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 31,1998.

[ ]  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)

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

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

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

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

                               Title of each class

                    Common Stock, par value $.0019 per share

          Indicate  by check  mark  whether  the  registrant  (1) has  filed all
reports  required to be filed by Section 13 or 15(d) of the Securities  Exchange
Act of 1934 during the preceding 12 months (or for such shorter  period that the
registrant  was required to file such  reports) and (2) has been subject to such
reporting requirements for the past 90 days.

                             Yes X           No____

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

          Aggregate  market value of voting stock held by  non-affiliates  as of
February 5, 1999 was approximately $27,259,060.

  Number of shares of Common Stock outstanding as of February 5, 1999: 8,901,576

          Documents  incorporated by reference:  Definitive  proxy statement for
the registrant's 1999 annual meeting of shareholders (Part III).


<PAGE>


                              BIONX IMPLANTS, INC.

                                TABLE OF CONTENTS

                                     PART I
                                                                        Page

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

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

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

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

Item 4A       Executive Officers of the Registrant.......................24

                                     PART II

Item 5        Market for the Registrant's Common Equity and 
              Related Stockholder Matters................................26

Item 6        Selected Financial Data....................................27

Item 7        Management's Discussion and Analysis of Results of 
              Operations and Financial  Condition........................29

Item 7A       Quantitative and Qualitative Disclosures About Market Risk.36

Item 8        Financial Statements and Supplementary Data ...............37

Item 9        Changes in and Disagreements with Accountants 
              on Accounting and Financial Disclosure.....................37

                                    PART III

Item 10       Directors of the Registrant................................38

Item 11       Executive Compensation.....................................38

Item 12       Security Ownership of Certain Beneficial 
              Owners and Management......................................38

Item 13       Certain Relationships and Related Transactions.............38

                                     PART IV

Item 14       Exhibits, Financial Statements Schedules and 
              Reports on Form 8-K........................................38

Signatures    ...........................................................40



<PAGE>


Item 1.  Business of the Company

Introduction

          Bionx  Implants,  Inc. (the  "Company",  "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.  See Note 1 of the Notes to the  Company's
Consolidated Financial Statements.

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

Overview

         The  Company  is a leading  developer,  manufacturer  and  marketer  of
Self-Reinforced, resorbable polymer implants, including screws, pins, arrows and
stents, for use in a variety of applications which include orthopaedic  surgery,
urology and  cranio-facial  surgery.  The  Company's  proprietary  manufacturing
processes self-reinforce a resorbable polymer, modifying the gel-like or brittle
polymer  structure into a  physiologically  strong  structure  with  controlled,
variable  strength  retention  (ranging from three weeks to six months depending
upon the medical indication). The Company currently markets its products through
a hybrid sales force comprised of a managed network of independent  sales agents
and direct sales  representatives in the U.S., and independent  distributors and
dealers in markets  outside of the U.S.  The  Company's  twelve  product  lines,
representing  more  than  150  distinct  products,   were  designed  to  address
recognized  clinical  needs.  The Company  estimates that its products have been
used in over  270,000  surgeries  worldwide.  The  Company has  received  510(k)
clearance  from the U.S.  Food and Drug  Administration  (the "FDA") for the ten
product  lines  that it  currently  markets  in the U.S.  The  Company  has also
received  regulatory  approvals  for its product  lines in certain  European and
Asian markets.

Background

         The human  skeletal  system is  comprised  of bone,  connective  tissue
(ligaments  and tendons) and cartilage.  Bone,  which provides the basic support
for the body, may sustain damage by traumatic incident,  degenerative disease or
surgical  procedures  designed  to  repair  or  correct  skeletal  abnormalities
(osteotomy).  As a result of the high  vascularity  of bone, the healing of bone
requires only that the fractured  sections be in close  proximity to each other.

<PAGE>

Bone heals through a process that involves  structural  stress,  either  through
load-bearing or use,  resulting in the replacement of old, damaged bone with new
healthy tissue.  Healing of bone in healthy individuals generally requires three
to 20 weeks, with the fastest healing occurring in children.

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

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

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

Traditional Approaches to Fixation

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

          Rigid Internal Fixation

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

<PAGE>

          Connective Tissue Fixation

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

          Cartilage and Cartilaginous Tissue Repair

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

Limitations of Traditional Approaches

          Metal Implants

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

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

          First Generation Resorbable Implants

          Resorbable   fixation  devices  were  developed  in  response  to  the
limitations of metal fixation devices. The first generation of these devices was
introduced  in Europe in the  mid-1980s  and in the U.S. in the late 1980s.  The
majority of these devices are either  brittle or overly  flexible as a result of
the  processes,   such  as  injection  molding,  which  may  be  used  in  their

<PAGE>

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

Self-Reinforced, Resorbable Implants

          The Company has developed a variety of proprietary  resorbable polymer
fixation implant product lines,  including screws, pins, tacks, arrows,  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 gel-like or brittle
structure  into  a  physiologically  strong  polymer  implant  with  controlled,
variable strength retention  (ranging from three weeks to six months,  depending
upon the medical  indication) which can be used safely and reliably in a variety
of  applications,  including  orthopaedic  surgery,  urology  and  cranio-facial
surgery.

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

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

Products

          The Company currently  markets twelve product lines  representing more
than 150 distinct products. The Company's product lines are described below:


<PAGE>

<TABLE>
<CAPTION>

              -------------------------------- ------------------------------ --------------------
               Product Lines                    Targeted Indications(1)        Regulatory Status

<S>            <C>                              <C>                            <C>    
               Fracture Fixation:
                        SR PLLA Pins            Fractures/Osteotomies          Marketed Worldwide
                        SR PLLA Screws          Fractures/Osteotomies          Marketed Worldwide
                        SR PGA Pins             Fractures/Osteotomies          Marketed Worldwide
                        SR PGA Screws           Fractures/Osteotomies          Marketed Worldwide

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

               Cranio-Facial Fixation
                        SR-PDLA Screws         Mid-face Correction             Marketed Worldwide
                        SR-PDLA Plates         Mid-face Correction             Marketed Worldwide
                        SR-PDLA Screw          Endo-brow Lifts                 Marketed Worldwide

               Urology Stents:
                        SR-PGA Stents           Post Benign Prostatic          Marketed Outside U.S.
                                                Hyperplasia Swelling

                        SR-PLGA Stents          Benign Prostatic               Marketed Outside U.S.
                                                Hyperplasia Prophylaxis        FDA Submission Expected
                                                                                 in 1999(2)
</TABLE>

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

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

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

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

<PAGE>


          PLLA and PGA Pins

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

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

          PLLA and PGA Screws

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

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

          Meniscus Arrows

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

<PAGE>

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

          PLLA Tacks

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

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

          PLLA Bankart Tacks

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

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

<PAGE>

         Cranio-Facial 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. As a result, foreign body metallic properties continue to remain in
the  body.  At  present,  there  are no  absolute  answers  regarding  long-term
(25-year)  viability.  This  environment  creates a  surgical  receptiveness  to
resorbable  fixation  implants  in  pediatric  and adult  craniofacial  surgery,
provided  the  products  are  comparable  to  titanium in  mechanical  strength,
biocompatability and cost.

         The Company's 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.


         Urology Stents

         Benign prostatic  hyperplasia ("BPH"), a common condition in older men,
is characterized by the non-cancerous  enlargement of the prostate gland,  which
can block the normal flow of urine.  The  treatment  of BPH  typically  involves
either invasive surgical techniques and/or drug therapies.  Invasive techniques,
including the use of lasers,  microwave or RF energy and other surgical options,
are designed to remove a portion of the obstructive  tissue,  thereby enabling a
return to normal urine flow.  However,  patients must typically  accept urethral
catheterization,  together with its discomfort  and associated  risks of urinary
tract  infections,  following these  procedures--often  for prolonged periods of
time.  Patients  receiving  drug therapy for BPH must accept a  continuation  of
their symptoms,  often for many months,  before the effect of the drug treatment
becomes  noticeable.  Efforts to address these problems have focused on the need
for temporary  prostate stents to relieve short term obstructive  symptoms,  but
the experience to date with metallic and various non-resorbable stents have been
marked by removal difficulties,  stent dislocation,  and various negative tissue
reactions to these non-resorbable materials.

         In response to the needs in the market,  the Company has  developed the
first resorbable,  self-expanding  stent for use in urological  procedures.  The
Company's  resorbable  prostate  stents  are used to  improve  urine  flow-rates
whenever  the  temporary  relief of BPH  symptoms  is needed.  The design of the
Company's  stent  allows it to be easily  inserted  under  direct  vision with a
cystoscope,  making the device  suitable for both  hospital as well as physician
office use. The  self-expanding  nature of the Company's  stent fixes the device
firmly in the prostate to prevent the problems of  dislocation so prevalent with
previously marketed temporary stents.

         In various clinical  studies,  the Company's  prostate stents have been
shown to enable  patients  to avoid  the need for  catheterization  following  a
variety of surgical  procedures,  to achieve  relief from their  symptoms  while
waiting for a therapeutic  procedure,  and to improve symptoms while waiting for
BPH drug therapy to become effective. The Company's prostate stents are approved
for sale in most international  markets, and plans are underway to release these
stents for  distribution  internationally.  In the US, the FDA has  advised  the
Company that its urology stent will require  approval under the FDA's  Premarket
Approval ("PMA") process,  which is generally more expensive and  time-consuming
than the FDA's 510(k)  Premarket  Notification  process.  The  Company's  stents
cannot be marketed or sold in the U.S.  until approval is obtained from the FDA.
See "Government Regulation."

<PAGE>

         Instrumentation

         The Company, with the assistance of certain contract manufacturers, has
developed a series of instrumentation  systems designed for use with each of the
Company's  product lines.  The Company  distributes its  instruments  both on an
instrument-by-instrument  basis or in kits.  The implant grade  stainless  steel
instruments are manufactured by third-parties  and are designed  specifically to
enable implantation of a particular product  manufactured by the Company. All of
the  Company's  currently  distributed  instrumentation  systems  are  reusable.
Accordingly, 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  on a  consignment  basis to  customers  that  commit  to a certain
purchase level of implant  products.  The instruments are loaned to customers on
the basis of a one year  consignment  policy.  The costs of such instruments are
amortized  over their  estimated  useful life.

Geographic Information

         For geographic  information  regarding the Company,  see Note 14 of the
Notes to the Company's Consolidated Financial Statements.

Product Development

         The Company's product  development efforts focus upon expanding the use
of the Company's  platform  technology to address the limitations of traditional
surgical  techniques  and  existing  implants.  To  date,  all of the  Company's
implants  sold in the U.S.  have  been  cleared  through  the  510(k)  Premarket
Notification process. However, lengthier and more costly PMA submissions will be
required  in order to  obtain  approval  to sell  urological  stents  and may be
required for other new products in the U.S.  The Company  incurred  research and
development expenses of $459,666,  $871,101 and $2,360,485 during 1996, 1997 and
1998, respectively.

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


<PAGE>

<TABLE>
<CAPTION>

                                          Clinical                                     Estimated              Clinical/Regulatory
         Product                         Indication                   Patients         Duration                    Status(1)

      ORTHOPAEDICS

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

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

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

PLLA Wedge                 High tibial osteotomy (leg)                   25               TBD         Commenced in 1997
                           ACL fixation (knee)                           20            complete       510(k) to be submitted in 1999

PLLA Screw/Washer          Rotator cuff repair (shoulder)                25              12-30        To commence in 1999

PLLA/PDLA Anchor           Bankart tears and rotator cuff                *                 *          510(k) clearance received 4/98


           UROLOGY

PGA Stent                  Lumen support post BPH treatment             TBD               TBD         PMA  required; IDE to be filed
                                                                                                      1999

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

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

       GENERAL SURGERY

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

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

CRANIO-FACIAL SURGERY

PDLA Screw and Plate       Mid-face corrections                          50            complete       510(k) clearance received 9/98
                           Cranial facial fractures                      10            complete       510(k) clearance received 2/99
PLGA Plate                 Cranial-facial fractures                      26            complete       Enrollment  commenced    1997,
                                                                                                      510(k) submission in 1999
</TABLE>

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

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


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


          Intramedullary Nails. To treat fractures of the forearm and humerus in
children,  pediatric  surgeons  currently use flexible stainless steel wire as a
substitute for nails in order to avoid damaging the growth plates in either bone
of the forearm.  While these wires are less  invasive  and do not  stress-shield
growing  bones as do metal  plates and  screws,  they may be  difficult  for the
pediatric  surgeon to  manipulate  in the small bones of a child and may require
removal in the future. To respond to the needs of pediatric surgeons for a fast,
easy to use and safe  procedure  to manage  forearm  and  humeral  fractures  in
children  while  avoiding  the need to remove  metal  implants,  the Company has

<PAGE>

developed and tested in  preclinical  studies a resorbable  intramedullary  nail
made of  poly-dl-lactic  acid ("PDLA").  The Company believes that PDLA implants
were chosen due to their greater  tortional  strength,  higher  flexibility  and
faster absorption rates than PLLA implants.  These performance  characteristics,
particularly rapid, safe absorption,  are important in children because of their
rapid  growth  and the  traumatic  impact on  children  of  surgically  removing
permanent  implants.  Based on the elimination of the need for removal  surgery,
the Company believes that its intramedullary nails are a superior alternative to
current  techniques  for the  fixation of displaced  fractures in the  pediatric
forearm.  Preclinical  studies have  demonstrated  that the use of the Company's
resorbable implants in the intramedullary canal do not create local inflammation
or interfere with the normal healing process.

