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                       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, 2001

[_]      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 0-22401

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

         Pennsylvania                                         22-3458598
-------------------------------                            ----------------
(State or other jurisdiction of                            (I.R.S. Employer
 incorporation or organization)                          Identification Number)

                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. [X]

         Aggregate  market  value of voting stock held by  non-affiliates  as of
March 26, 2002 was approximately $23,051,396.

  Number of shares of Common Stock outstanding as of March 26, 2002: 10,862,127

     Documents incorporated by reference: Definitive proxy statement for the
          registrant's 2002 annual meeting of shareholders (Part III).
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                              BIONX IMPLANTS, INC.

                                TABLE OF CONTENTS


                                     PART I

                                                                           Page
                                                                          number

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

Item 2        Properties.....................................................26

Item 3        Legal Proceedings..............................................26

Item 4        Submission of Matters to a Vote of Security Holders............26

Item 4A       Executive Officers of the Registrant...........................27


                                     PART II

Item 5        Market for the Registrant's Common Equity and Related
              Stockholder Matters............................................29

Item 6        Selected Financial Data........................................29

Item 7        Management's Discussion and Analysis of Results of
              Operations and Financial Condition.............................31

Item 7A       Quantitative and Qualitative Disclosures About Market Risk.....40

Item 8        Financial Statements and Supplementary Data ...................41

Item 9        Changes in and Disagreements with Accountants
              on Accounting and Financial Disclosure.........................63


                                    PART III

Item 10       Directors of the Registrant....................................63

Item 11       Executive Compensation.........................................63

Item 12       Security Ownership of Certain Beneficial
              Owners and Management..........................................63

Item 13       Certain Relationships and Related Transactions.................63


                                     PART IV

Item 14       Exhibits, Financial Statements Schedules
              and Reports on Form 8-K........................................63

Signatures    ...............................................................65

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ITEM 1.  BUSINESS OF THE COMPANY

INTRODUCTION

         Bionx  Implants,  Inc. (the "Company" or "Bionx") 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.  On  August  27,  1999  the  Company  was
reincorporated  in the Commonwealth of Pennsylvania.  There was no change in the
name, business,  management, benefit plans, location, assets, liabilities or net
worth of the Company as a result of the reincorporation.

         The following terms used on this form 10-K are registered trademarks of
Bionx  Implants,  Inc:  Meniscus Arrow,  SmartScrew  ACL, The Wedge,  SmartNail,
Bankart Tack, BioCuff, Self Reinforced, Contour Labral Nail, BioSorb, Biocuff C,
Next Generation Meniscus Arrow.

         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  orthopedic  applications,  including  Sports
Medicine  and  Fracture  Fixation   applications.   Fracture  Fixation  includes
Orthopedic  Trauma  and  Craniofacial   Surgery.  The  Company  has  proprietary
manufacturing processes for Self-Reinforced  resorbable polymers,  modifying the
brittle  polymer  structure  into  a   physiologically   strong  structure  with
controlled,  variable  strength  retention.  The Company's  patented position in
orthopedic  implants and innovative  resorbable  materials for medical uses is a
key strength that the Company uses to develop products that satisfy the needs of
surgeons.

         The  Company  currently  markets  its  products  through a sales  force
comprised of a managed network of independent  sales agents and  distributors in
the U.S.;  Europe,  Middle East,  and Africa  ("EMEA");  and Asia. The Company's
product lines: Sports Medicine,  Orthopedic Trauma and Craniofacial Surgery were
designed to address  recognized  clinical  needs.  The Company is  dedicated  to
satisfying  these needs by developing  new and  innovative  products,  licensing
products that  complement  the  established  product lines and  partnering  with
organizations that can provide new products or technologies.

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<PAGE>
         The Company  estimates that its products have been used in over 350,000
surgeries  worldwide.  The Company has received  510(k)  clearance from the U.S.
Food and Drug  Administration  (the  "FDA")  for its  products  in the U.S.  The
Company has also received regulatory  approvals for its product lines in certain
European and Asian markets.

THE HUMAN SKELETAL SYSTEM

         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.  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,  orthopedic  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 REPOSITIONING TISSUE AND FIXATION

         To achieve proper skeletal tissue healing,  orthopedic  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.

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         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 that are not removed cause stress
shielding preventing the underlying bone from returning to full strength.

         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.

         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 orthopedic 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. Although it is recommended that metal

                                       5
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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 when
certain metal fixation devices 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 were either brittle or overly  flexible as a result of
the processes,  such as injection molding, which were used in their manufacture.
The low strength of these implants led 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 led 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,  anchors,
plates,  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 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  clinical
applications.

         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 broadens 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.

                                       6
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BUSINESS FOCUS

         In order to achieve  strategic  focus,  satisfy  surgeon  needs in core
businesses and develop new and innovative products, the Company has restructured
its  business  to focus on the  development  of key  market  opportunities.  The
Company's primary market and focus is Sports Medicine, with our secondary market
focus on Fracture  Fixation,  consisting of Orthopedic  Trauma and  Craniofacial
product lines.  This re-directed  focus has enabled the Company to get closer to
the surgeon, through the establishment of surgeon advisory boards, attending and
participating  in  premier  surgeon  conferences,   and  tailoring  our  product
development,  sales,  and marketing  efforts towards the growing Sports Medicine
market.  The Company has  consolidated  the Orthopedic  Trauma and  Craniofacial
product  lines into Small Bone  Fixation.  The Company has designed or realigned
its business with an emphasis on the following key business imperatives:

                                 SPORTS MEDICINE

         The Company has an intense  focus on  improving  patient  outcomes  and
satisfying  surgeon needs in the procedural  specific Sports  Medicine  business
segment, which is approximately $500 million worldwide.  The procedural specific
market  segment  consists of product  offerings  that are  designed to perform a
specific  clinical  procedure.  Products in this market segment consist of guide
systems for ligament  reconstruction,  fixation  devices for securing tissue and
ligaments  to bone,  tissue  removal  systems and an  assortment  of  disposable
ancillary  products  that aid in  performing  a surgical  procedure.  The market
growth rate is projected at 10 to 15% annual growth per year,  mostly due to the
aging active population engaging in sport activities and the introduction of new
surgical  technologies  that enable the surgeon to treat patients that could not
be  effectively  treated in the past.  The  Company's  focus is on new  surgical
modalities  and  developing  innovative  new products  that achieve  significant
surgeon acceptance.

         The  majority  of  sports  related   injuries  that  require   surgical
intervention  consist of torn  ligaments  and  detachments  of tendons  from the
supporting bony  structures.  Surgical  techniques  involve the replacement of a
ligament  with a graft and  attachment  of the  ligament  and  tendons  to bone.
Depending  on the age of the  patient  and the  quality of the bone and  tissue,
clinical  outcomes  vary.  There  is a need to  improve  current  reconstruction
instruments  and fixation  devices to provide  proper  anatomical  placement and
fixation of the ligament and tendon.

         Surgeons are increasingly  requesting  alternative solutions to current
products available that will improve ease of use and provide improved biological
and anatomical results.  Acceptance of resorbable materials and other biological
products  has been  evident by the use of these  products  for the repair of the
meniscus  and  resurfacing  of  articulate  cartilage  in the  knee.  The use of
resorbable polymers in sports medicine applications is widely accepted.

         The  Company  has  established  relationships  with  key  surgeons  and
established  its own  surgical  advisory  board  that  works  closely  with  the
Company's  product  development  experts.  The Company's  Surgeon Advisory Board
consists of premier surgeon champions.  The primary goal of the SAB is to assist
the  Company's  research  and  development  team to  design  procedure  specific
products which will fulfill orthopedic surgeons and ultimately patient needs.

         Within  the  Sports  Medicine   business  these  surgeon  advisors  are
themselves  experts  and  many are key  scientific  thought  leaders  in the two
premier societies that support this market segment:  Arthroscopy  Association of
North American (AANA) and the American Society of Sports Medicine (ASSM).

         In order to develop  products that satisfy the clinical needs of Sports
Medicine surgeons,  the Company has intensely concentrated on developing a world
class product development team. Working with our Surgeon Advisory Board, product
development  assesses  current  clinical  practices,  uses computer aided design
techniques  to  visualize  appropriate  implant  design,   produces  prototypes,
consults

                                        7
<PAGE>
again with the Surgeon  Advisory Board  (including  testing in synthetic bone or
cadavers),  makes  modifications  and ensures  that all the quality and clinical
tests required for FDA or other  governmental  approval are met. The Company has
used these  efforts to expand our product line (see 2001 Product  Introductions)
in both Knee and Shoulder applications.

         Over the last two years (2000 and 2001) the Company has introduced
seven new Sports Medicine products:

         Contour Meniscus Arrow             Knee
         Smart Screw ACL                    Knee
         The Wedge                          Knee
         Smart Nail                         Knee

         Biocuff C                          Shoulder
         Biocuff                            Shoulder
         Contour Labral Nail                Shoulder

         As a result of these product  development  and launch  initiatives  the
Company now has a diversified  product  portfolio,  with 33 % of Sports Medicine
sales coming from Non-Arrow products in 2001.

         This  change in focus is a result of an  intensive  strategic  planning
process the Company  began in 2000 and have been  implementing  since that time.
The Company's goal is to be the premier Sports  Medicine  company focused on the
needs of surgeons and using our brand identity and resorbable polymer technology
as core strengths.

         By increasing the number of procedure  specific  Non-Arrow products the
Company will become a greater resource to the Sports Medicine surgeon,  increase
operating  room  presence  and  generate  revenue to be used to develop the next
generation of innovative medical devices.

         Additionally, the Company is committed to remaining on the cutting edge
of  technology  by  developing  new  materials  to address  the  limitations  of
traditional  orthopedic  surgical  techniques  or for use in a variety of Sports
Medicine indications.

                        PROCESS AND MATERIALS DEVELOPMENT

         The Company's Sports Medicine  business uses advanced polymer materials
developed by the Company to provide proper fixation and  bioabsorbability.  As a
recognized leader in resorbable  polymer  technology,  the Company has attracted
the attention of numerous scientific  organizations  interested in melding their
particular  expertise  with the  patented  techniques  available  utilizing  the
Company's  intellectual  property.  Additionally,  the Company  has  significant
proprietary  materials  development  capabilities  that  may be  applied  toward
therapeutic areas that are outside the Company's  marketing focus. The Company's
materials  development  segment has successfully  patented a variety of products
that demonstrate creative new approaches to the traditional treatment modalities
in these therapeutic  areas. The Company continues to develop these products and
will apply its materials science expertise in both its core businesses and other
areas,  including other  orthopedic  areas such as the spine and  non-orthopedic
areas.  In each of these  cases the  Company's  primary  strategy is to identify
strategic  partners that will bring funding,  synergistic  technology and market
expertise to the partnership.





                                       8
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                           FRACTURE FIXATION PRODUCTS

         The market for bone fixation products in which the Company participates
is defined as a small bone fixation segment,  comprised of orthopedic  extremity
trauma and  craniofacial  reconstruction.  This market segment,  as defined,  is
approximately $500 million  worldwide.  The small bone fixation segment consists
of product  offerings  that allow the surgeon to  reposition  bones  together to
facilitate normal healing of the bones.  Products in this market segment consist
of pins, plates, screws, joint spacers, external fixation frames and instruments
for achieving  appropriate  reduction of the bones to enable proper healing. The
market growth rate is projected at 8 to 10% annual  growth per year,  mostly due
to the aging active  population  and the  introduction  of newer  materials that
provide for improved biological healing.

         The  majority  of  conditions   and  injuries  that  require   surgical
intervention  consist of fractured  bones and deformities of the skeletal frame.
Surgical  techniques  involve  the  reduction  and  repair of bones to  maintain
alignment  and  promote  healing.  Depending  on the age of the  patient and the
quality of the bone,  clinical outcomes vary. There is a need to improve current
reconstruction  instruments  and fixation  devices to provide proper  anatomical
reduction  and alignment to promote  satisfactory  clinical  outcomes.  Clinical
procedures that involve bony fixation of the  extremities  that are fixated with
metal screws and plates often  required  removal  after the bones heal to reduce
the  rate  of  refracture  due to  stress  shielding  of the  bone  and  patient
discomfort.  Surgeons are requesting  alternative  solutions to current products
available that will improve ease of use,  reduce the need to remove the hardware
after  healing has  occurred  and provide  improved  biological  and  anatomical
results.  Acceptance of resorbable  materials and other biological  products has
been evident by the use of these products for the repair and  reconstruction  of
craniofacial and extremity fractures.

         The Company  brings a range of unique bone fixation and  reconstruction
products  to the market  which  support  applications  where  non-weight-bearing
fixation of bone is required.  The Company has established a leadership position
for  resorbable  pins and screws  and has  leveraged  its  current  position  by
introducing new and innovative  products directed towards improving the range of
alternative products and techniques available to the surgeon.

         Scientific  thought leaders that form the core of the Company's medical
and product  advisory  team are experts with a focus in either lower  extremity,
foot /  ankle,  hand  or  upper  extremity  surgical  anatomy  and  craniofacial
reconstruction.



















                                       9
<PAGE>
                                     STENTS

         The  Company  has  significant   technological  assets,  including  the
aforementioned  materials  science  capabilities,  that have been applied to the
development of bioabsorbable  stents for urological  applications - specifically
Benign prostatic  hyperplasia  ("BPH"), a common condition in older men which is
characterized by the non-cancerous  enlargement of the prostate gland, which can
block the normal flow of urine.  In response  to the needs of this  market,  the
Company has developed a resorbable, self-expanding stent that is used to improve
urine flow-rates  whenever the temporary  relief of BPH symptoms is needed.  The
Company's  prostate stents have been tested in clinical trials and are the basis
for continued product development and improvement.

         The  Company  has  determined  that the  resorbable  stent  business is
potentially  lucrative  by virtue of the fact that it has a  significant  market
size,  a  well-defined   regulatory   pathway,   and  has  therapeutic   outcome
characteristics that may favor resorbable stents.  However,  given the Company's
limited cash  resources,  management  is exploring  other  funding and licensing
opportunities  with respect to the Stent business and has limited Stent spending
to minimal amounts.


PRODUCTS

         During 2001, the Company  introduced  important new products  utilizing
the Company's  technology  platform,  consisting  of fixation  products for knee
ligament fixation, shoulder rotator cuff repair and orthopedic surgery products.
The Company  intends to continue to expand its product  offerings and strengthen
its market position during 2002 by introducing  additional new products for knee
and  shoulder   procedures,   and  for   orthopedic   trauma  and   craniofacial
reconstruction.


2001 PRODUCT INTRODUCTIONS:

1.5 mm Bone Fixation Kit            - for fixation of cancellous bone fragments
BioCuff C Repair System             - for repair of rotator cuff injuries
Contour Meniscus Arrow              - for repair of torn meniscus

         In addition to the new  products  released  above in 2001,  the Company
also received clearance from the FDA to market:

SmartScrews                         - for maintenance and alignment and fixation
                                    of fractures, osteotomies, arthrodesis
                                    within the condylar aspect of the upper
                                    extremity, ankle and foot

PLLA Pin/Smart Pin                  - for fixation of fragments of fractured
                                    non-load bearing bones, osteotomies and
                                    arthrodesis











                                       10
<PAGE>
         The Company's products consist of:
         ================================================================
         PRODUCTS                              TARGETED INDICATIONS(1)
         --------                              -----------------------
         SPORTS MEDICINE - KNEE

         Meniscus Arrow                        Meniscus Repair
         Contour Meniscus Arrow                Meniscus Repair
         SmartScrew ACL                        Ligament Attachment
         The Wedge                             Ligament Attachment
         SmartNail                             Condral Fragments

         SPORTS MEDICINE - SHOULDER

         Bankart Tack                          Labral Repair
         BioCuff                               Rotator Cuff Repair
         BioCuff C Repair System               Rotator Cuff Repair
         Contour Labral Nail                   Labral Repair

         ORTHOPEDIC TRAUMA AND CRANIOFACIAL RECONSTRUCTION

         PLLA and PLGA Pins                    Fractures/Osteotomies
         PLLA Screws                           Fractures
         Cannulated Screws                     Fractures/Osteotomies
         1.5 mm Bone Fixation Kit              Fractures
         BioSorb screws and plates             Craniofacial Fixation

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

SPORTS MEDICINE - KNEE

         MENISCUS ARROWS

         Tears of the cartilage pads in the knee, known as the menisci,  are the
most common knee injuries  treated by orthopedic  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 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 11
<PAGE>
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.

