<PAGE>   1
                       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, 1999.

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

                         Commission File Number 0-22401

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

        Pennsylvania                                   22-3198032
(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
March 15, 2000 was approximately $24,000,000.

         Number of shares of Common Stock outstanding as of March 15, 2000:
10,759,442

         Documents incorporated by reference: Definitive proxy statement for the
registrant's 2000 annual meeting of shareholders (Part III).
<PAGE>   2
                              BIONX IMPLANTS, INC.

                                TABLE OF CONTENTS

                                     PART I

<TABLE>
<CAPTION>
                                                                                                          Page number
<S>           <C>                                                                                         <C>
Item 1        Business of the Company.................................................................          3

Item 2        Properties...............................................................................        22

Item 3        Legal Proceedings........................................................................        22

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................        25

Item 6        Selected Financial Data..................................................................        26

Item 7        Management's Discussion and Analysis of Results of Operations and Financial  Condition...        28

Item 7A       Quantitative and Qualitative Disclosures About Market Risk...............................        35

Item 8        Financial Statements and Supplementary Data .............................................        36

Item 9        Changes in and Disagreements with Accountants on Accounting and
              Financial Disclosure.....................................................................        36

                                                     PART III

Item 10       Directors of the Registrant..............................................................        37

Item 11       Executive Compensation...................................................................        37

Item 12       Security Ownership of Certain Beneficial Owners and Management...........................        37

Item 13       Certain Relationships and Related Transactions...........................................        37

                                                      PART IV

Item 14       Exhibits, Financial Statements Schedules and Reports on Form 8-K.........................        37

Signatures    .........................................................................................        39
</TABLE>


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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.  On August 27, 1999 the Company was reincorporated
in the commonwealth of Pennsylvania. See Note 1 of the Notes to the Company's
Consolidated Financial Statements.  There was no change in the name,
business, management, benefit plans, location, assets, liabilities or net
worth of the Company as a result of the reincorporation.

      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 Orthopedic Trauma,
SportsMedicine, Urology and Craniofacial Surgery. The Company has proprietary
manufacturing processes for Self-Reinforced resorbable polymers, modifying the
brittle polymer structure into a physiologically strong structure with
controlled, variable strength retention. The Company 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 sixteen 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 300,000 surgeries worldwide. The Company has
received 510(k) clearance from the U.S. Food and Drug Administration (the "FDA")
for the fourteen 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. As a
result of the high vascularity of bone, the healing of bone requires only that
the fractured sections be in close proximity to each other. Bone heals through a
process that involves structural stress, either through load-bearing or use,
resulting in the replacement of old, damaged bone with new healthy tissue.


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

      Connective Tissue Fixation

      Connective tissue fixation may involve the reattachment of ligaments or
tendons that have been torn at the point of attachment. Alternatively, ligaments
or tendons may tear at a point other than the point of attachment, requiring
reconnection to return functionality. Connective tissue fixation techniques


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<PAGE>   5
are performed either through open incisions or through minimally invasive
techniques, and involve the use of tacks, screws, nails or sutures to effect the
anatomical reattachment as close to the original point of attachment as
possible. The same repair options are available to the surgeon when ligaments
are torn in areas other than at their point of attachment. In both fracture
fixation and connective tissue repair, the affected joint or limb is immobilized
for a period of time to promote healing. While traditional connective tissue
fixation techniques have resulted in adequate repairs, metal fixation devices or
suture systems can cause long-term problems and complications, including local
pain and limited joint functionality.