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

         Product  development  involves a high  degree of risk.  There can be no
assurance  that the Company's new product  candidates in various early stages of
development  will prove to be safe and  effective,  will  receive the  necessary
regulatory  approvals  or will  ultimately  be  commercially  successful.  These
product candidates will require substantial  additional  investment,  laboratory
development,  clinical  testing and FDA or other agency  approval prior to their
commercialization. The Company's inability to successfully develop and introduce
these  product  candidates  on a  timely  basis  or at all,  or  achieve  market
acceptance  of such  products,  could  have a  material  adverse  effect  on the
Company's business, financial condition and results of operations.

Sales, Marketing and Distribution

         The Company sells its products  through a hybrid sales force  comprised
of  a  managed   network  of   independent   sales   agents  and  direct   sales
representatives in the U.S., and independent distributors and dealers in markets
outside of the U.S. In the U.S., the Company manages a network of agents who are
responsible for particular orthopaedic products and territories. In managing its
U.S.  network,  the  Company  maintains a direct  relationship  with its medical
community  customers by handling  all  invoicing  functions  directly and paying
commissions to its sales agents.  The Company  supports its U.S. managed network
of sales agents with an in-house  staff of trainers and managers who  supplement
the work of the sales agents,  providing  training to orthopaedic  surgeons with
respect to the features  and  modalities  applicable  to  particular  resorbable
implant  products.  In certain  geographic  areas,  which are  characterized  by
unusual demographic or competitive factors, the Company has hired its own direct
sales  force.  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.

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

<PAGE>

resorbable  polymeric  materials and products.  Substantially all aspects of the
manufacturing process are subject to, and are designed to comply with, the FDA's
Good Manufacturing  Practices ("GMP")  requirements.  The facility is subject to
inspection by the FDA and European regulatory agencies. The Company has received
a  European  Community  ("EC")  Design  Examination  and  an EC  quality  system
Certificate  and is  entitled  to  affix a CE  marking  on all of its  currently
marketed  orthopaedic,   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. Microbial testing of the
final product is contracted  to an  FDA-registered  facility in the U.S. Much of
the machinery  utilized by the Company in the  manufacturing  process was either
created by the  Company's  technical  team or has been  modified by that team to
meet the Company's requirements.

          The raw  materials  for the  Company's  PLLA  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  contracts  with any of such  suppliers,
although it is currently  negotiating a supply agreement with its principal PLLA
supplier.  In the  event  that  the  Company  is  unable  to  obtain  sufficient
quantities  of such raw  materials on  commercially  reasonable  terms,  or in a
timely manner,  the Company would not be able to  manufacture  its products on a
timely and cost-competitive  basis which, in turn, would have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition,  if any of the raw materials for the Company's PLLA products are no
longer  available  in the  marketplace,  the Company  would be forced to further
develop its technology to incorporate alternate components. The incorporation of
new raw materials  into the Company's  existing  products  would likely  require
clearance  or  approval  from the  FDA.  There  can be no  assurance  that  such
development would be successful or that, if developed by the Company or licensed
from third parties,  devices containing such alternative materials would receive
FDA clearance on a timely basis, or at all.

          The Company  intends to establish  manufacturing  capabilities  in the
U.S. in order to increase  its  manufacturing  capacity for its existing and new
products.  The Company  anticipates  that it will either (i) equip and operate a
leased  facility in the  eastern  U.S.  or (ii)  contract  with a third party to
provide a  manufacturing  capability  to the Company.  The Company  presently is
exploring both of these  alternatives.  If the Company chooses to use a contract
manufacturer,  the Company would likely equip the manufacturer's  facility, with
the objective of ultimately  transitioning to a Company-owned or  Company-leased
facility.  The Company believes that on an interim basis, contract manufacturing
may  enable  the  Company  to save  certain  staffing  costs and  enable  senior
management  to focus on other  aspects  of its  business;  however,  savings  in
staffing  costs may be outweighed by fees payable to the contract  manufacturer.
The foregoing  statement  regarding  such plans  constitutes  a  Forward-Looking
Statement.  Actual timing could differ materially from such plans as a result of
a number of  factors,  including  the  availability  of trained  personnel,  the
availability of necessary  resources,  space location  factors and other factors
cited in this  paragraph.  While the  Company's  plans may  change,  the Company
anticipates that once full  manufacturing  commences in the U.S.  facility,  the
Company  will  seek to  manufacture  the  Company's  entire  product  line  both
domestically  and abroad.  There can be no  assurance  that the Company will not
encounter  difficulties in scaling up production in the U.S., including problems
involving  production  yield,  quality  control and  assurance,  and shortage of
qualified  personnel.  In  addition,  the U.S.  facility  will be subject to GMP

<PAGE>

regulations,  international  quality  control  standards  and  other  regulatory
requirements.  Difficulties encountered by the Company in manufacturing scale-up
or the failure by the Company to establish  and  maintain  the U.S.  facility in
accordance with such  regulations,  standards or other  regulatory  requirements
could entail a delay or termination  of production,  which could have a material
adverse  effect on the Company's  business,  financial  condition and results of
operations.  The Company  continues  to upgrade  its  production  machinery  and
processes in Finland to address increased demand. No assurance can be given that
the integration of these machines into the production  process will occur within
the  scheduled  time frame or will not result in  difficulties  in scale-up that
could lead to delays in filling orders in the future.

Licenses, Trade Secrets, Patents and Proprietary Rights

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

          The Company's  patent strategy has been to seek patent  protection for
the technologies that produce the Company's  Self-Reinforced  resorbable polymer
products and, when available,  for the products themselves.  The Company owns or
has  licenses  to  patents  issued in the United  States and in various  foreign
countries and has patent applications  pending at the U.S. PTO and in the patent
offices of various foreign countries.  The Company's four principal U.S. patents
(two of which are owned by the  Company  and two of which  are  licensed  to the
Company on an  exclusive  basis)  will  expire  between  2004 and 2008.  The two
principal   U.S.   patents  owned  by  the  Company   relate  to  the  Company's
Self-Reinforced  resorbable polymer products,  the Company's  sintering process,
and resorbable  polymer products produced from the Company's  controlled drawing
process.  The Company has  received a notice of  allowance  for its U.S.  patent
application  that relates to the  Company's  resorbable  stent  technology.  The
Company's  other  patents  and patent  applications  relate to various  uses for
Self-Reinforced  resorbable polymers,  either alone or in combination with other
resorbable polymers or biocompatible  materials,  and generally involve specific
applications  or  improvements  of the  technologies  disclosed in the Company's
principal  patents and patent  applications.  European  counterparts  to the two
principal  U.S.  patents  that  are  owned  by  the  Company  and  the  Japanese
counterpart  to  one  such  patent  are  currently  the  subject  of  opposition
proceedings.  In addition,  the Japanese counterpart to another of the Company's
U.S. patent applications is being opposed.  The Company is vigorously  defending
its European and Japanese patent  positions in these  proceedings.  One of these
European  patents was revoked by the European  Patent Office for lack of novelty
based on an earlier publication.  The Company successfully appealed the European
Patent  Office's  revocation  decision and has had that patent  reinstated.  The
other European patent and the Japanese patent  applications are being challenged
on lack of novelty and inventiveness grounds on the basis of disclosures made in
patent and other  publications.  The  validity of the  European  patent has been
recently upheld by the European Patent Office.  This favorable decision has been
appealed and no assurance  can be given that this decision will not be reversed.
Further,  no  assurance  may be given as to the outcome of the pending  Japanese
opposition  proceedings.  In order  to  clarify  and  confirm  its  U.S.  patent
position,  the  Company  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 the patent
describing  the  self-reinforcing  method  used  in  approximately  98%  of  the
Company's existing products. The second reexamination is still proceeding.  This
second reexamination is expected to continue at least through the fourth quarter
of 1999 and could extend beyond that date.  Such  reexamination  could result in
some or all of the patent claims set forth in this U.S.  patent being altered to
provide narrower coverage or determined to be unpatentable.  No assurance can be
given as to the outcome of the ongoing reexamination  process.  Narrowing of the
coverage or a holding of  unpatentability  of this U.S. patent may significantly
ease entry to the U.S. market for the products of the Company's  competitors and
could  have a  material  adverse  effect on the  Company's  business,  financial
condition and results of operations.

          The Company has 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 is vigorously  seeking
both monetary and  injunctive  relief from the third party.  The third party has
asserted  that this  patent is  invalid,  unenforceable  and not  infringed.  No

<PAGE>

assurance  can be given that the Company will be  successful in this lawsuit and
that the patent will not be held to be invalid,  unenforceable or not infringed.
If the patent is held to be invalid,  unenforceable or not infringed,  the third
party will be able to continue  selling its  self-reinforced  devices,  and this
could  have a  material  adverse  effect on the  Company's  business,  financial
condition and results of operations.

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

          Additionally, the Company 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.  This license agreement  requires the Company to pay periodic royalties
to the licensor,  Saul N. Schreiber,  M.D., an orthopaedic  surgeon. The license
has a term  expiring in 2006,  unless  terminated  earlier by the  licensor  for
breach by the Company.  In 1998,  the Company paid or accrued a liability to the
licensor for approximately $400,000 in royalties under this license agreement on
U.S.  Meniscus  Arrow  sales  of  approximately  $12  million.  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 has 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.  The Company is vigorously  seeking both monetary and injunctive relief
from both third  parties.  Both third  parties have asserted that this patent is
invalid,  unenforceable  and not  infringed.  No assurance can be given that the
Company will be  successful in this lawsuit and that the patent will not be held
to be  invalid,  unenforceable  or not  infringed.  If the  patent is held to be
invalid,  unenforceable  or not  infringed,  the third  parties  will be able to
continue  selling their devices for the fixation of meniscal  lesions,  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
patents are issued in the U.S., or  corresponding  applications are published in
foreign  countries,  and since  publication  of discoveries in the scientific or
patent  literature often lags behind actual  discoveries,  the Company cannot be
certain that it was the first to make its  inventions,  or that it was the first
to file patent applications for such inventions.

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

<PAGE>

terms  acceptable  to  the  Company  or  that  the  Company  would  be  able  to
successfully redesign its products or processes to avoid such patents. In either
such case, such inability could have a material  adverse effect on the Company's
business, financial condition and results of operations.

          Legal  standards  relating to the scope of claims and the  validity of
patents in the medical device field are still evolving,  and no assurance can be
given as to the degree of  protection  any patents  issued to or licensed to the
Company would provide.  The medical device  industry has been  characterized  by
extensive litigation  regarding patents and other intellectual  property rights,
and companies in the medical device industry have employed intellectual property
litigation  to  gain  competitive  advantage.   The  Company  has  initiated  an
opposition  in the  European  Patent  Office  challenging  the  grant of a third
party's  European  patent  relating  to  a  drawing  process  for  manufacturing
resorbable  polymer products.  Subsequently,  another company has instituted its
own opposition against that patent. These oppositions resulted in the revocation
of that patent. The third party has appealed, and no assurance can be given that
this favorable decision will not be reversed.  If an appeal is successful,  then
no assurance can be given that the third party will not assert that its European
patent is infringed by sales of one or more of the Company's  products or by the
practice of one or more of the Company's processes in any of the eight countries
identified in the European patent.  The Company has also initiated an opposition
in the European Patent Office  challenging the grant of a third party's European
patent  relating to a bioabsorbable  membrane.  This opposition will 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  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 is currently  prosecuting three patent  infringement cases
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.  Through  December
31,  1998,  the  Company has  incurred  approximately  $350,000  relating to the
prosecution of these matters.

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

Competition

          Competition in the medical device industry is intense both in the U.S.
and  abroad.  In  orthopaedics,  the  Company's  principal  competitors  are the
numerous  companies  that sell metal  implants  The  Company  competes  with the
manufacturers  and  marketers  of  metal  implants  by  emphasizing  the ease of
implantation of the Company's  Self-Reinforced,  resorbable  implants,  the cost
effectiveness  of such products and the elimination of risks associated with the
failure to perform  removal  surgeries.  Within the resorbable  implant  market,

<PAGE>

Johnson & Johnson and Biomet sell an FDA-cleared  resorbable  product for use in
the  fracture  fixation  market.  Smith  &  Nephew,  U.S.  Surgical,  Zimmer  (a
subsidiary  of Bristol  Myers-Squibb),  Howmedica  (a  division  of Pfizer)  and
Synthes have reported that they are developing  resorbable products for internal
fixation. The Company is competing with Johnson & Johnson and expects to compete
with the other  manufacturers of resorbable  internal fixation devices primarily
on the basis of the  physiological  strength of the  Company's  polymers and the
length of the strength retention time demonstrated by the Company's products.

