of  unpatentability  in relation to one or both of
these two principal U.S. patents may significantly ease entry to the U.S. market
for the products of the Company's  competitors and could have a material adverse
effect on the Company's business, financial condition and results of operations.

         The  Company  also  relies  upon trade  secret  protection  for certain
unpatented aspects of its proprietary technology, including its Self-Reinforcing
technology.  Although  the Company has taken steps to protect its trade  secrets
and know-how,  through the use of confidentiality  agreements with its employees
and certain of its business  partners and  suppliers,  there can be no assurance
that these agreements will not be breached, that the Company would have adequate
remedies for any breach, that others will not 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 be no
assurance that the steps taken by the Company will prevent  misappropriation  of
its trade  secrets.  As a result of the reliance that the Company  places on its
trade secrets,  loss of the Company's trade secret protection in this area would
have a material adverse effect on the Company's  business,  financial  condition
and results of operations.

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

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

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

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

Competition

         Competition in the medical device  industry is intense both in the U.S.
and  abroad.  In  orthopaedics,  the  Company's  principal  competitors  are the
numerous  companies  that sell metal  implants  The  Company  competes  with the
manufacturers  and  marketers  of  metal  implants  by  emphasizing  the ease of
implantation of the Company's  Self-Reinforced,  resorbable  implants,  the cost
effectiveness  of such products and the elimination of risks associated with the
failure to perform  removal  surgeries.  Within the resorbable  implant  market,
Johnson  &  Johnson  sells  an  FDA-cleared  resorbable  product  for use in the
fracture fixation market. Smith & Nephew, U.S. Surgical, Zimmer (a subsidiary of
Bristol  Myers-Squibb),  Howmedica  (a  division  of Pfizer)  and  Synthes  have
reported that they are developing resorbable products for internal fixation. The
Company is  competing  with  Johnson & Johnson and  expects to compete  with the
other  manufacturers of resorbable  internal  fixation devices  primarily on the
basis of the physiological  strength of the Company's polymers and the length of
the strength retention time demonstrated by the Company's products.

         In knee arthroscopy for meniscal repair,  the Company's  Meniscus Arrow
products compete with a non-resorbable  product marketed by Smith & Nephew, with
a resorbable staple from U.S. Surgical and with a series of suturing  techniques
developed by orthopaedic surgeons for the repair of the meniscus. The Company is
aware  that  several  companies,  including  Linvatec,  Johnson  &  Johnson  and
Innovasive  Devices,  are  developing  and testing  products with  approaches to
meniscus repair similar to the Company's approach.

         In  urology,  several  companies  have  developed  temporary  metal  or
non-resorbable polymer stents for use in the ureter or urethra or for use in the
treatment  of  prostate  disease.  The  Company  is not  presently  aware of any
substantial development of resorbable stents for this application outside of the
Company's  efforts in Europe.  The  Company  believes  that the  difficulty  and
discomfort  associated with the subsequent  removal of temporary  non-resorbable
stents should provide the Company's  Self-Reinforced,  resorbable urology stents
with a potential competitive advantage.

          Overall,  the Company believes that the primary competitive factors in
the markets for its  products  are safety and  efficacy,  ease of  implantation,
quality  and  reliability,  pricing  and the cost  effectiveness  of  resorbable
products as compared with non-resorbable  products.  In addition,  the length of
time required for products to be developed and to receive regulatory approval is
an important competitive factor. The Company believes that it competes favorably
with respect to these  factors,  although there can be no assurance that it will
continue to do so. For  information  regarding the  potential  impact of certain
competitive practices upon the Company's performance during the first six months
of 1998, see  "Management's  Discussion and Analysis of Financial  Condition and
Results of Operation - Results of  Operations  For the Years Ended  December 31,
1995, 1996 and 1997 - Product Sales."

         The  medical  device  industry  is   characterized   by  rapid  product
development  and  technological  advancement.  The Company's  products  could be
rendered  noncompetitive  or obsolete by technological  advancements made by the
Company's current or potential  competitors.  There can be no assurance that the
Company  will be able to  respond  to  technological  advancements  through  the
development and  introduction of new products.  Moreover,  many of the Company's
existing  and  potential   competitors  have  substantially  greater  financial,
marketing,  sales,  distribution and  technological  resources than the Company.
Such existing and potential  competitors may be in the process of seeking FDA or
other regulatory approvals, or patent protection,  for their respective products
or may also enjoy  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 the  development  of  distribution  channels.  Since the
Company's  products  compete with procedures  that have, over the years,  become
standard within the medical  community,  there also can be no assurance that the
procedures  underlying the Company's resorbable products will be able to replace
more  established  procedures  and products.  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.

Government Regulation

         United States.  Products manufactured or marketed by the Company in the
U.S. are subject to  extensive  regulation  by the FDA.  Pursuant to the Federal
Food,  Drug and  Cosmetic  Act,  as  amended,  and the  regulations  promulgated
thereunder (the "FDC Act"), the FDA regulates the clinical testing, manufacture,
labeling,  distribution  and promotion of medical  devices.  Noncompliance  with
applicable  requirements  can result in, among other things,  warnings  letters,
import detentions,  fines,  injunctions,  civil penalties,  recall or seizure of
products,  total or partial suspension of production,  failure of the government
to grant premarket  clearance or premarket  approval for devices,  withdrawal of
marketing 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.

         Under the FDC Act,  medical  devices are classified  into three classes
(class I, II or III), on the basis of the controls  deemed  necessary by the FDA
to  reasonably  assure their safety and efficacy.  Under the FDA's  regulations,
class I  devices  are  subject  to  general  controls  (for  example,  labeling,
premarket  notification  and adherence to GMPs) and class II devices are subject
to general and special controls (for example, performance standards,  postmarket
surveillance,  patient  registries  and FDA  guidelines).  Generally,  class III
devices are those  which must  receive  premarket  approval by the FDA to ensure
their safety and efficacy (for  example,  life-sustaining,  life-supporting  and
certain  implantable   devices,  or  new  devices  which  have  not  been  found
substantially  equivalent to legally marketed Class I or Class II devices).  The
Company believes that its products are class II or class III devices.

         Before a new device can be introduced  into the market in the U.S., the
manufacturer  or  distributor  generally  must  obtain FDA  marketing  clearance
through either a 510(k) premarket notification or a PMA application. 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.  If a medical device  manufacturer  or  distributor  can
establish,  among other things,  that a device is "substantially  equivalent" in
intended use and technological  characteristics to a class I or class II medical
device or a  pre-amendment  class III  medical  device for which the FDA has not
called for PMAs, the manufacturer or distributor may seek clearance from the FDA
to market  the  device  by filing a 510(k).  The  510(k)  must be  supported  by
appropriate information establishing to the satisfaction of the FDA the claim of
substantial equivalence to a legally marketed predicate device. In recent years,
the  FDA  has  been  requiring  a more  rigorous  demonstration  of  substantial
equivalence,  including  more  frequent  requests  for  clinical  data in 510(k)
submissions.

         If clinical  testing of a device is required and if the device presents
a "significant  risk", an Investigational  Device Exemption ("IDE")  application
must be approved prior to commencing  clinical trials.  The IDE application must
be supported by data,  typically  including the results of laboratory and animal
testing.  If the  IDE  application  is  approved  by the  FDA  and  one or  more
appropriate Institutional Review Boards ("IRBs"), clinical trials may begin at a
specific number of investigational  sites with a maximum number of patients,  as
approved by the agency.  If the device presents a  "nonsignificant  risk" to the
patient, a sponsor may begin the clinical trial after obtaining approval for the
study by one or more appropriate IRBs without the need for FDA approval.  In all
cases,  the  clinical  trials  must be  conducted  under the  auspices of an IRB
pursuant  to FDA  regulations.  The  Company's  failure to adhere to  regulatory
requirements generally applicable to clinical trials and to the conditions of an
IDE approval could result in a material adverse effect on the Company, including
an inability to obtain marketing  clearance or approval for its products.  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 supports FDA clearance or approval.

         Following  submission of the 510(k)  notification,  the manufacturer or
distributor  may not place the device into  commercial  distribution  unless and
until an order is issued by the FDA  finding  the  product  to be  substantially
equivalent.  In  response to a 510(k),  the FDA may  declare  that the device is
substantially  equivalent  to  another  legally  marketed  device  and allow the
proposed device to be marketed in the U.S. The FDA, however, may require further
information,   including  clinical  data,  to  make  a  determination  regarding
substantial  equivalence,  or may  determine  that the  proposed  device  is not
substantially  equivalent  and  require  a PMA.  Such a request  for  additional
information or  determination  that the device is not  substantially  equivalent
would delay market  introduction of the product.  There can be no assurance that
the Company will obtain 510(k)  premarket  clearance  within  satisfactory  time
frames, if at all, for any of the devices for which it may file a 510(k).

         For  any  medical   device   cleared   through   the  510(k)   process,
modifications  or  enhancements  that could  significantly  affect the safety or
effectiveness  of the device or that  constitute  a major change to the intended
use of the device will require a new 510(k) submission.

         If a manufacturer  or distributor of medical  devices cannot  establish
that a proposed device is substantially equivalent to a legally marketed device,
the  manufacturer  or distributor  must seek premarket  approval of the proposed
device through  submission of a PMA. A PMA must be supported by extensive  data,
including  laboratory,  preclinical  and clinical trial data to prove the safety
and  effectiveness  of the  device,  and  extensive  manufacturing  information.
Following  receipt  of a PMA,  if the FDA  determines  that the  application  is
sufficiently  complete to permit a substantive  review,  the FDA will "file" the
application.  The PMA approval process can be lengthy,  expensive and uncertain.
If granted,  the approval of the PMA 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.   Furthermore,   the  FDA  is  generally  familiar  with  the
toxicological  properties of polymers used in the Company's orthopaedic products
and to date has not  required  extensive  preclinical  or clinical  testing with
respect to biocompatibility as a condition of granting 510(k) clearance to those
products. In certain submissions for orthopaedic products,  the Company obtained
clearance  within  90 days of  submission.  Other  submissions  by the  Company,
however,  have taken  longer.  The FDA has 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 or that the FDA's  familiarity with the Company's  polymers will shorten
the FDA's review time or reduce testing requirements for either 510(k) clearance
or PMA approval.

         There  can be no  assurance  that the  Company  will be able to  obtain
further 510(k) clearances or PMA approvals,  if required, to market its products
for their  intended  uses on a timely  basis,  if at all.  Moreover,  regulatory
approvals, if granted, may include significant limitations on the indicated uses
for which a product may be marketed.  Delays in the receipt of or the failure to
obtain such  clearances  or  approvals,  the need for  additional  clearances or
approvals, the loss of previously received clearances or approvals,  unfavorable
limitations or conditions of approval, or the failure to comply with existing or
future  regulatory  requirements  could  have a material  adverse  effect on the
Company's business, financial condition and results of operations.

         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.

         Manufacturers of medical devices for marketing in the U.S. are required
to adhere to the Quality System  Regulation  ("QSR")  setting forth detailed GMP
requirements, which include testing, control and documentation requirements. The
QSR  revises  the  previous  GMP   regulation  and  imposes   certain   enhanced
requirements that are likely to increase the cost of compliance.  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.
Manufacturers   must  also  comply  with  Medical   Device   Reporting   ("MDR")
requirements  that a company report to the FDA any incident in which its product
may have caused or  contributed  to a death or serious  injury,  or in which its
product  malfunctioned and, if the malfunction were to recur, it would be likely
to cause or contribute to a death or serious  injury.  Delays in the receipt of,
or the failure to obtain,  regulatory clearances and approvals, the restriction,
suspension or revocation of regulatory clearances and approvals, if obtained, or
any failure to comply with regulatory requirements could have a material adverse
effect on the Company's business, financial condition and results of operations.

         From  time to time the FDA has  made  changes  to the GMP  requirements
which increase the cost of compliance.  Changes in existing laws or requirements
or adoption of new laws or 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 incur significant costs to comply with
applicable  laws and  requirements  in the  future or that  applicable  laws and
requirements  will  not  have a  material  adverse  effect  upon  the  Company's
business, financial condition and results of operations.

         The Company also is subject to numerous  federal,  state and local laws
relating to such matters as safe working conditions,  environmental  protection,
and fire hazard control.  There can be no assurance that the Company will not be
required to incur  significant costs to comply with such laws and regulations in
the future or that such laws or  regulations  will not have a  material  adverse
effect  upon  the  Company's  business,   financial  condition  and  results  of
operations.

         Regulations  regarding  the  development,  manufacture  and sale of the
Company's products are subject to change. The Company cannot predict the impact,
if any, that such changes might have on its  business,  financial  condition and
results of operations.