         The Contour  Meniscus Arrow,  introduced in the fourth quarter of 2001,
is a next  generation  product  for  the  Company.  The  unique  Self-Reinforced
copolymer  utilized  for the  Contour  Arrow is  manufactured  using a patented,
Self-Reinforcing  manufacturing  process and is a bioresorbable  meniscus repair
system used to repair a torn  meniscus.  The Company  believes  that the Contour
Arrow provides  superior  benefits over other meniscus  repair products and that
the advantages of the Contour  Meniscus  Arrow are: 1) low profile  fixation for
the  arthroscopic  repair of a torn meniscus;  2) superior pull out strength and
performance  compared to other  meniscus  repair  devices;  3) the new copolymer
increases the flexibility of the Arrow and reduces the time for resorption;  and
4) the Contour Arrow utilizes existing instrumentation for delivery, maintaining
the same surgical technique for arrow insertion.

         SMARTSCREW ACL & THE WEDGE

         The SmartScrew ACL is a cannulated,  bioresorbable  interference  screw
used to  attach  a graft  during  cruciate  ligament  reconstruction,  including
bone-patella  tendon-bone or soft tissue grafts. This product was cleared by the
FDA at the end of 1999.  Made from a  patented,  Self-Reinforcing  manufacturing
process,  the  SmartScrew  ACL  reduces the  chances of the screw  shearing  and
breaking  during  insertion - an occurrence that has been associated with molded
polymer implants.

         The Wedge is a bioresorbable  interference fit implant that can also be
used to  attach  a graft  during  cruciate  ligament  reconstruction,  including
Bone-Patella  Tendon-Bone or Soft Tissue  Grafts.  The Wedge has a unique design
that provides  superior  benefits over  traditional  interference fit techniques
with a simple, easy to use insertion technique.

         The  Company  estimates  that one out of 3,000  Americans  and  300,000
people worldwide  experience problems with their anterior and posterior cruciate
ligaments that may require surgical intervention.  The Company believes that the
advantages  of  bioresorbable  implants  over metal  implants  are:  1) revision
surgery  with  resorbable  implants  is  believed  to be easier  and  safer;  2)
resorbable  implants are  radiolucent;  as a result,  they do not interfere with
post surgical  radiographs;  and 3) resorbable  interference  screw implants are
clinically  equivalent to metal interference  screws. The SmartScrew ACL implant
and The Wedge compete in the interference screw product segment, which comprises
over 90% of the market for all fixation  type  devices used during  anterior and
posterior cruciate ligament reconstruction.

         SMARTNAIL

         The  SmartNail  is  a  bioresorbable  implant  used  during  orthopedic
surgery.  This product was cleared by the FDA at the end of 1999.  The SmartNail
is  indicated  to  maintain  fixation  and  accurate  alignment  of  small  bone
fractures,  osteochondral  fragments or osteochondritis  dissecans lesions which
are generally  subchondral bone chips involving the overlying  cartiledge.  Many
osteochondral  fragments are derived from  repetitive  trauma during athletic or
recreational  activities or can be derived from direct trauma  induced from such
incidents as a motor vehicle accident.

         The SmartNail  resorbable  implant addresses some of the current issues
surrounding  the use of  fixation  implants  for  osteochondral  fragments.  The
product  allows the surgeon to deliver a  resorbable  implant  arthroscopically,
thus  simplifying  the procedure and  minimizing  the patient  morbidity that is
associated  with open  fixation and the use of metal  screws.  In addition,  the
SmartNail  has the  benefits  of  bioresorbable  fixation,  which  are  clinical
effectiveness,  no second surgery for removal of the metal implant, radiolucency
and reduced stress shielding. 12
<PAGE>
SPORTS MEDICINE - SHOULDER

         BANKART TACK

         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  resorbable,  they do not
require surgical removal. In addition,  unlike metal screws, resorbable tacks or
plugs do not cause tissue irritation due to metal corrosion and loosening.

         The  Bankart  Tack was  cleared by the FDA in  January  1998 for use in
reattaching  soft tissue to bone to repair a specific  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.

         BIOCUFF ROTATOR CUFF REPAIR SYSTEM

         The BioCuff is a bioresorbable  screw and spiked washer implant used to
fixate  torn  rotator  cuff  tissue  back to bone.  The  unique  Self-Reinforced
copolymer   utilized  for  BioCuff   provides  the  ability  to  manufacture  an
independent  spiked washer to address some of the current issues surrounding the
use of suture based repair methods and fixed headed tacks and screws for rotator
cuff repair. Made from a patented,  Self-Reinforcing  manufacturing process, the
Company  believes  that BioCuff  provides  superior  benefits  over  traditional
products used during  rotator cuff surgery with a  sutureless,  simple and quick
insertion technique.

         During  insertion  of the BioCuff,  the  innovative  thread  design and
multiple lengths allow optimal purchase into bone, including highly osteoporotic
bone found in older patients.  The independent  screw and washer design provides
rigid soft tissue  fixation to bone  without  binding  and  twisting  the tissue
during  insertion.  BioCuff  provides a greater  surface area for tendon to bone
contact  and  reduces  problems  that can be  associated  with  traditional  and
arthroscopic  rotator  cuff  repair,  such as suture  breakage  and knot  tying.
Additionally,  the BioCuff offers the following  advantages over metal implants:
1) revision surgery with resorbable implants is believed to be easier and safer;
2)  resorbable  implants  are  radiolucent,  which do not  interfere  with  post
surgical  radiographs;  and 3) resorbable  implants  allow for a gradual loss of
stiffness  to  reduce  stress  shielding  and  tissue  necrosis  that  has  been
associated with metal implants.

         BIOCUFF C ARTHROSCOPIC ROTATOR CUFF REPAIR SYSTEM

         During the fourth quarter of 2001, the Company  released the BioCuff C,
a bioresorbable  cannulated  screw and spiked washer implant used to secure torn
rotator cuff tissue back to bone. The unique Self-Reinforced  copolymer utilized
for BioCuff C was  developed by the Company to allow the surgeon to address some
of the current issues surrounding the use of metal fixation implants for rotator
cuff repair. Made from a patented,  Self-Reinforcing  manufacturing process, the
Company believes that the BioCuff C provides  superior benefits over traditional
products for rotator cuff surgery.  This is another next generation  product for
the  Company,  and the Company  believes  that the  advantages  of the BioCuff C
bioresorbable  implant in shoulder  surgery are: 1) the cannulated  screw design
allows for arthroscopic 13
<PAGE>
repair of the rotator cuff; 2) the  rotating washer  design provides  for secure
tissue fixation without damaging the tissue during fixation.

         CONTOUR LABRAL NAIL

         The Contour  Labral Nail is a cannulated  bioresorbable  device used to
reattach soft tissue to bone resulting from traumatic  shoulder  injuries.  This
product  was  cleared by the FDA at the end of 1999.  The  Contour  Labral  Nail
allows  the  surgeon  to  reposition  the labrum  ligament  complex  back to the
shoulder's  glenoid  rim with a  relatively  quick and easy  minimally  invasive
surgical  technique.  Traditional  shoulder  surgery,  whether open or minimally
invasive,  involves  tacking,  anchoring  or  suturing  the soft  tissue  to the
underlying bone. The Company believes that the design of the Contour Labral Nail
allows  for an easy and safe  arthroscopic  technique  through  creation  of two
portals, resulting in a quick and simple minimally invasive procedure.

         The design is anatomically  correct, with the objective of reducing the
chances for  impingement  of the implant to the humeral head. The contoured head
corners the labrum  ligament  complex to the glenoid rim, thus creating a bumper
effect that eliminates  anterior  dislocation without the head of the resorbable
implant impinging on the humeral head.

FRACTURE FIXATION
(ORTHOPEDIC TRAUMA AND CRANIOFACIAL SURGERY)

         PLLA AND PLGA PINS

         Fracture  fixation pins are indicated for the  management of cancellous
bone  fractures and  osteotomies  in the non-load  bearing 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.  While the use of metal pins in these areas is common,  these
implants are inconvenient  for the patient.  Metal pinning often results in pins
protruding  from the body to allow for their later removal,  are associated with
increased levels of pin tract  infections,  and require  additional trauma and a
secondary surgery or office visit 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, afford the surgeon an array of options
for  fixation.  All  pins  can  be cut to the  precise  length  required  for an
individual patient, and since they don't need to be removed,  they are cut flush
with the bone eliminating the discomfort associated with protrusion and possible
tract  infection.  Bionx pins are also  designed  to  improve  the  fixation  of
fractures because they are slightly oval in shape providing an improved friction
fit compared to round metal pins. The pins and their associated  instrumentation
are  designed  to  be  used  in  open,  percutaneous,   or  endoscopic  surgical
procedures.  In the U.S.,  while the Company's PLLA pins are currently  approved
for  Hallus  Valgus  deformities,  PLGA pins are  currently  cleared  for a wide
variety of indications in cancellous bone regions.

         PLLA SCREWS

         Although  management of fractures in the cancellous areas of bones with
metal screws and plates is currently the standard of care,  resorbable  products
offer the surgeon dependable fixation and strength while eliminating some of the
inherent issues associated with metallic methods.

         A  difference  in  stiffness  between the metal screws and the bone can
cause  complications,  including  stress  shielding  and  inducement of relative
motion at the  fracture  site.  Such  motion can cause  screws to loosen and can
result  in  local  bone  degradation.  This  phenomenon  is not a  problem  with
resorbable  screws since the stiffness of these screws is similar to bone, which
permits  stress  sharing as the fracture  heals.  Metal screws can also protrude
from the bone surface after  implantation  resulting in soft tissue  irritation.
This may result in the need for  removal of the metal  screw.  Resorbable  screw
heads 14
<PAGE>
can be easily cut and shaped intra-operatively to ensure the screw head is flush
with the  surface of the bone,  thereby  reducing  or  eliminating  soft  tissue
irritation and  eliminating the need for a second surgery to remove the implant.
Resorbable screws are also radio opaque and do not interfere with radiographs or
MRI's.  Additionally,  resorbable  products  afford the  surgeon  the ability to
perform revision  procedures more easily because hardware removal or positioning
is not a consideration.

         The Company's  resorbable screws range in diameter from 2.0 mm to 4.5mm
in lengths up to 70mm. The smaller screws are employed in more delicate hand and
foot  procedures  and the  3.5mm  and 4.5 mm are  primarily  used in  foot/ankle
fractures.  Fully threaded  designs are available for all screws while the 3.5mm
and 4.5mm are also available in partially threaded configurations.  The geometry
of these  screws  has been  specifically  designed  with the  polymer in mind to
impart  exceptional  insertion and purchase  characteristics  in cancellous bone
fractures. The screw heads may be cut or shaped by the surgeon to conform to the
bone contour and prevent irritation. All of the Company's screws are constructed
of  Self-Reinforced(TM)  polymers  that provide  exceptional  strength over more
competitive resorbable products.

         CANNULATED SCREWS

         During 2000 the Company released the 4.5 mm resorbable Cannulated Screw
for the  maintenance of alignment of cancellous  bone fractures of the malleolus
of the  ankle  as the  intended  first  in a line of  cannulated  products.  The
cannulation  enables  the  surgeon  to  place a guide  wire at the  fracture  or
osteotomy  site in order to obtain  initial  reduction and then insert the screw
over the wire for final fixation. As with all of the Company's screws, the 4.5mm
cannulated  screws are  constructed  of  Self-Reinforced(TM)  polymers for added
strength,  and implant  removal is not warranted - which obviates the need for a
second surgery.

         Studies  have shown that  overall  costs are reduced  using  resorbable
implants when compared to metallic  fixation and the added cost  associated with
subsequent  hardware removal.  The Company estimates that there are over 400,000
cancellous  bone fractures per year in the U.S. of which  approximately  150,000
represent ankle fractures.  The Company believes that many of these patients are
potential  candidates  for resorbable  fracture  fixation and that the Company's
pins and screws offer a safe,  effective and innovative clinical solution to the
surgeon and patient

         BIOSORB CRANIOFACIAL FIXATION

         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 and 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 BioSorb family of resorbable products includes screws and
plates for craniofacial  cosmetic,  trauma,  and reconstructive  surgery.  These
products  were launched in the  international  market in  September,  1998.  The
products  were  launched in the U.S.  market in  November,  1998  following  FDA
clearance in September, 1998.

         The Company's  self-reinforcing  process  imparts to the BioSorb line a
unique set of  performance  characteristics  including:  (i)  enhanced  strength
retention;  (ii) resistance to torque damage;  and (iii) the ability to bend the
BioSorb  plates  without the need for external  devices to heat the plates.  The
Company  believes  that these  unique  characteristics  will  allow for  broader
application and acceptance of the products in the clinical setting.

                                       15
<PAGE>
         1.5MM BONE FIXATION KIT

         During the third  quarter of 2001 the Company  released  the 1.5mm Bone
Fixation  Kit, a  bioresorbable  implant  for the  fixation of  cancellous  bone
fragments of fractured  non-load  bearing bones,  osteotomies and arthrodeses of
the hand and foot. This kit is self contained, complete with instrumentation and
implant.  The kit allows the surgeon to decrease  operating room time by quickly
and easily delivering the implant into the reduced fragment without the need for
extra  instrumentation.  The low profile headed implant's  proprietary  integral
barbed design,  maintains  compression of the osteotomy,  prevents migration and
decreases tissue irritation.  Traditional surgery,  involves fixation with metal
K-wires  or  screws.  The  Company  believes  that the  design of the 1.5mm Bone
Fixation Kit allows for an easy and safe technique for fixation,  resulting in a
quick and simple procedure.

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  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.
Predominantly all of the Company's currently distributed instrumentation systems
are reusable.  Accordingly,  sales or consignment of instrumentation systems 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.  In most cases,
instrumentation  is provided to customers  when they purchase a certain level of
implant products.

GEOGRAPHIC INFORMATION

         For geographic  information  regarding the Company,  see Note 15 of the
Notes to the Company's Consolidated Financial Statements.

SALES, MARKETING AND DISTRIBUTION

         The  Company  currently  markets  its  products  through a sales  force
comprised of a managed network of independent  sales agents and  distributors in
the U.S.; Europe,  Middle East, and Africa ("EMEA");  and Asia. In the U.S., the
Company  handles all invoicing  functions  directly and pays  commissions to its
sales  agents or  representatives.  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  has one  business  segment -  bioabsorbable  implants  and
instruments for orthopedic  surgical use. Sports Medicine and Fracture  Fixation
are product lines sold for  particular  orthopedic  surgical  applications.  The
Company's product lines, Sports Medicine and Fracture Fixation, were designed to
address recognized  clinical needs. The Company is dedicated to satisfying these
needs  by  developing  new and  innovative  products,  licensing  products  that
complement the established  product lines and partnering with organizations that
can provide new products or technologies.

         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  product  training and
product managers who supplement the work of the sales agents,  thereby providing
training to  orthopedic  surgeons  with respect to the  features and  modalities
applicable  to  particular  resorbable  implant  products.  The  Company  is not
obligated on any sale of product to support or train. As a part of the Company's
marketing  efforts,  the Company's  marketing  staff and regional sales managers
participate in conventions 16
<PAGE>
attended by surgeons,  demonstrate the products in models of human bone and show
surgeons how to use the products.  These  individuals may also attend a surgical
procedure to answer any  questions  the surgeon may have.  None of these efforts
are obligations related to a contract or a sale but are done to enhance customer
relationships at the discretion of the Company. 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 on an  exclusive  basis  within a defined
territory and permit the distributors to sell other medical products.