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

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

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

         The  medical  device  industry  is   characterized   by  rapid  product
development  and  technological  advancement.  The Company's  products  could be
rendered  noncompetitive  or obsolete by technological  advancements made by the
Company's current or potential  competitors.  There can be no assurance that the
Company  will be able to  respond  to  technological  advancements  through  the
development and  introduction of new products.  Moreover,  many of the Company's
existing  and  potential   competitors  have  substantially  greater  financial,
marketing,  sales,  distribution and  technological  resources than the Company.
Such existing and potential  competitors may be in the process of seeking FDA or
other regulatory approvals, or patent protection,  for their respective products
or may also enjoy  substantial  advantages over the Company in terms of research
and development expertise,  experience in conducting clinical trials, experience
in regulatory matters,  manufacturing  efficiency,  name recognition,  sales and
marketing  expertise or the  development  of  distribution  channels.  Since the
Company's  products  compete with procedures  that have, over the years,  become
standard within the medical  community,  there also can be no assurance that the
procedures  underlying the Company's resorbable products will be able to replace
more  established  procedures  and products.  There can be no assurance that the
Company  will  be  able  to  compete  successfully  against  current  or  future
competitors or that  competition  will not have a material adverse effect on the
Company's business, financial condition and results of operations.

Government Regulation

         United States.  Products manufactured or marketed by the Company in the
U.S. are subject to  extensive  regulation  by the FDA.  Pursuant to the Federal
Food,  Drug and  Cosmetic  Act,  as  amended,  and the  regulations  promulgated
thereunder (the "FDC Act"), the FDA regulates the clinical testing, manufacture,
labeling,  distribution  and promotion of medical  devices.  Noncompliance  with
applicable  requirements  can result in, among other things,  warnings  letters,

<PAGE>

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
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.

<PAGE>

         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 orthopaedic products
and to date has not  required  extensive  preclinical  or clinical  testing with
respect to biocompatibility as a condition of granting 510(k) clearance to those
products. In certain submissions for orthopaedic products,  the Company obtained
clearance  within  90 days of  submission.  Other  submissions  by the  Company,
however,  have taken  longer.  The FDA has advised the Company  that its urology
stent will require PMA approval. There can be no assurance that the FDA will not
determine that other products  currently in development by the Company or future
products  must also undergo the more costly,  lengthy and uncertain PMA approval
process or that the FDA's  familiarity with the Company's  polymers will shorten
the FDA's review time or reduce testing requirements for either 510(k) clearance
or PMA approval.

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

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

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

         From  time  to  time  the FDA has  made  changes  to the GMP and  other
requirements  that increase the cost of compliance.  Changes in existing laws or

<PAGE>

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  structure  which the  Company  has elected to follow)
establish and maintain a complete  quality system for design and  manufacture as
described  in Annex II of the MDD  (this  corresponds  to a quality  system  for
design  described in ISO 9001 and EN 46001  standards).  The Notified  Body must
audit this quality system and determine if it meets the requirements of the MDD.
In addition,  the Notified Body must approve the specific  design of each device
in class III. The Company  received an EC Design  Examination  and an EC quality
system  Certificate  from a Notified  Body on January 23,  1997.  As part of the
design  approval  process,  the Notified Body must also verify that the products
comply with the Essential Requirements of the MDD. In order to comply with these
requirements, the Company must, among other things, complete a risk analysis and
present  sufficient  clinical  data.  The clinical data presented by the Company
must provide  evidence  that the products  meet the  performance  specifications
claimed by the Company,  provide sufficient  evidence of adequate  assessment of
unwanted  side-effects and demonstrate that the benefits to the patient outweigh
the risks  associated with the device.  The Company will be subject to continued
supervision  by the  Notified  Body and will be  required  to report any serious
adverse  incidents  to the  appropriate  authorities.  The Company  also will be
required to comply with  additional  national  requirements  that are beyond the

<PAGE>

scope of the MDD.  The  Company is  entitled to affix a CE marking on all of its
currently  marketed  orthopaedic,  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 would have a material adverse effect on
the Company's business, financial condition and results of operations.

Product Liability and Insurance

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

<PAGE>

Employees

         As of December 31, 1998, the Company employed 105 full-time  employees;
49 full-time employees in the U.S. and 56 full-time employees in Finland. Of its
full-time  employees,  at that date 34 were engaged in sales and  marketing,  18
were engaged in research, development, regulatory and quality assurance matters,
32  were  engaged  in  manufacturing  and  21  were  engaged  in  financial  and
administrative services. The Company also contracts with independent consultants
from time to time. The Company's  Finnish  production  and office  employees are
members of a union and the terms of their  employment  are governed in part by a
collective  bargaining  agreement.   The  Company  believes  that  it  maintains
satisfactory relations with its employees.

Item 2.  Properties

         The Company currently operates two facilities,  a central manufacturing
facility in Tampere,  Finland  that is part owned and part leased by the Company
and office space in Blue Bell,  Pennsylvania that is leased by the Company.  The
Finnish facility,  comprising approximately 18,000 square feet, is located in an
industrial  science  park  adjacent  to the  Technical  University  at  Tampere.
Currently, that facility houses the Company's manufacturing, quality control and
product  development  functions  and serves as the Company's  European  customer
service and  central  shipping  location.  The Company  operates  its  corporate
headquarters,  its  executive  offices  and its  worldwide  marketing  and sales
operations from its 13,500 square foot office space in Pennsylvania.  The annual
rent on these facilities is  approximately  $395,000.  In addition,  in order to
establish a U.S.  manufacturing  presence,  the Company anticipates that it will
either (i) equip and  operate a leased  facility  in the  eastern  U.S.  or (ii)
contract  with a third  party  to  provide  a  manufacturing  capability  to the
Company. No specific site has been selected. See "Business--Manufacturing".

Item 3.  Legal Proceedings

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

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

         Not applicable.


Item 4A.  Executive Officers of the Registrant

         The Company's executive officers, their respective ages (as of December
31, 1998) and their positions with the Company are set forth below:

<TABLE>
<CAPTION>

Name                               Age                                      Position

<S>                                   <C>                                                  
David W. Anderson                     46    President, Chief Executive Officer and Director
Pertti Tormala                        53    Executive Vice President, Research and Director
Michael J. O'Brien                    38    Vice President, Finance and Administration, and Chief Financial Officer
Pertti Viitanen                       48    Managing Director of the Company's Finnish subsidiary
Gerald Carlozzi                       43    Vice President, Product Development
James Hogan                           42    President, Urology and Non-Vascular Stenting Division
Gregory S. Jones                      41    Vice President, Marketing
Stephen A. Lubischer                  36    Vice President, U.S. Sales - Orthopaedics Division
Michael F. Matz                       40    Vice President, Sales - Craniofacial Division

</TABLE>

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

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

         Michael  J.  O'Brien  joined  the  Company  in  November  1996  as Vice
President, Finance and Administration, and Chief Financial Officer. From January
1996 to October 1996, Mr.  O'Brien  served as a financial  consultant to Biocyte
Corporation and Immunotherapy,  Inc. From July 1993 to January 1996, Mr. O'Brien
was the Chief  Financial  Officer,  and from  December  1994 to January 1996 Mr.
O'Brien  was the  President  and  acting  Chief  Executive  Officer,  of Biocyte
Corporation,  a biopharmaceutical  company engaged in stem cell transplantation.
From  September  1986 to February  1993, he held senior  finance and  operations
positions at domestic and international sites with The Ultimate  Corporation,  a
computer systems  reseller,  and from February 1993 to July 1993, he served as a
consultant to The Ultimate Corporation.  From September, 1983 to September 1986,
he was an auditor with the public accounting firm of Deloitte & Touche.

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

         Gerard  S.  Carlozzi  joined  the  Company  in  November  1998  as Vice
President of Product Development. 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  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 Director of Research and Development and
General Manager for the Spinal Products Group, he held positions responsible for
Research & Development, Sales and Marketing,  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 Research & Development, Marketing and Sales for Infusaid
Corporation,  a manufacturer of implantable drug delivery systems.  From 1974 to
1979, he held various  product  development  positions for Boston Gear Works, an
industrial manufacturer of power transmission products.

         James Hogan joined the Company in November, 1998 as President,  Urology
and Non-Vascular Stenting Division.  Prior to joining Bionx Implants,  Mr. Hogan
was President and CEO of ArgoMed,  Inc., a privately held urology device company
since March 1997. From August,  1993, until March 1997 he was the Vice President

<PAGE>

of Marketing and International  Operations for Iotek, a drug delivery company in
Switzerland.  Prior to Iotek,  Mr. Hogan spent 12 years in urology with American
Medical Systems, in a variety of sales and marketing positions, based at various
US and international locations.

         Greg  Jones  joined  the  Company  in June  1998 as Vice  President  of
Marketing. From 1991 to 1998, Mr. Jones was employed by Linvatec Corporation,  a
subsidiary of Conmed. At Linvatec,  Mr. Jones held numerous marketing positions,
the last of which was the Director of Global  Marketing.  In that  position,  he
managed the  Arthroscopy and Hall  Surgical/Powered  Instrument  groups.  He was
responsible for product  management,  product  disclosures,  medical  education,
conventions, consultant relationships,  training, advertising and promotion, and
various other product management functions.  From 1986 to 1991, Mr. Jones worked
in product  management,  national account sales, field sales and market research
for Smith & Nephew United, a wound management company. From 1983 to 1986, Mr.
Jones was a financial analyst for Paradyne Corporation.

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

         Michael F. Matz joined the Company in September 1997 as Vice-President,
Sales - Craniofacial Division.  Prior to joining the company, Mr. Matz served as
Vice President,  Business Unit Director of Anspach Fixation Systems,  a division
of The Anspach Effort,  Inc., a privately held medical instrument  manufacturer.
Anspach  Fixation   Systems   manufactured   and  globally   marketed   titanium
craniomaxillofacial   implants.   The  technology  was  acquired  in  1994  from
Techmedica,  Inc  where  Mr.  Matz  co-developed  and  initiated  the  company's
Craniofacial Division in 1989. Prior to launching Techmedica  Craniofacial,  Mr.
Matz  held  sales  and  sales  management   positions  with  Zimmer  and  Baxter
Healthcare.


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




                                     PART II

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

         (a) Market and Dividend Information

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

<TABLE>
<CAPTION>


                                                                                              High                  Low


<S>                       <C> <C>                                                              <C>                 <C>   
Second Quarter Ended June 30, 1997...............................                           $20.00              $10.50
Third Quarter Ended September 30, 1997...........................                            29.75               16.00
Fourth Quarter Ended December 31, 1997..........................                             26.50               20.00

First Quarter Ended March 31, 1998..................................                         31.88               17.88
Second Quarter Ended June 30, 1998...............................                            24.94               15.00
Third Quarter Ended September 30, 1998...........................                            16.63                5.50
Fourth Quarter Ended December 31, 1998..........................                             10.88                4.88
</TABLE>


<PAGE>

         As of February  5, 1999,  there were 71  stockholders  of record of the
Company's Common Stock.  The Company  estimates that as of such date, there were
approximately  2,930  beneficial  owners  of  its  Common  Stock,   although  no
assurances can be given with respect to the accuracy of this estimate.

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

         (b) Use of Proceeds

         The  Company's  initial  public  offering  was  effected  pursuant to a
registration  statement on Form S-1 (No.  333-22359)  declared  effective by the
Securities and Exchange  Commission  (the "SEC") on April 24, 1997. The offering
commenced  on April 25,  1997 and  terminated  after all  securities  were sold.
Pursuant to Rule 463, the following  information  is presented to supplement the
related information set forth in the Company's prior public reports.

         (i) From April 25, 1997 through December 31, 1998, the Company has used
the  following  amount of the net proceeds  from such offering for the following
categories enumerated by the SEC:

<TABLE>
<CAPTION>

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

<S>                                                                                <C>         
Construction of plant, building and facilities                                     $      1,241
Purchase and installation of machinery and equipment                                      1,290
Purchases of real estate                                                                      -
Acquisition of other businesses                                                               -
Repayment of indebtedness                                                                   695
Working capital                                                                           2,398
Short term investments                                                                   14,910

</TABLE>

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

Item 6.  Selected Financial Data

         The following  consolidated selected financial data is qualified in its
entirety by, and should be read in conjunction  with,  "Management's  Discussion
and  Analysis  of  Financial  Condition  and  Results  of  Operations"  and  the
Consolidated  Financial  Statements  and  the  related  Notes  thereto  included
elsewhere in this Annual Report.  The Consolidated  Statement of Operations data
for the  years  ended  December  31,  1996,  1997 and 1998 and the  Consolidated
Balance  Sheet data as of December  31, 1997 and 1998 are derived  from  audited
Consolidated  Financial  Statements  of the Company  included  elsewhere in this
Annual Report. The Consolidated Statement of Operations data for the years ended
December 31, 1994 and 1995 and the  Consolidated  Balance Sheet data at December
31,  1994,  1995  and 1996  are  derived  from  audited  consolidated  financial
statements not included in this Annual Report.