         International. Sales of medical devices outside the U.S. are subject to
foreign  regulatory  requirements that vary widely from country to country.  The
time required to obtain clearance required by foreign countries may be longer or
shorter than that required for FDA clearance or approval,  and the  requirements
may differ. In most instances,  the Company currently relies on its distributors
for the receipt of  premarket  approvals  and  compliance  with  clinical  trial
requirements  in those foreign  countries  that require them.  Many countries in
which the Company  intends to operate either do not currently  regulate  medical
devices or have minimal registration requirements;  however, these countries may
develop more extensive regulations in the future that could adversely affect the
Company's  ability to market its products.  Other  countries  have  requirements
similar to those of the U.S. The disparity in the regulation of medical  devices
among foreign  countries  may result in more rapid product  clearance in certain
countries  than in others.  The  products  sold by the  Company  are  subject to
premarket approval as well as other regulatory requirements in many countries.

         In order to continue selling its products within the European  Economic
Area following June 14, 1998, the Company is required to achieve compliance with
the  requirements  of the  Medical  Devices  Directive  (the "MDD") and affix CE
marking  on its  products  to attest  such  compliance.  To  achieve  this,  the
Company's products must meet the Essential Requirements as defined under the MDD
relating  to  safety  and  performance  of its  products  and the  Company  must
successfully  undergo  verification  of its regulatory  compliance  ("conformity
assessment")  by a Notified  Body  selected by the  Company.  The nature of such
assessment will depend on the regulatory class of the Company's products.  Under
European law, the Company's  products are likely to be in class III. In the case
of class III products, the Company must (as a result of the regulatory structure
which the  Company  has  elected to follow)  establish  and  maintain a complete
quality  system for design and  manufacture  as described in Annex II of the MDD
(this  corresponds to a quality  system for design  described in ISO 9001 and EN
46001 standards). The Notified Body must audit this quality system and determine
if it meets the  requirements  of the MDD. In addition,  the Notified  Body must
approve the specific design of each device in class III. The Company received an
EC Design  Examination and an EC quality system Certificate from a Notified Body
on January 23, 1997. As part of the design approval  process,  the Notified Body
must also verify that the products comply with the Essential Requirements of the
MDD. In order to comply with these  requirements,  the Company must, among other
things,  complete a risk  analysis and present  sufficient  clinical  data.  The
clinical data  presented by the Company must provide  evidence that the products
meet the performance  specifications claimed by the Company,  provide sufficient
evidence of adequate  assessment of unwanted  side-effects  and demonstrate that
the benefits to the patient outweigh the risks  associated with the device.  The
Company will be subject to continued  supervision  by the Notified Body and will
be  required  to  report  any  serious  adverse  incidents  to  the  appropriate
authorities.  The  Company  also  will be  required  to comply  with  additional
national  requirements  that are  beyond  the scope of the MDD.  The  Company is
entitled  to affix a CE marking on all of its  currently  marketed  orthopaedic,
dental and  cranio-facial  products.  The Company  submitted its required design
dossier for the Company's  stent products in March 1998.  Failure to obtain a CE
marking for the  Company's  stent  products by June 14, 1998 would mean that the
Company  would be unable to sell such  products in the  European  Economic  Area
unless and until  compliance  was 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 the requirements
of the MDD and other regulatory requirements.

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 on third-party  payors,  including  Medicare,  Medicaid and other
health insurance plans, to reimburse all or part of the cost of the procedure in
which the medical  device is being used.  The Company  believes  that,  to date,
domestic  health care  providers  have been  reimbursed  in full for the cost of
procedures  which  utilize  the  Company's  products.  However,  there can be no
assurance  that   third-party   reimbursement   for  such   procedures  will  be
consistently available or that such third-party  reimbursement will be adequate.
There is significant  uncertainty concerning  third-party  reimbursement for the
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 are
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.  Congress and certain state legislatures have
considered  reforms  in  the  health  care  industry  that  may  affect  current
reimbursement  practices,  including  controls on health care  spending  through
limitations on the growth of Medicare and Medicaid spending.  The development of
managed care programs in which the providers  contract to provide  comprehensive
health  care to a patient  population  at a fixed cost per person has also given
rise to substantial pressure on health care providers to lower costs.

         Outside  the  U.S.,  the  success  of the  Company's  products  is also
dependent in part upon the availability of reimbursement and health care payment
systems.  These reimbursement and health care payment systems vary significantly
by  country,  and  include  both  government  sponsored  health care and private
insurance  plans.  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.  Several
governments  have  recently  attempted  to  dramatically  reshape  reimbursement
policies  affecting  medical  devices.  Typically,  the Company's  international
independent distributors have obtained any necessary reimbursement approvals.

          The  ability  of  hospitals  and  physicians  to  obtain   appropriate
reimbursement  from government and private  third-party payors for procedures in
which the Company's products are used is critical to the success of the Company.
Failure  by  such  users  of  the  Company's   products  to  obtain   sufficient
reimbursement  from  third-party  payors for  procedures  in which the Company's
products are used, or adverse changes in government and private payors' policies
toward reimbursement for such procedures would have a material adverse effect on
the Company's business, financial condition and results of operations.

Product Liability and Insurance

         The Company's  business is subject to product  liability risks inherent
in the testing, manufacturing and marketing of the Company's products. There can
be no assurance that product  liability  claims will not be asserted against the
Company  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
product  liability  insurance will be available to the Company in the future, on
terms  satisfactory to the Company,  if at all. A successful  product  liability
claim or series of such  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.

Employees

         As of December 31, 1997, the Company  employed 70 full-time  employees;
28 full-time employees in the U.S. and 42 full-time employees in Finland. Of its
full-time  employees,  at that date 19 were engaged in sales and  marketing,  10
were engaged in research, development, regulatory and quality assurance matters,
28  were  engaged  in  manufacturing  and  13  were  engaged  in  financial  and
administrative services. The Company also contracts with independent consultants
from time to time. The Company's  Finnish  production  and office  employees are
members of a union and the terms of their  employment  are governed in part by a
collective  bargaining  agreement.   The  Company  believes  that  it  maintains
satisfactory relations with its employees.

Item 2.  Properties

         The Company currently operates two facilities,  a central manufacturing
facility in Tampere,  Finland  that is part owned and part leased by the Company
and office space in Blue Bell,  Pennsylvania that is leased by the Company.  The
Finnish facility,  comprising approximately 15,000 square feet, is located in an
industrial  science  park  adjacent  to the  Technical  University  at  Tampere.
Currently, that facility houses the Company's manufacturing, quality control and
product  development  functions  and serves as the Company's  European  customer
service and  central  shipping  location.  The Company  operates  its  corporate
headquarters,  its  executive  offices  and its  worldwide  marketing  and sales
operations from its 7,300 square foot office space in  Pennsylvania.  The annual
rent on these facilities is  approximately  $215,000.  In addition,  in order to
establish a U.S.  manufacturing  presence,  the Company anticipates that it will
either (i) equip and  operate a leased  facility  in the  eastern  U.S.  or (ii)
contract  with a third  party  to  provide  a  manufacturing  capability  to the
Company. No specific site has been selected. See "Business--Manufacturing".

Item 3.  Legal Proceedings

         Reference is made to  "Business--Licenses,  Trade Secrets,  Patents and
Proprietary Rights" for information  regarding certain patent  proceedings.  The
Company is subject from time to time to various other legal proceedings  ("Other
Proceedings"),  including product liability claims,  which arise in the ordinary
course of its business.  The Company believes that no existing Other Proceedings
are  likely  to  have a  material  adverse  effect  on its  business,  financial
condition, and results of operations.

Item 4.  Submissions of Matters to a Vote of Security Holders

         Not applicable.

Item 4A.  Executive Officers of the Registrant

         The Company's  executive  officers,  their  respective  ages (as of
December 31, 1997) and their positions with the Company are set forth below:


Name                  Age                                   Position

David W. Anderson      45  President, Chief Executive Officer and Director
Pertti Tormala         52  Executive Vice President, Research and Director
Michael J. O'Brien     37  Vice President, Finance and Administration and Chief
                           Financial Officer
Pertti Viitanen        47  Managing Director of the Company's Finnish subsidiary
Stephen A. Lubischer   35  Vice President, U.S. Sales
Michael J. Simpson     52  President, Cranio-Facial Division

         David W. Anderson has been the President  and Chief  Executive  Officer
and a member  of the  Board of  Directors  of Bionx  Implants,  Inc.  since  its
inception in 1995. He has served as the chief executive officer of the Company's
operating subsidiaries since December 1994. Prior to joining the Company, he was
the  President  and Chief  Executive  Officer  of  Kensey  Nash  Corporation,  a
developer of  cardiology  products,  from 1992 to 1994.  From 1989 to 1992,  Mr.
Anderson was a Vice President of LFC Financial  Corp., a private  investment and
venture capital company, with responsibility for healthcare.  From 1986 to 1989,
he was a founder  and  Executive  Vice  President  of  Osteotech,  Inc.,  a high
technology  orthopaedic  company.  Mr.  Anderson  also  served  in a  number  of
operations and general management positions with Schering Plough Corporation,  a
pharmaceutical and health care products manufacturer, from 1978 to 1986.

         Pertti Tormala is a founder of the Company's  Finnish  subsidiaries and
has directed the Company's  research and development work since the mid -1980's.
He has been a director of Bionx  Implants,  Inc. since its inception.  Professor
Tormala is the  Chairman  of the  Institute  of  Biomaterials  at the  Technical
University  at Tampere  and is an  international  lecturer  on the  science  and
application  of  bioabsorbable  Self-Reinforced  polymers in medicine.  In 1995,
Professor  Tormala  was  elected to an Academy  Professor  Chair by the  Finnish
Academy.  He has written and  published a  substantial  number of peer  reviewed
articles,  many on resorbable  polymers.  Professor  Tormala  received a Masters
Degree and Ph.D. in Polymer Chemistry from the University of Helsinki.

         Michael  J.  O'Brien  joined  the  Company  in  November  1996  as Vice
President, Finance and Administration, and Chief Financial Officer. From January
1996 to October 1996, Mr.  O'Brien  served as a financial  consultant to Biocyte
Corporation and Immunotherapy,  Inc. From July 1993 to January 1996, Mr. O'Brien
was the Chief  Financial  Officer,  and from  December  1994 to January 1996 Mr.
O'Brien  was the  President  and  acting  Chief  Executive  Officer,  of Biocyte
Corporation,  a biopharmaceutical  company engaged in stem cell transplantation.
From  September  1986 to February  1993, he held senior  finance and  operations
positions  at  international  sites with The  Ultimate  Corporation,  a computer
hardware  reseller,  and  from  February  1993  to July  1993,  he  served  as a
consultant to The Ultimate  Corporation.  He began his career as an auditor with
the accounting firm of Deloitte & Touche.

         Pertti Viitanen has been the Managing Director of the Company's Finnish
operations since 1990.  Prior to joining the Company,  he was the production and
export manager for a major Finnish plastics manufacturer from 1981 to 1990. From
1968 to 1981, Mr. Viitanen held positions of increasing  responsibility in sales
and  operations  at  companies  in the paper and machine  tool  industries.  Mr.
Viitanen  received a Masters in Science Degree in Plastics  Technology  from the
Technical University at Tampere.

         Stephen  A.  Lubischer  joined  the  Company  in  April  1996  as  Vice
President,  U.S.  Sales.  Prior to  joining  the  Company,  Mr.  Lubischer  held
positions in sales and  distribution  management at Interpore  International,  a
manufacturer and marketer of bone substitute materials, from 1990 to April 1996.
He also held sales  positions with the Critikon  subsidiary of Johnson & Johnson
from 1987 to April 1990.

         Michael J. Simpson joined the Company in September 1997 as President of
the Company's cranio-facial division.  Prior to joining the Company, Mr. Simpson
served as  President  of  Synthes  Maxillofacial  and Vice  President  Sales and
Marketing,  Synthes  (USA)  for  the  period  1982-1996.  Synthes  is a  leading
manufacturer and marketer of skeletal fixation implants.  From 1969 to 1982, Mr.
Simpson  held a variety of  medical  device  sales and  marketing  positions  at
Stryker and Baxter V. Mueller.

         Executive officers serve at the discretion of the Board, subject to the
provisions of applicable employment agreements.


                                     PART II

Item 5.  Market for the Registrant's Common Equity and Related Stockholder
         Matters

         (a) Market and Dividend Information

         The Company's  Common Stock  commenced  trading on the Nasdaq  National
Market  System under the symbol "BINX" on April 25, 1997.  The  following  table
sets forth, for the periods  indicated,  the intra-day high and low sales prices
per share of Common Stock on the Nasdaq National Market System:

                                                   High               Low

Second Quarter Ended June 30, 1997
     (from April 25, 1997)................        $20.00            $10.50
Third Quarter Ended September 30, 1997....         29.75             16.00
Fourth Quarter Ended December 31, 1997....         26.50             20.00

         As of February  2, 1998,  there were 71  stockholders  of record of the
Company's Common Stock.  The Company  estimates that as of such date, there were
approximately  2,930  beneficial  owners  of  its  Common  Stock,   although  no
assurances can be given with respect to the accuracy of this estimate.

         The  Company  has  never  declared  or paid any cash  dividends  on its
capital stock. The Company  currently  intends to retain any future earnings for
funding its growth and, therefore, does not anticipate paying any cash dividends
in the foreseeable future.