         The Company  typically sells,  consigns,  or provides free of charge to
hospitals  stainless  steel  surgical  instruments  for  use  with  each  of its
Self-Reinforced,  resorbable products.  The sale of these instruments results in
margins which are typically  lower than the margins  applicable to the Company's
implant products.  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.

         Outside  of the  Sports  Medicine  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.  No assurance  can be given that the Company
will be able to enter into license arrangements 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.

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  orthopedic,   urological,   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.  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  and  PDLA  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

                                       17
<PAGE>
contracts with any of such suppliers. 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.

         Periodically   the  Company  has  evaluated   constructing  or  leasing
manufacturing  facilities  in  the  United  States  to  supplement  its  Finnish
manufacturing  capabilities.  At this time the Company has decided to supplement
its Finnish manufacturing using third party contract manufacturers, primarily in
the United States,  to produce  specific  implants or  instruments.  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.

PRODUCT DEVELOPMENT

         To date,  all of the  Company's  implants  sold in the U.S.  have  been
cleared through the 510(k) Premarket  Notification  process.  Lengthier and more
costly PMA  submissions  may be  required  in order to obtain  approval  to sell
urological  stents  and other new  products  in the U.S.  The  Company  incurred
research and  development  expenses of  $3,758,680,  $2,682,256,  and $3,347,853
during 1999, 2000 and 2001 respectively.

         The Company's  estimations of the benefits,  criteria,  markets,  uses,
features,  market acceptance,  medical indication and other items related to its
products constitute Forward Looking Statements.  See Exhibit 99.1 to this Annual
Report on Form 10-K.

         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.

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  (Patent  &
Trademark  Office) and in the patent offices of various foreign  countries.  The
Company's four principal U.S. patents

                                       18
<PAGE>
(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 two U.S.  patents  relating to methods of making the
Company's  resorbable  stents and the stents  themselves.  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  devices,
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 were the subject of opposition  proceedings.  The
Company vigorously  defended its European and Japanese patent positions in these
proceedings.  The Company was  successful in defending its European  counterpart
patents,  and the validity of those European  patents was upheld by the European
Patent Office.  The favorable  decision as to one of those European  patents has
been  appealed  and no  assurance  can be given that this  decision  will not be
reversed.  The Japanese patent  application is still being challenged on lack of
novelty and inventiveness grounds.  Further, no assurance may be given as to the
outcome of this pending Japanese opposition proceeding.  In order to clarify and
confirm its U.S. patent  position,  the Company  requested  reexamination by the
U.S. PTO of the two  principal  U.S.  patents  owned by the Company.  The issues
raised during the reexamination proceedings were resolved in the Company's favor
on both patents,  including the one describing the self-reinforcing  method used
in approximately 98% of the Company's existing products.

         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 has a license to 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.  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.

         The Company had initiated a patent infringement  lawsuit asserting that
a third party who is selling  self-reinforced  devices is infringing  one of the
principal  patents assigned to the Company.  The Company  vigorously sought both
monetary and  injunctive  relief from the third party.  The third party asserted
that this  patent is invalid  and not  infringed  and filed a motion for summary
judgment on an issue of invalidity with the court. The court denied that summary
judgment  motion.  This  lawsuit  settled  out of court,  and the patent in suit
remains in force.

         The Company had initiated two separate  patent  infringement  lawsuits,
asserting  that two third  parties who are selling  devices for the  fixation of
meniscal  lesions are  infringing one of the principal  patents  licensed to the
Company.  One of the litigation's  settled,  with the Company granting a royalty
bearing  license  to the  third  party to sell its  meniscal  devices  under the
patent.  In the other case, which is still pending,  the Company is seeking both
monetary and injunctive  relief.  The third party filed summary judgment motions
asserting  that the patent was invalid and  unenforceable  and that they did not
infringe.  In May 2000,  the  district  court  denied  the  defendant's  summary
judgment motions as to invalidity and unenforceability,  but granted its summary
judgment motion as to non-infringement. The Company has

                                       19
<PAGE>
appealed from the district  court's order that the defendant  does not infringe.
The briefing for the appeal is  complete,  and an oral  argument was made before
the appellate  court.  The Company now is awaiting the decision of the appellate
court regarding its appeal. This litigation has been expensive, and there can be
no  assurance  of the outcome of the appeal or the  district  court  litigation,
should the  Company  prevail on the appeal  and the  litigation  resume.  If the
patent is finally held invalid,  unenforceable or not infringed, the third party
can  continue  to sell its  meniscal  fixation  devices,  and this  could have a
material  adverse  effect on the  Company's  business,  financial  condition and
results of operations.

         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
a patent  actually  issues or the time set by  statute  for  publication  of the
application is reached in the U.S., or a corresponding  application is published
in a foreign country,  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 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  instituted its own opposition against
that patent.  These oppositions  resulted in the revocation of that patent.  The
third party appealed, and the appeal resulted in the issuance of the patent with
narrowed claims. The third party has appealed again,  seeking broader claims. No
assurance can be given that the third party will not win its pending  appeal and
assert that the Company infringes those broader claims or, even if it loses that
appeal,  no assurance can be given that the third party will not assert that its
European patent with narrowed claims 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
also initiated an opposition in the European Patent Office challenging the grant
of a third party's  European patent relating to a bioabsorbable  membrane.  This
opposition  resulted in the  narrowing of its claims.  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

                                       20
<PAGE>
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.

         The Company is currently  prosecuting a patent infringement case in the
United States.  As noted above,  the prosecution of such cases can be expensive,
and there can be no assurances as to the outcome.

COMPETITION

         Competition in the medical device  industry is intense both in the U.S.
and abroad. In orthopedics, 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 clinical  advantages of the
Company's   Self-Reinforced,   resorbable   implants,   which   are   the   cost
effectiveness,  strength,  reduction of stress  shielding and the elimination of
risks  associated  with the  failure to perform  removal  surgeries.  Within the
resorbable  implant  market,  Johnson & Johnson and Biomet  sell an  FDA-cleared
resorbable product for use in the fracture fixation market. Other companies have
reported that they are developing resorbable products for internal fixation. The
Company is  competing  with  Johnson & Johnson,  Smith & Nephew,  and Biomet 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,  the  length  of  the  strength  retention  time  demonstrated  by the
Company's products and ease of use.

         In knee arthroscopy for meniscal repair,  the Company's  Meniscus Arrow
products  compete  with a  non-resorbable  product  marketed  by Smith & Nephew,
resorbable  products marketed by U.S.  Surgical,  Conmed,  Johnson & Johnson and
Arthrex,  and with a series  of  suturing  techniques  developed  by  orthopedic
surgeons for the repair of the meniscus.

         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,   see  "Management's
Discussion  and  Analysis of  Financial  Condition  and  Results of  Operation -
Results of  Operations  For the Years Ended  December 31, 1999,  2000 and 2001 -
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

                                       21
<PAGE>
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  and
adherence to GMP  requirements)  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  "preamendment"  (in  commercial  distribution  before May 28, 1976)
Class III device for which the FDA has not called for PMA applications  (defined
below),  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

                                       22
<PAGE>
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 for review.  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  orthopedic 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.   Submission  clearance  times  vary  for  each  product,  in  certain
submissions for orthopedic  products,  the Company obtained  clearance within 90
days of submission, and other submissions by the Company have taken longer, note
these  timeframes  are not  controlled  by the  Company  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

                                       23
<PAGE>
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 and  other
requirements  that 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.

         For all products sold after June 14, 1998,  the European  Economic Area
requires the Company 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

                                       24
<PAGE>
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 August 8, 2000.  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
orthopedic,  dental,  cranio-facial  and  urology  products.  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

                                       25
<PAGE>
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. While the
Company maintains product  liability  insurance,  there can be no assurance that
this  coverage  will be  adequate  to protect  the  Company  against any 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, 2001, the Company employed 108 full-time  employees;
35 full-time  team members in the U.S. and 72 full-time team members in Finland.
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 19,140 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  marketing  and  sales  and  product
development  functions from its 13,500 square foot office space in Pennsylvania.
The annual rent on these facilities is approximately $380,000.  Periodically the
Company has evaluated  constructing or leasing  manufacturing  facilities in the
United States to supplement its Finnish manufacturing capabilities. At this time
the Company has decided to supplement its Finnish  manufacturing  by using third
party  contract  manufacturers,  primarily  in the  United  States,  to  produce
specific implants or instruments. 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

                                       26
<PAGE>
         At the  Company's  Annual  Meeting  on  November  16,  2001,  Gerard S.
Carlozzi and Terry D. Wall were elected as directors of the Company for terms of
3 years. The votes were as follows:

Name                                For                                Against
------------------                  ---------                          -------
Gerard S. Carlozzi                  7,572,077                          0
Terry D. Wall                       7,566,567                          0

There were 26,375 and 31,885 abstentions  respectively, and no broker non-votes.

ITEM 4A.  EXECUTIVE OFFICERS OF THE REGISTRANT

         The Company's executive officers, their respective ages (as of December
31, 2001) and their positions with the Company are set forth below:

 NAME                    AGE                   POSITION
 ----                    ---                   --------
Gerard S. Carlozzi       46      President, Chief Executive Officer and Director
Pertti Tormala           56      Executive Vice President, Research and Director
Drew Karazin             48      Vice President and Chief Financial Officer
Dennis Mahoney           49      Vice President, Global Operations
Pertti Viitanen          51      Managing Director of the Company's Finnish
                                 subsidiary Vice President, Manufacturing

         Gerard S. Carlozzi has been President,  Chief  Executive  Officer and a
member of the Board of  Directors  of Bionx  Implants,  Inc.  and its  operating
subsidiaries  since  September 1999. He was appointed as the President and Chief
Operating  Officer in May 1999 and joined the Company in November 1998 as a Vice
President.  Prior to joining the Company,  he held positions with Synthes USA, a
leader in  Orthopedic  and  Maxillofacial  Trauma  products,  as the Director of
Biotechnology  Development and the Director of Marketing and Product Development
for Maxillofacial  Surgical Products,  from 1995 to 1998. From 1986 to 1995, Mr.
Carlozzi held various positions with Acufex Microsurgical,  a pioneer and leader
in Arthroscopic  orthopedic  surgery,  which was acquired by Smith & Nephew.  At
Acufex  Microsurgical,  as the General Manager for the Spinal Products Group and
the Global  Director of Research and  Development,  Mr. Carlozzi was responsible
for  Sales  and  Marketing,  Research  &  Development,   Manufacturing,  Quality
Assurance,  Clinical and Regulatory Affairs and other various general management
and business development functions. From 1979 to 1986, Mr. Carlozzi held various
management  positions in  Marketing,  Sales,  and Research and  Development  for
Infusaid  Corporation,  a manufacturer of implantable drug delivery systems. Mr.
Carlozzi  holds a degree in  Engineering  and a Masters  Degree in Business from
Northeastern University.

         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 review
articles,  many on resorbable  polymers.  Professor  Tormala  received a Masters
Degree and Ph.D. in Polymer Chemistry from the University of Helsinki.

         Drew Karazin joined the Company in December, 1999 as Vice President and
Chief Financial  Officer.  Prior to joining the Company,  he was Chief Financial
Officer  of Life  Medical  Sciences,  Inc.,  a  publicly  traded  cardiovascular
research company during 1998 and 1999. Prior to that time, he was the

                                       27
<PAGE>

Chief  Financial  Officer for SCA  Molnlycke,  a $200  million  subsidiary  of a
Swedish  medical  device and  incontinence  company,  during 1996 and 1997,  and
President  of  Jersey  Integrated  Healthcare,  one  of  the  largest  physician
management  companies in New Jersey,  during 1996. From 1992 to 1995, he was the
senior executive responsible for Finance,  M&A, Business Development,  Strategic
Planning,  Information  Systems and certain  marketing  and product  development
activities for Calgon Vestal Laboratories Inc., a $100 million division of Merck
& Co., Inc. Mr. Karazin held several financial management positions from 1983 to
1995 with Merck, as well as serving in manufacturing and research  positions for
Merck from 1977 to 1983.  Prior to this time,  Mr.  Karazin  was a research  and
manufacturing engineer at Chesebrough-Ponds.  He received a Bachelors of Science
in Engineering from Clarkson University and a Masters of Business Administration
from Fairleigh Dickenson University.

         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.

         Dennis Mahoney joined the Company in September,  2001 as Vice President
of Global  Operations.  Prior to joining the Company,  he was Vice  President of
Operations for COBE Cardiovascular, a Division of Sorin Biomedical, from 1996 to
2000.  Prior to that time,  he was Vice  President of  Operations  for A.B. Dick
Company,  a Graphic  Arts  Division of GEC, UK. He has more than twenty years of
progressive Operations Management experience including Manufacturing, Research &
Development,  Supply Chain Management, Quality Assurance, and Technical Support.
Other  companies  he has  worked  for  include  Abbott  Laboratories  Diagnostic
Division, Otis Engineering, and Baker Oil Tools. Mr. Mahoney holds a Bachelor of
Science  Degree from the United States  Military  Academy,  a Masters in Quality
Systems  from the  University  of  Dallas,  and a  Masters  Degree  in  Business
Administration  from the  University of Dallas.  He also spent three years as an
Examiner for the Malcolm Baldridge National Quality Award.

         Executive officers serve at the discretion of the Board.






















                                       28
<PAGE>
                                     PART II
                                     -------

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

         MARKET AND DIVIDEND INFORMATION

         The  Company's  Common  Stock is traded on the Nasdaq  National  Market
System under the symbol "BINX" . 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
                                                               -----     -----
First Quarter Ended March 31, 2000..........................   $6.75     $2.69
Second Quarter Ended June 30, 2000..........................    3.88      1.38
Third Quarter Ended September 30, 2000......................    3.63      2.09
Fourth Quarter Ended December 31, 2000......................    3.19      0.69

First Quarter Ended March 31, 2001..........................   $2.38     $1.03
Second Quarter Ended June 30, 2001..........................    2.85      1.03
Third Quarter Ended September 30, 2001......................    3.54      1.78
Fourth Quarter Ended December 31, 2001......................   $4.35     $2.34


         As of March  26,  2002  there  were 44  stockholders  of  record of the
Company's Common Stock.

         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.

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,  1999,  2000 and 2001 and the  Consolidated
Balance Sheet data as of December 31, 2000 and 2001 are derived from the 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, 1997 and 1998 and the  Consolidated  Balance Sheet data at December
31,  1997,  1998  and 1999  are  derived  from  audited  consolidated  financial
statements not included in this Annual Report.