      Cartilage and Cartilaginous Tissue Repair

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

LIMITATIONS OF TRADITIONAL APPROACHES

      Metal Implants

      For more than 30 years, stainless steel, titanium and metal alloy screws,
tacks, pins and plates have been recognized as the standard of care for the
fixation of bone and connective tissue as a result of the implants' strength and
their relatively low reactivity rates. The use of metal implants as the standard
of care has been reinforced through the application of Association for the Study
of Internal Fixation ("ASIF") techniques and the training received by most
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. 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 when 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 were either brittle or overly flexible as a result of the
processes, such as injection molding, which were used in their manufacture. The
low strength of these implants led designers to create overly large implants
with extremely high molecular weights, which, in certain instances, may have
caused local inflammation and irritation at the implant site. In addition, due
to their large size, these implant configurations could be applied in only
certain anatomical areas, which may limit their clinical utility. For
screw-shaped implants, the application of torque to effect a successful
implantation often results in the breaking of the implant and the release of
relatively large particles into joints or soft tissues. Implants that do not
have a discernible strength are limited in their application because surgeons
are familiar with metal implants and demand similar strength from resorbable
implants.


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<PAGE>   6
Surgeons have reported that certain of the first generation resorbable implants
resorb too quickly and do not provide fixation for the period required for
proper bone or tissue healing. The combination of these factors led most
surgeons to reject the first generation of resorbable implants, leaving metal
implants as the standard of care.

SELF-REINFORCED, RESORBABLE IMPLANTS

      The Company has developed a variety of proprietary resorbable polymer
fixation implant product lines, including screws, pins, tacks, arrows, plates,
membranes and urology stents, which provide an alternative to currently marketed
implants. By modifying well-characterized resorbable polymers (e.g.,
poly-l-lactic acid ("PLLA") and polyglycolic acid ("PGA")) through the use of
several proprietary manufacturing and processing techniques, the Company is able
to create Self-Reinforced, resorbable implants. The Company's Self-Reinforcing
technologies modify a resorbable polymer's properties from a brittle structure
into a physiologically strong polymer implant with controlled, variable strength
retention (ranging from three weeks to six months, depending upon the medical
indication) which can be used safely and reliably in a variety of 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 broadens the clinical applications for these devices. For
example, the polymers can be machined using custom metal forming techniques,
and, as a result, the Company has been able to design and develop a variety of
resorbable implant devices, including pins, screws and other profiled
(nonsmooth-surfaced) implants of clinically appropriate sizes that incorporate
machined features, such as ridges and barbs, for improved fixation.

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

PRODUCTS

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


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<TABLE>
<CAPTION>
      PRODUCT LINES                         TARGETED INDICATIONS(1)      REGULATORY STATUS
      -------------                         -----------------------      -----------------
<S>                                         <C>                          <C>
      ORTHOPEDIC TRAUMA
      SR PLLA Pins                          Fractures/Osteotomies        Marketed Worldwide
      SR PLLA Screws                        Fractures/Osteotomies        Marketed Worldwide
      SR PLLA Cannulated Screws             Fractures/Osteotomies        Marketed Worldwide
      SR PGA Pins                           Fractures/Osteotomies        Marketed Worldwide
      SR PGA Screws                         Fractures/Osteotomies        Marketed Worldwide

      SPORTS MEDICINE
      Meniscus Arrows                       Meniscus Repair              Marketed Worldwide
      SR-PLLA Tacks                         Ligament Attachment          Marketed Worldwide
      Smart Screw ACL                       Ligament Attachment          Marketed Worldwide
      Smart Nail                            Condral Fragments            Marketed Worldwide
      Bankart Tack                          Shoulder Repair              Marketed Worldwide
      Contour Labral Nail                   Shoulder Repair              Marketed Worldwide

      CRANIOFACIAL TRAUMA AND
      RECONSTRUCTION
      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
</TABLE>

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

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



Orthopedic Trauma

      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.


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<PAGE>   8
      The Company's resorbable pins, which range in diameter from 1.1mm to 4.5mm
and in length from 10mm to 70mm, 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 2.0mm for delicate hand and
foot procedures to 4.5mm 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.