<PAGE>

<TABLE>
<CAPTION>

                                                                                         Years Ended December 31,
                                                                    ----------------------------------------------------------------
                                                                       1994           1995          1996           1997       1998
                                                                                  (In thousands except per share amounts)

<S>                                                                  <C>            <C>            <C>        <C>             <C>   
Consolidated Statement of Operations Data:
Revenues..................................................           $1,280         $1,622         $5,379     $16,014       $21,100
Gross Profit..............................................              804          1,084          3,165      12,336        16,573
Operating Expenses........................................              883          2,439          7,819      10,579        15,320
Operating income (loss)...................................              (79)        (1,355)        (4,654)      1,757        1,253
Net income (loss).........................................             (162)        (1,478)        (4,992)      2,158        1,261
Earnings (loss) per share(1):
     Basic................................................                                         (0.89)        0.28         0.14
     Diluted..............................................                                         (0.89)        0.25         0.14
Shares used in computing earnings (loss) per share(1):
     Basic................................................                                         5,621        7,787        8,918
     Diluted..............................................                                         5,621        8,526        9,243

                                                                                             December 31,
                                                                   -----------------------------------------------------------------
                                                                       1994           1995           1996        1997       1998
                                                                       ----           ----           ----        ----       ----

Consolidated Balance Sheet Data:
Working capital (deficit).................................          $  (164)       $  (576)       $ 2,046      $24,549      $23,984
Total assets..............................................            2,029          1,794          9,370       33,541       36,949
Long-term debt less current portion.......................              301            896            590          115           75
Mandatorily redeemable convertible
   preferred stock........................................               --             --          5,000          --          --
Accumulated deficit.......................................           (1,215)        (2,693)        (7,686)      (5,527)      (4,266)
Total stockholders' equity (deficit)......................             (280)        (1,036)         1,023       29,081       30,241

</TABLE>

--------------------
(1)  In 1996 the Company was reorganized as described in Note 1 to the Company's
Consolidated Financial Statements. Accordingly, earnings (loss) per share is
not presented for 1994 and 1995.



<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, in this  "Management's  Discussion
and Analysis of Financial  Condition  and Results of  Operations"  and under the
caption "Business" in this Annual Report on Form 10-K.

Overview

          The Company was founded in 1984 to develop certain resorbable polymers
for  orthopaedic  uses. The Company has incurred  substantial  operating  losses
since its inception and, as of December 31, 1998, had an accumulated  deficit of
approximately $4.3 million.  Such losses have resulted principally from expenses
associated with the development and patenting of the Company's  Self-Reinforcing
technologies and resorbable  implant designs,  preclinical and clinical studies,
preparation  of  submissions  to the FDA and foreign  regulatory  agencies,  the
development  of sales,  marketing and  distribution  channels,  the write-off of
acquired  in-process  research  and  development,  and  the  development  of the
Company's  manufacturing  capabilities.  Although the  Company's  revenues  grew
significantly  in the second half of 1996 and during 1997 and 1998 and  although
the Company  reported a profit for 1997 and 1998, no assurance can be given that
revenues will  continue to grow or that  revenues of any  magnitude  will exceed
expenses  incurred in anticipation  of future growth.  There can be no assurance
that the Company will be able to successfully commercialize its products or that
profitability will continue.

          The Company first  introduced  its PGA pins in 1984 and its PGA screws
in 1986. In 1987, the Company  introduced  its first PLLA  products,  PLLA pins.
PLLA screws were introduced in 1989.  Since the  introduction of these products,
the Company has expanded its PGA and PLLA pin and screw product lines to address
additional  clinical  indications.   The  Company's  PGA  membrane  product  was
introduced in 1992, and, in 1995, the Company launched its Meniscus Arrow,  PLLA
tacks,  and PGA and PLLA  urology  stents.  In 1998,  the Company  launched  its
cranio-facial product line. Prior to 1996, the Company derived substantially all
of its  revenue  from sales of its PLLA and PGA screws and pins.  A  substantial
portion of the Company's  revenues and revenue growth in the second half of 1996
and during  1997 and 1998  resulted  from  sales of the  Meniscus  Arrow,  which
received FDA clearance in March 1996. To date,  all products sold by the Company
have been launched first in international  markets.  During 1996, 1997 and 1998,
international product sales represented 32%, 15% and 20%,  respectively,  of the
Company's  total  product  sales.  See  Note 14 of the  Notes  to the  Company's
Consolidated Financial Statements.

          The Company typically sells or consigns implant grade, stainless steel
surgical  instruments  for  use  with  each of its  Self-Reinforced,  resorbable
products.  The sale of these  instruments  result in margins which are typically
lower than the margins  applicable to the Company's implant  products.  However,
since  orthopaedic  companies  operating in the U.S. have  traditionally  loaned
rather than sold instruments to their customers, the Company anticipates that in
the  future,  it will be  necessary  for the  Company to  provide an  increasing
proportion of its  instrumentation  in the U.S. on a loan basis.  In most cases,
instrumentation is provided on a consignment basis to customers that commit to a
certain  purchase level of implant  products.  The instruments are loaned on the
basis of a one year  consignment  policy.  Similar  practices  are not common in
international markets. For financial statement purposes,  revenues from the sale
of  instrumentation   systems  are  included  within  product  sales  and  costs
associated with such systems are included within cost of goods sold. In the case
of consigned product, the Company amortizes the cost of the instrumentation over
a three to four year period as cost of goods sold. The Company's instrumentation
systems are reusable. Accordingly, sales and loans of such systems are likely to
be most  pronounced in periods  shortly after product  launches and likely to be
less prevalent as  penetration  of the market  increases over the long term. For
information regarding the Company's  instrumentation  practices,  see "Business-
Products - Instrumentation."

<PAGE>

         The Company sells its products  through managed networks of independent
sales agents,  direct sales  representatives,  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. The Company  anticipates that during the next
few years,  the relative  percentage of its U.S.  product sales to total product
sales is likely to continue to increase.  Since the Company pays  commissions on
sales made through its U.S. agent network, an increased percentage of U.S. sales
in the future will likely  result in an increase in the  percentage  of selling,
general  and  administrative  expenses to total  sales.  This  increase  will be
partially  offset by the higher gross  margins  received on products sold in the
U.S.

         Outside of the  orthopaedic  market,  the Company may seek to establish
licensing or distribution  agreements with strategic partners to develop certain
products and to market and  distribute  products that the Company  elects not to
distribute   through  its  managed   networks  of   independent   sales  agents,
distributors  and dealers.  The Company has licensed its membrane patent for use
in dental and two other  applications in Europe to Ethicon GmbH, a subsidiary of
Johnson & Johnson.  During  1996,  Ethicon  GmbH paid the Company  approximately
$201,000.  No licensing fees were received during 1997 or 1998. Ethicon GmbH has
agreed to pay royalties to the Company upon the  initiation of commercial  sales
of its membrane products, which were released for commercial sale in July, 1997.
Revenues from the Company's  sales of such products have not been  material.  No
assurance can be given that royalty  payments from Ethicon GmbH will be material
in the future.  Furthermore,  no assurance can be given that the Company will be
able to enter  into other  license  arrangements  regarding  other  products  on
satisfactory terms.

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

         The Company  currently  manufactures its implant products solely at its
Tampere,  Finland  plant.  The  Company  intends to use a portion of its capital
resources to establish a manufacturing  capability in the U.S. The Company plans
to establish this capability either by equipping and operating a leased facility
or contracting  with a third party to provide a manufacturing  capability to the
Company. The Company believes that on an interim basis,  contract  manufacturing
may  enable  the  Company  to save  certain  staffing  costs and  enable  senior
management to focus on other aspects of its  business.  However,  if the Company
arranges for a third party to provide  contract  manufacturing in the U.S., fees
payable to such manufacturer may exceed any savings in staffing costs and result
in higher costs of goods sold and lower gross profit. Ultimately, in operating a
U.S. facility,  the Company will incur certain  duplicative  manufacturing costs
which could result in higher costs of goods sold and lower gross profit margins.
For information  regarding the operations of the Company by geographic area, see
Note 14 of the Notes to the Company's Consolidated Financial Statements.

         The Company invoices more than 85% of its  consolidated  revenues in US
Dollars.  Approximately  80%  of  the  expenses  incurred  by  the  Company  are
denominated  in US Dollars.  The remaining  portion of revenues and expenses are
denominated in European  currencies,  predominantly  Finnish Markka. The Company
seeks to manage its foreign currency risk for these other currencies through the
purchase of foreign currency options and forward contracts. No assurances can be
given that such  hedging  techniques  will  protect  the Company  from  exposure
resulting  from  relative  changes  in the  economic  strength  of  the  foreign
currencies  applicable to the Company.  Foreign exchange  transaction  gains and
losses can vary significantly from period to period.

         While the  Company's  operating  losses have  resulted in net operating
loss carryforwards of approximately $2,100,000 for income tax reporting purposes
as of December 31, 1998, the extent to which such carryforwards are available to
offset  future U.S. and Finnish  taxable  income is  significantly  limited as a
result of  various  ownership  changes  that  have  occurred  in  recent  years.

<PAGE>

Additionally,   because  U.S.  tax  laws  limit  the  time  during  which  these
carryforwards  may be applied against future taxes,  the Company may not be able
to take full advantage of the U.S.  portion of these  carryforwards  for federal
income tax purposes.  Furthermore, income earned by a foreign subsidiary may not
be offset against  operating  losses of U.S.  entities.  The statutory tax rates
applicable to the Company and its foreign  subsidiaries vary substantially.  Tax
rates have  fluctuated  in the past and may do so in the future.  See Note 12 of
the Notes to the Company's Consolidated Financial Statements.

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

Results of Operations for the Years Ended December 31, 1996, 1997 and 1998

          Product Sales. The Company's product sales increased by 213% from $5.0
million in 1996 to $15.8  million in 1997,  and by 31% to $20.7 million in 1998.
The increase in product sales in 1997 reflected further  penetration in Meniscus
Arrow  sales in the  United  States  from its U.S.  introduction  in the  second
quarter of 1996,  as well as  increased  utilization  of the  Company's  managed
network of independent  sales agents in the U.S. and increased  sales of several
non-Arrow products in both the U.S. and international  markets.  The increase in
product sales in 1998 reflected continued penetration in Meniscus Arrow sales in
the United States and increased sales of several non-Arrow  products in both the
U.S.  and   international   markets.   Revenues   generated  from  the  sale  of
instrumentation  systems and related loaner fees  represented 20%, 11% and 8% of
total sales in 1996,  1997 and 1998,  respectively,  amounting to  approximately
$1.0  million  in 1996,  $1.8  million  in 1997 and $1.7  million  in 1998.  The
increase from the 1996 level to the 1997 level was attributable primarily to the
U.S.  introduction  of the Meniscus Arrow during the second quarter of 1996. The
decline from 1997 to 1998 in both  percentage  and dollar terms  declined due to
the increasingly competitive  environment.  Instrumentation revenues relating to
the  Meniscus  Arrow  during 1996,  1997 and 1998 were  approximately  $453,000,
$850,000 and $624,000 respectively.

          License and grant  revenues.  License and grant revenues  decreased by
30% from  $345,000 in 1996 to $242,000 in 1997 and  increased by 73% to $418,000
in 1998.  The  decline in  revenue  from 1996 to 1997 was due to the lack of any
license revenue recorded in 1997,  compared with $201,000  recorded in 1996. The
increase in revenues from 1997 to 1998 resulted from an increase in the level of
research activity during 1998.

         Gross  profit;   gross  profit  margins.  The  Company's  gross  profit
increased by 290% from $3.2 million in 1996 to $12.3  million in 1997 and by 34%
to $16.6 million in 1998. The increase in the Company's gross profit during 1996
and 1997  primarily  reflected the increased  sales of Meniscus  Arrow  products
after their introduction in the U.S. in the second quarter of 1996. Overall, the
Company's gross profit margin  increased from 58.8% in 1996 to 77.0% in 1997 and
increased to 78.5% in 1998.  During 1997 and 1998,  the increase in gross profit
margin was  primarily  due to the volume  increase  in  revenues  which  created
operational  efficiencies  in  production.  The  Company's  gross profit  margin
applicable  to  implant  sales,  representing  implant  sales less  related  raw
materials, direct labor and overhead and associated variable expenses, increased
from 66.7% in 1996 to 80.2% in 1997 and 82.9% in 1998.  The  improvement in this
portion of the Company's gross profit margin  resulted  primarily from increased
sales of higher margin  Meniscus  Arrow  products,  increased  U.S. based sales,
increased  sales of higher  margin PLLA  products and the  leveraging of certain
fixed  manufacturing costs over the Company's expanded revenue base. The Company
amortizes the cost of  instrumentation  inventory  consigned to  customers,  and
classifies this as an inventory reserve. This amortization charge increased from
$0 during 1996 to $510,000 during 1997 and $800,000 during 1998. The increase is
due to a related  increase in the number of  instruments  consigned to customers
versus the previous practice of selling the instruments.

<PAGE>

         Selling,  general and  administrative  expenses.  Selling,  general and
administrative  expenses  increased  by 114% from $4.5  million  in 1996 to $9.7
million in 1997,  and by 33% to $13.0 million in 1998.  Such expenses were 89.9%
of product sales in 1996,  61.6% of product sales in 1997,  and 62.7% of product
sales in 1998.  The  increases  in the dollar  amount of  selling,  general  and
administrative  expenses during these periods were primarily attributable to the
costs  incurred  in the launch of the  craniofacial  division,  the  increase in
commission payment obligations, reflecting the Company's increased product sales
in the U.S.,  the  increase  in expenses in  regulatory  and patent  activities,
including the costs of prosecuting patent  infringement  suits, and the increase
in expenses  associated  with  establishing  and supporting a managed network of
independent  sales  agents  in the  U.S.  Selling,  general  and  administrative
expenses have declined as a percentage of revenue due to increased  efficiencies
resulting from the leveraging of certain  non-selling  expenses over an expanded
revenue base.