         (b) 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, the following  information  is presented to supplement the
related information set forth in the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997:

         (i) From April 25, 1997 through December 31, 1997, the Company has used
the  following  amount of the net proceeds  from such offering for the following
categories enumerated by the SEC:

<PAGE>

                                                        Reasonable Estimated
                                                               Amount
                                                        ------------------------
Category                                                   (in thousands)

Construction of plant, building and facilities            $      80
Purchase and installation of machinery and equipment            326
Purchases of real estate                                          -
Acquisition of other businesses                                   -
Repayment of indebtedness                                       655
Working capital                                                   -
Short term investments                                       20,039
Other purposes for which at least $100,000                        -
  has been used

         (ii) 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.  Selected Financial Data

         The following  consolidated selected financial data is qualified in its
entirety by, and should be read in conjunction  with,  "Management's  Discussion
and  Analysis  of  Financial  Condition  and  Results  of  Operations"  and  the
Consolidated  Financial  Statements  and  the  related  Notes  thereto  included
elsewhere in this Annual Report.  The Consolidated  Statement of Operations data
for the  years  ended  December  31,  1995,  1996 and 1997 and the  Consolidated
Balance  Sheet data as of December  31, 1996 and 1997 are derived  from  audited
Consolidated  Financial  Statements  of the Company  included  elsewhere in this
Annual Report. The Consolidated Statement of Operations data for the years ended
December 31, 1993 and 1994 and the  Consolidated  Balance Sheet data at December
31,  1993,  1994 and 1995 are derived from  audited and  unaudited  consolidated
financial statements not included in this Annual Report.



<PAGE>
<TABLE>
<CAPTION>

                                                                                Year Ended December 31,
                                                            -------------------------------------------------------------------
                                                             1993(1)         1994           1995           1996        1997
                                                                         (In thousands except per share amounts)

Consolidated Statement of Operations Data:
<S>                                                          <C>           <C>             <C>           <C>          <C>
Revenues..................................................   $1,177        $1,280          $1,622        $5,379       $16,014
Gross Profit..............................................      831           804           1,084         3,165        12,336
Operating Expenses........................................    1,135           883           2,439         7,819        10,579
Operating income (loss)...................................     (304)          (79)         (1,355)       (4,654)        1,757
Net income (loss).........................................     (219)         (162)         (1,478)       (4,992)        2,158
Pro forma earnings (loss) per share(2):
     Basic................................................                                                (0.89)         0.24
     Diluted..............................................                                                (0.89)         0.23
Shares used in computing pro forma earnings (loss) per
share(2):
     Basic................................................                                                5,621        8,916
     Diluted..............................................                                                5,621        9,251

                                                                                       December 31,
                                                            --------------------------------------------------------------------
                                                               1993(1)       1994            1995          1996        1997
                                                               ----          ----            ----          ----        ----

Consolidated Balance Sheet Data:
Working capital (deficit).................................  $  (224)      $  (164)        $  (576)      $ 2,046       $24,549
Total assets..............................................    2,551         2,029           1,794         9,370        33,541
Long-term debt less current portion.......................      890           301             896           590           115
Mandatorily redeemable convertible
   preferred stock........................................       --            --              --         5,000            --
Accumulated deficit.......................................     (956)       (1,215)         (2,693)       (7,686)       (5,527)
Total stockholders' equity (deficit)......................      333          (280)         (1,036)        1,023        29,081

</TABLE>

--------------------
(1)  Consolidated  Statement of Operations  Data for the year ended December 31,
1993 and the  Consolidated  Balance Sheet Data as of December 31, 1993 have been
derived from unaudited financial statements of the Company.
(2) See Note 2 of Notes to  Consolidated  Financial  Statements for  information
concerning the computation of pro forma earnings (loss) per share.



<PAGE>



Item 7.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations

          The following  discussion  of the  financial  condition and results of
operations of the Company  should be read in conjunction  with the  Consolidated
Financial  Statements and the related Notes thereto presented  elsewhere herein.
The  discussion  in this  Annual  Report on Form 10-K  contains  Forward-Looking
Statements that involve risks and  uncertainties.  The Company's  actual results
could differ materially from those discussed in the Forward-Looking  Statements.
Factors that could cause or  contribute  to such  differences  include,  without
limitation,  those discussed in Exhibit 99.1, in this  "Management's  Discussion
and Analysis of Financial  Condition  and Results of  Operations"  and under the
caption "Business" in this Annual Report on Form 10-K.

Overview

         The Company was founded in 1984 to develop certain resorbable  polymers
for  orthopaedic  uses. The Company has incurred  substantial  operating  losses
since its inception and, as of December 31, 1997, had an accumulated  deficit of
approximately $5.5 million.  Such losses have resulted principally from expenses
associated with the development and patenting of the Company's  Self-Reinforcing
technologies and resorbable  implant designs,  preclinical and clinical studies,
preparation  of  submissions  to 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 the
Company's  manufacturing  capabilities.  Although the  Company's  revenues  grew
significantly  in the  second  half of 1996 and  during  1997 and  although  the
Company  reported a profit for 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.  There can be no assurance that the Company will
be able to successfully  commercialize its products or that  profitability  will
continue.

         The Company first introduced its PGA pins in 1984 and its PGA screws in
1986. In 1987, the Company  introduced its first PLLA 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 during all of 1997 resulted  from 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 1995, 1996 and
1997, international product sales represented 65%, 32% and 15%, respectively, of
the  Company's  total product  sales.  See Note 14 of the Notes to the Company's
Consolidated Financial Statements.

          The Company  typically  sells implant grade,  stainless steel surgical
instruments for use with each of its Self-Reinforced,  resorbable products.  The
margins for these instruments are typically lower than the margins applicable to
the Company's implant products.  However,  since orthopaedic companies operating
in the U.S.  have  traditionally  loaned rather than sold  instruments  to their
customers,  the Company anticipates that in the future, it will be necessary for
the Company to provide an increasing  proportion of its  instrumentation  in the
U.S. on a loan basis. Similar practices are not common in international markets.
For financial  statement  purposes,  revenues  from the sale of  instrumentation
systems are included within product sales and costs associated with 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
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
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.  During  1995,  1996 and 1997,  Ethicon GmbH paid the Company
approximately  $200,000,  $201,000  and $0,  respectively,  in  licensing  fees.
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
sale in July, 1997.  Revenues from the Company's sales of such products have not
been material. Accordingly, no assurance can be given that royalty payments from
Ethicon GmbH will be material.  Furthermore,  no assurance can be given that the
Company will be able to enter into other license  arrangements  regarding  other
products on satisfactory terms.

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

         The Company has benefited from the research and development  activities
of Dr. Pertti Tormala,  the founder of the Company, at the Technical  University
in Tampere,  Finland.  Dr.  Tormala is  currently  an Academy  Professor  at the
Technical University and is permitted by the University to devote his efforts to
developing  products for the  Company.  Dr.  Tormala  utilizes a group of senior
researchers,  graduate  students  and  faculty at the  Technical  University  to
perform  research and development  projects  involving  resorbable  polymers and
other topics relating to the Company's  technology and manufacturing  processes.
This   arrangement,   permitted  in  Finland  as  a  means  of  encouraging  the
commercialization of technological development, has resulted in substantial cost
savings to the Company while greatly expanding its product development  efforts.
Any failure by the Company to obtain the continued  services of Dr. Tormala,  or
any  requirement  that the Company fund  research at a  substantially  increased
level, could have a material adverse effect on the Company's business, financial
condition  and  results of  operations.  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 use a portion of its capital
resources 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.
For information  regarding the operations of the Company by geographic area, see
Note 14 of the Notes to the Company's Consolidated Financial Statements.

          While the  Company's  operating  losses have resulted in net operating
loss  carryforwards of approximately  $900,000 for income tax reporting purposes
as of December 31, 1997, 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 U.S.  entities.  The statutory tax rates
applicable to the Company and its foreign  subsidiaries vary substantially.  Tax
rates have  fluctuated  in the past and may do so in the future.  See Note 12 of
the Notes to the Company's Consolidated Financial Statements.

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

Results of Operations for the Years Ended December 31, 1995, 1996 and 1997

          Product Sales. The Company's product sales increased by 272% from $1.4
million in 1995 to $5.0  million  in 1996 and by 213% to $15.8  million in 1997.
The  increase in product  sales  during 1996  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 were approximately $2.4
million in 1996, as compared  with $0.2 million in 1995.  In addition,  the 1996
sales increase reflects  increased  utilization of the Company's managed network
of  independent  sales  agents in the  U.S.,  increased  sales of the  Company's
existing products in international markets and increased  instrumentation system
sales.  The increase in product sales in 1997 reflected  further  penetration in
Meniscus  Arrow  sales in the United  States (a 368%  increase  in 1997 to $11.2
million),  as well as increased  utilization of the Company's managed network of
independent  sales agents in the U.S. and increased  sales of several  non-Arrow
products in both the U.S. and international markets. Revenues generated from the
sale of instrumentation systems and related loaner fees represented 15%, 20% and
11% of total  sales  in  1995,  1996 and  1997,  respectively,  increasing  from
approximately  $200,000 in 1995 to  approximately  $1.0 million in 1996 and $1.8
million in 1997. The 1996 and 1997 increases are  attributable  primarily to the
U.S.  introduction of the Meniscus Arrow during the second quarter of 1996; 1996
and  1997   instrumentation   revenues  relating  to  the  Meniscus  Arrow  were
approximately $453,000 and $850,000, respectively.

          During  the  first  quarter  of  1998,   the  Company   reported  that
discounting  and  other  competitive  practices  by  competitors  launching  new
products  were  adversely  impacting  sales of the Meniscus  Arrow.  The Company
estimates that for the first six months of 1998,  such practices  (which are not
expected to continue on a long-term  basis) are expected to reduce revenues from
Meniscus Arrow sales by approximately  $2.0 million from the Company's  previous
expectations.  The immediately  preceding sentence constitutes a Forward-Looking
Statement.  Actual results could differ  materially from the projections in that
sentence as a result of several factors,  including the pricing practices of the
Company's  competitors  and  other  factors  set  forth in  Exhibit  99.1 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.

          License and grant  revenues.  License and grant revenues  increased by
29.3%  from  $267,000  in 1995 to  $345,000  in 1996 and  decreased  by 29.9% to
$242,000 in 1997.  The decline in revenue  from 1996 to 1997 was due to the lack
of any license  revenue  recorded in 1997,  compared  with $200,000 and $201,000
recorded in 1995 and 1996, respectively.

         Gross  profit;   gross  profit  margins.  The  Company's  gross  profit
increased  by 192.1%  from $1.1  million in 1995 to $3.2  million in 1996 and by
290% to $12.3 million in 1997. The increase in the Company's gross profit during
1997 and 1996 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  declined from 66.8% in 1995 to 58.8% in 1996 and
increased  to  77.0%  in  1997.  Substantially  all of the  decline  in  1996 is
attributable  to the inclusion  within  products sales and cost of goods sold of
revenues and expenses associated with the purchasing and sale of instrumentation
systems  and to the  accounting  step-up  in value of  inventory  related to the
Reorganization.  During 1997,  the increase in gross profit margin was primarily
due to the volume increase in revenues which created operational efficiencies in
production.  The  Company's  gross profit margin  applicable  to implant  sales,
representing  implant  revenues  less  related raw  materials,  direct labor and
overhead and associated variable expenses, increased from 66.1% in 1995 to 66.7%
in 1996 and to 80.2% in 1997.  The  improvement in this portion of the Company's
gross profit margin in 1996 and 1997 resulted  primarily from increased sales of
higher margin  Meniscus Arrow  products,  increased U.S. based sales,  increased
sales of higher  margin  PLLA  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 109.2% from $2.2 million in 1995 to $4.5
million in 1996 and by 114% to $9.7 million in 1997.  Such  expenses were 159.8%
of product  sales in 1995,  89.9% of product  sales in 1996 and 61.6% of product
sales in 1997.  The  increases  in the dollar  amount of  selling,  general  and
administrative  expenses  during these periods were  primarily  attributable  to
increased  commission payment  obligations,  reflecting the Company's  increased
product  sales  in  the  U.S.,  increased  expenses  in  regulatory  and  patent
activities, and increased expenses associated with establishing and supporting a
managed  network of independent  sales agents in the U.S.  Selling,  general and
administrative  expenses  have  declined  as a  percentage  of  revenue  due  to
increased  efficiencies  resulting  from the  leveraging of certain  non-selling
expenses over an expanded revenue base.

         Acquired  in-process  research and  development.  In September 1996, in
connection   with  the  Company's   Reorganization,   the  Company   recorded  a
non-recurring  charge of $2.8 million for the acquisition of in-process research
and development that had not yet reached technological feasibility.

         Research and development.  Research and development  expenses increased
by 67.6% from  $274,000  in 1995 to $460,000 in 1996 and by 89.3% to $871,000 in
1997. These increases  reflected an increased volume of product development work
being performed by the Company and increased staffing levels.