      Cannulated SmartScrew

      The 4.5mm Cannulated SmartScrew is a bioresorbable implant indicated for
the maintenance of alignment of cancellous bone fractures of the malleolus of
the ankle. This product was cleared by the FDA during November 1999. The
cannulation enables the surgeon to place a guidewire in order to obtain exact
reduction and then placement of the resorbable screw, thus allowing for complete
fracture fixation that will dissolve over time as the bone heals. The Company's
resorbable polymers are designed to diminish the osteopenia associated with
stress shielding that accompanies metal implants, and to eliminate the need for
a second surgery to remove the implant and have been shown in studies to reduce
the overall costs when compared to metallic osteosynthesis. The Company
estimates that there are approximately 130,000 ankle fractures that are
potential candidates for resorbable fracture fixation in the U.S. The Company
believes that the 4.5mm Cannulated SmartScrew provides an innovative clinical
solution to the surgeon by offering an improved method for the treatment of
ankle fractures.


Sports Medicine

      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 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


                                      -8-
<PAGE>   9
tie secure knots arthroscopically, which is one of the most technically
demanding skills in arthroscopic surgery. Surgical complications, including
damage to the vascular and neural system, can arise during this time-consuming
suturing process, due in part to the necessity of creating a small opening at
the back of the knee to allow for the passing of sutures and the tying of knots.

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

      PLLA Tacks

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

      The Company developed its PLLA tack to provide the surgeon with an easy to
use implant designated to reduce the risk of long-term and intra-operative
tissue damage that may occur in traditional suturing techniques. The insertion
procedure for the Company's tack involves the use of standard surgical
techniques to first create a channel in the ligament and a small drill hole in
the bone, and then attaching the ligament with manual pressure. The Company's
tack is designed to swell in the drill hole in order to provide immediate
fixation and to withstand stresses in the thumb. The degradation of the tack
after healing of the reattachment site reduces the risk of long-term tissue
damage. In the U.S., the Company's PLLA tacks are cleared 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 resorbable, they do not
require surgical removal. In addition, unlike metal screws, resorbable tacks or
plugs do not cause tissue irritation due to metal corrosion and loosening.

      The Bionx Bankart Tack was cleared by the FDA in January 1998 for use in
reattaching soft tissue to bone to repair a specific type of forward shoulder
dislocation. It is a high-strength, biocompatible, resorbable tack-type product,
which can be used in either open or minimally invasive


                                      -9-
<PAGE>   10
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.

      Contour Labral Nail

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

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

      SmartNail

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

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

      SmartScrew ACL

      The SmartScrew ACL is a cannulated, bioresorbable interference screw used
to attach a graft during cruciate ligament reconstruction, including
bone-patella tendon-bone or soft tissue grafts. This product was cleared by the
FDA at the end of 1999. The Company estimates that one out of 3,000 Americans
and 300,000 people worldwide experience problems with their anterior and
posterior cruciate ligaments that may require surgical intervention.

      Made from a patented, Self-Reinforcing manufacturing process, the
SmartScrew ACL reduces the chances of the screw shearing and breaking during
insertion - an occurrence that has been associated with molded polymer implants.
The Company believes that the advantages of bioresorbable implants over metal
implants are: 1) revision surgery with resorbable implants is believed to be
easier and safer; 2) resorbable implants are radiolucent; as a result, they do
not interfere with post surgical radiographs; and 3) resorbable interference
screw implants are clinically equivalent to metal interference screws. The
SmartScrew ACL implant competes in the interference screw product segment, which
comprises over 90% of the market for all fixation type devices used during
anterior and posterior cruciate ligament reconstruction.


                                      -10-
<PAGE>   11
Craniofacial Fixation

      Metallic fixation of the facial skeleton has become the accepted standard
of care in craniomaxillofacial trauma and reconstruction over the past 15 years.
Titanium has become the material of surgical choice due to its strength,
malleability, and tissue compatibility. However, implant removal remains an open
long-term clinical question. Most metallic plates and screws are not removed. 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 a
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. 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."


                                      -11-
<PAGE>   12
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 to customers when they purchase a certain level of implant products.
The costs of such instruments for dealers and distributors are amortized over
their estimated useful life. However, due to increased competitive activity in
the hospital setting, the company began expensing instruments during the fourth
quarter 1999 as they are placed in hospitals for use by the surgeon. See Notes 2
and 3 of the Notes to the Company's Consolidated Financial Statements.