                                       29
<PAGE>


<TABLE><CAPTION>
                                                                                      YEARS ENDED DECEMBER 31,
                                                               --------------------------------------------------------------------
                                                                   1997           1998         1999          2000            2001
                                                                   ----           ----         ----          ----            ----
                                                                             (In thousands except per share amounts)

CONSOLIDATED STATEMENT OF OPERATIONS DATA:
<S>                                                             <C>            <C>          <C>           <C>             <C>
Revenues..................................................      $16,014        $21,100      $21,068       $18,232         $18,888
Cost of Goods Sold (1)....................................        3,678          4,527        5,857         8,299           5,927
Special Charges Related to Inventory......................           --             --        6,241            --              --
Gross Profit..............................................       12,336         16,573        8,970         9,933          12,961
Operating Expenses........................................       10,579         15,320       22,084        14,408          15,630
Operating income (loss)...................................        1,757          1,253      (13,114)       (4,475)         (2,669)
Net income (loss).........................................        2,158          1,261      (12,463)       (4,609)         (2,481)
Earnings (loss) per share:
     Basic................................................        $0.28          $0.14       $(1.39)       $(0.44)         $(0.23)
     Diluted..............................................        $0.25          $0.14       $(1.39)       $(0.44)         $(0.23)
Shares used in computing earnings (loss) Per share:

     Basic................................................        7,787          8,918        8,943        10,503          10,832


     Diluted..............................................        8,526          9,243        8,943        10,503          10,832





                                                                                             DECEMBER 31,
                                                               -------------------------------------------------------------------
                                                                  1997            1998         1999          2000            2001
                                                                  ----            ----         ----          ----            ----
CONSOLIDATED BALANCE SHEET DATA:

Working capital...........................................     $24,549         $24,232      $11,556       $11,717         $ 9,722
Total assets..............................................      33,541          36,949       23,421        22,179          18,815
Long-term debt less current portion.......................         115              75           33           331             494
Accumulated deficit.......................................      (5,527)         (4,266)     (16,729)      (21,338)        (23,819)
Total stockholders' equity (deficit)......................     $29,081         $30,241      $17,994       $17,530         $15,117
</TABLE>



(1) The Company  recorded a charge of $1.5 million in the fourth quarter of 2000
for excess  implant and  instrument  inventory.  Charges for excess  implant and
instrument  inventory in 1999 of $6.2 million which included $5.3 million in the
fourth quarter and $0.9 million in the second  quarter,  are included in Special
Charges  Related  to  Inventory.  See  Note  3  to  the  Consolidated  Financial
Statements for further detail on the Company's inventory accounting.


                                       30
<PAGE>


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
        FINANCIAL CONDITION

         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 to this Annual Report on form 10-K,
in this  "Management's  Discussion  and  Analysis of Results of  Operations  and
Financial  Condition" 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 orthopedic uses. The Company has incurred substantial operating losses since
its  inception  and, as of December  31,  2001,  had an  accumulated  deficit of
approximately  $23.8  million.  Such losses have resulted to a large extent from
expenses  associated  with  the  development  and  patenting  of  the  Company's
Self-Reinforcing  technologies and resorbable implant designs, the write off and
reserve of impaired inventory, pre-clinical 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.  The Company has recorded  losses in recent  periods,  including a
loss of  approximately  $4.6 million in 2000 and $2.5 million in 2001.  Although
the Company's  revenues grew significantly in the second half of 1996 and during
1997 and 1998,  there was no revenue growth during 1999,  revenues  decreased by
$2.8 million in 2000,  but have increased $0.7 million in 2001. No assurance can
be given that  revenues  will grow in the future or that  revenues  will  exceed
expenses.  There  can  be  no  assurance  that  the  Company  will  be  able  to
successfully  commercialize  its products or that the Company will be profitable
again.

         The Company  has one  business  segment -  bioabsorbable  implants  and
instruments for surgical use in bone and bone to soft tissue procedures.  Sports
medicine and Fracture  fixation  are product  lines sold for these  applications
During 2001,  approximately 91% of the Company's revenues were implants, 5% were
associated instruments,  and 4% were other revenues.  Instruments are needed for
surgical   procedures   involving  the  Company's  implants  and  are  therefore
inexorably  linked to implant  sales.  A  substantial  portion of the  Company's
revenues  result  from the  sales of the  Meniscus  Arrow,  which  received  FDA
clearance in March 1996.  During 1999, 2000 and 2001,  Meniscus Arrow sales were
62%, 59% and 47%, respectively, of the Company's total product sales.

         During 2001, the Company continued to implement its initiatives,  begun
in 2000, to refocus its business and reallocate critical  resources.  During the
third quarter ended September 30, 2001, the Company took a restructuring  charge
of $343 thousand.  The charge related primarily to severance for sales and order
entry  personnel.   This  reduction  was  made  to  eliminate  redundancies  and
streamline  operations.  During the fourth  quarter ended December 31, 2001, the
Company reported earnings of $187 thousand,  resulting in earnings per basic and
diluted share of $0.02.  Management  has  continued  with its  implementaion  of
operation  improvement  plans  and  during  2002 is  continuing  to focus on and
evaluate  monthly the effects of these  initiatives.  No assurances can be given
that the  Company's  initiatives  will result in  profitable  operations  in the
future.

         The Company sells implants and stainless steel surgical  instruments to
hospitals  and  surgery  centers in the United  States  and to  distributors  in
international  locations.  In certain  more limited  cases the Company  consigns
implants to hospitals in the United  States,  primarily  during an  introductory
period when surgeons are evaluating these products.  In order to support implant
sales efforts in the United States the Company will, in limited  cases,  provide
instruments free of charge to hospitals and surgery  centers.  The sale of these
instruments  results  in margins  which are  typically  lower  than the  margins
applicable to the Company's implant products.  For financial statement purposes,
revenues from the sale

                                       31
<PAGE>
of  instrumentation   systems  are  included  within  product  sales  and  costs
associated  with such  systems  are  included  within  cost of goods  sold.  The
following is a summary of the Company's  business  practices related to implants
and instruments at hospitals and distributors in the United States.

         The Company's consigned products at distributors or hospitals represent
implants  and  instruments.   The  Company  had  been  amortizing  the  cost  of
instruments  provided to  distributors  and hospitals  over their economic life.
During the fourth  quarter of 1999, the Company began  expensing  instruments at
hospitals.  During the second  quarter of 2001,  the Company fully  reserved for
instruments  on  consignment   at   distributors,   resulting  in  a  charge  of
approximately $0.2 million.  Due to competitive and technological  factors,  the
Company now expenses all instruments consigned to distributors and hospitals.

         HOSPITALS

         All of the Company's  implant  products are used  exclusively  with the
         appropriate  instrument set. The placing of instruments at the hospital
         is,  therefore,  required for all of the Company's product sales and is
         not related to only particular customers or groups of customers.

         While the primary  mode of sale in the United  States is direct sale to
         hospitals from the Company's warehouse,  The Company has also consigned
         implants at  hospitals  in the United  States,  but not in hospitals in
         foreign locations. Implants are generally consigned to hospitals during
         the  defined  period  (usually  30 to  60  days)  while  a  surgeon  is
         evaluating  the  implants.  Title passes to the hospital at the time of
         usage of the implant in a surgical procedure, in which case the Company
         records the sale, or the hospital returns the unused consigned implants
         when the trial period is over.

         The  Company  considers  the placing of  instruments  at  hospitals  to
         represent a cost  incurred  to promote the future  sales of its implant
         products.  The Company  classifies  this expense in cost of goods sold.
         Since the Company does not enforce minimum  purchase  requirements,  it
         does not view the instrument as a sales discount.

         Due to competitive  factors,  the Company made a  determination  in the
         fourth  quarter  of 1999 that it could no  longer  control  the  future
         purchases of the implants associated with hospital  instruments.  Since
         the  benefits  of future  sales  from  placing  the  instrument  became
         uncertain and recovery of the cost of the instrument or payment for the
         instrument  was and is considered  unlikely,  the Company  expenses the
         cost of the instrument when placed at the hospital.

         DISTRIBUTORS

         The accounting  policy for consigned  implants at  distributors  is the
         same as  that  for  consigned  implants  at  hospitals  -  there  is no
         recognition  of a sale  until  the risk of  ownership  and  title  have
         passed.  In  the  case  of  consigned  implants  at  distributors,  the
         distributor  will  deliver the product to a hospital,  typically on the
         day of the surgery, and title passes to the hospital at the time of the
         usage of the implant in a surgical procedure, at which time the Company
         records the sale.

         Through March 31, 2001, the Company  believed that  instruments held by
         distributors being used primarily for sales demonstrations had a useful
         life of  approximately  three  years,  which  represented  management's
         estimate   of  the   future   life  of  the   instruments   considering
         technological and competitive factors.  Consequently, the cost of these
         instruments was amortized over this period.

         During  the  second  quarter  of 2001,  it became  apparent  during the
         Company's  periodic  review of distributor  inventory,  that the future
         life of instruments at distributors had become unpredictable due to the
         competitive  environment and pace of technological changes. The Company
         determined that a portion of instruments  held at distributors  were in
         fact being given to hospitals

                                       32
<PAGE>

         by the distributors  due to competitive  pressures.  Additionally,  the
         return of instruments from distributors was resulting in write offs due
         to wear and tear and technology changes.  For these reasons the Company
         estimated  that the future life of instruments  placed at  distributors
         would be reduced and fully  reserved  for the  remaining  $0.2  million
         balance of instruments at distributors during the period ended June 30,
         2001.  This resulted in a charge of $0.2 million to cost of goods sold.
         The Company now expenses instruments upon placement with distributors.


         As a part of the Company's  marketing efforts,  the Company's marketing
staff and  regional  sales  managers  participate  in  conventions  attended  by
surgeons in which they demonstrate the products in models of human bone and show
surgeons how to use the products.  These  individuals may also attend a surgical
procedure to answer any  questions  the surgeon may have.  None of these efforts
are obligations related to a contract or a sale but are done to enhance customer
relationships at the discretion of the Company.  The Company is not obligated on
any sale of product to support or train.  The Company sells its products through
managed  networks of sales agents,  distributors  and dealers.  In the U.S., the
Company  handles all invoicing  functions  directly and pays  commissions to its
sales  agents or  representatives.  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.

         Bionx continues to evaluate the formation of strategic partnerships for
craniofacial  products. The Company believes that with the appropriate strategic
partner who has a focused  marketing and sales effort,  coupled with key surgeon
champions  and a unique  product  portfolio,  resorbable  fixation  products can
effectively penetrate this craniofacial market. Bionx currently  participates in
this  craniofacial  market and has established a position for resorbable  plates
and screws.  If working  with the  appropriate  strategic  partner,  the Company
believes  that it can  leverage  its  current  position  and  expand  its market
presence by  introducing  new and  innovative  products  directed  towards these
surgical specialties.

         Outside of the orthopedic market, the Company has intellectual property
and  techniques  for which it may seek to establish  licensing  or  distribution
agreements with strategic  partners to fund and 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.  No
assurance  can be given  that the  Company  will be able to enter  into  license
arrangements on satisfactory terms.

         The Company's cash and cash equivalents  decreased from $7.0 million at
December  31, 2000 to $5.0  million at December  31,  2001.  The  decrease  from
December 31, 2000 is primarily due to the Company's net loss, offset by non-cash
expenses (depreciation,  amortization and consignment  amortization) and capital
spending.  At December 31, 2001,  the Company had net working  capital  totaling
$9.7 million, or a 4:1 ratio of current assets to current liabilities.

         During 2000, the Company began invoicing  European customers in Euro's.
The majority of the Company's  sales are in the United States,  with most of the
sales to international  markets in Europe and Asia. During 1999, 2000, and 2001,
international  product  sales  represented   approximately  18%,  18%  and  21%,
respectively,  of the  Company's  total product  sales.  The Company has foreign
operations in Finland consisting  primarily of manufacturing and certain R&D and
marketing  functions.  The Company  invoices  more than 85% of its  consolidated
revenues  in US  Dollars.  Approximately  75% of the  expenses  incurred  by the
Company are  denominated  in US Dollars.  The  majority  of other  revenues  and
expense  are in  Euro's - Euro  denominated  expenses  exceed  Euro  denominated
revenues.  Consequently,  a weakening in the Euro has a favorable  impact on the
Company while a strengthening  has an unfavorable  impact.  Foreign exchange can
currently reduce annual income before taxes by approximately $50 thousand if the
Euro  increases in value by 1% depending  upon the extent of the Company's  Euro
denominated net expenses and/or net assets for the period under evaluation.  The
Company may seek to manage its foreign  currency  risk  through the  purchase of
foreign currency options and forward contracts in the future.  However, there is
a cost to such hedging and, for 2001, the Company did not hedge such  exposures.
No  assurances  can be given that such hedging  techniques if  implemented  will
protect the

                                       33
<PAGE>

Company from exposure  resulting from relative changes in the economic  strength
of  the  Euro.   Foreign  exchange   transaction   gains  and  losses  can  vary
significantly from period to period.

         Periodically,   the  Company  has  evaluated  constructing  or  leasing
manufacturing  facilities  in  the  United  States  to  supplement  its  Finnish
manufacturing  capabilities.  At this time the Company has decided to supplement
its Finnish manufacturing by using third party contract manufacturers, primarily
in the United States, to produce specific implants or instruments.

         While the  Company's  operating  losses have  resulted in net operating
loss  carryforwards  ("NOL") of approximately  $8.1 million in federal NOL, $2.6
million in state NOL, and $5.7  million in foreign  NOL. For federal,  state and
foreign  income tax  reporting  purposes as of December 31, 2001,  the extent to
which such carryforwards are available to offset future U.S. and Finnish taxable
income  may be  limited  as a result  of  various  ownership  changes  that have
occurred in recent years.  Additionally,  because 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  these  carryforwards  for  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 11 of the Notes to
the Company's Consolidated Financial Statements.

         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.  The
Company's inventory reserve methodology and accounts receivable  methodology are
described in Note 2 'Summary of Significant  Accounting  Policy' in the Notes to
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, 1999, 2000 AND 2001

         The  following  table  sets  forth,  for  the  periods  indicated,  the
percentage  increase  or  decrease of certain  items  included in the  Company's
consolidated statements of income.


                     INCREASE (DECREASE) FROM PREVIOUS YEAR

                                                         2000           2001
                                                       COMPARED       COMPARED
                                                       WITH 1999      WITH 2000
                                                       ---------      ---------
Total Revenues                                          (13.5%)          3.6%
Cost of goods sold, excluding special charge (note 3)     41.7%        (28.6%)
Gross profit                                              10.7%         30.5%
Selling, general, and administrative expenses           (28.3%)          3.9%
Research and development expenses                       (28.6%)         24.8%

See Note 3 to the Company's Consolidated Financial Statement

                                       34
<PAGE>

PRODUCT SALES
The  Company's  product  sales  decreased by 12.3% from $20.5 million in 1999 to
$17.9  million in 2000,  and  increased  by 4.1% to $18.7  million in 2001.  The
decrease in product sales in 2000  reflected a 7.4% reduction in sales of Sports
Medicine  products and a 23.5% reduction in Orthopedic  Trauma and  Craniofacial
products due to changes in distribution effectiveness and reduced Meniscus Arrow
sales offset by new product sales. Meniscus Arrow sales were negatively impacted
by a  reduction  in  the  number  of  arrows  used  per  surgery,  increases  in
competitive offerings, and the increase in non-Arrow sales reflects new products
and market opportunities.

The increase in product sales in 2001  resulted  from the  Company's  continuing
focus on growing market share and  diversification of our product line. Revenues
generated  from the sale of  instrumentation  systems  and  related  loaner fees
represented  4%, 8% and 7% of total sales in 1999,  2000,  and 2001 amounting to
$.9  million  in  1999,  $1.4  million  in  2000,  and  $1.3  million  in  2001.
Instrumentation  revenues  relating to the Meniscus Arrow during 1999, 2000, and
2001  were   approximately   $0.3   million,   $0.2  million  and  $0.1  million
respectively.  Sports Medicine  products  represented  approximately  71% of the
Company's product sales in 2001.

New products  introduced in 2000  accounted for $3.6 million of sales in 2001, a
118% increase over the sale of the same new products in 2000 of $1.7 million, as
the Company's product development,  marketing and sales activities resulted in a
more  diverse  product  line,  in line with the  Company's  strategy  to satisfy
surgeon needs by developing new and innovative procedure specific products.

During  1999,   2000  and  2001,   international   product   sales   represented
approximately  18%, 18%, and 21%  respectively,  of the Company's  total product
sales.  See  Note  15 of the  Notes  to  the  Company's  Consolidated  Financial
Statements.