          Other  income and  expense.  Other  income  and  expense  consists  of
interest income and expense and miscellaneous expense and income items. Interest
expense remained relatively constant from 1995 to 1996. During 1997, the Company
generated net interest  income of $752,000  compared to net interest  expense of
$98,000  and $87,000 in 1995 and 1996,  respectively.  Funds  obtained  form the
Company's  initial public  offering  during the second quarter of 1997 generated
the net  interest  income  for 1997.  A  foreign  currency  transaction  gain of
$408,000  was  recorded  in  "other  income"  in  1997.  Net  foreign   currency
transaction gain and losses in 1995 and 1996 were insignificant.

         Income taxes.  Due to operating  losses in Finland and in the U.S., the
Company  did not incur any tax  obligations  during  1995.  In 1996,  one of the
Company's Finnish  subsidiaries  recorded a profit,  which resulted in a Finnish
tax liability of $208,000. In 1997, the Company recorded an income tax provision
of $758,000,  which  primarily  reflected the income  generated in the Company's
Finnish subsidiary.

         Net income.The Company reported net losses of $1,478,000 and $4,992,000
in 1995 and 1996 and net income of $2,158,000 in 1997.

         Pro Forma Earnings  (Loss) Per Share.  Pro forma earnings per share for
1997 was $0.24 (basic) and $.023 (diluted), as compared with a $0.89 loss (basic
and  diluted) in 1996.  Effective  December 31,  1997,  the Company  adopted the
provisions of Statement of Financial  Accounting Standards No. 128 ("SFAS 128"),
Earnings per Share (EPS).  SFAS 128  establishes and simplifies the standards of
computing  earnings per share  previously  found in Accounting  Principles Board
Opinion No. 15, Earnings per Share,  and makes them comparable to  international
EPS standards. Under SFAS 128, basic earnings (loss) per share is computed using
the weighted  average  number of shares of common stock  outstanding  during the
period. Diluted earnings (loss) per share is computed using the weighted average
number of common and dilutive  potential  common shares  outstanding  during the
period.  Potential common shares consist of stock options and warrants using the
treasury stock method and are excluded if their effect is antidilutive.

         Pursuant to Securities and Exchange  Commission  (SEC) Staff Accounting
Bulletin  No. 98 and SEC staff  policy,  all  common  shares  issued  during the
periods  prior to the  Company's  initial  public  offering  ("IPO") for nominal
consideration  are presumed to have been issued in  contemplation of the IPO and
are to be included in the  calculation of basic earnings  (loss) per share as if
they were outstanding for all periods  presented.  Similarly,  common shares and
potential  common  shares  issued during the period prior to the IPO for nominal
consideration  are presumed to have been issued in  contemplation of the IPO and
are to be included in the calculation of diluted earnings (loss) per share, even
though anti-dilutive,  as if outstanding for all periods presented.  The Company
had no common or potential common shares issued for nominal consideration during
the periods prior to the IPO.

         The calculation of shares used in computing pro forma basic and diluted
earnings  (loss) per share also  includes the Company's  mandatorily  redeemable
convertible  preferred  stock and related  warrants,  assuming  conversion  into
shares of common stock (using the if-converted method) from the original date of
issuance in 1996.  The  calculation  also assumes that the shares  issued in the
Company's IPO were outstanding as of January 1, 1997.

Recent Accounting Pronouncements

         In June  1997,  the  FASB  issued  Statement  of  Financial  Accounting
Standards No. 130, Reporting  Comprehensive Income ("Statement 130").  Statement
130 requires that all items that are required to be recognized  under accounting
standards  as  components  of  comprehensive  income be  reported in a financial
statement  that is  displayed  with  the  same  prominence  as  other  financial
statements. Statement 130 is effective for fiscal years beginning after December
15, 1997. The Company plans to adopt this accounting  standard as required.  The
adoption  of this  standard  will  have no  impact  on the  Company's  earnings,
financial condition or liquidity, but will require the Company to classify items
of  other  comprehensive  income  in  a  financial  statement  and  display  the
accumulated  balance  of other  comprehensive  income  separately  in the equity
section of the balance sheet.

         In June 1997,  the FASB also issued  Statement of Financial  Accounting
Standards  No. 131,  Disclosures  about  Segments of an  Enterprise  and Related
Information  ("Statement 131").  Statement 131 supersedes Statement of Financial
Accounting  Standards  No. 14,  Financial  Reporting  for Segments of a Business
Enterprise,  and  establishes  new  standards for  reporting  information  about
operation  segments  in  annual  financial   statements  and  requires  selected
information about operating segments in interim financial reports. Statement 131
also establishes  standards for related disclosures about products and services,
geographic  areas and major  customers.  Statement  131 is effective for periods
beginning after December 15, 1997. This Statement affects reporting in financial
statements only and will have no impact on the Company's  results of operations,
financial condition or liquidity.

Year 2000 Compliance

         The Company  recognizes the need to ensure that its operations will not
be adversely  impacted by Year 2000  hardware and software  issues.  The Company
intends to confirm its  compliance  regarding Year 2000 issues for both internal
and  external  information  systems by the end of 1998.  With respect to its own
computer systems,  the Company expects to upgrade,  generally,  in order to meet
the demands of its  expanding  business.  In the process,  the Company is taking
steps to identify,  correct, or reprogram and test its existing systems for Year
2000  compliance.   In  addition,   the  Company  intends  to  communicate  with
significant  suppliers,  financial  institutions  and other parties that provide
significant services to the Company in order to obtain Year 2000 compliance from
such  third  parties.  Expenditures  required  to make  the  Company  Year  2000
compliant  will be expensed as incurred  and are not  expected to be material to
the Company's  consolidated  financial  position or results of operations.  This
expectation constitutes a Forward-Looking Statement. Actual results could differ
materially from such  expectation as a result of a number of factors,  including
the ability of the Company's significant suppliers and financial institutions to
become Year 2000  compliant and the actual timing of the Company's  upgrading of
its own computer systems.

Quarterly Product Sales

         The following table presents  unaudited  product sales  information for
the quarters indicated. In the opinion of management,  this information has been
prepared  on  the  same  basis  as  the  product  sales  data  included  in  the
Consolidated  Financial  Statements appearing elsewhere in this Annual Report of
Form  10-K.  Product  sales for any  period are not  necessarily  indicative  of
product sales to be expected for any future period.


                                                           in thousands)
1996
Quarter ended March 31.....................................$    666
Quarter ended June 30......................................     730
Quarter ended September 30.................................   1,212
Quarter ended December 31..................................   2,426

1997
Quarter ended March 31.....................................$  3,218
Quarter ended June 30......................................   3,822
Quarter ended September 30.................................   4,149
Quarter ended December 31..................................   4,584

         The  quarterly  increases  in product  sales  principally  reflect  the
continuing  development of the Company's  managed  network of independent  sales
agents in the U.S.  and the U.S.  introduction  of the Meniscus  Arrow  products
during  the second  quarter  of 1996.  The  Company  anticipates  that in future
periods,  third  quarter  revenues may be adversely  impacted due to  relatively
lower European sales activity during the summer months. In addition, competitive
practices are expected to impact  Meniscus  Arrow sales during the first half of
1998. See "-- Results of Operations for the Years Ended December 31, 1995,  1996
and 1997 -- Product Sales."

         Revenue  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,
competitive sales practices,  the ability of the Company to enter into strategic
alliances  with  corporate  partners  and the  Company's  ability to attract and
retain highly qualified technical,  sales and marketing personnel.  Accordingly,
there can be no assurance that future revenues will not vary  significantly from
quarter to quarter.

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, 1997 and 1996, cash and cash equivalents  totaled $22.6
million  and  $1.6  million,   respectively.  The  increase  in  cash  and  cash
equivalents  of $21.0  million is  primarily  attributable  to the net  proceeds
received  from the  Company's  1997 initial  public  offering and the  Company's
profitable operations during 1997.

         As of December  31,  1997,  the  Company  had working  capital of $24.5
million. Long-term debt (including the current portion) was reduced by $655,000,
from the level at the beginning of the year to $159,000 as of December 31, 1997.
The  majority  of this debt was  repaid  from net  proceeds  generated  from the
Company's  initial public offering.  The interest rates on the debt remaining as
of December 31, 1997 range from 1 - 3% 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 for the forseeable future.
This statement  constitutes a  Forward-Looking  Statement.  Actual results could
differ  materially  from  the  Company's   expectations  regarding  its  capital
requirements   and  its  sources  of  capital.   The  Company's  future  capital
requirements  and the adequacy of  available  capital  resources  will depend on
numerous  factors,  including  market  acceptance  of its  existing  and  future
products, the successful commercialization of products in development,  progress
in its product  development  efforts,  the  magnitude and scope of such efforts,
acquisition  opportunities,  progress with preclinical studies,  clinical trials
and product clearances by the FDA and other agencies, the cost and timing of the
Company's 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 the Company's
products.  To the extent that funds  generated  from the  Company's  operations,
together  with its  existing  capital  resources,  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.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

         Not applicable.



<PAGE>


Item 8.       Financial Statements and Supplementary Data

         The following financial information is set forth on the following pages
immediately following this page:

                                                                        Page


Independent Auditors' Report                                             F-1

Consolidated Balance Sheets as of
    December 31, 1996 and 1997                                           F-2

Consolidated Statements of Operations
  for the Years Ended December 31,
  1995, 1996 and 1997                                                    F-3

Consolidated Statement of Stockholders'
  Equity (Deficit) for the Years Ended
  December 31, 1995, 1996 and 1997                                       F-4

Consolidated Statements of Cash Flows
  for the Years Ended December 31,
  1995, 1996 and 1997                                                    F-5

Notes to Consolidated Financial Statements                               F-7


Item 9.Changes in and Disagreements with Accountants on Accounting and Financial
       Disclosure

         Not applicable.


<PAGE>


                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders of Bionx Implants, Inc.:

         We have audited the accompanying  consolidated  balance sheets of Bionx
Implants,  Inc.  and  subsidiaries  as of December  31,  1996 and 1997,  and the
related consolidated  statements of operations,  stockholders' equity (deficit),
and cash flows for each of the years in the three-year period ended December 31,
1997. These  consolidated  financial  statements are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
consolidated financial statements based on our audits.

         We conducted our audits in accordance with generally  accepted auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

         In our opinion, the consolidated financial statements referred to above
present  fairly,  in all  material  respects,  the  financial  position of Bionx
Implants,  Inc.  and  subsidiaries  as of December  31,  1996 and 1997,  and the
results  of their  operations  and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.

                                                          KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
February 2, 1998



<PAGE>

<TABLE>
<CAPTION>

                                                BIONX IMPLANTS, INC. AND SUBSIDIARIES

                                                     CONSOLIDATED BALANCE SHEETS
                                                     DECEMBER 31, 1996 AND 1997

                                                                         December 31,
                                                          ----------------------------------------------
                                                                 1996                     1997
<S>                                                         <C>                         <C>
                                                                 ----                     ----
ASSETS
Current assets:
     Cash and cash equivalents............................  $  1,593,131                22,631,652
     Inventory, net (note 3)..............................     1,030,809                 2,549,528
     Trade accounts receivable, net of allowance of.......
         $110,707 and $97,325 as of December 31, 1997
         and 1996, respectively...........................     1,708,432                 3,069,895

     Grants receivable....................................       122,711                   128,953
     Deferred offering costs..............................       194,981                        --
     Prepaid expenses and other current assets............       153,005                   158,434
     Deferred tax asset...................................         --                      355,000
                                                               ---------                ----------
Total current assets......................................     4,803,069                28,893,462
Investments...............................................       100,334                    87,115
Deposits                                                          43,964                        --
Plant and equipment, net (note 4).........................       483,219                   849,241
Goodwill and intangibles, net.............................     3,939,163                 3,711,163
                                                               ---------                 ---------
Total assets.............................................. $   9,369,749                33,540,981
                                                            ============                ==========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Trade accounts payable............................... $     848,127                 1,774,960
     Long-term debt, current portion (note 7).............       223,037                    43,314
     Related party (note 5)...............................       163,184                    74,358
     Current income tax liability.........................       205,065                   994,229
     Accrued and other current liabilities (note 6).......     1,317,196                 1,457,539
                                                               ---------                 ---------
Total current liabilities.................................     2,756,609                 4,344,400
                                                               ---------                 ---------

Long-term debt (note 7)...................................       590,336                   115,370
                                                              ----------                ----------

Series A mandatorily  redeemable  convertible preferred
     stock, par value $0.001 per share; 2,000,000 shares
     authorized, 2,000,000 shares issued and outstanding
     as of December 31, 1996, none issued and outstanding
     at December 31, 1997 (note 9)........................     5,000,000                        --

Stockholders' equity (notes 9 and 11)
     Preferred stock, par value $0.001 per share,
         8,000,000 shares  authorized and
         none issued and outstanding......................           --                         --
     Common stock, par value $0.0019 per share,
         31,600,000 shares authorized, 5,318,424 and
         8,916,812 shares issued and outstanding as of
         December 31, 1996 and 1997, respectively.........        10,105                    16,942
     Additional paid-in capital...........................     8,967,993                35,616,254
     Accumulated deficit..................................    (7,685,717)               (5,527,354)
     Foreign currency translation adjustment..............      (269,577)               (1,024,631)
                                                                ---------               -----------

Total stockholders' equity ..............................      1,022,804                29,081,211
                                                               ---------                ----------

Total liabilities and stockholders' equity...............   $  9,369,749                33,540,981
                                                               =========                ==========
</TABLE>

          See accompanying notes to consolidated financial statements.