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. 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 $871,101, $2,360,485 and $3,758,680 during 1997, 1998 and 1999,
respectively.

      During 1999 the Company began to establish product development activities
in the U.S. Several key employees were added to focus on new product development
programs involving surgeons from the U.S.

      During 1999 the Company entered into development, marketing and
distribution agreements with Mentor and Toray to fund the development and
regulatory costs associated with urology stent applications, to develop the U.S.
and international markets and to distribute urology stents.

      In addition, The Company is engaged in a number of studies designed to
enable the Company to increase the surgical applications and benefits of
existing products and to introduce new products.

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

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


                                      -12-
<PAGE>   13
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
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.

      During 1999 the Company entered into development, marketing and
distribution agreements with Mentor and Toray to fund the development and
regulatory costs associated with urology stent applications, to develop the U.S.
and international markets and to distribute urology stents.


MANUFACTURING

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

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

      The raw materials for the Company's PLLA and PDLA materials are currently
available from three qualified sources. The raw materials for the Company's PGA
products are currently provided to the Company by two qualified sources. These
raw materials have been utilized in products cleared by the FDA and the
Company's suppliers maintain Device Master Files at the FDA that contain basic
toxicology and manufacturing information accessible to the FDA. The Company does
not have long-term supply contracts with any of such suppliers. In the event
that the Company is unable to obtain sufficient quantities of such raw materials
on commercially reasonable terms, or in a timely manner, the Company would not
be able to manufacture its products on a timely and cost-competitive basis
which, in turn, would have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, if any of the raw
materials for the Company's PLLA products are no longer available in the
marketplace, the Company would be forced to further develop its technology to
incorporate alternate


                                      -13-
<PAGE>   14
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 add to its manufacturing capabilities by
establishing manufacturing capabilities in the U.S. in order to increase its
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 statements 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. There can be no assurance
that the Company will not encounter difficulties in scaling up production in the
U.S., including problems involving production yield, quality control and
assurance, and shortage of qualified personnel. In addition, the U.S. facility
will be subject to GMP regulations, international quality control standards and
other regulatory requirements. Difficulties encountered by the Company in
manufacturing scale-up or the failure by the Company to establish and maintain
the U.S. facility in accordance with such regulations, standards or other
regulatory requirements could entail a delay or termination of production, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company continues to upgrade its
production machinery and processes in Finland to address increased demand. No
assurance can be given that the integration of these machines into the
production process will occur within the scheduled time frame or will not result
in difficulties in scale-up that could lead to delays in filling orders in the
future.

LICENSES, TRADE SECRETS, PATENTS AND PROPRIETARY RIGHTS

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

      The Company's patent strategy has been to seek patent protection for the
technologies that produce the Company's Self-Reinforced resorbable polymer
products and, when available, for the products themselves. The Company owns or
has licenses to patents issued in the United States and in various foreign
countries and has patent applications pending at the U.S. PTO and in the patent
offices of various foreign countries. The Company's four principal U.S. patents
(two of which are owned by the Company and two of which are licensed to the
Company on an exclusive basis) will expire between 2004 and 2008. The two
principal U.S. patents owned by the Company relate to the Company's
Self-Reinforced resorbable polymer products, the Company's sintering process,
and resorbable polymer products produced from the Company's controlled drawing
process. The Company has a U.S. patent relating to methods of making the
Company's resorbable stents. The Company's other patents and patent applications
relate to various uses for Self-Reinforced resorbable polymers, either alone or
in combination with other resorbable polymers or biocompatible materials, and
generally involve specific devices, applications or improvements of the
technologies disclosed in the Company's principal patents and patent
applications. European counterparts to the two principal U.S. patents that are
owned by the Company and the Japanese counterpart to one such patent are
currently the subject of opposition proceedings. The Company is vigorously
defending its European and Japanese patent positions in these proceedings. One
of these European patents was revoked by the European Patent Office for lack of