         Acquired  in-process  research and  development.  In September 1996, in
connection   with  the  Company's   reorganization,   the  Company   recorded  a
non-recurring  charge of $2.8 million for the acquisition of in-process research
and development.  This amount was expensed as non-recurring  charges because the
acquired in-process technology had not reached technological feasibility and had
no future alternative uses. Since the  reorganization,  the Company has used the
acquired  in-process  technology  to develop new  orthopaedic  and  craniofacial
surgery  products,  which  have or will  become  part of the  Company's  line of
products  when  completed.  The  fair  value  of the  in-process  technology  in
reorganization  was based on analysis of the markets,  projected  cash flows and
risks  associated with achieving such projected cash flows. In developing  these
cash flow  projections,  revenues  were  forecasted  based on relevant  factors,
including aggregate revenue growth rates for the business as a whole, individual
revenues,  characteristics  of the  potential  market for the  products  and the
anticipated life of the underlying technology.

         Research and development.  Research and development  expenses increased
by 89.5% from  $460,000 in 1996 to $871,000 in 1997 and by 171% to $2,360,000 in
1998. These increases  reflected an increased volume of product development work
being performed by the Company and increased staffing levels.

         Other income and expense. Other income and expense consists of interest
income and  expense and  miscellaneous  expense  and income  items.  The Company
generated net interest  expense of $87,000 during 1996, and net interest  income
of $752,000 during 1997 and $986,000 during 1998. Net interest income  generated
during 1997 and 1998 was obtained from funds received from the Company's initial
public  offering  during  the  second  quarter  of  1997.  A  foreign   currency
transaction gain of $408,000 was recorded in "other income" in 1997, compared to
a foreign  currency  transaction  losses of $263,000  during  1998.  Net foreign
currency transaction gains and losses in 1996 were insignificant.

         Income  taxes.  In  1996,  one of the  Company's  Finnish  subsidiaries
recorded a profit,  which  resulted in a Finnish tax  liability of $208,000.  In
1997, the Company recorded an income tax provision of $758,000, or 26% of income
from operations, which primarily reflected the income generated in the Company's
Finnish  subsidiary.  In 1998,  the Company  recorded an income tax provision of
$741,000, or 37% of income from operations.  This increase in effective tax rate
reflected the increase in income  generated by the Finnish  subsidiary  taxed at
the rate of 28%.  Although an  operating  loss was  recorded by the U.S.  entity
during  1998,  no  corresponding  tax  benefit  was  recognized  due to the  net
operating loss position in the U.S.

          Net income.  The Company reported a net loss of $4,992,000 in 1996 and
net income of $2,158,000 and $1,261,000 in 1997 and 1998, respectively.

<PAGE>

Recent Accounting Pronouncements

          In March 1998, the Accounting  Standards  Executive  Committee  issued
Statement  of  Position  98-1,  Accounting  for the Costs of  Computer  Software
Developed  or  Obtained  for  Internal   Use   ("Statement   98-1").   Once  the
capitalization  criteria of Statement 98-1 have been met, external directs costs
of  materials  and services  consumed in  developing  or obtaining  internal-use
computer  software;  payroll and  payroll-related  costs for  employees  who are
directly  associated  with  and who  devote  time to the  internal-use  computer
software project (to the extent of the time spent directly on the project);  and
interest  costs  incurred  when  developing  computer  software for internal use
should be  capitalized.  Training  costs and data  conversion  costs,  should be
expensed as incurred.  Statement 98-1 is effective for financial  statements for
fiscal  years  beginning  after  December 15,  1998,  with  earlier  application
encouraged.  The  adoption of this  standard is not  expected to have a material
impact on the Company's earnings or financial position.

          In April 1998, the Accounting  Standards  Executive  Committee  issued
Statement of Position 98-5,  Reporting on the Costs of Start-Up  Activities (the
"Statement").  The Statement  requires costs of start-up  activities,  including
organizational  costs,  to be  expensed as  incurred.  Start-up  activities  are
defined  as  those  one-time  activities  related  to  opening  a new  facility,
introducing a new product or service,  conducting businesses in a new territory,
conducting business with a new process in an existing facility,  or commencing a
new  operation.  The  Statement is effective  for fiscal years  beginning  after
December  15,  1998.  The  adoption of this  standard is not  expected to have a
material impact on the Company's earnings or financial position.

          In June  1998,  the FASB  issued  Statement  of  Financial  Accounting
Standards No.133,  Accounting for Derivative  Instruments and Hedging Activities
("Statement133").  Statement 133 establishes  accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other  contracts,  and for hedging  activities.  Statement  133 requires that an
entity  recognize  all  derivatives  as  either  assets  or  liabilities  in the
statement of financial  position and measure the  instrument at fair value.  The
accounting changes in the fair value of a derivative depends on the intended use
of the derivative and the resulting designation. This Statement is effective for
all fiscal quarters  beginning after June 15, 1999. The Company intends to adopt
this  accounting  standard as  required.  The  adoption of this  standard is not
expected  to have a  material  impact on the  Company's  earnings  or  financial
position.


Year 2000 Compliance

         Readiness

         The Company's  centralized corporate business and technical information
systems have been fully assessed as to year 2000  compliance and  functionality.
Presently,  these systems are nearly complete with respect to required  software
changes,  tests  and  migration  to  the  production  environment.  The  Company
anticipates that internal  business and technical  information  system year 2000
compliance  issues  will be  substantially  remedied  by the  end of the  second
quarter 1999. This expectation constitutes a Forward-Looking Statement.

         The Company has satisfactorily  completed the identification and review
of computer hardware and software  suppliers and is in the process of verifying,
reviewing  and logging  year 2000  preparedness  of general  business  partners,
suppliers,  vendors, and/or service providers that the Company has identified as
critical.

<PAGE>

         Costs

         The Company incurred costs of approximately $250,000 in 1998 associated
with the purchase of and modifications to the Company's existing systems to make
them year 2000 ready.  The Company  expects to incur costs between  $100,000 and
$200,000 in 1999 for a total project cost of less than  $500,000.  Most of these
costs relate to the implementation of a new internal business system, which will
be  depreciated  over its  estimated  life.  Any  other  cost  relating  to this
undertaking will be expensed as incurred. Based on the estimates and information
currently  available,  the Company does not anticipate  that the cost associated
with year 2000 compliance issues will be material to the Company's  consolidated
financial position or results of operations.

         Risks and Contingency Plans

         Considering the substantial progress made to date, the Company does not
anticipate  delays in  finalizing  internal  year 2000  remediation  within  the
remaining  time  schedules.  There  can  be no  assurances,  however,  that  the
Company's internal systems or those of a third party on which the Company relies
will be year 2000 compliant by the year 2000. An  interruption  of the Company's
ability to conduct its business due to a year 2000 readiness  problem could have
a material adverse effect on the Company.

         Anticipated  completion of this review is estimated to be by the end of
the second quarter of 1999.  Pending the results of the Company's  review of the
year 2000  preparedness  of its critical  third  parties,  the Company will then
determine what course of action and contingencies will need to be made, if any.

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.

<TABLE>
<CAPTION>

                                                                                            (in thousands)
1997
<S>                 <C>                                                                       <C>     
Quarter ended March 31................................................                        $  3,218
Quarter ended June 30.................................................                           3,822
Quarter ended September 30............................................                           4,149
Quarter ended December 31.............................................                           4,584

1998
Quarter ended March 31................................................                        $  4,459
Quarter ended June 30.................................................                           5,057
Quarter ended September 30............................................                           5,265
Quarter ended December 31.............................................                           5,902

</TABLE>


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

<PAGE>

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

Liquidity and Capital Resources

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

         At December 31, 1997 and 1998, cash and cash equivalents  totaled $22.6
million  and  $14.2  million,  respectively.  The  decrease  in  cash  and  cash
equivalents  of  $8.4  million  resulted  from  the  use of  cash  in  operating
activities,  primarily  attributable to increased  inventory levels,  and a $2.0
million increase in plant and equipment.

         As of December  31,  1998,  the  Company  had working  capital of $24.0
million,  compared  with $24.5  million at December  31,  1997.  Long-term  debt
(including  the current  portion) was reduced by $43,000,  from the level at the
beginning of the year to $115,000 as of December 31, 1998. The interest rates on
the debt remaining as of December 31, 1998 averaged 1% per annum.

         The Company believes that existing  capital  resources from its initial
public  offering,  its  September  1996 private  placement  and its $2.0 million
credit line,  together  with cash flow from  operations  (if, and to the extent,
generated),  will be  sufficient  to  fund  its  operations  during  1999.  This
statement constitutes a Forward-Looking  Statement.  Actual results could differ
materially from the Company's  expectations  regarding its capital  requirements
and its sources of capital.  The Company's  future capital  requirements and the
adequacy  of  available  capital  resources  will  depend on  numerous  factors,
including market acceptance of its existing and future products,  the successful
commercialization   of  products  in   development,   progress  in  its  product
development  efforts,  the  magnitude  and  scope of such  efforts,  acquisition
opportunities,  progress with preclinical  studies,  clinical trials and product
clearances by the FDA and other  agencies,  the cost and timing of the Company's
efforts  to  expand  its  manufacturing   capabilities,   the  cost  of  filing,
prosecuting,  defending  and  enforcing  patent  claims  and other  intellectual
property  rights,  competing  technological  and  market  developments,  and the
development of strategic alliances for the marketing of certain of the Company's
products.  The  sufficiency  of the Company's  capital  reserves with respect to
operations  beyond  1999 will  depend  primarily  upon the  Company's  operating
results and the extent to which such results are capable of funding  anticipated
growth.  To the  extent  that funds  generated  from the  Company's  operations,
together  with its  existing  capital  resources,  and the net  interest  earned
thereon, are insufficient to meet current or planned operating requirements, the
Company  will be  required to obtain  additional  funds  through  equity or debt
financings,  strategic  alliances with corporate partners and others, or through
other  sources.   The  terms  of  any  equity  financings  may  be  dilutive  to
stockholders  and the  terms  of any debt  financings  may  contain  restrictive

<PAGE>

covenants which limit the Company's ability to pursue certain courses of action.
Principal  stockholders  of the Company who previously  provided  funding to the
Company and provided guarantees to sources of credit have indicated that they do
not intend to continue furnishing such assistance. The Company does not have any
committed sources of additional financing beyond that described above, and there
can be no assurance that additional funding, if necessary,  will be available on
acceptable  terms,  if at all. If adequate funds are not available,  the Company
may be  required  to delay,  scale-back  or  eliminate  certain  aspects  of its
operations  or attempt  to obtain  funds  through  arrangements  with  strategic
partners or others that may require the Company to relinquish  rights to certain
of its  technologies,  product  candidates,  products or potential  markets.  If
adequate funds are not available,  the Company's  business,  financial condition
and results of operations could be materially and adversely affected.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

         Not applicable.



<PAGE>


Item 8.       Financial Statements and Supplementary Data

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

                                                                       Page


Independent Auditors' Report                                            F-1

Consolidated Balance Sheets as of
    December 31, 1997 and 1998                                          F-2

Consolidated Statements of Operations
  for the Years Ended December 31,
  1996, 1997 and 1998                                                   F-3

Consolidated Statement of Stockholders'
  Equity (Deficit) and Comprehensive Income for the Years
  Ended December 31, 1996, 1997 and 1998                                F-4

Consolidated Statements of Cash Flows
  for the Years Ended December 31,
  1996, 1997 and 1998                                                   F-5

Notes to Consolidated Financial Statements                              F-7


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

              Not applicable.