GLOBAL SPORTS MEDICINE
Consolidated sales of Sport Medicine products, including instruments,  increased
4.1% from $12.7  million  during the twelve  months  ended  December 31, 2000 to
$13.2  million  during the twelve  months ended  December 31, 2001.  Non - Arrow
sales  accounted for 33% of the 2001 Sports  Medicine  sales,  and new products,
consisting  primarily of Sports  Medicine  products,  had a sales growth of 118%
over 2000.  We plan to continue to expand our product  offerings,  providing the
surgeon with improved clinical solutions in all segments our business.

FRACTURE FIXATION PRODUCTS
Consolidated sales of Fracture Fixation  products,  which include the Orthopedic
Trauma and Craniofacial  product lines,  increased 5.0% from $5.2 million during
the twelve  months ended  December  31, 2000 to $5.5  million  during the twelve
months ended December 31, 2001.

           GLOBAL ORTHOPEDIC TRAUMA
           Consolidated   sales  of  Orthopedic   Trauma   products,   including
           instruments, increased less than 1% to $4.1 million during the twelve
           months ended  December  31, 2001 from $4.0 million  during the twelve
           months ended December 31, 2000.

           GLOBAL CRANIOFACIAL
           Consolidated sales of Craniofacial  products,  including instruments,
           increased  21% from $1.2  million  during  the  twelve  months  ended
           December  31, 2000 to $1.4  million  during the twelve  months  ended
           December  31,  2001.  This is  largely  due to  strong  sales  in the
           international markets utilizing new focused distributor partners.

LICENSE AND GRANT REVENUES
License and grant  revenues  decreased  by 52% from $0.6 million in 1999 to $0.3
million in 2000 and  decreased by 28% to $0.2  million in 2001.  This revenue is
generated from grants obtained from a Finnish government  research  organization
which  funds  certain  research  and  development  projects.  These  grants have
declined due to increased in-house product development funding which enables the
Company to meet short-term horizons for product introductions.

                                       35
<PAGE>
         GROSS  PROFIT;   GROSS  PROFIT  MARGINS.  The  Company's  gross  profit
increased by 11% to $9.9 million in 2000,  and increased 31% to $13.0 million in
2001.  Overall,  the Company's gross profit margin was 43% in 1999, 55% in 2000,
and 69% in 2001. The cost of goods sold in 1999 includes $6.2 million of charges
related to obsolete instrument and implant inventory.  The cost of goods sold in
2000 includes a $1.5 million charge for excess implant and instrument  inventory
primarily due to a change in the Company's  distributor channel for craniofacial
surgery products and, to a lesser extent,  due to competitive and  technological
advances.  The gross profit  excluding these  adjustments  would have been $15.2
million  and  $11.5  million  in 1999 and  2000,  respectively.  Excluding  this
adjustments  the gross  profit  margin  would  have been 72% and 63% in 1999 and
2000. The reduction in gross profit margin as a percent of sales is attributable
primarily  to the effect of fixed  overhead  spread  over lower sales in 2000 as
compared to 1999 and a change in mix towards  products with lower gross margins.
In 2001 the Company's  gross profit was 69%. The improvement in 2001 as compared
to the 63% gross profit in 2000,  excluding the $1.5 million charge,  was due to
reductions in obsolete  implant and instrument  charges and from ongoing process
improvements  within our logistics and  manufacturing  groups and a reduction in
the  manufacturing  work force. See Note 3 'Inventory' for further detail on the
charges to cost of goods sold from prior years.

         The Company had been  amortizing  the cost of  instruments  provided to
distributors  and dealers over their  economic  life.  The Company  periodically
reviews  instruments at dealers and distributors to determine the future utility
of the  instruments.  During the second  quarter of 2001,  the Company wrote off
instruments  on  consignment   at   distributors,   resulting  in  a  charge  of
approximately  $0.2 million.  Prior to the second  quarter of 2001,  the Company
amortized the cost of  instrumentation  inventory  consigned to distributors and
dealers,  and classified this as accumulated  amortization.  The Company's total
amortization  charge for these items was $0.3  million in 1999,  $0.7 million in
2000, and $0.5 million in 2001.

SELLING,   GENERAL   AND   ADMINISTRATIVE   EXPENSES.   Selling,   general   and
administrative expenses decreased by 28% to $11.4 million in 2000, and increased
3.9% to $11.8  million in 2001.  Such expenses were flat at 63% of product sales
in 2000 and 2001 The  decrease  in the dollar  amount of  selling,  general  and
administrative  expenses during 2000 is primarily  attributable to reduced sales
expense as the Company  restructured its operations and organization to a system
of managed sales agents and  distributors  from the previously  utilized  hybrid
structure  that included  sales  employees and is also  attributable  to reduced
Craniofacial  distributor  commissions,  with reduced sales  administration  and
marketing costs  contributing to the reduction to a lesser extent.  The increase
in the dollar amount of selling, general and administrative expenses during 2001
is  primarily  attributable  to the  Company's  use of  outside  consultants  to
streamline  and manage our  computer  systems and other  day-to-day  operations.
Advertising  expenses  were  $350,848 and $216,525 for years ended  December 31,
2000 and 2001, respectively.

RESEARCH AND  DEVELOPMENT.  Research and development  expenses  decreased by 29%
from $3.8 million in 1999 to $2.7  million in 2000 and  increased by 25% to $3.3
million in 2001.  Research  and  development  as a percentage  of product  sales
decreased  from 18% in 1999, to 15% in 2000,  and increased to 18% in 2001.  The
decrease in 2000 is the result of reduced  spending on projects with longer time
horizons  as the  Company  emphasized  projects  that  appear  to  have  shorter
development  cycles,  and the  increase  in 2001 is a  result  of the  Company's
commitment to providing  cutting-edge  products for an increasingly  competitive
Sports  Medicine  environment.  Management  intends  to  continue  this level of
funding as our  commitment to our customers  requires  continuous  technological
advancement, but makes no assurances as to the Company's ability to do so.

                                       36
<PAGE>

PATENTS AND LITIGATION EXPENSE.  The Company's fees of $0.1 million in 2001 were
reduced significantly compared to fees of $0.3 million in 2000, and $2.1 million
in 1999.  The Company  incurred  legal fees to  prosecute  (and in one  instance
settle)  three patent  infringements  suits during 1999.  The patent  litigation
legal fees  incurred  during  1999,  2000 and 2001,  were part of the  Company's
efforts  to  protect  and  strengthen  its  proprietary   intellectual  property
position.  As these actions were not  generally as active in 2000 and 2001,  the
expenses were reduced.

OTHER INCOME AND EXPENSE.  Other income and expense  consists of interest income
and expense and  miscellaneous  expense and income items. The Company  generated
net  interest  income of $0.2 million in 1999,  $0.3  million in 2000.  Interest
income in 2001 was $0.2 million,  and interest  expense was $0.01 million,  with
net interest income remaining at $0.19 million.  A foreign currency  transaction
gain of $0.5  million  was  recorded  in "other  income" in 1999,  compared to a
foreign  currency  transaction  loss of $0.5  million  during 2000 and a gain of
$0.001 million in 2001.

INCOME TAXES. During 1999 both the US and Finnish operations had net losses with
no benefit recorded. The tax charge of $63,000 in 1999 represented an adjustment
to the net deferred tax asset.  In 2000 there were no charges as the Company had
a loss and there were no taxes  required.  During 2001, the tax charge of $5,553
was  due to  Finnish  taxes  from  a  previous  year.  Both  the US and  Finnish
operations had net losses with no benefit recorded.

NET  INCOME(LOSS).  The  Company  reported  net  losses of $12.5  million,  $4.6
million, and $2.5 million in 1999, 2000, and 2001, respectively.

RECENT ACCOUNTING PRONOUNCEMENTS

         In June 1998, the Financial Accounting Standards Board issued Statement
of  Financial   Accounting   Standards  No.  133,   "Accounting  for  Derivative
Instruments and Hedging Activities " (SFAS 133). SFAS 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
companies to recognize all  derivatives  as either assets or  liabilities on the
balance  sheet and measure  those  instruments  at fair  value.  Gains or losses
resulting from changes in the value of those derivatives would be accounted for,
depending  on the use of the  derivative  and  whether  it  qualifies  for hedge
accounting under SFAS 133.  Prospective  application of SFAS 133, as amended, is
required  commencing  with the first quarter of the fiscal year beginning  after
December 31, 2000, however, earlier application is permitted. The impact of SFAS
133 was not material to our  financial  position and results of  operations.  At
December 31, 2001, the Company had no derivative instruments.

         In June  2001,  the FASB  issued  SFAS No.  143,  Accounting  for Asset
Retirement  Obligations  (SFAS No.  143).  SFAS No. 143  requires the Company to
record the fair value of an asset  retirement  obligation  as a liability in the
period in which it incurs a legal  obligation  associated with the retirement of
tangible  long-lived  assets  that result  from the  acquisition,  construction,
development  and/or  normal  use of the  assets.  The  Company  also  records  a
corresponding asset which is depreciated over the life of the asset.  Subsequent
to the initial  measurement of the asset retirement  obligation,  the obligation
will be  adjusted  at the end of each  period to reflect the passage of time and
changes in the  estimated  future  cash flows  underlying  the  obligation.  The
Company is required to adopt SFAS No. 143 on January 1, 2003.

         In  July  2001,  the  Financial   Accounting   Standards  Board  issued
Statements  of Financial  Accounting  Standards No. 141,  Business  Combinations
("FAS 141") and No. 142,  Goodwill and Other Intangible  Assets ("FAS 142"). FAS
141  requires  all  business  combinations  initiated  after June 30, 2001 to be
accounted for using the purchase method.  Under FAS 142, goodwill and intangible
assets with indefinite lives are no longer  amortized but are reviewed  annually
(or more frequently if impairment  indicators  arise) for impairment.  Separable
intangible assets that are not deemed to have indefinite lives

                                       37
<PAGE>
will continue to be amortized  over their useful lives.  The Company is required
to adopt FAS 142 effective January 1, 2002. As of December 31, 2001, the Company
had net goodwill of $2,905,133  million.  For the year ended  December 31, 2001,
the Company  recorded  $1,034,030 of goodwill  amortization.  At this time,  the
Company  does not  believe  that the  adoption  of FAS 142 will have a  material
effect  on the  Company's  financial  position  or  results  of  operation,  but
understands  that  market  conditions  and other  uncertainties  may  change the
Company's exposure in the future.

         In  August  2001,  the  Financial  Accounting  Standards  Board  issued
Statements  of  Financial  Accounting  Standards  No.  144,  Accounting  for the
Impairment or Disposal of Long-Lived  Assets ("FAS 144").  FAS 144 requires that
long-lived  assets be  reviewed  for  impairment  whenever  events or changes in
circumstances  indicate  that  the  carrying  amount  of an  asset  may  not  be
recoverable.  Recoverability  of  assets  to be held and used is  measured  by a
comparison of the carrying  amount of an asset to future net cash flows expected
to be generated by the asset.  If the  carrying  amount of an asset  exceeds its
estimated future cash flows, an impairment charge is recognized by the amount by
which the  carrying  amount of the asset  exceeds  the fair  value of the asset.
Assets to be disposed of are  reported  at the lower of the  carrying  amount or
fair value less  costs to sell.  The  provisions  of FAS 144 are  effective  for
financial  statements issued for fiscal years beginning after December 15, 2001,
and  interim  periods  within  those  fiscal  years,   with  early   application
encouraged.  The  provisions  of  this  statement  generally  are to be  applied
prospectively.  At this time,  the Company does not believe that the adoption of
FAS 144 will have a  material  effect on the  Company's  financial  position  or
results  of  operation,   but  understand  that  market   conditions  and  other
uncertainties may change the Company's exposure in the future.

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 on
Form  10-K.  Product  sales for any  period are not  necessarily  indicative  of
product sales to be expected for any future period.

                                                      (in thousands)
2000
Quarter ended March 31................................   $ 4,971
Quarter ended June 30.................................     4,397
Quarter ended September 30............................     4,111
Quarter ended December 31.............................    $4,454

2001
Quarter ended March 31................................   $ 4,931
Quarter ended June 30.................................     4,763
Quarter ended September 30............................     4,347
Quarter ended December 31.............................    $4,631

         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.

                                       38
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

         Historically,   the  Company  has  relied  upon  bank  loans,   capital
contributions by its principal  stockholders  and government  grants to fund its
operations.

         The Company has relied  primarily  upon  external  (private and public)
sources of equity to fund operations and development. At December 31, 2001, cash
and cash equivalents  totaled $5.0 million,  which is a decrease of $2.0 million
from $7.0 million at December 31, 2000.  The decrease  from December 31, 2000 is
primarily  due  to  the  Company's  net  loss,   offset  by  non-cash   expenses
(depreciation,  amortization and consignment amortization) and capital spending.
At December 31, 2001, the Company had net working capital totaling $9.7 million,
or a 4:1 ratio of current assets to current liabilities.

         The  Company's  liquidity  is dependent  primarily  upon its ability to
improve   operating  results  and  thereby  generate  adequate  cash  flow  from
operations.  During 2001,  the Company  continued to implement its  initiatives,
begun in 2000, to refocus its business and reallocate critical resources. During
the third quarter ended  September  30, 2001,  the Company took a  restructuring
charge of $343 thousand. The charge related primarily to severance for sales and
order entry  personnel.  This reduction was made to eliminate  redundancies  and
streamline  operations.  Management has implemented  operation improvement plans
and during 2002 is  continuing  to focus on and evaluate  monthly the effects of
these initiatives.  These plans have included the addition of critical resources
in areas  that  will  have  the  greatest  impact  on sales  growth  and  profit
improvement;  consolidation of the sales organization  designed to improve sales
efficiencies,  increase market coverage, and reduce the Company's cost of sales;
reduction in sales administration to reduce the Company's overall selling costs;
a refocus of R&D  investments  on new product  introductions  that will  provide
complementary  product offerings;  consolidation of global inventories to reduce
the Company's  overall  investment in inventories and improve  customer  service
levels;  reduction in inventory  levels to improve  inventory turn rates thereby
reducing the  Company's  cash  requirements  to support  inventory  investments;
increases in sales and marketing efforts designed to expand sales  contributions
from markets outside of the US; and the  implementation  of surgeon  educational
programs  designed  to  increase  surgeon  awareness  and  use of the  Company's
products.  However,  there  can  be  no  assurance  that  these  steps  will  be
successful.  The  Company's  operations  may not provide  sufficient  internally
generated cash flows to meet the Company's projected requirements. The Company's
ability to  continue  to finance  its  operations  will depend on its ability to
achieve profitability by improving sales and margins, its ability to reduce cash
outflows  and,  if  necessary,  its ability to obtain  other  sources of funding
sufficient to support the Company's operations.  No assurances can be given that
such funding will be available on satisfactory terms or at all.

         On March 3, 2000, the Company completed a shareholder  rights offering,
pursuant to which it raised, net of expenses,  $3.9 million and issued 1,586,857
shares of Common Stock. The Company  distributed  0.173 of a subscription  right
for each share of Common Stock  outstanding  on the January 10, 2000 record date
for a total of 1,586,857 shares offered in the rights offering. The subscription
price of $2.55 per share was  established  by the Board of Directors  based on a
15% discount from the market price on January 14, 2000, at the time the offering
was priced.

         The Company believes that existing capital resources together with cash
flow from  operations  (if, and to the extent,  generated) will be sufficient to
fund its operations  during 2002. 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 the Company's  ability to
reverse recent trends and successfully  perform management  initiatives,  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

                                       39
<PAGE>

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.  The Company's
operations did not produce  positive cash flows during 1994,  1995,  1996, 1998,
1999,  or 2001,  with a  slight  increase  in 2000.  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  financing,  strategic  alliances with
corporate  partners  and  others,  or through  other  sources.  The terms of any
further equity  financing may be dilutive to  stockholders  and the terms of any
debt  financing  may contain  restrictive  covenants,  which limit the Company's
ability  to pursue  certain  courses of action.  The  Company  does not have any
committed  sources of financing  and there can be no assurance  that  additional
funding,  if  necessary,  will be  available  on  acceptable  terms,  if at all.
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.  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.
The  sufficiency  of the Company's  capital  reserves with respect to operations
beyond  December 31, 2001 will depend  primarily  upon the  Company's  operating
results and the extent to which such results are capable of funding  anticipated
growth.