                                      -14-
<PAGE>   15
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
through an appeal process. The U.S. PTO allowed some of the claims in the second
reexamination, but finally rejected other claims in that application. This final
rejection has been appealed by the Company to the U.S. PTO Appeals Board. The
appeal in the second 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. The claims that were allowed by the U.S. PTO
cannot be issued in a reexamination until the appeal of the rejected claims is
decided, and there is no guarantee that the allowed claims will be permitted by
the Appeals Board to issue in a reexamination certificate. 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 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 1999, the Company paid or accrued a liability to the
licensor for approximately $400,000 in royalties on sales that are covered under
the agreement of $10.2 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 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 and not infringed and filed a motion for
summary judgment on an issue of invalidity with the court. The court denied that
summary judgment motion. However, if the patent is held to be invalid 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.


                                      -15-
<PAGE>   16
      The Company had initiated two separate patent infringement lawsuits,
asserting that two third parties who are selling devices for the fixation of
meniscal lesions are infringing one of the principal patents licensed to the
Company. One of those litigations settled, with the Company granting a royalty
bearing license to the third party to sell its meniscal devices under the
patent. In the other case, which is still pending, the Company is seeking both
monetary and injunctive relief. The third party filed summary judgment motions
asserting that the patent was invalid and unenforceable and that they did not
infringe. In November 1999, the Company was orally informed by the judge's law
clerk that the third party's motions with respect to invalidity and
unenforceability will be denied but that the third party will prevail in the
non-infringement motion. The Company has not received the judge's final judgment
in writing. If the third party does in fact prevail, the Company intends to
appeal. This litigation has been expensive, and there can be no assurance of the
outcome. If the patent is finally held invalid, unenforceable or not infringed,
the third party can continue to sell its meniscal fixation devices, and this
could have a material adverse effect on the Company's business, financial
condition and results of operations.

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

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

      Legal standards relating to the scope of claims and the validity of
patents in the medical device field are still evolving, and no assurance can be
given as to the degree of protection any patents issued to or licensed to the
Company would provide. The medical device industry has been characterized by
extensive litigation regarding patents and other intellectual property rights,
and companies in the medical device industry have employed intellectual property
litigation to gain competitive advantage. The Company has initiated an
opposition in the European Patent Office challenging the grant of a third
party's European patent relating to a drawing process for manufacturing
resorbable polymer products. Subsequently, another company has instituted its
own opposition against that patent. 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


                                      -16-
<PAGE>   17
consuming, regardless of whether the outcome is favorable to the Company, and
can result in the diversion of substantial financial, management and other
resources from the Company's other activities. An adverse outcome could subject
the Company to significant liability to third parties, require the Company to
obtain licenses from third parties, or require the Company to cease any related
product development activities or product sales. In addition, the laws of
certain countries may not protect the Company's patent rights, trade secrets,
inventions, products or processes to the same extent as in the U.S.

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

      The Company is currently prosecuting two 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, 1999, the
Company incurred costs of approximately $2.4 million relating to the prosecution
of these two matters and the litigation that settled.

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 clinical advantages of the
Company's Self-Reinforced, resorbable implants, which are the cost
effectiveness, strength, reduction of stress shielding and the elimination of
risks associated with the failure to perform removal surgeries. Within the
resorbable implant market, Johnson & Johnson and Biomet sell an FDA-cleared
resorbable product for use in the fracture fixation market. Other companies have
reported that they are developing resorbable products for internal fixation. The
Company is competing with Johnson & Johnson and Biomet and expects to compete
with the other manufacturers of resorbable internal fixation devices primarily
on the basis of the physiological strength of the Company's polymers, the length
of the strength retention time demonstrated by the Company's products and ease
of use.

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


                                      -17-
<PAGE>   18
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, 1997, 1998 and 1999 - Product Sales."