<PAGE>

                                INDEPENDENT AUDITORS' REPORT

 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,  1997 and 1998,  and the
related  consolidated  statements of operations,  stockholders' equity (deficit)
and comprehensive income, and cash flows for each of the years in the three-year
period  ended  December  31,  1998.  In  connection   with  our  audits  of  the
consolidated  financial  statements,  we  have  also  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 generally  accepted auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

         In our opinion, the consolidated financial statements referred to above
present  fairly,  in all  material  respects,  the  financial  position of Bionx
Implants,  Inc.  and  subsidiaries  as of December  31,  1997 and 1998,  and the
results  of their  operations  and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting  principles.  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 3, 1999



<PAGE>


<TABLE>
<CAPTION>


                      BIONX IMPLANTS, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1997 AND 1998

                                                                                        December 31,
                                                                       -----------------------------------------------
                                                                                1997                    1998
                                                                                ----                    ----
ASSETS
<S>                                                                        <C>                       <C>                 
Current assets:
     Cash and cash equivalents................................              $22,631,652              $14,213,368
     Inventory, net (note 3)..................................                2,549,528                9,777,988
     Trade accounts receivable, net of allowance of...........
         $110,707 and $142,883 as of December 31, 1997
         and 1998, respectively...............................                2,954,629                4,643,280

     Grants receivable........................................                  128,953                  188,888
     Related party receivable(note 5).........................                  115,266                  238,950
     Prepaid expenses and other current assets................                  158,434                  726,154
     Deferred tax asset.......................................                  355,000                  828,784
                                                                           ------------                  -------
Total current assets..........................................               28,893,462               30,617,412
Investments...................................................                   87,115                   87,115
Plant and equipment, net (note 4).............................                  849,241                2,560,440
Goodwill and intangibles, net.................................                3,711,163                3,684,081
                                                                              ---------                ---------
Total assets..................................................              $33,540,981              $36,949,048
                                                                             ==========               ==========

LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
     Trade accounts payable...................................             $  1,774,960             $  4,176,406
     Long-term debt, current portion (note 7).................                   43,314                   40,842
     Related party liability (note 5).........................                   74,358                       --
     Current income tax liability.............................                  994,229                  577,673
     Accrued and other current liabilities (note 6)...........                1,457,539                1,838,984
                                                                              ---------                ---------
Total current liabilities.....................................                4,344,400                6,633,905
                                                                              ---------                ---------

Long-term debt (note 7).......................................                  115,370                   74,527
                                                                             ----------                   ------


Series A mandatorily  redeemable  convertible  
preferred stock, par value $0.001
per share; 2,000,000 shares authorized, 
none issued and outstanding at
December 31, 1997 and 1998 (note 9)...........................                       --                       --

Stockholders' equity (notes 9 and 11)
     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, 8,916,812 and 8,922,076 
          shares issued as of December 31, 1997 and 1998, 
          respectively........................................                  16,942                   16,952

     Treasury stock, 20,500 shares as of December 31, 1998                         --                   (128,198)
     Additional paid-in capital...............................               35,616,254               35,642,502
     Accumulated deficit......................................               (5,527,354)              (4,266,009)
     Accumulated other comprehensive income (note 2)..........               (1,024,631)              (1,024,631)
                                                                             -----------              -----------

Total stockholders' equity ...................................               29,081,211               30,240,616
                                                                             ----------               ----------

Total liabilities and stockholders' equity....................              $33,540,981              $36,949,048
                                                                           ============               ==========

                See accompanying notes to consolidated financial statements.

</TABLE>


<PAGE>

<TABLE>
<CAPTION>

          
                                         BIONX IMPLANTS, INC. AND SUBSIDIARIES
                                       CONSOLIDATED STATEMENTS OF OPERATIONS
                                   YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998

                            Years ended December 31,
                                                    -------------------------------------------------------------------------
                                                            1996                     1997                     1998
                                                            ----                     ----                     ----
Revenues:
<S>                                                       <C>                     <C>                      <C>       
   Product sales.............................             $5,033,952              15,772,674               20,682,965
   License and grant revenues (note 13)......                345,203                 241,685                  417,507
                                                             -------                 -------                  -------
         Total revenues......................              5,379,155              16,014,359               21,100,472
                                                           ---------              ----------               ----------

Cost of goods sold...........................              2,214,061               3,678,112                4,527,301
                                                           ---------               ---------                ---------

Gross profit.................................              3,165,094              12,336,247               16,573,171
                                                           ---------              ----------               ----------

Selling, general and administrative                        4,527,421               9,708,389               12,959,532
Acquired in-process research and
  development................................              2,832,035                      --                       --
Research and development.....................                459,666                 871,101                2,360,485
                                                         -----------            ------------                ---------

Total operating expenses.....................              7,819,122              10,579,490               15,320,017
                                                          ----------              ----------               ----------

Operating income (loss)......................             (4,654,028)              1,756,757                1,253,154
                                                          -----------              ---------                ---------

Other income and (expenses):
   Interest income and (expense), net........                (86,906)                751,694                  985,609
   Other, net................................                (42,951)                408,256                 (236,002)
                                                          -----------                -------                 ---------

         Total other income (expense), net                  (129,857)              1,159,950                  749,607
                                                           ----------              ---------                  -------

Income (loss) before provision for income
  taxes  ....................................             (4,783,885)              2,916,707                2,002,761
Provision for income taxes (note 12)                        (208,390)               (758,344)                (741,416)
                                                            ---------               ---------                ---------

Net income (loss)............................             (4,992,275)              2,158,363                1,261,345
                                                          ===========              =========                =========

Earnings (loss) per share (note 2):
     Basic...................................           $      (0.89)                   0.28                     0.14
     Diluted.................................           $      (0.89)                   0.25                     0.14
Shares used in computing earnings (loss) per share (note 2):
     Basic...................................              5,621,320               7,786,937                8,918,391
     Diluted.................................              5,621,320               8,526,081                9,243,369

          See accompanying notes to consolidated financial statements.

</TABLE>


<PAGE>

<TABLE>
<CAPTION>

                                       BIONX IMPLANTS, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE INCOME
                                   YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998

                                           COMMON
                                            STOCK                                                        FOREIGN          TOTAL
                                          PAR VALUE                      ADDITIONAL                      CURRENCY      STOCKHOLDERS'
                                          OR STATED        TREASURY       PAID-IN        ACCUMULATED   TRANSLATION        EQUITY
                                            VALUE           STOCK         CAPITAL          DEFICIT      ADJUSTMENT       (DEFICIT)



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

Effect of reorganization (note 1)        (1,333,266)           --      8,442,389            --                  --        7,109,123
Proceeds from the issuance of
    Common stock                                 55            --         49,820            --                  --           49,875
Issuance costs--Series A
    mandatorily redeemable
    Convertible preferred stock                  --            --       (105,214)           --                  --         (105,214)

Comprehensive loss                               --            --                   (4,992,275)             (2,430)      (4,994,705)
                                         ----------      ----------    ---------   -----------             ---------     -----------

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

Proceeds  from initial  public  offering,      4,370           --     21,095,441            --                  --       21,099,811
net
Conversion of Series A mandatorily
    Redeemable convertible
    Preferred stock                            2,000           --      4,998,000            --                  --        5,000,000

Proceeds from warrant exercise                   466           --        551,568            --                  --          552,034
Proceeds from the exercise of
    incentive stock options                        1           --          3,252            --                  --            3,253
Comprehensive income                              --           --                    2,158,363            (755,054)       1,403,309
                                           -----------     --------    ----------    ---------         ------------       ---------

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

Treasury Stock purchased                          --      (128,198)        --            --                  --            (128,198)
Proceeds from the exercise of
    incentive stock options                       10          --          26,248        --                  --               26,258
Comprehensive   income                            --          --                     1,261,345                   --       1,261,345
                                          -----------     --------    -----------   ----------         ------------        ---------

Balance, December 31, 1998              $     16,952      (128,198)   35,642,502    (4,266,009)         (1,024,631)      30,240,616
                                         ============     =========   ==========    ===========         ===========      ===========



          See accompanying notes to consolidated financial statements.

</TABLE>

<PAGE>


<TABLE>
<CAPTION>

                                       BIONX IMPLANTS, INC. AND SUBSIDIARIES

                                       CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   Years Ended December 31, 1996, 1997 and 1998


                                                                                Years Ended December 31,
                                                                ----------------------------------------------------------
                                                                       1996                1997               1998
                                                                       ----                ----               ----

<S>                                                                <C>                  <C>                   <C>      
Cash flows from operating activities:
  Net income (loss)....................................            (4,992,275)          2,158,363             1,261,345
                                                                  ------------          ---------             ---------
  Adjustments to reconcile net loss to
   net cash (used in) provided by operating
   activities:
   Depreciation and amortization.......................               161,434             268,366               815,781
   Acquired in-process research and development........             2,832,035                  --                 --
   Deferred tax provision..............................                 --               (355,000)                --
   Other non-cash charges..............................               105,600                  --                 --
   Change in assets and liabilities:
     Increase in accounts receivable, net                          (1,284,957)         (1,367,006)           (1,803,177)
     Increase in inventory, net........................              (295,657)         (1,529,053)           (7,228,460)
     Increase in grant receivable......................              (114,981)             (6,140)              (59,935)
     (Increase) decrease in deferred
       issuance costs..................................              (194,981)            194,981                --
     (Increase) decrease in prepaid expense, related
       party and other assets..........................                17,060              (3,910)             (576,878)
     (Increase) decrease in deposits...................               (43,964)             43,964                --
     Increase in intangibles...........................                    --                --
     Increase (decrease) in accounts payable...........               (60,622)            922,805             2,401,446
     Increase (decrease) in related party..............               (34,912)            (88,826)              (74,358)
     Increase (decrease) in current tax liability......               205,065             769,093              (890,340)
     Increase (decrease) in accrued and
       other liabilities...............................               859,094             148,722               381,445
                                                                      -------             -------               -------

                                                                    2,150,214          (1,002,004)           (7,034,476)
                                                                    ---------           ----------           -----------

Net cash provided by (used in) operating
   Activities..........................................            (2,842,061)          1,156,359            (5,773,131)
                                                                   -----------          ---------            -----------

Cash flows from investing activities:
   Purchases of plant and equipment....................               (81,590)           (412,263)           (2,044,271)
   Purchases of computer software and intangibles......                 --                  --                 (455,627)
   Proceeds from sale of investments...................                 3,827              15,165                    --
                                                                     ---------         -----------           -----------

Net cash used in investing activities..................               (77,763)           (397,098)           (2,499,898)
                                                                    ----------         -----------           -----------

Cash flows from financing activities:
   Repayment of long-term debt.........................              (435,256)           (646,259)              (43,315)
   Net proceeds from the issuance of
     preferred stock...................................             4,894,786               --                     --
   Proceeds from the issuance of common stock..........                49,875               --                     --
   Proceeds from initial public offering, net..........                 --             21,099,811                  --
   Purchase of treasury shares                                          --                  --                 (128,198)
   Exercise of warrants................................                 --                552,034                  --
   Proceeds from exercise of employee
     stock options.....................................                 --                  3,253                26,258
                                                                        ---          --------------             -------

Net cash provided by (used in) financing activities....             4,509,405          21,008,839              (145,255)
                                                                    ---------          ----------              ---------

Net effects of foreign exchange rate differences.......               (47,112)           (729,579)                 --
                                                                       -------           ---------                 --
<PAGE>

Net increase (decrease) in cash and
   cash equivalents....................................             1,542,469          21,038,521            (8,418,284)

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

Cash and cash equivalents at end of period.............         $   1,593,131          22,631,652            14,213,368
                                                                  ===========          ==========            ==========

Supplemental disclosure of cash flow information:
Cash paid for interest.................................         $     195,035              26,398                 1,423
Cash paid for taxes....................................         $       3,325             190,578             1,631,756
                                                                ==============       ============             =========

Non-cash financing activities:
   Issuance of common stock related to the
     Reorganization....................................         $   7,109,123                --                     --
                                                                =============         ============            =========

      Conversion of Series A mandatorily redeemable
      convertible preferred stock to common stock......         $        --             5,000,000                  --
                                                                ==============        ===========            ==========


                                  See accompanying notes to consolidated financial statements

</TABLE>


<PAGE>


                      BIONX IMPLANTS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


                      BIONX IMPLANTS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                December 31, 1998

(1)      ORGANIZATION

         Basis of Presentation

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

          Given  the  common  ownership  relationship  of the  four  predecessor
corporations and the subsequent reorganization into the Company described below,
the accompanying financial statements include the four predecessor corporations'
financial  statements  combined  for the period  January 1, 1996 to September 2,
1996. The predecessor  corporations are consolidated as of December 31, 1997 and
1998,  for the period from  September 3, 1996 to December 31, 1996,  and for the
years ended December 31, 1997 and 1998.

         Reorganization

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


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

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

<PAGE>

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

         Acquired in-process research and development

         In September 1996, in connection with the Company's Reorganization, the
Company  recorded a non-recurring  charge of $2.8 million for the acquisition of
in-process  research and development.  This amount was expensed as non-recurring
charges because the acquired in-process technology had not reached technological
feasibility and had no future  alternative uses. Since the  Reorganization,  the
Company has used the acquired  in-process  technology to develop new orthopaedic
and  craniofacial  surgery  products,  which  have  or will  become  part of the
Company's line of products when completed.

         The fair value of the in-process technology in reorganization was based
on analysis  of the  markets,  projected  cash flows and risks  associated  with
achieving such projected cash flows. In developing these cash flow  projections,
revenues were forecasted based on relevant factors,  including aggregate revenue
growth rates for the business as a whole,  individual revenues,  characteristics
of the  potential  market  for  the  products  and the  anticipated  life of the
underlying technology.

         The fair value of the  acquired  in-process  research  and  development
projects  associated  with the  Reorganization  are based upon a discounted cash
flow  analysis.  The  projection  of cash flows  employed in this  analysis  was
provided  by   operational   projections   relied  upon  by  management  at  the
Reorganization  date. Based upon this projection,  cash flows for these projects
were expected to commence in 1998 and to grow significantly in 1999 and 2000. To
these projected cash flows,  risk adjusted discount rates in the range of 18% to
25% were applied to the projected cash flows. The most  significant  assumptions
affecting  management's cash flow projections for the business and operations of
the projects,  upon which the valuation of the acquired  in-process research and
development  projects  is based,  are the  timing  for  market  entrance  of the
projects, and assumed rates of market penetration thereafter.

         Initial Public Offering

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

          Business Purpose

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

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

<PAGE>

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         Principles of Consolidation

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


         Use of Estimates

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

         Cash and Cash Equivalents

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

         Inventory

          Inventory  is valued at the lower of cost or  market,  with cost being
determined under a first-in,  first-out (FIFO) method.  Reserves are established
for excess  and  obsolete  inventory  on a specific  identification  basis.  The
instrument inventory, to the extent it is released on consignment,  is amortized
over its estimated useful life of three to four years.