         No assurances can be given that the Company's  initiatives  will result
in profitable operations in the future.

         The Company is owed  $0.441  million  from Bionix B.V. at December  31,
2001.  Sixty-eight  percent of Bionix  B.V.  stock is owned by related  parties.
Bionix B.V. beneficially owns 24.9% of the Company.

         The  Company  was able to make  substantial  improvements  in cash flow
management due to its continued efforts to complete the management  initiatives,
while  continuing to fund research and  development at 18% of sales during 2001.
This research  funding  consisted of investing in new treatment  modalities  and
product  development that does not result in dramatic sales increases  initially
and does not do so until products are released and gain market acceptance.

         The  Company's  total  use of cash  and cash  equivalents  for 1999 was
$11,026,881 and total  generation of cash and cash  equivalents  during 2000 was
$3,863,591. During 2001, cash and cash equivalent use was $2,064,590.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         The Company's  functional currency is the US dollar,  however,  because
the Company has revenues and expenses that are  Euro-denominated the Company may
seek to manage  its  foreign  currency  risk  through  the  purchase  of foreign
currency options and forward  contracts in the future.  During 2001, the Company
did not purchase financial  instruments to manage foreign currency risk. Foreign
exchange can currently  reduce annual income before taxes by  approximately  $50
thousand if the Euro  increases in value by 1% depending  upon the extent of the
Company's Euro  denominated  net expenses and/or net assets for the period under
evaluation. The Company may seek to manage its foreign currency risk through the
purchase  of foreign  currency  options  and  forward  contracts  in the future.
However,  there is a cost to such  hedging  and,  for 2001,  the Company did not
hedge such exposures. No assurances can be given that such hedging techniques if
implemented  will  protect the Company from  exposure  resulting  from  relative
changes in the economic strength of the Euro. Foreign exchange transaction gains
and losses can vary significantly from period to period.

                                       40
<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                                                42

Consolidated Balance Sheets as of December 31, 2000 and 2001                43

Consolidated Statements of Operations for the Years Ended
  December 31, 1999, 2000 and 2001                                          44

Consolidated Statement of Stockholders' Equity and Comprehensive
  Income for the Years Ended December 31, 1999, 2000 and 2001               45

Consolidated Statements of Cash Flows for the Years Ended
  December 31, 1999, 2000 and 2001                                          46

Notes to Consolidated Financial Statements                                  48

Schedule II - Valuation and Qualifying Accounts                             63


                                       41
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

 Board of Directors and Stockholders
 Bionx Implants, Inc.:

         We have audited the accompanying  consolidated  balance sheets of Bionx
Implants,  Inc.  and  subsidiaries  as of December  31,  2000 and 2001,  and the
related  consolidated   statements  of  operations,   stockholders'  equity  and
comprehensive  income  (loss),  and  cash  flows  for  each of the  years in the
three-year  period ended December 31, 2001. In connection with our audits of the
consolidated  financial  statements,  we  also  have  audited  the  accompanying
financial  statement  schedule.  These  consolidated  financial  statements  and
financial statement schedule are the responsibility of the Company's management.
Our  responsibility  is to express an  opinion on these  consolidated  financial
statements and financial statement schedule based on our audits.

         We conducted our audits in accordance with auditing standards generally
accepted in the United States of America.  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,  2000 and 2001,  and the
results  of their  operations  and their cash flows for each of the years in the
three-year period ended December 31, 2001, in conformity with generally accepted
accounting principles in the United States of America. Also, in our opinion, the
related 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 LLP



Philadelphia, Pennsylvania
February 22, 2002

                                       42
<PAGE>

                      BIONX IMPLANTS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 2000 AND 2001
<TABLE><CAPTION>
                                                                      DECEMBER 31,
                                                              ---------------------------
                                                                  2000           2001
                                                              ------------   ------------
<S>                                                           <C>            <C>
      Cash and cash equivalents............................   $  7,050,078   $  4,985,488
      Trade accounts receivable, net of allowance of             2,526,255      2,466,521
           $246,781 and $245,788 as of December 31,
           2000 and 2001, respectively.....................
      Inventory, net (note 3)..............................      4,679,082      3,703,947

      Grants receivable....................................        109,405         95,436
      Related party receivable (note 5)....................        402,400        528,542
      Other receivables ...................................         77,021          7,819
      Prepaid expenses and other current assets ...........        392,076        339,884
      Deferred tax asset...................................        797,908        797,908
                                                                   -------        -------
Total current assets.......................................     16,034,225     12,925,545

Plant and equipment, net (note 4)..........................      2,229,470      2,061,611
Goodwill, net (note 2)                                           3,102,091      2,905,133
Intangibles, net (note 2)..................................        812,949        922,386
                                                              ------------   ------------
Total assets...............................................   $ 22,178,735   $ 18,814,675
                                                              ============   ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
      Trade accounts payable...............................   $  2,672,316   $  1,776,719
      Long-term debt, current portion (note 7).............          7,007         34,811
      Accrued and other current liabilities (note 6).......      1,637,881      1,391,820
                                                              ------------   ------------
Total current liabilities..................................      4,317,204      3,203,350

Long-term debt (note 7)....................................        185,828        348,919
Subordinated debt (note 7).................................        145,233        145,233

Total liabilities..........................................      4,648,265      3,697,502
                                                              ------------   ------------

Commitments and contingencies (note 9).....................              -              -
                                                              ------------   ------------

Stockholders' equity (notes 8 and 10)
     Preferred stock, par value $0.001 per share,
          8,000,000 shares authorized,
          None issued and outstanding .....................              -              -

     Common stock, par value $0.0019 per share, 31,600,000
          shares authorized, 10,819,464 and 10,864,906
          shares issued as of December 31, 2000 and 2001,
          respectively.....................................         20,557         20,643

     Treasury stock, 2,779 shares as of December 31, 2001 .              -         (7,698)
     Additional paid-in capital............................     39,872,309     39,986,221
     Accumulated deficit...................................    (21,337,765)   (23,819,063)
     Amounts due from employees related to stock
       Purchases                                                         -        (38,299)
     Accumulated other comprehensive income................     (1,024,631)    (1,024,631)
                                                              ------------   ------------

Total stockholders' equity ................................     17,530,470     15,117,173
                                                              ------------   ------------

Total liabilities and stockholders' equity.................   $ 22,178,735   $ 18,814,675
                                                              ============   ============
</TABLE>
          See accompanying notes to consolidated financial statements.

                                       43
<PAGE>

                      BIONX IMPLANTS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                  YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
<TABLE><CAPTION>
                                                                        YEARS ENDED DECEMBER 31,
                                                              ------------------------------------------
                                                                  1999           2000           2001
                                                              ------------   ------------   ------------
<S>                                                           <C>            <C>            <C>
Revenues:
   Product sales.....................................         $ 20,450,448   $ 17,932,871   $ 18,671,969
   License and grant revenues (note 12)..............              617,716        298,913        215,750
                                                              ------------   ------------   ------------
           Total revenues............................           21,068,164     18,231,784     18,887,719
                                                              ------------   ------------   ------------

Cost of goods sold (note 3)..........................            5,857,189      8,299,048      5,927,197
Special charge related to instrument
    and implant inventory (note 3)                               6,241,000              -              -
                                                              ------------   ------------   ------------

Gross profit.........................................            8,969,975      9,932,736     12,960,522
                                                              ------------   ------------   ------------

Selling, general and administrative                             15,887,518     11,392,089     11,834,062
Research and development.............................            3,758,680      2,682,256      3,347,853
Restructuring costs, including severance charges,
  (note 16)                                                        296,082              -        342,739
Patents and litigation expense                                   2,141,332        333,782        104,857
                                                              ------------   ------------   ------------

Total operating expenses.............................           22,083,612     14,408,127     15,629,511
                                                              ------------   ------------   ------------

Operating loss.......................................          (13,113,637)    (4,475,391)    (2,668,989)
                                                              ------------   ------------   ------------

Other income and (expenses):
   Interest income ..................................              250,760        341,402        206,823
   Interest expense                                                 (3,258)        (8,278)       (12,130)
   Other, net........................................              466,197       (466,376)        (1,449)
                                                              ------------   ------------   ------------

   Total other income and (expenses), net                          713,699       (133,252)       193,244
                                                              ------------   ------------   ------------

Loss before provision for income
    Taxes                                                      (12,399,938)    (4,608,643)    (2,475,745)
Provision for income taxes (note 11)                               (63,175)             -         (5,553)
                                                              ------------   ------------   ------------

Net loss.............................................         $(12,463,113)  $ (4,608,643)  $ (2,481,298)
                                                              ============   ============   ============

Loss per share (note 2):
      Basic..........................................         $      (1.39)        $(0.44)        $(0.23)
      Diluted........................................                (1.39)         (0.44)         (0.23)
Shares used in computing Loss per share (note 2):
      Basic..........................................            8,942,866     10,503,316     10,832,080
      Diluted........................................            8,942,866     10,503,316     10,832,080
</TABLE>
          See accompanying notes to consolidated financial statements.

                                       44
<PAGE>

                      BIONX IMPLANTS, INC. AND SUBSIDIARIES

 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
                  YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
<TABLE><CAPTION>

                                                                                                       Accumulated
                                                                Amounts Due   Additional                  Other          Total
                           Number of  Common Stock  Treasury  From Employees   Paid-In   Accumulated  Comprehensive  Stockholder's
                             Shares   Par Value or   Stock      For Shares     Capital     Deficit        Loss           Equity
                          ----------------------------------------------------------------------------------------------------------
<S>                       <C>           <C>       <C>           <C>         <C>          <C>           <C>            <C>
Balance, December 31,
 1998                      8,922,076     $16,952   $(128,198)    $      -    $35,642,502  $(4,266,009)  $(1,024,631)   $30,240,616

Treasury stock purchased,
 6000 shares                       -           -     (33,497)           -              -            -             -        (33,497)

Exercise of incentive
 stock options               277,009         526           -            -        249,474            -             -        250,000

Comprehensive loss                 -           -           -            -              -   (12,463,113)           -    (12,463,113)
                          ----------------------------------------------------------------------------------------------------------
Balance, December 31,
 1999                      9,199,085     $17,478   $(161,695)    $      -    $35,891,976  $(16,729,122)  $(1,024,631)  $17,994,006

Net proceeds from rights
 offering                  1,586,857       3,015           -            -      3,937,153             -             -     3,940,168

Issue of shares to
 employee investment
 plan                         33,522          64     161,695            -         43,180             -             -       204,939

Comprehensive loss                 -           -           -            -              -    (4,608,643)            -    (4,608,643)
                          ----------------------------------------------------------------------------------------------------------
Balance, December 31,
 2000                     10,819,464     $20,557   $       -     $      -    $39,872,309  $(21,337,765)  $(1,024,631)  $17,530,470



New issue of shares to
 employee Investment
 plan                         45,442          86           -            -        113,912             -             -       113,998

Amounts due from employees
 related to stock
 purchases                         -           -           -      (38,299)             -             -             -       (38,299)

Acquisition of Treasury
 Stock, 2,779 shares               -           -      (7,698)           -              -             -             -        (7,698)

Comprehensive loss                 -           -           -            -              -    (2,481,298)            -    (2,481,298)
                          ----------------------------------------------------------------------------------------------------------
Balance, December 31,
 2001                     10,864,906     $20,643     $(7,698)    $(38,299)   $39,986,221  $(23,819,063)  $(1,024,631)  $15,117,173
                          ==========     =======     ========    =========   ===========  =============  ============  ===========
</TABLE>
          See accompanying notes to consolidated financial statements.

                                       45
<PAGE>

                      BIONX IMPLANTS, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
                  --------------------------------------------
<TABLE><CAPTION>

                                                                          YEARS ENDED DECEMBER 31,
                                                                ------------------------------------------
                                                                    1999           2000           2001
                                                                ------------   ------------   ------------
<S>                                                             <C>            <C>            <C>
Cash flows from operating activities:
  Net income (loss)..........................................   $(12,463,113)  $ (4,608,643)  $ (2,481,298)
                                                                ------------   ------------   ------------
  Adjustments to reconcile net income (loss) to
    Net cash (used in) provided by operating activities:
Depreciation and amortization................................      1,391,646      1,264,632      1,195,022
Consignment amortization.....................................        295,331        698,948        516,665
Deferred tax provision.......................................         63,175       (280,694)             0
Provision for bad debt.......................................        297,815       (193,917)          (993)
Change in assets and liabilities:
   Decrease in inventory (note 3)............................      1,708,775      2,395,852        458,470
   Decrease in accounts receivable, net                              805,394      1,207,733         60,727
   Decrease in grant receivable..............................         52,365         27,118         13,969
   (Increase) decrease in prepaid expense, related
     party and other assets..................................       (269,191)       362,798         (4,748)
   (Decrease) in accounts payable............................     (1,236,189)      (267,901)      (895,597)

   (Decrease) in current tax liability.......................       (577,673)             -              -
   Increase (decrease) in accrued and other
     Liabilities.............................................        582,299       (535,007)      (246,061)
                                                                ------------   ------------   ------------
Net cash provided by (used in) operating
   Activities................................................   $ (9,349,366)  $     70,919   $ (1,383,844)
                                                                ------------   ------------   ------------
</TABLE>

                                       46
<PAGE>

                      BIONX IMPLANTS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
                  --------------------------------------------

                                    CONTINUED
<TABLE><CAPTION>
                                                                    1999           2000           2001
                                                                ------------   ------------   ------------
<S>                                                             <C>            <C>            <C>
Cash flows from investing activities:
   Purchases of plant and equipment..........................   $ (1,192,436)  $   (251,702)  $   (662,903)
   Purchases of intangibles..................................       (619,583)      (405,431)      (276,739)
                                                                ------------   ------------   ------------

Net cash used in investing activities........................     (1,812,019)      (657,133)      (939,642)
                                                                ------------   ------------   ------------

Cash flows from financing activities:
   Proceeds from increase of long-term debt..................              -        304,698        195,137

   Repayment of long-term debt...............................        (81,999)             -         (4,242)
   Acquisition of treasury shares............................        (33,497)             -         (7,698)
   Proceeds from rights offering.............................              -      3,940,168
   Proceeds from employee investment plan....................              -        204,939         75,699
   Proceeds from exercise of employee
      stock options..........................................        250,000              -              -
                                                                ------------   ------------   ------------

Net cash provided by  financing activities...................   $    134,504   $  4,449,805   $    258,896
                                                                ------------   ------------   ------------

Net increase (decrease) in cash and
   cash equivalents..........................................   $(11,026,881)  $  3,863,591   $ (2,064,590)

Cash and cash equivalents at beginning of year...............   $ 14,213,368   $  3,186,487   $  7,050,078
                                                                ------------   ------------   ------------

Cash and cash equivalents at end of year.....................   $  3,186,487   $  7,050,078   $  4,985,488
                                                                ============   ============   ============

Supplemental disclosure of cash flow information:
Cash paid for interest.......................................   $      3,258   $      5,033   $      8,885
Cash paid for taxes..........................................   $    275,321   $          -   $      5,553
                                                                ============   ============   ============
</TABLE>

           See accompanying notes to consolidated financial statements

                                       47
<PAGE>


                      BIONX IMPLANTS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) ORGANIZATION

BUSINESS PURPOSE

         The  Company  is a leading  developer,  manufacturer  and  marketer  of
self-reinforced, resorbable polymer implants, including screws, pins and arrows,
for use in a variety of applications  which include  orthopedic 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 product  lines through  managed  networks of
independent agents, distributors and dealers.