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

GOVERNMENT REGULATION

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

      Under the FDC Act, medical devices are classified into three classes
(class I, II or III), on the basis of the controls deemed necessary by the FDA
to reasonably assure their safety and efficacy. Under the FDA's regulations,
class I devices are subject to general controls (for example, labeling 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


                                      -18-
<PAGE>   19
recent years, the FDA has been requiring a more rigorous demonstration of
substantial equivalence, including more frequent requests for clinical data in
510(k) submissions.

      If clinical testing of a device is required and if the device presents a
"significant risk", an Investigational Device Exemption ("IDE") application must
be approved prior to commencing clinical trials. The IDE application must be
supported by data, typically including the results of laboratory and animal
testing. If the IDE application is approved by the FDA and one or more
appropriate Institutional Review Boards ("IRBs"), clinical trials may begin at a
specific number of investigational sites with a maximum number of patients, as
approved by the agency. If the device presents a "nonsignificant risk" to the
patient, a sponsor may begin the clinical trial after obtaining approval for the
study by one or more appropriate IRBs without the need for FDA approval. In all
cases, the clinical trials must be conducted under the auspices of an IRB
pursuant to FDA regulations. The Company's failure to adhere to regulatory
requirements generally applicable to clinical trials and to the conditions of an
IDE approval could result in a material adverse effect on the Company, including
an inability to obtain marketing clearance or approval for its products. There
can be no assurance that any clinical study proposed by the Company will be
permitted by the FDA, will be completed or, if completed, will provide data and
information that supports FDA clearance or approval.

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

      If a manufacturer or distributor of medical devices cannot establish that
a proposed device is substantially equivalent to a legally marketed device, the
manufacturer or distributor must seek premarket approval of the proposed device
through submission of a PMA. A PMA must be supported by extensive data,
including laboratory, preclinical and clinical trial data to prove the safety
and effectiveness of the device, and extensive manufacturing information.
Following receipt of a PMA, if the FDA determines that the application is
sufficiently complete to permit a substantive review, the FDA will "file" the
application 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


                                      -19-
<PAGE>   20
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
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


                                      -20-
<PAGE>   21
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
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


                                      -21-
<PAGE>   22
payment systems vary significantly by country, and include both government
sponsored health care and private insurance plans. Accordingly, there can be no
assurance that third-party reimbursement available under any one system will be
available for procedures utilizing the Company's products under any other
reimbursement system. Several governments have recently attempted to
dramatically reshape reimbursement policies affecting medical devices.
Typically, the Company's international independent distributors have obtained
any necessary reimbursement approvals.

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

PRODUCT LIABILITY AND INSURANCE

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

EMPLOYEES

      As of December 31, 1999, the Company employed 110 full-time employees; 24
full-time employees in the U.S. and 86 full-time employees in Finland. The
Company also contracts with independent consultants from time to time. The
Company's Finnish production and office employees are members of a union and the
terms of their employment are governed in part by a collective bargaining
agreement. The Company believes that it maintains satisfactory relations with
its employees.

ITEM 2.  PROPERTIES

      The Company currently operates two facilities, a central manufacturing
facility in Tampere, Finland that is part owned and part leased by the Company
and office space in Blue Bell, Pennsylvania that is leased by the Company. The
Finnish facility, comprising approximately 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 marketing and sales and product
development functions from its 13,500 square foot office space in Pennsylvania.
The annual rent on these facilities is approximately $400,000. 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


                                      -22-
<PAGE>   23
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, 1999) and their positions with the Company are set forth below:


<TABLE>
<CAPTION>
NAME                    AGE                 POSITION
----                    ---                 --------
<S>                     <C>   <C>
Terence D. Wall          58   Chairman, Board of Directors
Gerard S. Carlozzi       43   President, Chief Executive Officer and Director
Pertti Tormala           54   Executive Vice President, Research and Director
Pertti Viitanen          49   Managing Director of the Company's Finnish
                              subsidiary
                              Vice President, Manufacturing
James Hogan              43   President, Stenting Division
Drew Karazin             46   Vice President and Chief Financial Officer
</TABLE>

      Terence D. Wall is a founder of the Company and is also the founder of
Vital Signs, a manufacturer of disposable anesthesia and respiratory devices,
where he serves as President, Chief Executive Officer and Director. He received
a Bachelor of Science degree from the University of Maryland and a Master of
Business Administration degree from Pace University in 1975.