         Investments

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

         A decline  in the  market  value  below cost that is deemed to be other
than  temporary  results in a reduction  in carrying  amount to fair value.  The
impairment  is charged to  earnings  and a new cost  basis for the  security  is
established.  Dividend  and interest  income are  recognized  when  earned.  The
amortized cost approximates market value as of December 31, 1997 and 1998.

         Plant and Equipment

         Major  additions and  replacements  of assets are  capitalized at cost.
Maintenance, repairs, and minor replacements are expensed as incurred. Machinery
and  equipment are  depreciated  using the  straight-line  method over a five to
fifteen-year period. Leasehold improvements and equipment acquired under capital
lease are amortized  using the  straight-line  method over the estimated  useful

<PAGE>

life of the asset or the lease term,  whichever is shorter.  Upon  retirement or
sale, the cost of the asset disposed of and the related accumulated depreciation
are removed  from the  accounts  and any  resulting  gain or loss is credited or
charged to operations.

         Intangibles

         Patents  and  rights  are  stated at cost.  Amortization  of patents is
recorded using the  straight-line  method over the remaining  legal lives of the
patents, generally for periods ranging up to 12 years. Software costs are stated
at cost,  and are amortized  using the  straight-line  method over 5 to 7 years.
Accumulated  amortization  related to  intangibles  was $93,693 and  $415,484 at
December 31, 1997 and 1998, respectively.

 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  intangibles  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 $214,632 and $375,550 at December 31, 1997 and 1998, respectively.

         Certain Risks and Concentrations

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

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

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

         Fair Value of Financial Instruments

          Financial  Accounting  Standards Board Statement No. 107,  Disclosures
About Fair Value of Financial Instruments, defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged in a current
transaction between willing parties.  Cash, trade accounts  receivable,  prepaid
expenses and other current assets,  trade accounts  payable and accrued expenses
reported  in the 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 $240,000.

<PAGE>

         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.

         Research and Development

         All research and development costs are expensed as incurred.

         Foreign Exchange Risk Management

         The  Company  routinely  hedges its  estimated  net  economic  exposure
through foreign  exchange options and forward cover on a rolling 12-month basis.
Market value gains are  recognized in income  currently and the resulting  gains
offset foreign exchange  transaction losses.  Determination of hedge activity is
based upon market  conditions,  the  magnitude  of foreign  currency  assets and
liabilities and perceived  risks. A net foreign  currency  exchange  transaction
gain of  $408,000  was  recorded  in "other  income"  in 1997,  and net  foreign
currency exchange transaction losses of $236,000 were recorded in "other income"
in 1998. There were no significant foreign currency  transaction gains or losses
in 1996. As of December 31, 1998, the Company had no foreign currency options or
forward contracts outstanding.

          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. Exchange adjustments resulting from foreign
currency transactions are recognized in operations.

         Prior  to 1998,  the  financial  statements  of the  Company's  foreign
subsidiaries  were translated into U.S.  dollars in accordance with Statement of
Financial  Accounting  Standards  (SFAS) No. 52, Foreign  Currency  Translation.
Substantially  all assets  and  liabilities  of the  foreign  subsidiaries  were
translated  at  year-end  exchange  rates  and  income  and  expense  items  are
translated at an average exchange rate for the year.

<PAGE>

         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.

          Comprehensive Income

          On  January 1,  1998,  the  Company  adopted  SFAS No. 130  "Reporting
Comprehensive  Income".  SFAS No. 130  establishes  standards  for reporting and
presentation of the Company's  comprehensive income (loss) and its components in
a full set of financial statements.  Comprehensive income (loss) consists of net
income (loss) for the year and foreign currency translations  adjustments and is
presented in the consolidated  statement of changes in stockholder's  equity and
comprehensive income (loss). The Statement requires only additional  disclosures
in the  consolidate  financial  statements;  it does not  affect  the  Company's
financial  position or results of operations.  Prior year  financial  statements
have been reclassified to conform to the requirements of the statement.


Comprehensive Income (Loss) is summarized below:

<TABLE>
<CAPTION>

                                                      1996              1997             1998

<S>                                              <C>                 <C>               <C>        
         Net Income (loss)                       $ (4,992,275)       $ 2,158,363       $ 1,261,345
         Foreign currency translation adjustment       (2,430)          (755,054)              --
                                                 -------------       ------------      -----------

         Total comprehensive income (loss)       $ (4,994,705)       $ 1,403,309       $ 1,261,345
                                                 =============        ==========        ==========

</TABLE>

         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.  During October,  1998, 20,500 shares of treasury stock was
reacquired by the Company.  Diluted  earnings (loss) per share is computed using
the weighted  average  number of common and  potential  dilutive  common  shares
outstanding during the period. Potential dilutive common shares consist of stock
options and warrants  using the treasury  stock method and are excluded if their
effect is antidilutive.

         The following  table sets forth the  calculation of the total number of
shares used in the computation of earnings (loss) per common share for the years
ended December 31, 1996, 1997 and 1998:

<TABLE>
<CAPTION>

                                                                      1996              1997              1998
                                                                      ----              ----              ----


<S>                                                                  <C>                <C>           <C>    
Shares used in computing basic
         earnings (loss) per share                                    5,621,320         7,786,937    8,918,391

Assumed conversion of Series A Mandatorily
         Redeemable Convertible Preferred Stock
         and related warrants using the
         if-converted method                                           --                 405,310           --

Incremental shares from assumed exercise of
         dilutive options and warrants                                 --                 333,834        324,978
                                                                      ---------         ---------      ---------
Shares used in computing pro forma diluted
         earnings (loss) per share                                    5,621,320         8,526,081      9,243,369
                                                                      =========         =========      =========

</TABLE>


<PAGE>

 (3) INVENTORY

         Inventory consists of the following  components as of December 31, 1997
and 1998:

<TABLE>
<CAPTION>

                                                                       1997                        1998
                                                                       ----                        ----

<S>                                                                <C>                           <C>      
Raw materials                                                      $   437,032                   1,781,661
Finished goods - Implants                                              492,334                   2,570,416
Instruments                                                            984,566                   2,457,156
Instruments on consignment                                           1,300,921                   3,944,080
                                                                     ---------                   ---------
                                                                     3,214,853                  10,753,313

    Less:
             Inventory reserve                                        (155,570)                   (175,565)
             Accumulated amortization
              - consigned instruments                                 (509,755)                   (799,760)
                                                                      ---------                   ---------
                                                                    $2,549,528                   9,777,988
                                                                    ==========                   =========
</TABLE>

          The Company amortizes the cost of instrumentation  inventory consigned
to customers.

(4) PLANT AND EQUIPMENT

         Plant and equipment consist of the following  components as of December
31, 1997 and 1998:

<TABLE>
<CAPTION>

                                                                    1997                           1998
                                                                    ----                           ----

<S>                                                               <C>                           <C>      
Machinery and production equipment                                $  1,219,435                  1,998,820
Construction in progress                                                    --                     97,835
Furniture and fixtures                                                      --                    775,979
Capitalized software costs                                                  --                    302,613
Computer equipment                                                      84,582                    173,041
                                                                     ---------                   --------
                                                                     1,304,017                  3,348,288
Less accumulated depreciation                                         (454,776)                  (787,848)
                                                                      ---------                  ---------
                                                                  $    849,241                  2,560,440
                                                                  ============                  =========

</TABLE>

<PAGE>

(5) RELATED PARTY TRANSACTIONS

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

         The  Company's  product  development  efforts  are  dependent  upon Dr.
Tormala, who is a founder, director, and executive officer of the Company and is
currently an Academy Professor at the Technical  University in Tampere,  Finland
and as such is permitted by the  University  to devote his efforts to developing
new  products  for the  Company.  This  executive  utilizes  a group  of  senior
researchers,  graduate  students,  and faculty at the  Technical  University  to
perform  research and development  projects  involving  resorbable  polymers and
other topics impacting the Company's technology and processes. This arrangement,
partially  funded  by the  Company  and  permitted  in  Finland  as a  means  of
encouraging the commercialization of technological development,  has resulted in
substantial  cost  savings to the  Company  while  substantially  expanding  its
product development effort. The Company's funding obligation,  which amounted to
$167,000,  $271,000 and $328,000  during the years ended December 31, 1996, 1997
and 1998  respectively,  consists of providing the  University  with  reasonable
compensation for University  resources (including graduate students) utilized by
the Company.

During 1998,  the Company  loaned $9,158  (50,000  Finnish  Markka) to a related
party, Bioabsorbable Concepts, Inc.

During 1997 and 1998, the Company paid certain administrative expenses on behalf
of Bionix B.V., a related party. The loan amounts  outstanding were $115,266 and
$238,950 as of  December  31,  1997 and 1998,  respectively,  and are payable in
1999.

(6) ACCRUED AND OTHER CURRENT LIABILITIES

          Accrued  and  other  current  liabilities  consist  of  the  following
components as of December 31, 1997 and 1998:

<TABLE>
<CAPTION>

                                                                       1997                         1998
                                                                       ----                         ----

<S>                                                                <C>                                     <C>    
Commissions...........................................             $   457,184                             619,241
Royalties.............................................                 267,986                             264,544
Wages.................................................                 279,642                             270,718
Taxes withheld........................................                  82,079                             225,995
Interest..............................................                     948           
                                                                                                               692
Inventory purchases...................................                      --                             128,780
Professional fees.....................................                 234,658                             197,809
Research..............................................                  65,012                               74,200
Other.................................................                  70,030                               57,005
                                                                 -------------                          -----------
                                                                   $ 1,457,539                            1,838,984
                                                                   ===========                            =========
</TABLE>

<PAGE>

(7) LONG-TERM DEBT

         Long-term debt consists of the following  components as of December 31,
1997 and 1998:

<TABLE>
<CAPTION>

                                                                        1997                          1998
                                                                        ----                          ----

<S>                                                                 <C>                                      
Loans from financial institutions                                   $   40,843                             --
Loans from Finnish government                                          101,447                        101,447
Other debt                                                              16,394                         13,922
                                                                        ------                         ------
                                                                       158,684                        115,369
Less current portion                                                   (43,314)                       (40,842)
                                                                       --------                       --------
                                                                    $  115,370                         74,527
                                                                    ==========                         ======
</TABLE>

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


         The aggregate  maturities of long-term  debt for each of the five years
subsequent to December 31, 1998 are as follows:  1999,  $40,842;  2000, $27,234;
2001, $8,342, 2002, $8,342, 2003 and beyond, $30,609.



(8) LINE OF CREDIT


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

(9) COMMON STOCKHOLDERS' EQUITY

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

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

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

<PAGE>

         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,  the Company  repurchased  20,500  shares for a purchase  price of
$128,198.

(10) COMMITMENTS UNDER OPERATING LEASES

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


<TABLE>
<CAPTION>

Year ending December 31:

<S>           <C>                                                                <C>    
              1999                                                               513,847
              2000                                                               514,977
              2001                                                               485,768
              2002                                                               471,241
              2003                                                               348,107

</TABLE>

          Rental  expense for the years ended  December 31, 1996,  1997 and 1998
aggregated $98,755, $202,624 and $454,702, respectively.


(11) STOCK OPTION PLANS

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

         At December 31, 1998,  there were 353,556  additional  shares available
for grant under the 1996 Option Plan. The per share  weighted-average fair value
of stock  options  granted in 1996,  1997 and 1998 was $5.86,  $16.66 and $12.43
respectively,  on the date of grant using the Black Scholes option-pricing model
with the following weighted-average assumptions for the years ended December 31:

<TABLE>
<CAPTION>

                                                            1996                       1997                       1998
                                                            ----                       ----                       ----

<S>                                                         <C>                         <C>                        <C>  
Risk-free interest rate                                     6.50%                       6.22%                      5.30%
Expected life of option in years                           10                          10                         10
Expected dividend yield                                     -                           -                          -
Volatility of stock price                                   -                          43.5%                      84.7%
</TABLE>


         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:

<PAGE>

<TABLE>

                                                        1996                1997                1998
                                                        ----                ----                ----

<S>                                                  <C>                  <C>                  <C>   
Net income (loss):
         As reported                                $(4,992,275)          2,158,363            1,261,345
         Pro forma                                   (5,074,269)          1,704,353              913,106

Basic earning (loss) per common share
          As reported                                  (0.89)              0.28                 0.14
          Pro forma                                    (0.90)              0.22                 0.10

Diluted earnings (loss) per common share:              
          As reported                                  (0.89)              0.25                  0.14
          Pro forma                                    (0.90)              0.20                  0.10

</TABLE>

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

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

<TABLE>
<CAPTION>

                                                                                  RANGE OF EXERCISE
                                                            SHARES                 PRICES PER SHARE



<S>                                                          <C>                 <C>              
Balance, December 31, 1995                                   277,009             $          0.9025
  Granted.....................................               147,373                     4.75-9.50
                                                             -------                     ---------

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

Balance, December 31, 1997....................               650,568                  0.9025-25.00
  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....................               496,444             $    0.9025-22.00
                                                             -------             -----------------

Shares exercisable at December 31, 1998                      293,481             $    0.9025-16.00
                                                             -------             -----------------

</TABLE>


<PAGE>

         The  following  table  summarizes   information   about  stock  options
outstanding under the 1996 Option Plan at December 31, 1998:

<TABLE>
<CAPTION>

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

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

<S>   <C>                  <C>                  <C>             <C>                      <C>                  <C>       
      $ 0.9025             277,009              5.9             $  0.9025                221,608              $   0.9025
     4.75-9.50             123,685              7.7                7.65                   70,793                  7.33
       16.00                 5,400              8.4               16.00                    1,080                 16.00
     6.38-22.00             90,350              9.8               15.52                       --                 --
                            ------                                                       -------

    $.9025-22.00           496,444              8.3             $  5.42                  293,481              $   2.60
                           =======                                                       =======

</TABLE>

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

         On September 2, 1996, the Company granted various  employees options to
acquire 58,686 shares of common stock at $4.75 per share,  the deemed fair value
at the date of grant as determined by the Board of Directors.  A total of 43,109
shares vested as of December 31, 1998 and the balance substantially vest 20% per
year on each of the next three years at December  31. As of December  31,  1998,
17,897 of these granted options have been forfeited or exercised.