(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.

         The Company estimates its Accounts Receivable reserves by analyzing its
accounts receivable outstanding for both domestic and international accounts. It
uses common factors such as days receivables outstanding and aging schedules and
estimates reserve percentages based on historical experience.

         The Company also uses estimates for its inventory reserve  methodology.
Implants  and  instruments  are first  reserved  for known  rejected or impaired
product. Next, reserves are estimated based on an aging analysis that takes into
account factors such as inventory dating and considers  technology  advancements
based on sales history.

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.

                                       48
<PAGE>

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 generally
established  for  excess and  obsolete  inventory  on a specific  identification
basis. The instrument inventory,  to the extent it is released on consignment to
dealers and distributors, is expensed in the period released.

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.  Software costs are stated at cost, and are amortized using
the straight-line method over 5 to 7 years. Leasehold improvements 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 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  intangibles  was  $748,026  and  $715,055  at  December  31,  2000 and 2001,
respectively.  Other  intangibles  are  patents  held by the  Company's  Finnish
subsidiary.  At December 31, 2001 net patents  were  $922,386,  and  accumulated
amortization related to patents was $715,055.

         The Company's policy is to evaluate the appropriateness of the carrying
value of the unamortized balances of intangible assets on the basis of estimated
future cash flows  (undiscounted) and other factors.  If such evaluation were to
indicate an impairment of these  intangible  assets,  such  impairment  would be
recognized by a write-down of the applicable  assets.  The Company  continues to
evaluate the continuing value of patents and patent  applications,  particularly
as expenses to  prosecute  or maintain  these  patents  come due.  Through  this
evaluation, the Company may elect to continue to maintain these patents, seek to
out-license them or abandon them.

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  $837,072   and   $1,034,030   at  December  31,  2000  and  2001,
respectively.  Goodwill was  $3,939,163  at December 31, 2000 and 2001.  In July
2001, the Financial  Accounting  Standards Board issued  Statements of Financial
Accounting  Standards No. 142, Goodwill and Other Intangible Assets ("FAS 142").
Under FAS 142,  goodwill  and  intangible  assets with  indefinite  lives are no
longer  amortized  but are reviewed  annually (or more  frequently if impairment
indicators  arise) for  impairment.  Separable  intangible  assets  that are not
deemed to have indefinite  lives will continue to be amortized over their useful
lives. The Company is required to adopt FAS 142 effective January 1, 2002. As of
December 31, 2001, the Company has net goodwill of $2,905,133.

                                       49
<PAGE>

CERTAIN RISKS AND CONCENTRATIONS

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

         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 was
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,  long term debt, and
accrued expenses  reported in the 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
their carrying value.

STOCK OPTION PLAN

         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 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.

         The Company  recognizes  revenue upon  shipment and passage of title of
its  products  to  customers.   Some  factors  considered  in  the  the  revenue
recognition policy are as follows:

     o     The arrangement to sell  to customers is  evidenced by  firm purchase
           orders. Title and the risks and rewards of ownership are transferred
           to the  customer  when  product is  shipped  under  the  terms of the
           purchase orders.

     o     Payment by the  customer is due under  fixed payment terms and if the
           sale  is to a distributor is  not contractually or implicitly delayed
           until product is resold by the distributor.

                                       50
<PAGE>


     o     Returns are only accepted at the discretion of the Company with a 20%
           restocking charge and historically have not been significant.

     o     The terms of  the Company's  sales to  customers  do not  involve any
           obligations for the Company to perform future services.

SHIPPING AND HANDLING COSTS

         The Company records shipping and handling costs in selling, general and
administrative  expenses  rather than as cost of sales.  Such costs  amounted to
$420,000, $459,000 and $413,000 in 1999, 2000 and 2001. Charges to customers for
shipping and handling are included in total  revenues.  In accordance  with EITF
00-10,  the Company has recorded all  shipping  and handling  costs  invoiced to
customers as revenue.

RESEARCH AND DEVELOPMENT

         All research and development costs are expensed as incurred.

OTHER INCOME AND EXPENSES

         Other Income and Expenses  includes  interest  income and the effect of
the  remeasurement of foreign currency  accounts of the Company's  subsidiary in
Finland.  Net foreign currency  remeasurement losses of $466,376 and $8,454 were
recorded in "other income and expenses" in 2000 and 2001, respectively.

FOREIGN CURRENCY TRANSLATION

         Effective January 1, 1998, the Company changed the functional  currency
of its Finnish subsidiary, from the Finnish Markka to the US Dollar. This change
arose  due  to  certain  changes  in the  economic  conditions  of  the  Finnish
operations.  The underlying  economic  factors,  which  influenced the Company's
decision to change the functional currency,  was derived from an analysis of the
indicators  outlined  in FAS 52,  Appendix  A. This  included an analysis of the
currency  denominations of the related assets, cash flows, revenues and expenses
of the Finnish operating  subsidiary.  The Company's Finnish  subsidiary changed
its local  currency to the Euro on January 1, 2002 but  continues  to use the US
Dollar as its functional currency.

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.

EARNINGS (LOSS) PER SHARE

         Basic earnings (loss) per share is computed using the weighted  average
number of shares of common stock outstanding during the period, giving effect to
any treasury  shares.  Diluted  earnings (loss) per share are computed using the
weighted average number of common

                                       51
<PAGE>

and potential  dilutive common shares  outstanding during the period. The shares
outstanding for basic and diluted  calculations were the same for 1999, 2000 and
2001, at 8,942,866, 10,503,316, and 10,832,080,  respectively, due to net losses
in these periods.  These net losses would make the exercise of any stock options
and warrants  anti-dilutive.  Potential  dilutive common shares consist of stock
options and warrants  using the treasury  stock method and are excluded if their
effect is antidilutive.

         During the year ended December 31, 2000 and 2001 there were 718,043 and
1,119,236 , respectively,  stock options that were considered  antidilutive and,
accordingly, excluded in the calculation of earnings (loss) per share.

RECLASSIFICATIONS

         Certain  amounts in the 1999 and 2000  financial  statements  have been
reclassified to conform to the current year presentation.


(3) INVENTORY

         Inventory consists of the following  components as of December 31, 2000
and 2001:

<TABLE><CAPTION>
                                                       2000          2001
                                                       ----          ----
<S>                                                <C>               <C>
Raw materials                                       $   745,191       691,990
Finished goods - Implants                             2,698,371     2,301,360
Instruments                                           3,854,701     3,381,145
Instruments on consignment                            2,494,858     2,268,588
                                                      ---------     ---------
                                                      9,793,121     8,643,083
Less:
      Inventory reserve for obsolete and excess
         Instruments and implants
                                                     (5,114,039)   (4,939,136)
                                                     -----------   ----------
                                                     $4,679,082    $3,703,947
                                                     ==========    ==========
</TABLE>

1999 INVENTORY CHARGES

         During  the  second  quarter of 1999,  the  Company  recorded a special
charge of $0.9  million  for excess  implant  and  instrument  inventory  due to
changes in technology  and the  introduction  of new and competing  instruments.
During the fourth  quarter,  this charge was  increased by $1.6 million as these
continued  changes in  technology  created  excess  inventory.  The  factors the
Company  examined  were  forecasted  months of inventory  supply,  the potential
changes in technology,  the expected  introduction of new and competing products
and the  expiration  dating of implants.  The specific  amount of the charge was
dependent on particular  inventory  items and an estimate of excess amounts that
would ultimately be disposed.

         Additionally,  in the fourth  quarter of 1999,  the Company  identified
certain  distributor  accounts  that had been  terminated by the Company and had
outstanding  inventory  balances.  The  Company  took as special  charges,  $0.4
million of gross implant inventory and $0.9 million of gross instrument that had
been placed with these distributors.  The terminated  distributors owed the full
amount of  consigned  product  back to the  Company  including  any  product the
distributor  may have used as samples  and did not report  this  activity to the
Company.  The  reference  "used as  samples"  means that  included in the amount
written off were  implants  the  consigned  distributor  placed  with  potential
customers. These charges reflected the ability in a cost effective manner

                                       52
<PAGE>

for the  Company  to  recover  the  consigned  inventory  or  amounts  due  from
terminated  distributors for consigned inventory  particulary in light of having
no future business relationship with such distributors.

         Also in the fourth quarter of 1999, the Company  changed its accounting
estimate for  instruments  consigned to hospitals which resulted in a net charge
of $2.4 million.  Since the Company could not control future purchases from such
hospitals  and it was cost  prohibitive  to return the  instruments  the Company
began  expensing  the  instruments  on the  initial  sales to the  hospital.  In
accordance  with APB Opinion 20, the Company  wrote off $4.0 million of hospital
gross  inventory  and added  back an  associated  $1.6  million  of  accumulated
amortization, for a net $2.4 million charge.

         In aggregate,  the foregoing  charges  resulted in a Special  Charge of
$6.2 million during 1999.

2000 INVENTORY CHARGES

         During the fourth  quarter of 2000,  the Company  took a charge of $1.5
million as a result of reduced forecasted sales of craniofacial products and, to
a lesser extent,  orthopedic trauma products combined with changes in technology
and the introduction of new and competing products. The reduced forecasted sales
were created by reduced sales personnel and market distribution  coverage of the
mentioned product lines.

(4) PLANT AND EQUIPMENT

         Plant and equipment consist of the following  components as of December
31, 2000 and 2001:

<TABLE><CAPTION>
                                                  2000                2001
                                                  ----                ----
<S>                                             <C>                  <C>
Machinery and production equipment              $ 2,776,541          $3,061,544
Construction in progress                              8,039             167,622
Furniture and fixtures                            1,129,181           1,152,352
Capitalized software costs                          611,625             701,036
Computer equipment                                  350,657             412,037
                                                    -------             -------
                                                  4,876,043           5,494,591
Less accumulated depreciation                    (2,646,573)         (3,432,980)
                                                 -----------         -----------
                                                $ 2,229,470          $2,061,611
                                                ===========          ==========
</TABLE>

                                       53
<PAGE>

(5) RELATED PARTY TRANSACTIONS

         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
$417,000,  $315,000 and $200,000  during the years ended December 31, 1999, 2000
and 2001  respectively,  consists of providing the  University  with  reasonable
compensation for University  resources (including graduate students) utilized by
the Company. In addition,  Dr. Tormala has a non-interest  bearing loan from the
Company.  As of December  31,  1999,  2000 and 2001,  the amount of the loan was
$36,180 for expenses paid on his behalf.

         During 1998 the Company made advances of $9,158 (50,000 Finnish Markka)
on behalf of a related party,  Bioabsorbable  Concepts,  Inc., which is owned by
certain  shareholders,  directors,  and officers of the Company. This amount was
outstanding  as of December  31,  1998,  1999,  2000 and  2001.The  total amount
outstanding at December 31, 2001 was $50,800.  The Company's Finnish  subsidiary
is charging Bioabsorbable Concepts,  Inc., for research and development projects
on an ongoing basis.

         The  Company  has paid  certain  administrative  expenses  on behalf of
Bionix B.V., which is owned by certain shareholders,  directors, and officers of
the Company.  The loan amounts outstanding were $259,311,  $357,062 and $441,562
as of December 31, 1999,  2000 and 2001,  respectively.  Sixty-eight  percent of
Bionix B.V. stock is owned by related  parties.  Bionix B.V.  beneficially  owns
24.9% of the Company.

                                       54
<PAGE>

(6) ACCRUED AND OTHER CURRENT LIABILITIES

         Accrued  and  other  current   liabilities  consist  of  the  following
components as of December 31, 2000 and 2001:

<TABLE><CAPTION>

                                                   2000              2001
                                                   ----              ----
<S>                                            <C>                 <C>
Commissions..............................      $     42,466        $   68,692
Royalties................................           284,211           202,341
Wages and Benefits.......................           552,826           522,678
Taxes withheld...........................           111,100            47,909
Interest.................................             5,547             6,835
Professional fees........................            57,715           103,355
Research.................................           215,487            77,991
Severance *..............................                 -           157,954
Patents..................................            67,080            79,325
Returns and Allowances...................            31,352            15,000
Employee Investment Plan.................            81,062                 -
Other....................................           189,035           109,740
                                               ------------       -----------
                                               $  1,637,881       $ 1,391,820
                                               ============       ===========
</TABLE>

* The severance is related to a restructuring charge during the third quarter
  of 2001.  See Note 16 - `Restructuring'

(7) LONG-TERM DEBT

           Long-term debt consists of the following components as of December
31, 2000 and 2001:


                                       2000             2001
                                       ----             ----

Subordinated                       $  145,233        $ 145,233
debt
Long-term loans                       192,835          383,730
                                      --------         -------
                                      338,068          528,963
Less current portion                   (7,007)         (34,811)
                                  ------------         --------
                                    $ 331,061        $ 494,152
                                    =========        =========

Long-term debt represents the following:

          (1)   Subordinated  debt, from  the  National  Technology  agency,  is
                borrowed at an interest rate of 1% below the agency's short term
                base rate of 4.5% at  December 31, 2001. The  amount is  165,660
                Euro, equivalent to 145,233 US dollars  at December 31, 2001 and
                are due in annual installments  through 2006, commencing January
                1, 2003. The loan is subordinated to long-term debt.
          (2)   Long-term loans represent the aggregate of such loans payable to
                the National Technology  agency at an  interest rate of 3% below
                the agency's short-term  base rate  of 4.5% at December 31, 2001
                and are due in annual installments through 2006.

                                       55
<PAGE>

(8) COMMON STOCKHOLDERS' EQUITY

         During the fourth  quarter of 1998,  the  Company's  board of directors
announced a buy-back  program to repurchase  its common stock from time to time.
During 1998 and 1999,  the Company  repurchased  20,500  shares and 6,000 shares
respectively for a purchase price of $128,198 and $33,497,  respectively.  These
shares were purchased by and issued to employees under the Bionx Investment Plan
during 2000 and 2001, see Note 13.

         On March 3, 2000, the Company completed a shareholder  rights offering,
pursuant to which it raised $4,046,485  (before deducting  expenses of $109,332)
and issued 1,586,857 shares of Common Stock. The Company  distributed 0.173 of a
subscription right for each share of Common Stock outstanding on the January 10,
2000 record date for a total of 1,586,857 shares offered in the rights offering.
The  subscription  price of $2.55  per  share  was  established  by the Board of
Directors  based on a 15% discount from the market price on January 14, 2000, at
the time the offering was priced.

(9) COMMITMENTS AND CONTINGENCIES

         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:
------------------------

         2002                                  $445,722
         2003                                  $283,397
         2004                                  $171,584
         2005                                  $171,996
         2006                                  $175,292

         Rental  expense for the years ended  December 31,  1999,  2000 and 2001
aggregated $421,609, $377,599 and $382,542 respectively.