<PAGE>
<TABLE>
<CAPTION>


                      BIONX IMPLANTS, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                  YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997

                                                              Years ended December 31,
                                                   -------------------------------------------------------------------------
<S>                                                     <C>                      <C>                      <C>
                                                           1995                     1996                     1997
                                                           ----                     ----                     ----

Revenues:
   Product sales.............................          $  1,354,719               5,033,952               15,772,674
   License and grant revenues (note 13)......               266,887                 345,203                  241,685
                                                            -------                 -------                  -------

         Total revenues......................             1,621,606               5,379,155               16,014,359
                                                          ---------               ---------               ----------

Cost of goods sold...........................               538,013               2,214,061                3,678,112
                                                            -------               ---------                ---------

Gross profit.................................             1,083,593               3,165,094               12,336,247
                                                          ---------               ---------               ----------

Selling, general and administrative                       2,164,340               4,527,421                9,708,389
Acquired in-process research and
  development................................                    --               2,832,035                       --
Research and development.....................               274,213                 459,666                  871,101
                                                            -------             -----------             ------------

Total operating expenses.....................             2,438,553               7,819,122               10,579,490
                                                          ---------              ----------               ----------

Operating income (loss)......................            (1,354,960)             (4,654,028)               1,756,757
                                                         -----------             -----------               ---------

Other income and (expenses):
   Interest income and (expense), net........               (98,021)                (86,906)                 751,694
   Other, net................................               (25,035)                (42,951)                 408,256
                                                         -----------             -----------                 -------

         Total other income (expense), net...              (123,056)               (129,857)               1,159,950
                                                         -----------              ----------               ---------

Income (loss) before provision for income
  taxes  ....................................            (1,478,016)             (4,783,885)               2,916,707

Provision for income taxes (note 12)                              --               (208,390)                (758,344)
                                                        ------------               ---------                ---------

Net income (loss)............................           $(1,478,016)             (4,992,275)               2,158,363
                                                         ===========             ===========               =========

Pro forma earnings (loss) per share (note 2):
     Basic...................................                                    $    (0.89)                    0.24
     Diluted.................................                                    $    (0.89)                    0.23

Shares used in computing pro forma
earnings (loss) per share (note 2):
     Basic...................................                                     5,621,320                8,916,357
     Diluted.................................                                     5,621,320                9,250,546

                See accompanying notes to consolidated financial statements.
</TABLE>



<PAGE>
<TABLE>
<CAPTION>



                                                   BIONX IMPLANTS, INC. AND SUBSIDIARIES

                                         CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                                               YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997

                                                         COMMON
                                                         STOCK                                          FOREIGN            TOTAL
                                                       PAR VALUE      ADDITIONAL                       CURRENCY        STOCKHOLDERS'
                                         PREFERRED     OR STATED        PAID-IN      ACCUMULATED      TRANSLATION         EQUITY
                                           STOCK         VALUE          CAPITAL        DEFICIT        ADJUSTMENT         (DEFICIT)
                                         ---------     ---------      ----------     -----------      ----------        ------------
<S>                                    <C>            <C>               <C>         <C>                 <C>              <C>


Balance December 31, 1994              $     --          763,983         394,998    (1,215,426)          (223,739)         (280,184)

Proceeds from the issuance of
    common stock                             --          579,333         186,000            --                 --           765,333
Foreign currency translation
    adjustment                               --               --              --            --            (43,408)          (43,408)
Net loss                                     --               --             --     (1,478,016)                --        (1,478,016)
                                       ----------     ------------   ------------   -----------       -------------      -----------

Balance, December 31, 1995             $     --        1,343,316         580,998    (2,693,442)          (267,147)       (1,036,275)

Effect of reorganization (note 1)            --       (1,333,266)      8,442,389            --                 --         7,109,123
Proceeds from the issuance of
    common stock                             --               55          49,820            --                 --            49,875
Issuance costs--Series A
    mandatorily redeemable
    convertible preferred stock              --               --        (105,214)           --                 --          (105,214)
Foreign currency translation
    adjustment                               --               --              --            --             (2,430)           (2,430)
Net loss                                     --               --              --    (4,992,275)                --        (4,992,275)
                                       ----------     ----------     -------------  -----------       -----------        -----------

Balance, December 31, 1996             $     --           10,105       8,967,993    (7,685,717)          (269,577)        1,022,804

Proceeds from initial public offering,       --            4,370      21,095,441            --                 --        21,099,811
net Conversion of Series A mandatorily
    redeemable convertible
    preferred stock                          --            2,000       4,998,000            --                 --         5,000,000
Foreign currency translation
    adjustment                               --               --              --            --           (755,054)         (755,054)
Proceeds from warrant exercise               --              466         551,568            --                 --           552,034
Proceeds from the exercise of
    incentive stock options                  --                1           3,252            --                 --             3,253
Net income                                   --               --              --     2,158,363                 --         2,158,363
                                       --------       ----------     -------------   ---------        ------------      -----------

Balance, December 31, 1997             $     --           16,942      35,616,254    (5,527,354)        (1,024,631)       29,081,211
                                       =========      ==========      ==========    ===========        ===========       ==========
</TABLE>

          See accompanying notes to consolidated financial statements.


<PAGE>

<TABLE>
<CAPTION>

                                                   BIONX IMPLANTS, INC. AND SUBSIDIARIES

                                                   CONSOLIDATED STATEMENTS OF CASH FLOWS
                                               Years Ended December 31, 1995, 1996 and 1997


                                                                                Years Ended December 31,
                                                               -----------------------------------------------------------
                                                                      1995               1996                1997
                                                                      ----               ----                ----
<S>                                                             <C>                  <C>                   <C>


Cash flows from operating activities:
  Net income (loss)....................................         $ (1,478,016)         (4,992,275)           2,158,363
                                                                  -----------        ------------           ---------
  Adjustments to reconcile net loss to
   net cash (used in) provided by operating
   activities:
   Depreciation and amortization.......................               71,194             161,434              268,366
   Acquired in-process research and development........                --              2,832,035                  --
   Deferred tax provision..............................                --                 --                 (355,000)
   Other non-cash charges..............................                --                105,600                  --
   Change in assets and liabilities:
     (Increase) decrease in accounts receivable........               19,772          (1,310,264)          (1,361,463)
     Increase in inventory.............................             (150,547)           (299,165)          (1,518,719)
     Increase in grant receivable......................                --               (114,981)              (6,242)
     (Increase) decrease in deferred
       issuance costs..................................                --               (194,981)             194,981
     (Increase) decrease in prepaid expense
       and other assets................................              (54,589)             17,060               (5,429)
     (Increase) decrease in deposits...................                --                (43,964)              43,964
     Increase (decrease) in accounts payable...........               79,047             (60,568)             926,833
     Increase (decrease) in related party..............              198,096             (34,912)             (88,826)
     Increase in current tax liability.................                --                205,065              789,164
     Increase (decrease) in accrued and
       other liabilities...............................             (240,309)            852,971              140,343
                                                                    ---------            -------              -------

                                                                     (77,336)          2,115,330             (972,028)
                                                                    ---------          ---------             ---------

Net cash provided by (used in) operating
   activities..........................................           (1,555,352)         (2,876,945)           1,186,335
                                                                  -----------         -----------           ---------

Cash flows from investing activities:
   Purchases of plant and equipment....................              (37,316)            (80,520)            (406,388)
   Purchases of investments............................               (2,056)             --                      --
   Proceeds from sale of investments...................                 --                 3,827               13,219
                                                                  -----------          -----------          -----------


Net cash used in investing activities..................              (39,372)            (76,693)            (393,169)
                                                                  -----------          ----------          -----------

Cash flows from financing activities:
   Proceeds from long-term debt........................              484,139              --                      --
   Repayment of long-term debt.........................                --               (446,124)            (654,689)
   Net proceeds from the issuance of
     preferred stock...................................                --              4,894,786                  --
   Proceeds from the issuance of common stock..........              765,333              49,875                  --
   Proceeds from initial public offering, net..........                --                 --               21,099,811
   Exercise of warrants................................                --                 --                  552,034
   Proceeds from exercise of employee
     stock options.....................................                --                 --                    3,253
                                                                   ---------          ----------        --------------


Net cash provided by financing activities..............            1,249,472           4,498,537           21,000,409
                                                                   ---------           ---------           ----------

Net effects of foreign exchange rate differences.......              (43,408)             (2,430)            (755,054)
                                                                   ----------             -------            ---------

Net increase (decrease) in cash and
   cash equivalents....................................             (388,660)          1,542,469           21,038,521

Cash and cash equivalents at beginning of period.......              439,322              50,662            1,593,131
                                                                   ---------              ------            ---------

Cash and cash equivalents at end of period.............         $     50,662           1,593,131           22,631,652
                                                                 ===========           =========           ==========

Supplemental disclosure of cash flow information:
Cash paid for interest.................................         $     54,213             195,035               26,398
Cash paid for taxes....................................                  --                3,325              190,578
                                                                 ===========        =============         ===========

Non-cash financing activities:
   Issuance of common stock related to the
     Reorganization....................................         $        --             7,109,123                  --
                                                                 ===========        =============          ===========
   Conversion of Series A mandatorily redeemable
      convertible preferred stock to common stock......         $       --                  --               5,000,000
                                                                 ===========        =============         ============
</TABLE>

              See accompanying notes to consolidated financial statements



<PAGE>


                      BIONX IMPLANTS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                December 31, 1997

(1) ORGANIZATION

         Basis of Presentation

         Bionx Implants, Inc. (the Company) was incorporated in October, 1995 as
a  Delaware  corporation.  In 1996,  the  Company  completed  a  reorganization,
described more fully below, whereby four corporate entities that constituted the
business  activities of the Company were reorganized  into Bionx Implants,  Inc.
The shareholders of the four separate  corporations who were shareholders having
a common  interest in the combined  activities of the business  exchanged  their
shares pro-rata, directly or indirectly, for the shares of Bionx Implants, Inc.

          Given  the  common  ownership  relationship  of the  four  predecessor
corporations and the subsequent reorganization into the Company described below,
the accompanying financial statements include the four predecessor corporations'
financial  statements  combined for the year ended December 31, 1995 and for the
period January 1, 1996 to September 2, 1996. The  predecessor  corporations  are
consolidated  as of December 31, 1996 and 1997, for the period from September 3,
1996 to December 31, 1996, and for the year ended December 31, 1997.

         Reorganization

         In September 1996, the Company completed its reorganization. A group of
common stockholders controlled the U.S. subsidiaries and 61% of Bioscience, Ltd.
and  approximately  58% of Biocon,  Ltd. prior to the  reorganization,  with the
balance  of  the  Finnish  subsidiaries   controlled  by  a  group  of  minority
shareholders (the Minority Interest).  The reorganization was accounted for as a
recapitalization except for the component associated with the Minority Interest,
which was  accounted  for as a purchase.  The  purchase  price for the  Minority
Interest has been allocated to assets acquired and liabilities  assumed based on
their fair market value at the date of the reorganization. The fair value of the
assets acquired and liabilities assumed, after giving effect to the write-off of
certain  purchased  research and development  ($2.8  million),  is summarized as
follows (in thousands):




       Current assets........................        $1,549
       Plant and equipment...................           266
       Intangibles...........................           800
       Goodwill..............................         3,219
       Current liabilities...................          (751)
       Long-term liabilities.................          (343)

         Pursuant  to the  reorganization,  (i)  the  Company's  four  operating
entities  became  wholly-owned  subsidiaries  of the  Company,  (ii) each of the
Company's Finnish  shareholders  received capital stock of a Dutch company,  and
(iii) each of the Company's  United States  investors  received capital stock of
both a Dutch company and the Company.  Upon consummation of the  reorganization,
the sole assets of the Dutch  company  were  2,684,211  shares of the  Company's
common  stock.  As  a  result  of  the  reorganization,  the  Company  had  four
wholly-owned  subsidiaries--Orthosorb,  Inc., Biostent, Inc., Bioscience,  Ltd.,
and Biocon, Ltd.

<PAGE>
                      BIONX IMPLANTS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


         Shortly after the  reorganization  was completed,  the Company issued a
total of 2,000,000 shares of its Series A mandatorily redeemable preferred stock
("Series A") and 421,065 common stock warrants to certain  accredited  investors
in exchange for an aggregate capital contribution of $5,000,000.