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


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


                                      -23-
<PAGE>   24
      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.


      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
of Marketing and International Operations for Lotek, a drug delivery company in
Switzerland. Prior to Lotek, 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.


      Drew Karazin joined the Company in December, 1999 as Vice President and
Chief Financial Officer. Prior to joining the Company he was Chief Financial
Officer of Life Medical Sciences, Inc., a publicly traded cardiovascular
research company during 1998 and 1999. Prior to that he was the Chief Financial
Officer for SCA Molnlycke, a $200 million subsidiary of a Swedish medical device
and incontinence company during 1996 and 1997 and President of Jersey Integrated
Healthcare, one of the largest physician management companies in New Jersey,
during 1996. From 1992 to 1995 he was the senior executive responsible for
Finance, M&A, Business Development, Strategic Planning, Information Systems and
certain marketing and product development activities for Calgon Vestal
Laboratories Inc., a $100 million division of Merck & Co., Inc. From 1983 to
1995 Mr. Karazin served in financial management positions, and from 1977 to 1983
he served in manufacturing and research positions, with Merck. Prior to the he
was a research and manufacturing engineer at Chesebrough-Ponds.

      Executive officers serve at the discretion of the Board.


                                      -24-
<PAGE>   25
                                   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 is traded on the Nasdaq National Market System
under the symbol "BINX". The following table sets forth, for the periods
indicated, the intra-day high and low sales prices per share of Common Stock on
the Nasdaq National Market System:

<TABLE>
<CAPTION>
                                                     High          Low
<S>                                                 <C>           <C>
      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

      First Quarter Ended March 31, 1999              9.50          5.25
      Second Quarter Ended June 30, 1999              6.44          4.00
      Third Quarter Ended September 30, 1999          5.88          3.50
      Fourth Quarter Ended December 31, 1999          3.94          2.19
</TABLE>

      As of March 29, 2000 there were 63 stockholders of record of the Company's
Common Stock. The Company estimates that as of such date, there were
approximately 1000 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, 1999, 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                  $   2,433
Purchase and installation of machinery and equipment                1,909
Purchases of real estate                                                -
Acquisition of other businesses                                         -
Repayment of indebtedness                                             777
Working capital                                                    13,966
</TABLE>


                                      -25-
<PAGE>   26
      (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, 1997, 1998 and 1999 and the Consolidated
Balance Sheet data as of December 31, 1998 and 1999 are derived from the audited
Consolidated Financial Statements of the Company included elsewhere in this
Annual Report. The Consolidated Statement of Operations data for the years ended
December 31, 1995 and 1996 and the Consolidated Balance Sheet data at December
31, 1995, 1996 and 1997 are derived from audited consolidated financial
statements not included in this Annual Report.


                                      -26-
<PAGE>   27
<TABLE>
<CAPTION>
                                                                                    YEARS ENDED DECEMBER 31,
                                                             ------------------------------------------------------------------
                                                                1995           1996           1997          1998           1999
                                                                ----           ----           ----          ----           ----
                                                                           (In thousands except per share amounts)
<S>                                                          <C>            <C>            <C>           <C>           <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues .............................................       $ 1,622        $ 5,379        $16,014       $21,100       $ 21,068
Cost of Goods Sold ...................................           538          2,214          3,678         4,527          5,857
Special charges Related to Inventory .................            --             --             --            --          6,241
Gross Profit .........................................         1,084          3,165         12,336        16,573          8,970
Operating Expenses ...................................         2,439          7,819         10,579        15,320         22,084
Operating income (loss) ..............................        (1,355)        (4,654)         1,757         1,253        (13,114)
Net income (loss) ....................................        (1,478)        (4,992)         2,158         1,261        (12,463)
Earnings (loss) per share(1):
     Basic ...........................................            --          (0.89)          0.28          0.14          (1.39)
     Diluted .........................................            --          (0.89)          0.25          0.14          (1.39)
Shares used in computing earnings (loss) per share(1):
     Basic ...........................................            --          5,621          7,787         8,918          8,943
     Diluted .........................................            --          5,621          8,526         9,243          8,943
</TABLE>