(10) 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  that may be
issued under the Option Plan, as amended,  cannot exceed 850,000 shares. On June
9, 2000 an amendment to the plan was adopted  with  shareholder  approval to the
effect  that the  number of common  shares  that may be issued  under the Option
Plan, as amended,  cannot exceed 850,000 shares plus an annual increase equal to
the lesser of 5% of the annual  outstanding shares (on a non-diluted basis) or a
number of shares to be  determined  by the Board of  Directors.  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, 2001,  there were 810,723  additional  shares available
for grant under the 1996 Option Plan. The per share  weighted-average fair value
of stock  options  granted  in 1999,  2000 and 2001 was  $2.47,  $1.66 and $2.64
respectively, on the date of grant using the

                                       56
<PAGE>

         Black Scholes option-pricing model with the following  weighted-average
assumptions for the years ended December 31:


                                    1999            2000          2001
                                    ----            ----          ----

Risk-free interest rate             6.25%           5.77%          5.49%
Expected dividend yield             -               -              -
Volatility of stock price          100.0%           91.6%           113%
Expected life of options             3.5             3.5            3.5


         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:

<TABLE><CAPTION>
                                                 1999              2000              2001
                                                 ----              ----              ----
<S>                                         <C>                <C>               <C>
Net income (loss):
           As reported                      $(12,463,113)      $(4,608,643)      $(2,481,298)
           Pro forma                        $(12,768,154)      $(4,951,068)      $(2,764,619)

Basic earnings (loss) per common share:
           As reported                          $(1.39)          $(0.44)           $(0.23)
           Pro forma                            $(1.43)          $(0.47)           $(0.26)

Dilutive earnings (loss) per common share:
           As reported                          $(1.39)          $(0.44)           $(0.23)
           Pro forma                            $(1.43)          $(0.47)           $(0.26)

</TABLE>











                                       57
<PAGE>



         A summary of activity  under the 1996 Option Plan from  January 1, 1998
to December 31, 2001 is as follows:

<TABLE><CAPTION>
                                                                                                  RANGE OF EXERCISE
                                                                       SHARES                      PRICES PER SHARE
                                                                       ------                      ----------------
<S>                                                                    <C>                        <C>
Balance, December 31, 1997............................                  658,726                    $0.90 -   $25.00

  Granted.............................................                   91,350                     6.38 -    22.00
  Exercised...........................................                   (5,264)                    4.75 -     9.50
  Forfeited...........................................                 (240,210)                    4.75 -    25.00
                                                                      ---------               ---------------------
Balance, December 31, 1998.................                             504,602                     4.75 -    25.00

  Granted.............................................                  507,500                     2.38 -     5.50
  Exercised...........................................                 (277,009)                        0.9025
  Forfeited...........................................                  (17,050)                   15.50 -    22.00
                                                                      ---------               ---------------------
Balance, December 31, 1999.................                             718,043                     2.38 -    22.00

  Granted.............................................                  290,891                     2.77 -     4.68
  Exercised...........................................                        -                          -
  Forfeited...........................................                 (203,896)                    3.19 -    22.00
                                                                      ---------               ---------------------
Balance, December 31, 2000............................                  805,038                     2.77 -    22.00

  Granted...........................................                    520,697                     1.13 -     3.10
  Exercised.........................................                         -                           -
  Forfeited..........................................                  (206,499)                    1.13 -    22.00
                                                                      ---------               ---------------------
     Balance
Balance, December 31, 2001                                            1,119,236                      $1.13 - $22.00
                                                                      ---------

Shares exercisable at December 31, 2001                                 214,076
                                                                      ---------
</TABLE>

         The  following  table  summarizes   information   about  stock  options
outstanding under the 1996 Option Plan at December 31, 2001:

<TABLE><CAPTION>
                                      OPTIONS OUTSTANDING                                   OPTIONS EXERCISABLE
                       -----------------------------------------------                  ----------------------------
                                           Weighted
                                           Average            Weighted                                     Weighted
     Range of                             Remaining            Average                                      Average
     Exercise             Number         Contractual          Exercise                    Number           Exercise
      Prices            Outstanding      Life (Years)           Price                   Exercisable          Price
      ------            -----------      ------------           -----                   -----------          -----
<S>                      <C>                <C>              <C>                          <C>                <C>
  $ 1.13 - 2.77           546,342            4.7              $  2.58                           0            $    0
    3.05 - 3.31           201,279            8.9                 3.18                      57,760              3.16
    4.06 - 4.75           336,699            7.7                 4.16                     133,400              4.13
    6.38 - 22.00           34,916            6.6                11.01                      22,916             11.52
                        ---------                                                         -------

  $1.13 - 22.00         1,119,236            6.4              $  3.42                     214,076            $ 4.66
                        =========                                                         =======
</TABLE>

(11) INCOME TAXES

         At December 31, 2001,  the Company and its  subsidiaries  had available
U.S.  federal  net  operating  loss   carryforwards   ("NOL")  of  approximately
$8,100,000  and U.S.  state net operating loss  carryforwards  of  approximately
$2,600,000  for income tax  reporting  purposes,  which are  available to offset
future  federal  and  state  taxable  income,  if any,  through  2011 and  2006,
respectively.  Additionally,  the Company had an NOL of approximately $5,700,000
for foreign  income tax purposes  which is available  to offset  future  foreign
taxable income, if any, through 2011.

                                       58
<PAGE>

         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.  As  defined  by the Act the  utilization  of a
corporation's  net operating loss  carryforward  is limited  following a greater
than 50% change in  ownership.  Due to the  Company's  prior and current  equity
transactions,  the Company's net operating loss  carryforwards may be subject to
an  annual  limitation  generally  determined  by  multiplying  the value of the
Company on the date of the ownership change by the federal  long-term tax exempt
rate. Any unused annual  limitation  may be carried  forward to future years for
the balance of the net operating loss carryforward period.

         Income tax expense  attributable to the income (loss) before  provision
for taxes was $63,175, $0 and $5,553 for the years ended December 31, 1999, 2000
and 2001,  respectively,  and differed from the amounts computed by applying the
U.S.  federal  income tax rate of 35 percent to pretax income (loss) as a result
of the following:

<TABLE><CAPTION>
                                                     1999                2000             2001
                                                  -----------------------------------------------
<S>                                              <C>                 <C>              <C>
Computed "expected tax (benefit) expense         ($4,362,090)        ($1,613,028)     ($  866,504)
Increase (reduction) in income taxes
Resulting from:
  Difference in the foreign tax rates                  21,78              45,770          821,862
    and other, net
  Net change in the valuation allowance for
    deferred tax assets                            4,308,076           1,463,323          (36,240)
  Permanent Items                                    115,011             103,935           86,435
                                                  -----------------------------------------------
Income tax expense (benefit)                      $   63,175          $     --         $    5,553
                                                  ===============================================
</TABLE>


         The income tax expense for the years ended December 31, 1999, 2000, and
2001 relates to the foreign operations of the Company.  There were no federal or
state income taxes in the United  States for the years ended  December 31, 1999,
2000 and 2001 due to the operating losses in such jurisdictions.

Income tax expense consisted of the following:

<TABLE><CAPTION>
                                                        1999              2000            2001
                                                  -----------------------------------------------
<S>                                               <C>                 <C>              <C>
Current provision                                 $     --            $  280,694       $    5,553
Deferred (benefit) expense                            63,175            (280,694)               0

                                                  -----------------------------------------------
Total income tax (benefit) expense                $   63,175          $     --         $    5,553
                                                  ===============================================
</TABLE>
                                       59
<PAGE>


         The tax effects of temporary  differences that give rise to significant
portions of the Federal,  foreign and state  deferred tax assets at December 31,
2000 and 2001 are presented below:

                                                2000                  2001
                                            ---------------------------------
Deferred tax assets:
  Net operating loss carryforwards          $ 2,663,772           $ 4,622,344
  Research and development costs                109,890                60,848
  Accrued expenses and reserves               3,520,010             3,391,051
   Depreciation and other                     1,692,142                65,362
                                            -----------           -----------
  Total gross deferred tax assets             7,985,814             8,139,605
  Less valuation allowance                   (7,187,906)           (7,341,697)
                                            -----------           -----------
Net deferred tax assets                     $   797,908           $   797,908
                                            ===========           ===========


         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,  2000 and  2001.  The total
valuation  allowance  increased  by  $648,701  and $ 153,791 for the years ended
December 31, 2000 and 2001, respectively.

         A net  deferred  tax asset of $ 797,908 was  established  for the prior
year net operating loss carryforward  since it is the opinion of management that
the Company will more likely than not be able to realize this benefit.

(12) LICENSE AND GRANT REVENUE

         The Company has  applied  for grants  from the  Finnish  government  to
conduct  research  on  resorbable  polymers.  The  revenue  from such grants was
$617,716,  $298,913 and $215,750 for the years ended December 31, 1999, 2000 and
2001,  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.

(13) EMPLOYEE BENEFIT PLANS

         The Company provides a 401(K) Retirement Plan (The Bionx Implants, Inc.
401(K)  Retirement  Savings  Plan)  for all  full-time  U. S.  based  employees.
Employees  can  contribute  up to 15% of their  total W-2  income.  The  Company
matches 20% of the first 6% of defined income that the employee contributes. The
Company's  contributions  were  $22,927,  $20,431 and $21,080 in 1999,  2000 and
2001, respectively.

         During 2000 the Company  established The Bionx  Investment Plan for all
full time  employees.  Employees may purchase  Common Stock at fair market value
during 15 day window periods established by the Board of Directors,  intended to
be at six month intervals. For each share purchased the employee will be granted
between one and three stock options with an exercise  price equal to fair market
value, a term of 10 years and a vesting period of 2 years; assuming the employee
remains employed by the Company for these periods.  During the window periods in
2000,  options  were  issued on a one option  for one share  basis for the first
period and a two options for one share basis for the second  period.  During the
one window  period in 2001,  options  were issued on a two options for one share
basis.

                                       60
<PAGE>

(14) QUARTERLY FINANCIAL SUMMARY
(IN THOUSANDS)
<TABLE><CAPTION>
                                     1st Quarter        2nd Quarter         3rd Quarter        4th Quarter
                                     -----------        -----------         -----------        -----------
<S>                                      <C>                <C>                 <C>              <C>
2000
           Revenue                       $5,076             $ 4,466             $4,254           $ 4,436
           Gross Profit                  $3,355             $ 2,776             $2,884           $   918
           Net Loss                      $ (376)            $  (784)            $ (867)          $(2,582)
           EPS:
                     Basic               $(0.04)            $ (0.07)            $(0.08)          $ (0.25)
                     Diluted             $(0.04)            $ (0.07)            $(0.08)          $ (0.25)

2001
           Revenue                       $4,981             $ 4,842             $4,387           $ 4,678
           Gross Profit                  $3,434             $ 2,953             $3,177           $ 3,397
           Net Loss                      $ (568)            $(1,120)            $ (979)          $   187
           EPS:
                     Basic               $(0.05)            $ (0.10)            $(0.09)          $  0.02
                     Diluted             $(0.05)            $ (0.10)            $(0.09)          $  0.02
</TABLE>

         The Company  recorded a charge of $1.5 million in the fourth quarter of
2000 for excess  inventory.  A fourth  quarter charge in 1999 of $6.2 million is
included in Special Charges related to Inventory. See Note 3 to the Consolidated
Financial Statements.

(15)  SEGMENT INFORMATION

         The Company  has one  business  segment -  bioabsorbable  implants  and
instruments for surgical use in bone and bone to soft tissue procedures.  During
1999, 2000 and 2001, international product sales represented  approximately 18%,
18%, and 21% respectively, of the Company's total product sales.

PRODUCT SALES
(IN THOUSANDS)
                                                   Year ended December 31,
                                              ---------------------------------
                                                1999          2000       2001
                                              --------      --------   --------

Third party sales (by location of customer)

           United States                      $ 16,743      $ 14,634   $ 14,748
           All other countries                   3,707         3,299      3,924
                                              ---------------------------------

Total Sales                                   $ 20,450      $ 17,933   $ 18,672
                                              ========      ========   ========


LONG LIVED ASSETS
(IN THOUSANDS)                                      December 31,
                                              ----------------------
                                                2000          2001
                                              --------      --------

           United States                      $  3,806      $  3,510

           All other countries                   2,338         2,379
                                              --------      --------

Total long lived assets                       $  6,144      $  5,889
                                              ========      ========

                                       61
<PAGE>

(16) RESTRUCTURING

         During the third quarter ended  September 30, 2001,  the Company took a
restructuring charge of $342,739.  The charge related primarily to severance for
sales  and  order  entry  personnel.   This  reduction  was  made  to  eliminate
redundancies and streamline operations.


                                   SCHEDULE II

                          FINANCIAL STATEMENT SCHEDULE
                      BIONX IMPLANTS INC. AND SUBSIDIARIES

                        VALUATION AND QUALIFYING ACCOUNTS
              FOR THE YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
              ----------------------------------------------------


                              INVENTORY RESERVES    ACCOUNTS RECEIVABLE RESERVES


Balance as of 12/31/1998         $   975,325                $   142,883
Expenses                           8,144,000                    471,393
Deductions                        (5,323,262)                  (173,578)
                                 -----------                -----------
Balance as of 12/31/1999           3,796,063                    440,698
Expenses                           2,936,959                     42,817
Deductions                        (1,618,983)                  (236,734)
                                 -----------                -----------
Balance as of 12/31/2000           5,114,039                    246,781
Expenses                             604,513                     27,331
Deductions                          (779,416)                   (28,324)
                                 -----------                -----------

Balance as of 12/31/2001         $ 4,939,136                $   245,788
                                 ===========                ===========





                                       62
<PAGE>

ITEM  9. CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
         FINANCIAL DISCLOSURE

         Not applicable

                                    PART III

ITEM 10. DIRECTORS OF THE REGISTRANT

         The registrant  incorporates by reference herein  information set forth
in its definitive  proxy  statement for its 2002 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 2002 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 2002 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 2002 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)  See Item 8 for the financial statement schedule.

                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. (A)
 3.2            Bylaws of the Registrant. (A)
 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 Employment Agreement between the Registrant's Subsidiary
                and Pertti Tormala, as amended. (1)
 10.4           Form of Proprietary Information and Inventions Agreement. (1)

                                       63
<PAGE>

 10.5           Investors' Rights Agreement, dated as of September 6, 1996,
                between the Registrant and certain holders of the Registrant's
                securities. (1)
 10.6           Stock  Purchase Agreement  between the Registrant and purchasers
                of the Company's Preferred Stock and Warrants. (1)
 10.7*          License  Agreement between  the Registrant's Subsidiary and Saul
                N. Schreiber. (1)
 10.8*          License  Agreement  among  the  Registrant's  Subsidiary, Pertti
                Tormala, Markku Tamminmaki and Menifix I/S.(1)
 10.9*          Licensing, Manufacturing and Distribution Agreement among the
                Registrant's Subsidiary, Pertti Tormala and various Danish and
                Finnish inventors.(1)
 10.10          Amended and reinstated Shareholders' Agreement, dated as of
                October 1, 1998 among Bionix, B.V. and certain shareholders of
                the Company, is incorporated by reference herein to the
                Registrant's Annual Report on Form 10-K for the year ended
                December 31, 1999.
 10.11          Headquarters Lease. (1)
 10.12          Security Agreements and Secured Promissory Note. (1)
 10.13          Agreement between the Company and certain executives
 21.1           List of Subsidiaries. (1)
 23.1           Consent of KPMG LLP
 24.1           Power of Attorney
 99.1           Information Regarding Forward-Looking Statements

(A)   Incorporated  by  reference to  the  applicable  exhibit set  forth in the
      Registrant's Quarterly Report on Form 10-Q for the Quarter ended September
      30, 1999.

(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, 2001, the  Company did not file any
      Current Reports on Form 8-K.


                                       64
<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 27th
day of March, 2002.


                                    BIONX IMPLANTS, INC.


                                    By: /s/ Gerard S. Carlozzi
                                        ----------------------------------------
                                         Gerard S. Carlozzi
                                         (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/Gerard S. Carlozzi          President, Chief Executive        March 29,  2002
---------------------------    Officer and Director
Gerard S. Carlozzi             (Principal Executive Officer)


/s/ David J. Bershad *         Director                          March 29,  2002
---------------------------
David J. Bershad


/s/ Anthony J. Dimun *         Director                          March 29,  2002
---------------------------
Anthony J. Dimun


/s/ Pertti Tormala *           Director                          March 29,  2002
---------------------------
Pertti Tormala


/s/ Terry D. Wall *            Director                          March 29,  2002
---------------------------
Terry D. Wall


/s/ Drew Karazin *             Chief Financial Officer           March 29,  2002
---------------------------
Drew Karazin



*  By:  /s/ Gerard S. Carlozzi
      ---------------------------
      Gerard S. Carlozzi
      Attorney in Fact


                                       65