         Initial Public Offering

         During the second  quarter of 1997,  the Company  completed its initial
public offering (the "IPO") of 2,300,000  shares of Common Stock  (including the
exercise of the  underwriters  over-allotment  of 300,000  shares) at $10.50 per
share. (Note 9)

         Business Purpose

         The  Company  is a leading  developer,  manufacturer  and  marketer  of
self-reinforced, resorbable polymer implants, including screws, pins, arrows and
stents, for use in a variety of applications which include orthopaedic  surgery,
urology,   dentistry  and  craniofacial   surgery.  The  Company's   proprietary
manufacturing  processes  self-reinforce  a resorbable  polymer,  modifying  the
gel-like or brittle polymer  structure into a  physiologically  strong structure
with controlled,  variable strength  retention  (ranging from three weeks to six
months depending upon the medical indication). The Company currently markets its
ten product lines through managed networks of independent  agents,  distributors
and dealers.

         Prior to 1997, the Company sustained operating losses and has generated
its first positive cash flow from  operations  during 1997. The Company plans to
continue to finance its future  operations  with  revenues  from future  product
sales,  royalty payments and license and government grant payments,  if any, and
proceeds from the sale of capital  stock.  The Company's  future  operations are
dependent upon its ability to sustain profitable operations.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         Principles of Consolidation

         The consolidated  financial statements include the financial statements
of the Company and its wholly-owned  subsidiaries.  All significant intercompany
balances and transactions have been eliminated in consolidation.

         Use of Estimates

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

         Cash and Cash Equivalents

         The Company  considers all highly liquid  investments  with an original
maturity of three months or less when purchased to be cash equivalents. Cash and
cash  equivalents  include  cash on hand and in the  bank as well as  short-term
securities.  The carrying amount of cash and cash  equivalents  approximates its
fair value due to its short-term nature.

<PAGE>

                      BIONX IMPLANTS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


         Inventory

         Inventory  is valued at the lower of cost or  market,  with cost  being
determined under a first-in,  first-out (FIFO) method.  Reserves are established
for excess and obsolete inventory on a specific identification basis.

         Investments

         Investments consist of certain real property interests in Finland.  The
Company  can  classify  its  investments  in one of three  categories:  trading,
available-for-sale, or held-to-maturity.  Trading securities are bought and held
principally  for the purpose of selling them in the near term.  Held-to-maturity
securities are those  securities in which the Company has the ability and intent
to hold the  security  until  maturity.  All of the  Company's  investments  are
classified as held-to-maturity  and are recorded at amortized cost, adjusted for
the  amortization or accretion of premiums or discounts.  All other  investments
would be classified as available-for-sale.

         A decline  in the  market  value  below cost that is deemed to be other
than  temporary  results in a reduction  in carrying  amount to fair value.  The
impairment  is charged to  earnings  and a new cost  basis for the  security  is
established.  Dividend  and interest  income are  recognized  when  earned.  The
amortized cost approximates market value as of December 31, 1996 and 1997.

         Plant and Equipment

         Major  additions and  replacements  of assets are  capitalized at cost.
Maintenance, repairs, and minor replacements are expensed as incurred. Machinery
and  equipment are  depreciated  using the  straight-line  method over a five to
fifteen-year period. Leasehold improvements and equipment acquired under capital
lease are amortized  using the  straight-line  method over the estimated  useful
life of the asset or the lease term,  whichever is shorter.  Upon  retirement or
sale, the cost of the asset disposed of and the related accumulated depreciation
are removed  from the  accounts  and any  resulting  gain or loss is credited or
charged to operations.

         Intangibles

         Patents  and  rights  are  stated at cost.  Amortization  of patents is
recorded using the  straight-line  method over the remaining  legal lives of the
patents,  generally for periods ranging up to 12 years. Accumulated amortization
related to patents and rights was  $26,667 and $93,693 at December  31, 1996 and
1997, respectively.

         Goodwill

         Goodwill,  representing  costs in  excess  of the fair  value of assets
acquired,  is amortized on a  straight-line  basis over 20 years.  On a periodic
basis, the Company  evaluates the carrying value of intangible assets based upon
expectations of undiscounted  cash flows.  Accumulated  amortization  related to
goodwill was $53,658 and $214,632 at December 31, 1996 and 1997, respectively.

         Certain Risks and Concentrations

         The Company  extends  unsecured  trade  credit in  connection  with its
commercial  sales to a diversified  customer base  comprised of both foreign and
domestic entities, most of which are concentrated in the healthcare industry.

<PAGE>

                      BIONX IMPLANTS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


        The  Company  invests  its  excess  cash in  deposits  with  major U.S.
financial  institutions  and money market  funds.  To date,  the Company has not
experienced any losses on its cash equivalents and money market funds.

         The Company's  products  require  approvals or clearances from the U.S.
Food and Drug Administration  (FDA) and international  regulatory agencies prior
to commercialized  sales.  There can be no assurance that the Company's products
will receive any of the required  approvals or  clearances.  If the Company were
denied such  approvals  or  clearances,  or such  approvals or  clearances  were
delayed,  it would have a material  adverse  impact on the results of operations
and financial position of the Company.

         Fair Value of Financial Instruments

         Financial  Accounting  Standards Board  Statement No. 107,  Disclosures
About Fair Value of Financial Instruments, defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged in a current
transaction between willing parties.  Cash, trade accounts  receivable,  prepaid
expenses and other current assets,  trade accounts  payable and accrued expenses
reported in the combined  balance sheets equal or approximate  fair value due to
their short maturities.  Based on the borrowing rates currently available to the
Company, the fair value of all of the Company's loans is approximately $130,500.

         Stock Option Plan

         Prior to January 1, 1996,  the Company  accounted  for its stock option
plan in accordance  with the  provisions of  Accounting  Principles  Board (APB)
Opinion  No.  25,  Accounting  for  Stock  Issued  to  Employees,   and  related
interpretations.  As such, compensation expense would be recorded on the date of
grant only if the current  market  price of the  underlying  stock  exceeded the
exercise  price.  Effective  January 1, 1996, the Company  adopted SFAS No. 123,
Accounting for Stock-Based Compensation,  which permits entities to recognize as
expense over the vesting period the fair value of all stock-based  awards on the
date of grant.  Alternatively,  SFAS No. 123 also allows entities to continue to
apply the  provisions of APB Opinion No. 25 and provide pro forma net income and
pro forma earnings per share  disclosures  for employee stock option grants made
in 1995 and future years as if the  fair-value-based  method defined in SFAS No.
123 had been  applied.  The  Company  has  elected  to  continue  to  apply  the
provisions of APB Opinion No. 25 and provide the pro forma disclosures  required
by SFAS No. 123.

         Revenue Recognition

         Revenue from product sales is  recognized  upon shipment and passage of
title to the customer. Revenue from license fees is recognized when the required
milestones are met. Revenue from grant agreements is recognized in the period in
which the related  expenses are incurred and in  accordance  with the  Company's
obligations under the terms of the respective grants.

         Research and Development

         All research and development costs are expensed as incurred.

         Foreign Exchange Risk Management

         The  Company  routinely  hedges its  estimated  net  economic  exposure
through foreign  exchange options and forward cover on a rolling 12-month basis.
Market value gains are  recognized in income  currently and the resulting  gains
offset foreign exchange  transaction losses.  Determination of hedge activity is
based upon market  conditions,  the  magnitude  of foreign  currency  assets and
liabilities  and  perceived  risks.  As of December  31,  1997,  the Company had
options  outstanding  for the  purchase of  17,000,000  Finnish  Markkas.  A net
foreign  currency  exchange  transaction gain of $408,000 was recorded in "other
income" in 1997. There were no significant foreign currency transaction gains or
losses in 1995 and 1996.

<PAGE>
                      BIONX IMPLANTS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


         Foreign Currency Translation

         The  financial  statements of the Company's  foreign  subsidiaries  are
translated  into  U.S.   dollars  in  accordance  with  Statement  of  Financial
Accounting Standards (SFAS) No. 52, Foreign Currency Translation.  Substantially
all assets  and  liabilities  of the  foreign  subsidiaries  are  translated  at
year-end  exchange  rates and  income and  expense  items are  translated  at an
average exchange rate for the year. Exchange adjustments  resulting from foreign
currency transactions are generally recognized in operations,  while adjustments
resulting  from the  translation  of  financial  statements  are  reflected as a
separate component of stockholders' equity.

          Accounting for Income Taxes

          The Company  accounts  for income  taxes under  Statement of Financial
Accounting Standards (SFAS) No. 109, Accounting for Income Taxes.

         Deferred tax assets and liabilities are determined based on differences
between the financial  reporting and tax bases of assets and liabilities and are
measured  using the  enacted tax rates and laws that will be in effect when such
differences  are expected to reverse.  The measurement of deferred tax assets is
reduced,  if necessary,  by a valuation allowance for any tax benefits which are
not expected to be realized.  The effect on deferred tax assets and  liabilities
of a change in tax rates is  recognized  in the period that such tax rate change
is enacted.

         Recent Accounting Pronouncements

         In June  1997,  the  FASB  issued  Statement  of  Financial  Accounting
Standards No. 130, Reporting  Comprehensive Income ("Statement 130").  Statement
130 requires that all items that are required to be recognized  under accounting
standards  as  components  of  comprehensive  income be  reported in a financial
statement  that is  displayed  with  the  same  prominence  as  other  financial
statements. Statement 130 is effective for fiscal years beginning after December
15, 1997. The Company plans to adopt this accounting  standard as required.  The
adoption  of this  standard  will  have no  impact  on the  Company's  earnings,
financial condition or liquidity, but will require the Company to classify items
of  other  comprehensive  income  in  a  financial  statement  and  display  the
accumulated  balance  of other  comprehensive  income  separately  in the equity
section of the balance sheet.

         In June 1997,  the FASB also issued  Statement of Financial  Accounting
Standards  No. 131,  Disclosures  about  Segments of an  Enterprise  and Related
Information  ("Statement 131").  Statement 131 supersedes Statement of Financial
Accounting  Standards  No. 14,  Financial  Reporting  for Segments of a Business
Enterprise,  and  establishes  new  standards for  reporting  information  about
operation  segments  in  annual  financial   statements  and  requires  selected
information about operating segments in interim financial reports. Statement 131
also establishes  standards for related disclosures about products and services,
geographic  areas and major  customers.  Statement  131 is effective for periods
beginning after December 15, 1997. This Statement affects reporting in financial
statements only and will have no impact on the Company's  results of operations,
financial condition or liquidity.

         Pro Forma Earnings (Loss) Per Share

         Effective  December 31, 1997,  the Company  adopted the  provisions  of
Statement of Financial Accounting  Standards No. 128 ("SFAS 128"),  Earnings per
Share (EPS).  SFAS 128  establishes  and  simplifies  the standards of computing

<PAGE>
                      BIONX IMPLANTS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


earnings per share previously  found in Accounting  Principles Board Opinion No.
15,  Earnings  per  Share,  and  makes  them  comparable  to  international  EPS
standards. Under SFAS 128, basic earnings (loss) per share is computed using the
weighted average number of shares of common stock outstanding during the period.
Diluted  earnings (loss) per share is computed using the weighted average number
of common and dilutive  potential common shares  outstanding  during the period.
Potential common shares consist of stock options and warrants using the treasury
stock method and are excluded if their effect is antidilutive.

          Pursuant to Securities and Exchange  Commission (SEC) Staff Accounting
Bulletin  No. 98 and SEC staff  policy,  all  common  shares  issued  during the
periods  prior to the Company's  IPO for nominal  consideration  are presumed to
have  been  issued in  contemplation  of the IPO and are to be  included  in the
calculation of basic earnings  (loss) per share as if they were  outstanding for
all periods  presented.  Similarly,  common shares and  potential  common shares
issued during the period prior to the IPO for nominal consideration are presumed
to have been  issued in  contemplation  of the IPO and are to be included in the
calculation of diluted earnings (loss) per share, even though anti-dilutive,  as
if outstanding for all periods presented. The Company had no common or potential
common shares issued for nominal  consideration  during the periods prior to the
IPO.

         The calculation of shares used in computing pro forma basic and diluted
earnings  (loss) per share also  includes the Company's  mandatorily  redeemable
convertible  preferred  stock and related  warrants,  assuming  conversion  into
shares of common stock (using the if-converted method) from the original date of
issuance in 1996.  The  calculation  also assumes that the shares  issued in the
Company's IPO were outstanding as of January 1, 1997.

         The following  table sets forth the  calculation of the total number of
shares used in the computation of pro forma earnings (loss) per common share for
the years ended December 31, 1996 and 1997:

                                                         1996         1997
                                                         ----         ----

Weighted average common shares outstanding            5,281,020      8,507,492
Assumed conversion of Series A Mandatorily
         Redeemable Convertible Preferred Stock
         and related warrants using the
         if-converted method                            340,300        408,865
                                                        -------        -------

Shares used in computing pro forma basic
         earnings (loss) per share                    5,621,320      8,916,357

Incremental shares from assumed exercise of
         dilutive options and warrants                      --         334,189
                                                     ----------        -------

Shares used in computing pro forma diluted
         earnings (loss) per share                    5,621,320      9,250,546
                                                      =========      =========


The net loss per share for the year ended  December 31, 1995 is not presented in
the  Statement of  Operations  as it was before both the  reorganization  of the
Company as described in Note 1, and before the Company's initial public offering
as described in Note 9, and would not be meaningful.