         On November 24, 1996, the Company granted various  employees options to
acquire 88,686 shares of common stock at $9.50 per share,  the deemed fair value
at the grant date as determined  by the Board of  Directors.  A grant of options
covering 65,790 shares vests as follows:  15,790 on each of the first and second
anniversaries of the date of grant,  13,158 on the third anniversary of the date
of grant, and 10,526 on the fourth and fifth anniversaries of the date of grant.
The remaining  options  covering  22,896 shares vest 20% per year on each of the
next five  anniversaries of the date of grant. As of December 31, 1998, 5,790 of
these granted options have been forfeited or exercised.

         During 1997, the Company granted various  employees  options to acquire
235,400  shares of common  stock at prices  ranging  from  $16.00 to $25.00  per
share, the fair market value on the grant date. As of December 31, 1998, 230,000
of these granted options have been forfeited.

         During 1998, the Company granted various  employees  options to acquire
91,350 shares of common stock at prices  ranging from $6.38 to $22.00 per share,
the fair market value on the grant date.  . As of December  31,  1998,  1,000 of
these granted options have been forfeited.


(12) INCOME TAXES

         At December 31, 1998,  the Company and its  subsidiaries  had available
U.S.  federal  net  operating  loss   carryforwards   ("NOL")  of  approximately
$2,100,000  and U.S.  state net operating  loss  carryforward  of  approximately
$1,000,000  for income tax  reporting  purposes,  which are  available to offset
future  federal  and  state  taxable  income,  if any,  through  2018 and  2008,
respectively.

         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

<PAGE>

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

         Income tax expense  attributable  to the income  before  provision  for
taxes was $758,344 and $741,416 for the years ended  December 31, 1997 and 1998,
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>

                                                                                 1997                     1998
                                                                                 ----                     ----

<S>                                                                         <C>                            <C>    
Computed "expected" tax (benefit) expense                                   $ 1,020,847                    700,966
Increase (reduction) in income taxes
  resulting from:
     Difference in the foreign tax rates........................               (245,454)                  (303,800)
     Net change in the valuation allowance for
       deferred tax assets......................................               (146,804)                   218,936
     Permanent items............................................                 70,000                    106,831
     Other, net.................................................                 59,755                     18,483
                                                                               --------                     ------

Income tax expense                                                          $   758,344                    741,416
                                                                            ===========                    =======

</TABLE>


         The income tax expense for the years ended December 31, 1996,  1997 and
1998 relate 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, 1996,
1997 and 1998 due to the  operating  losses in such  jurisdictions.  Income  tax
expense consisted of the following:

<TABLE>
<CAPTION>

                                                                1996            1997                   1998   

<S>                                                           <C>              <C>                   <C>      
         Current provision                                    $ 208,390        1,113,344             1,215,200
         Deferred benefit                                             -         (355,000)             (473,784)
                                                          -------------       ----------         -------------

         Total income tax expense                             $  208,390         758,344               741,416
                                                          ==============      ===========        =============
</TABLE>


         The tax effects of temporary  differences that give rise to significant
portions of the Federal,  foreign and state  deferred tax assets at December 31,
1997 and 1998 are presented below:

<TABLE>
<CAPTION>

                                                                                     1997                 1998
                                                                                     ----                 ----
<S>                                                                            <C>                       <C>    
  Deferred tax assets:
       Net operating loss carryforwards..............................          $    328,686              473,624
       Research and development costs................................               109,890              109,890
       Deferred intercompany profit..................................               769,910            1,234,430
                                                                                         --
       Recognition of accrued expenses or reserves for
         financial statement reporting purposes but not for
         income tax reporting purposes...............................               315,815              429,501
                                                                                 ----------              -------

       Total gross deferred tax assets...............................             1,524,301            2,247,445
  Deferred tax liability:
       Depreciation expense                                                            --                (30,424)
                                                                                       --               --------
  expense.........................................................                1,524,301            2,217,021
       Total net deferred tax assets

       Less valuation allowance......................................            (1,169,301)          (1,388,237)
                                                                                 -----------          -----------

  Net deferred tax assets............................................          $    355,000              828,784
                                                                                 ==========             =========
</TABLE>

         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,  1997 and  1998.  The total
valuation  allowance  decreased by $146,804,  and  increased by $218,936 for the
years ended December 31, 1997 and 1998, respectively.

(13) LICENSE AND GRANT REVENUE

         In May 1995, the Company  entered into an exclusive  license  agreement
with Ethicon GmbH (a  wholly-owned  subsidiary of Johnson & Johnson) to market a
product based on the Company's patents for bioresorbable  membranes.  As part of
this agreement,  Ethicon GmbH paid the Company a  nonrefundable  license fee and
milestone  revenue of $201,287 for the year ended December 31, 1996. The license
agreement  requires  Ethicon GmbH to pay royalties based upon net sales of these
products.  This license agreement terminates upon the later of the expiration of
all of the Company's patent rights covering its membrane technology or 20 years.
Royalties  relating to this  agreement for the year ended  December 31, 1997 and
1998 were insignificant.

         In  addition,  the  Company  has  applied  for grants  from the Finnish
government  to conduct  research on resorbable  polymers.  The revenue from such
grants was  $143,916,  $241,685 and  $417,507  for the years ended  December 31,
1996, 1997 and 1998,  respectively.  In connection with such grants, the Company
typically  commits to perform research  projects and to report on the status of,
and the conclusions drawn from, its projects.

(14) SEGMENT AND RELATED INFORMATION

The Company adopted SFAS No. 131 Disclosures About Segments of an Enterprise and
Related  Information,  in 1998.  The Company  believes  that all of its material
operations  are part of the  medical  device  industry,  with  similar  purpose,
production  processes,  markets, and regulatory  requirements,  and it currently
reports as a single industry segment.

To date,  the  Company  manufactures  its  products  solely in its  facility  in
Finland.  The Company  sells  products in the U.S.  through a hybrid sales force
comprised  of  managed  network of  independent  sales  agents and direct  sales
representatives   managed  from  its  U.S.   headquarters   and  sells  products
internationally  through a  network  of  independent  distributors  and  dealers
managed from the Company's  facility in Finland.  Approximately 68%, 85% and 80%
of the  Company's  revenue  from  external  customers  in 1996,  1997 and  1998,
respectively  was  generated  in the US.  The  remaining  external  revenue  was
generated in foreign countries concentrated in Europe and Asia. Of the remaining
20% of 1998 external revenue,  no one particular  country accounted for revenues
greater than  approximately  of 8% of total revenue.  Information  regarding the
Company's product sales, net income (loss) and identifiable assets by geographic
area is set forth below:

<PAGE>


<TABLE>
<CAPTION>

                                                     UNITED
                                                     STATES          INTERNATIONAL        ELIMINATIONS        CONSOLIDATED

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

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

Year ended December 31, 1998 Product sales:
  Customers...............................         $16,480,164      $ 4,202,801         $       --             $20,682,965
  Intercompany............................             438,806       11,599,940          (12,038,746)                   --
                                                 -------------       ----------          ------------      ---------------
Total product sales                                 16,918,970       15,802,741          (12,038,746)           20,682,965
Net income (loss).........................          (1,153,412)       3,666,429           (1,251,672)            1,261,345
Identifiable assets.......................          31,383,328       13,301,995           (8,210,060)           36,475,264

</TABLE>

Sales from the subsidiary in Finland to the parent company are based upon profit
margins which represent competitive pricing of similar products.

No single customer  accounted for more than 5% of consolidated  revenue in 1996,
1997 and 1998.

<PAGE>


                                    PART III

Item 10.  Directors of the Registrant

          The registrant  incorporates by reference herein information set forth
in its definitive  proxy  statement for its 1999 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 1999 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 1999 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 1999 annual meeting of  shareholders
that is responsive to the information required with respect to this Item.

                                                      PART IV

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

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

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

            Description                                                   Page


      Schedule II  - Valuation and Qualifying Accounts                     S-1

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

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

   3.1        Restated Certificate of Incorporation of the Registrant. (1)
   3.2        Bylaws of the Registrant. (1)
   4.1        Specimen Common Stock Certificate. (1)
  10.1        Reorganization Agreement dated as of September 5, 1996. (1)
  10.2        Registrant's 1996 Stock Option/Stock Issuance Plan. (1)
  10.3        Form of Amended and Restated Employment Agreement between the 
              Registrant and David W. Anderson. (1)
  10.4        Form of Employment Agreement between the Registrant's Subsidiary 
              and Pertti Tormala, as amended. (1)
  10.5        Form of Proprietary Information and Inventions Agreement. (1)
  10.6        Investors' Rights Agreement, dated as of September 6, 1996, 
              between the Registrant and certain holders of the Registrant's 
              securities. (1)
  10.7        Stock Purchase  Agreement  between the Registrant and purchasers 
              of the Company's  Preferred  Stock and Warrants. (1)
  10.8*       License Agreement between the Registrant's Subsidiary and Saul 
              N. Schreiber. (1)
  10.9*       License  Agreement among the Registrant's  Subsidiary,  Pertti 
              Tormala,  Markku  Tamminmaki and Menifix I/S. (1)
 10.10*       Licensing,  Manufacturing and Distribution Agreement among the 
              Registrant's Subsidiary,  Pertti Tormala and various Danish and 
              Finnish inventors. (1)
 10.11        Shareholders' Agreement among Bionix, B.V. and certain 
              shareholders of the Company. (1)
 10.12        Headquarters Lease. (1)
 10.13        Security Agreements and Secured Promissory Note. (1)
 10.14        Form of Employment Agreement between the Registrant and Michael J.
              O'Brien. (2)
 21.1         List of Subsidiaries. (1)
 23.1         Consent of KPMG  LLP.
 24.1         Power of Attorney.
 27.1         Financial Data Schedule.
 99.1         Information Regarding Forward-Looking Statements


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

(2)  Incorporated  by reference to Exhibit 10.14 to the Company's  Annual Report
     on Form 10-K for the year ended  December 31,  1997. * 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,  1998,  the Company did not
file any Current Reports on Form 8-K.


<PAGE>


                                   SIGNATURES

          Pursuant to the  requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended,  the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, this ____
day of March, 1999.


                                                     BIONX IMPLANTS, INC.


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


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

      Signature                        Title                          Date

/S/____________________
   David W. Anderson          President, Chief Executive 
                              Officer and  Director (Principal
                              Executive Officer)                 March __, 1999


/S/____________________
  David J. Bershad            Director                           March __, 1999


/S/____________________
   Anthony J. Dimun           Director                           March __, 1999


/S/____________________
   David H. MacCallum         Director                           March __, 1999


/S/____________________
   Pertti Tormala             Director                           March __, 1999


/S/____________________
   Terry D. Wall              Director                           March __, 1999


/S/____________________
   Michael J. O'Brien         Chief Financial and 
                               Accounting Officer               March __, 1999


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


<PAGE>

<TABLE>


                      Bionx Implants, Inc. and Subsidiaries

                        Valuation and Qualifying Accounts

                   For the Three Years Ended December 31, 1998
<CAPTION>

                               Charged                              Charged                        Charged
                    Balance      to                    Balance      to                   Balance      at                 Balance
                      at      Costs and                  at        Costs and               at      Costs and                at
Classifications     12/31/95  Expenses    Deductions   12/31/96   Expenses  Deductions  12/31/97   Expenses  Deductions  12/31/98

<S>               <C>           <C>       <C>          <C>        <C>       <C>         <C>        <C>       <C>         <C>
Inventory
   Reserves....    $161,021     119,325       -         280,346    384,979       -       665,325   310,000        -      975,325
                   ----------  ---------  ---------    --------    -------  ---------   -------    -------   --------   ---------
Accounts
Receivable
    Reserves....   $   -         97,325          -       97,325     31,035    17,653)    110,707    70,205     (38,029)  142,883
                   ----------  ---------    ---------   --------   -------  ----------  ---------   ------    ---------  -------

</TABLE>


<PAGE>


                                  EXHIBIT INDEX

Exhibit
Number                         Description

23.1                     Consent of KPMG  LLP

24.1                     Power of Attorney

27.1                     Financial Data Schedule

99.1                     Information Regarding Forward-Looking Statements