<PAGE>


                      BIONX IMPLANTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


(3) INVENTORY

         Inventory consists of the following  components as of December 31, 1996
and 1997:

                                          1996                       1997
                                          ----                       ----

Raw materials                         $   101,122                 $   437,032
Finished goods                          1,210,033                   2,777,821
                                        ---------                   ---------
                                        1,311,155                   3,214,853
Less reserves                            (280,346)                   (665,325)
                                         ---------                   ---------
                                      $ 1,030,809                 $ 2,549,528
                                        =========                   =========

(4) PLANT AND EQUIPMENT

         Plant and equipment consist of the following  components as of December
31, 1996 and 1997:

                                            1996                      1997
                                            ----                      ----

Machinery and production equipment      $   883,016              $  1,219,435
Computer equipment                           14,613                    84,582
                                           --------                 ---------
                                            897,629                 1,304,017
Less accumulated depreciation              (414,410)                 (454,776)
                                           ---------                 ---------
                                        $   483,219              $    849,241
                                         ==========               ===========

(5) RELATED PARTY TRANSACTIONS

         Under an employment  agreement  dated August 21, 1992,  the Company was
obligated to pay an executive  officer (Dr.  Pertti Tormala) a 2 percent royalty
on sales of certain  products  for which the  Company  received  a patent  after
August 1992. This agreement also required that the Company pay a minimum royalty
of approximately  $2,200 per month. Dr. Tormala and another employee are parties
to an  additional  agreement  that  provides  royalties  on sales of a  specific
product patented prior to 1992,  again subject to certain annual  minimums.  The
aggregate  amount of all royalties due to employees  related to these agreements
was  $163,184  and $74,358 as of December  31, 1996 and 1997,  respectively.  In
December,  1996,  the Company  restructured  the  employment  agreement with Dr.
Tormala to eliminate any future royalty obligation beyond these payments.

         The  Company's  product  development  efforts  are  dependent  upon Dr.
Tormala, who is a founder, director, and executive officer of the Company and is
currently an Academy Professor at the Technical  University in Tampere,  Finland
and as such is permitted by the  University  to devote his efforts to developing
new  products  for the  Company.  This  executive  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 impacting the Company's technology and processes. This arrangement,
partially  funded  by the  Company  and  permitted  in  Finland  as a  means  of
encouraging the commercialization of technological development,  has resulted in
substantial  cost  savings to the  Company  while  substantially  expanding  its
product development effort. The Company's funding obligation,  which amounted to
$0,  $167,000 and $271,000  during the years ended  December 31, 1995,  1996 and
1997,  respectively,  consists  of  providing  the  University  with  reasonable
compensation for University  resources (including graduate students) utilized by
the Company.

<PAGE>

                      BIONX IMPLANTS, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

(6) ACCRUED AND OTHER CURRENT LIABILITIES

         Accrued  and  other  current   liabilities  consist  of  the  following
components as of December 31, 1996 and 1997:


                                           1996                         1997
                                           ----                         ----

Commissions.......................     $   284,687                 $   457,184
Royalties.........................          75,000                     267,986
Wages.............................         184,920                     279,642
Taxes withheld....................         236,306                      82,079
Interest..........................          77,252                         948
Inventory purchases...............          23,002                          --
Professional fees.................         305,492                     234,658
Research..........................              --                      65,012
Other.............................         130,537                      70,030
                                        ----------               -------------
                                       $ 1,317,196                 $ 1,457,539
                                         =========                  ==========

(7) LONG-TERM DEBT

         Long-term debt consists of the following  components as of December 31,
1996 and 1997:


                                           1996                       1997
                                           ----                       ----

Loans from financial institutions     $   546,930                  $   40,843
Loans from Finnish government             226,483                     101,447
Other debt                                 39,960                      16,394
                                           ------                      ------
                                          813,373                     158,684
Less current portion                     (223,037)                    (43,314)
                                         ---------                    --------
                                      $   590,336                  $  115,370
                                          =======                     =======

         The loans from the financial  institutions  are payable in  semi-annual
and annual  installments with interest rates of one percent (1%). The loans from
the Finnish government are made in order to support  technology  development and
are payable in annual installments with interest rates ranging from one to three
percent (1-3%).

         The aggregate  maturities of long-term  debt for each of the five years
subsequent to December 31, 1997 are as follows:  1998,  $43,314;  1999, $43,315;
2000, $29,707; 2001, $10,815 and 2002 and beyond, $31,533.

(8)  LINE OF CREDIT

         In April  1997,  the  Company  entered  into a $2 million  credit  line
agreement  secured by the  personal  property of the  Company and a  subsidiary.
Amounts to be advanced  thereunder are subject to the lender's  discretion at an
interest  rate of 8.25%,  and are  limited to  specific  percentages  of certain
domestic receivables and inventory. To date, no amounts have been borrowed under
the credit line.

<PAGE>

                      BIONX IMPLANTS, INC. AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


(9) COMMON STOCKHOLDERS' EQUITY

         In September,  1996,  the Company issued  2,000,000  shares of Series A
mandatorily  redeemable  convertible  preferred stock (the "Series A Preferred")
and warrants to purchase  421,065 shares of common stock at an exercise price of
$5.70 per share. The net proceeds to the Company were $4,894,786.

         On February 24, 1997,  the Company  effected a 1 for 1.9 reverse  stock
split. All common shares and per share amounts in the accompanying  consolidated
financial  statements  have been  retroactively  adjusted to reflect this common
stock reverse split.  Preferred  stock amounts,  other than the shares of common
stock into which Series A Preferred is convertible,  have not been retroactively
adjusted.

         During  the second  quarter of 1997,  the Company  completed its IPO of
2,300,000  shares of Common Stock  (including  the exercise of the  underwriters
over-allotment  of 300,000 shares) at $10.50 per share. Upon consummation of the
IPO,  the  2,000,000  shares of  Series A  Preferred  outstanding  automatically
converted  into  1,052,638  shares  of  common  stock on a 1 for 1.9  basis.  An
additional  245,065  shares of Common Stock were issued upon the exercise of all
outstanding warrants.  The net proceeds of the IPO, after underwriting discounts
and costs in connection with the sale and distribution of the securities and the
exercise of the warrants, were approximately $21.7 million.

(10) COMMITMENTS UNDER OPERATING LEASES

         The Company leases offices and laboratory  facilities,  equipment,  and
vehicles  under various  non-cancelable  operating  lease  arrangements.  Future
minimum rental commitments required by such leases are as follows:


Year ending December 31:

              1998                           $295,720
              1999                            274,042
              2000                            272,691
              2001                            264,162
              2002                            173,733

         Rental  expense for the years ended  December 31,  1995,  1996 and 1997
aggregated $90,815, $98,755, and $202,624, respectively.

(11) STOCK OPTION PLANS

         In September  1996, the Board of Directors  adopted a stock option plan
(the 1996  Option  Plan) under  which the number of common  shares  which may be
issued under the Option Plan, as amended, cannot exceed 850,000 shares. The 1996
Option  Plan  permits  the  granting  of  both   incentive   stock  options  and
non-qualified  options.  Options are exercisable over a period determined by the
Board of Directors, but no longer than ten years after the grant date.

         At December 31, 1997,  there were 199,432  additional  shares available
for grant under the 1996 Option Plan. The per share  weighted-average fair value
of stock options granted in 1995, 1996 and 1997 was $0.46 and $5.86, and $16.66,
respectively,  on the date of grant using the Black Scholes option-pricing model
with the following weighted-average assumptions for the years ended December 31:

<PAGE>

                      BIONX IMPLANTS, INC. AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


                                      1995        1996         1997
                                      ----        ----         ----

Risk-free interest rate               7.06         6.50         6.22%
Expected life of option in years     10           10           10
Expected dividend yield               -            -            -
Volatility of stock price             -            -           43.5%


         The  Company  applies APB  Opinion  No. 25 in  accounting  for its 1996
Option Plan and,  accordingly,  no compensation cost has been recognized for its
stock  options  in  the  financial   statements.   Had  the  Company  determined
compensation  cost  based on the  fair  value at the  grant  date for its  stock
options under SFAS No. 123, the Company's net loss would have been increased and
net income decreased as indicated below:

                                    1995             1996           1997
                                    ----             ----           ----

Net income (loss):
         As reported            $(1,478,016)     $(4,992,275)      2,158,363
         Pro forma               (1,530,121)      (5,074,269)      1,704,353

         Since no stock  options or warrants  were  granted  prior to January 1,
1995,   the  pro  forma  net  loss  reflects  the  full  impact  of  calculating
compensation cost for stock options under SFAS No. 123.

         A summary of activity  under the 1996 Option Plan from  January 1, 1995
to December 31, 1997 is as follows:

                                                          RANGE OF EXERCISE
                                             SHARES         PRICES PER SHARE

Balance, January 1, 1995................          --                    --
  Granted...............................      277,009        $       0.9025
                                              -------                ------

Balance, December 31, 1995                    277,009                0.9025
  Granted...............................      147,373             4.75-9.50
                                              -------             ---------

Balance, December 31, 1996..............      424,382           0.9025-9.50
  Granted...............................      235,400           16.00-25.00
  Exercised.............................         (685)                 4.75
  Forfeited.............................       (8,529)            4.75-9.50
                                            ----------       --------------

Balance, December 31, 1997..............      650,568        $ 0.9025-25.00
                                              =======          ============

Shares exercisable at December 31, 1997       215,158        $  0.9025-9.50
                                              =======           ===========

<PAGE>

                      BIONX IMPLANTS, INC. AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


        The  following  table  summarizes   information   about  stock  options
outstanding under the 1996 Option Plan at December 31, 1997:
<TABLE>
<CAPTION>

                                       Options Outstanding                        Options Exercisable
                     ---------------------------------------------------------  -------------------------

                                     Weighted
     Range of                        Average          Weighted                      Weighted
     Exercise        Number         Remaining          Average                      Average
      Prices       Outstanding     Contractual        Exercise        Number        Exercise
                                   Life (Years)         Price       Exercisable      Price
<S>                  <C>               <C>           <C>             <C>         <C>

  $   0.9025         277,009           6.9           $  0.9025       166,206      $   0.9025
     4.75-9.50       138,159           8.7              7.65          48,952          6.64
    16.00-25.00      235,400           9.7             24.79               -          -
                     -------                                         --------


   $.9025-25.00      650,568           8.3           $ 10.98         215,158      $   2.21
                     =======                                         =======
</TABLE>



         As part of an employment  agreement,  an officer and stockholder of the
Company  was  granted an option in 1995 to  purchase  an  equivalent  of 277,009
common shares at an exercise  price of $.9025 per share,  the deemed fair market
value at the grant date as determined  by the Board of Directors.  These options
vest 30% on each of the first and second and 20% on each of the third and fourth
anniversaries of the grant date and are exercisable over a period no longer than
ten years after the grant date.

         On September 2, 1996, the Company granted various  employees options to
acquire 58,686 shares of common stock at $4.75 per share,  the deemed fair value
at the date of grant as determined by the Board of Directors.  A total of 19,635
shares  vested  during 1996 and the balance  substantially  vest 20% per year on
each of the next four years at December 31.

         On November 24, 1996, the Company granted various  employees options to
acquire 88,687 shares of common stock at $9.50 per share,  the deemed fair value
at the grant date as determined  by the Board of  Directors.  A grant of options
covering 65,790 shares vests as follows:  15,790 on each of the first and second
anniversaries of the date of grant,  13,158 on the third anniversary of the date
of grant, and 10,526 on the fourth and fifth anniversaries of the date of grant.
The remaining  options  covering  22,897 shares vest 20% per year on each of the
next five anniversaries of the date of grant.

         During 1997, the Company granted various  employees  options to acquire
235,400  shares of common  stock at prices  ranging  from  $16.00 to $25.00  per
share, the fair market value on the grant date.

(12) INCOME TAXES

         At December 31, 1997,  the Company and its  subsidiaries  had available
U.S. net operating  loss  carryforwards  ("NOL") of  approximately  $939,000 for
income tax reporting  purposes,  which are  available to offset  future  taxable
income, if any, through 2011.

         The Tax Reform Act of 1986 (the "Act") provides for a limitation on the
annual use of U.S. NOL carryforwards  (following certain ownership  changes,  as
defined  by the Act) that could  significantly  limit the  Company's  ability to
utilize certain  carryforwards.  The Company has experienced  various  ownership
changes, as defined by the Act, as a result of past financings. Accordingly, the
Company's  ability to utilize the  aforementioned  carryforwards may be limited.
Additionally,  because tax law limits the time during which these  carryforwards
may be applied  against  future taxes,  the Company may not be able to take full
advantage of these carryforwards for income tax purposes.

         Income tax expense  attributable  to the income  before  provision  for
taxes was $208,390 and $758,344 for the years ended  December 31, 1996 and 1997,
respectively,  and  differed  from the amounts

<PAGE>

                      BIONX IMPLANTS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

computed by applying  the U.S.  federal  income tax rate of 35 percent to pretax
income (loss) as a result of the following:

                                                             1996       1997
                                                             ----       ----

Computed "expected" tax (benefit) expense               $(1,674,360)  1,020,847
Increase (reduction) in income taxes
  resulting from:
     Difference in the foreign tax rates...............     (47,430)   (245,454)
     Acquisition of in-process research and development     991,212          --
     Net change in the valuation allowance for
       deferred tax assets.............................     896,930    (146,804)
     Goodwill amortization.............................          --      70,000
     Other, net........................................      42,038      59,755
                                                           --------    --------

Income tax expense                                      $   208,390     758,344
                                                            =======     =======

         The tax effects of temporary  differences that give rise to significant
portions of the Federal,  foreign and state  deferred tax assets at December 31,
1996 and 1997 are presented below:

                                                            1996        1997
                                                            ----        ----

    Deferred tax assets:
         Net operating loss carryforwards.............. $  528,919     328,686
         Research and development costs................    184,125     109,890
         Depreciation adjustments......................     60,937          --
         Inventory and related items...................    413,280     769,910
         Recognition of accrued expenses or reserves
          for financial statement reporting purposes
          but not for income tax reporting purposes....    128,844     315,815
                                                        ----------  ----------

         Total gross deferred tax assets...............  1,316,105   1,524,301
         Less valuation allowance...................... (1,316,105) (1,169,301)
                                                        ----------- -----------

    Net deferred tax assets...........................  $       --     355,000
                                                        ==========  ==========

         Realization of net deferred tax assets is dependent on future earnings,
which are  uncertain.  Accordingly,  a valuation  allowance  was recorded by the
Company  against  certain  assets  at  December  31,  1996 and  1997.  The total
valuation  allowance  increased by $573,845,  and  decreased by $146,804 for the
years ended December 31, 1996 and 1997, respectively.

(13) LICENSE AND GRANT REVENUE

          In May 1995, the Company entered into an exclusive  license  agreement
with Ethicon GmbH (a  wholly-owned  subsidiary of Johnson & Johnson) to market a
product based on the Company's patents for bioresorbable  membranes.  As part of
this  agreement,  Ethicon GmbH paid the Company  nonrefundable  license fees and
milestone revenue of $199,904 and $201,287 for the years ended December 31, 1995
and 1996,  respectively.  The license  agreement  requires  Ethicon  GmbH to pay
royalties  based  upon net  sales  of these  products.  This  license  agreement
terminates  upon the  later of the  expiration  of all of the  Company's  patent
rights covering its membrane technology or 20 years.  Royalties relating to this
agreement for the year ended December 31, 1997 were insignificant.


<PAGE>
                      BIONX IMPLANTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

         In  addition,  the  Company  has  applied  for grants  from the Finnish
government  to conduct  research on resorbable  polymers.  The revenue from such
grants was $66,983, $143,916 and $241,685 for the years ended December 31, 1995,
1996 and 1997,  respectively.  In  connection  with  such  grants,  the  Company
typically  commits to perform research  projects and to report on the status of,
and the conclusions drawn from, its projects.

(14) GEOGRAPHIC INFORMATION

          To date,  the  Company has  manufactured  its  products  solely in its
facility in Finland. The Company sells products in the U.S. through a network of
independent  sales agents managed from its U.S.  headquarters and sells products
internationally  through a  network  of  independent  distributors  and  dealers
managed  from the  Company's  facility in  Finland.  Information  regarding  the
Company's product sales, net income (loss) and identifiable assets by geographic
area is set forth below.

<PAGE>
<TABLE>
<CAPTION>

                                      UNITED
                                      STATES             INTERNATIONAL   ELIMINATIONS        CONSOLIDATED
                                      -------            -------------   ------------        ------------
<S>                                <C>               <C>               <C>                   <C>


Year ended December 31, 1995
Product sales:
  Customers......................  $   477,952       $    876,767      $         --          $  1,354,719
  Intercompany...................           --            985,354          (985,354)                   --
                                    ----------            -------          ---------        --------------
Total product sales..............      477,952          1,862,121          (985,354)            1,354,719
Net income (loss)................   (1,323,214)            79,601          (234,403)           (1,478,016)
Identifiable assets..............      745,329          2,310,037        (1,261,128)            1,794,238

Year ended December 31, 1996
Product sales:
  Customers......................  $ 3,412,204       $  1,621,748      $         --          $  5,033,952
  Intercompany...................           --          3,506,864        (3,506,864)                   --
                                 -------------          ---------        -----------        -------------
Total product sales                  3,412,204          5,128,612        (3,506,864)            5,033,952
Net loss.........................   (2,269,215)        (1,476,516)       (1,246,544)           (4,992,275)
Identifiable assets..............    5,061,627          8,468,315        (4,160,193)            9,369,749

Year ended December 31, 1997
Product & sales:
  Customers...................... $ 13,449,891       $  2,322,783      $         --          $ 15,772,674
  Intercompany...................           --          7,072,314        (7,072,314)                   --
                                 -------------          ---------        -----------        -------------
Total product sales:                13,449,891          9,395,097        (7,072,314)           15,772,674
Net income (loss)................     (615,759)         3,674,368          (900,246)            2,158,363
Identifiable assets..............   33,670,471          6,849,627        (6,979,117)           33,540,981

</TABLE>



<PAGE>


                                    PART III

Item 10.  Directors of the Registrant

         The registrant  incorporates by reference herein  information set forth
in its definitive  proxy  statement for its 1998 annual meeting of  shareholders
that is responsive to the information required with respect to this Item.

Item 11.  Executive Compensation

         The registrant  incorporates by reference herein  information set forth
in its definitive  proxy  statement for its 1998 annual meeting of  shareholders
that is responsive to the information required with respect to this Item.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

         The registrant  incorporates by reference herein  information set forth
in its definitive  proxy  statement for its 1998 annual meeting of  shareholders
that is responsive to the information required with respect to this Item.

Item 13.  Certain Relationships and Related Transactions

         The registrant  incorporates by reference herein  information set forth
in its definitive  proxy  statement for its 1998 annual meeting of  shareholders
that is responsive to the information required with respect to this Item.

                                     PART IV

Item 14   Exhibits, Financial Statement Schedules and Reports on Form 8-K

     (a) See  Item 8 for a list of  financial  statement  information  presented
herein.

     (b) The  following  financial  statement  schedule is filed as part of this
Annual Report.

<PAGE>
                  Description                                         Page

         Schedule

                  Independent Auditor's Report                          S-1

           II       Valuation and Qualifying Accounts                   S-2

All other  schedules  have been omitted  because they are not  applicable or the
required  information  is included in the  registrant's  Consolidated  Financial
Statements or the notes thereto.

         (c)      The following exhibits are incorporated by reference herein or
annexed to this Annual Report on Form 10-K:

 3.1  Restated Certificate of Incorporation of the Registrant. (1)
 3.2  Bylaws of the Registrant. (1)
 4.1  Specimen Common Stock Certificate. (1)
10.1  Reorganization Agreement dated as of September 5, 1996. (1)
10.2  Registrant's 1996 Stock Option/Stock Issuance Plan. (1)
10.3  Form of Amended and Restated Employment Agreement between the Registrant
      and David W. Anderson. (1)
10.4  Form of Employment Agreement between the Registrant's Subsidiary and
      Pertti Tormala, as amended. (1)
10.5  Form of Proprietary Information and Inventions Agreement. (1)
10.6  Investors' Rights Agreement,  dated as of September 6, 1996, between the
      Registrant and certain holders of the Registrant's securities. (1)
10.7  Stock Purchase  Agreement  between the Registrant and purchasers of the
      Company's  Preferred  Stock and  Warrants. (1)
10.8* License Agreements between the Registrant's Subsidiary and Saul N.
      Schreiber. (1)
10.9* License  Agreement among the Registrant's  Subsidiary,  Pertti Tormala,
      Markku  Tamminmaki and Menifix I/S. (1)
10.10*Licensing,  Manufacturing and Distribution Agreement among the
      Registrant's Subsidiary,  Pertti Tormala and various Danish and Finnish
      inventors. (1)
10.11 Shareholders' Agreement among Bionix, B.V. and certain shareholders of the
      Company. (1)
10.12 Headquarters Lease. (1)
10.13 Security Agreements and Secured Promissory Note. (1)
10.14 Form of Employment Agreement between the Registrant and Michael J.O'Brien.
21.1  List of Subsidiaries. (1)
23.1  Consent of KPMG Peat Marwick LLP.
24.1  Power of Attorney.
27.1  Financial Data Schedule.
99.1  Information Regarding Forward-Looking Statements

----------------------
(1)   Incorporated by reference to the applicable  exhibit set forth in the
Registrant's  Registration  Statement on Form S-1 initially filed with the
Commission on February 26, 1997 (No. 333-22359).

* Certain  portions of this exhibit  have been omitted  based upon a request for
confidential  treatment.   The  omitted  portions  of  this  exhibit  have  been
separately filed with the Securities and Exchange Commission.

         (d)  During the quarter ended December 31, 1997, the Company did not
file any Current Reports on Form 8-K.



<PAGE>


                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended,  the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, this 30th
day of March, 1998.


                                     BIONX IMPLANTS, INC.


                                     By:/s/David W. Anderson
                                        _____________________
                                        David W. Anderson
                                        (President and Chief Executive Officer)


         Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended,  this  Annual  Report  on Form 10-K has been  signed  by the  following
persons in the capacities and on the dates indicated:

      Signature                      Title                       Date

/s/David W. Anderson
----------------------
David W. Anderson     President, Chief Executive Officer and
                      Director (Principal Executive Officer)     March 30, 1998


____________________
David J. Bershad     Director                                    March 30, 1998


/s/Anthony J. Dimun*
_____________________
Anthony J. Dimun     Director                                    March 30, 1998


/s/David H. MacCallum*
_____________________
David H. MacCallum   Director                                    March 30, 1998


/s/Pertti Tormala*
_____________________
Pertti Tormala       Director                                    March 30, 1998


/s/Terry D. Wall*
_____________________
Terry D. Wall        Director                                    March 30, 1998


/s/Michael J. O'Brien
_____________________
Michael J. O'Brien   Chief Financial and Accounting Officer      March 30, 1998


*By:/s/David W. Anderson
_______________________
David W. Anderson
Attorney-in-Fact



<PAGE>



          Independent Auditors' Report on Financial Statement Schedule

The Board of Directors and Stockholders
Bionx Implants, Inc.:

Under date of February 2, 1998, we reported on the  consolidated  balance sheets
of Bionx Implants,  Inc. and  subsidiaries as of December 31, 1996 and 1997, and
the related consolidated statements of operations, stockholders' equity and cash
flows for cash of the years in the  three-year  period ended  December 31, 1997.
These consolidated  financial  statements and our report thereon are included in
the  annual  report  on Form  10-K for the year  ended  December  31,  1997.  In
connection  with  our  audits  of  the  aforementioned   consolidated  financial
statements,  we  also  audited  the  related  financial  statement  schedule  of
Valuation  and  Qualifying  Accounts.  The financial  statement  schedule is the
responsibility of the Company's management.  Our responsibility is to express an
opinion on the financial statement schedule based on our audits.

In our opinion,  such financial statement schedule,  when considered in relation
to the basic consolidated financial statements taken as a whole, presents fairly
in all material respects, the information set forth therein.

                                        KPMG Peat Marwick LLP



Philadelphia, Pennsylvania
February 2, 1998


<PAGE>
<TABLE>
<CAPTION>

                                   Schedule II

                      Bionx Implants, Inc. and Subsidiaries

                        Valuation and Qualifying Accounts

                   For the Three Years Ended December 31, 1997

                            Charged                             Charged                             Charged
                  Balance     to                      Balance     to                    Balance       to                   Balance
                     at     Costs and                   at      Costs and                  at       Costs and                 at
Classifications   12/31/94  Expenses   Deductions   12/31/95    Expenses   Deductions   12/31/96    Expenses   Deductions  12/31/97
---------------  ---------  ---------  ----------   --------    ---------  ----------   --------    ---------  ----------  ---------
<S>               <C>       <C>        <C>          <C>         <C>         <C>         <C>        <C>         <C>          <C>
Inventory
   Reserves....   $   -      161,021       -        161,021      119,325        -        280,346     384,979       -       665,325

Accounts
Receivable
    Reserves....  $   -         -          -           -          97,325        -         97,325      31,035     (17,653)  110,707
                    ---------  ---------  --------- ---------   ----------  ----------  ---------  ----------  ---------- ----------

</TABLE>

<PAGE>

                                       E-1

                                  EXHIBIT INDEX

Exhibit
Number            Description

10.14             Form of Employment Agreement between the
                  Registrant and Michael J. O'Brien

23.1              Consent of KPMG Peat Marwick LLP

24.1              Power of Attorney

27.1              Financial Data Schedule

99.1              Information Regarding Forward-Looking Statements