<TABLE>
<CAPTION>
                                                                                          DECEMBER 31,
                                                                ------------------------------------------------------------------
                                                                  1995          1996           1997           1998           1999
                                                                -------       -------       --------       --------       --------
<S>                                                             <C>           <C>           <C>            <C>            <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit) ................................      $  (576)      $ 2,046       $ 24,549       $ 24,232       $ 11,556
Total assets .............................................        1,794         9,370         33,541         36,949         23,421

Long-term debt less current portion ......................          896           590            115             75             33
Mandatorily redeemable convertible
   preferred stock .......................................           --         5,000             --             --             --
Accumulated deficit ......................................       (2,693)       (7,686)        (5,527)        (4,266)       (16,729)
Total stockholders' equity (deficit)......................       (1,036)        1,023         29,081         30,241         17,994
</TABLE>

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

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


                                      -27-
<PAGE>   28
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, 1999, had an accumulated deficit of
approximately $16.7 million. Such losses have resulted to a large extent from
expenses associated with the write off and reserve of impaired inventory, 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. After recording profitable results for a number of quarters, the
Company has again recorded losses in recent periods, including a loss of
approximately $12.5 million in 1999. Although the Company's revenues grew
significantly in the second half of 1996 and during 1997 and 1998, there was no
revenue growth during 1999. No assurance can be given that revenues will grow in
the future or that revenues will exceed expenses. There can be no assurance that
the Company will be able to successfully commercialize its products or that the
Company will be profitable again.

      In late 1998, the Company entered into an expansion phase building
inventory levels and personnel in anticipation of continued growth in its core
business and the introduction of new products in the Craniofacial surgical
market. Actual sales results were substantially less than planned; thus these
increased expenditures, together with legal costs incurred to protect the
Company's intellectual property and a 1% year over year (1999 vs 1998) reduction
is sales resulted in operating losses during 1999 of approximately $13.1
million.

      The Company incurred losses of $865,000 and $3,560,000 in the first and
second quarters of 1999. During the second quarter of 1999, the Company began to
implement initiatives to refocus its business and reallocate critical resources
with a goal of achieving sales growth, profit improvement and a positive cash
flow position. Management initiatives included: development and implementation
of a management-restructuring plan that included adding critical resources in
areas that will have the greatest impact on sales growth and profit improvement;
consolidation of sales efforts for craniofacial and orthopedic products designed
to improve sales efficiencies, increase market coverage and reduce the Company's
cost of sales; reduction in sales administration to reduce the Company's overall
selling costs; refocus of R&D investments on new product introductions that will
provide complementary product offerings for orthopedic and craniofacial
products; consolidation of global inventories to reduce the Company's overall
investment in inventories and improve customer service levels; reduction in
inventory levels to improve inventory turn rates thereby reducing the Company's
cash requirements to support inventory investments; increases in sales and
marketing efforts designed to expand sales contributions from markets outside of
the US; and the implementation of surgeon educational programs designed to
increase surgeon awareness and use of the Company's products. In addition to
these initiatives, during the second quarter of 1999, four new patents were
issued for the application of the Company's technology for orthopedic
indications.


                                      -28-
<PAGE>   29
      During the third and fourth quarters of 1999, the Company continued to
implement these initiatives and refocus its business in an attempt to improve
its profitability and operations performance. Four new products were introduced.
The loss from operations excluding the special inventory charges, increased
reserves and litigation costs; has been reduced from $2,028,000 in the second
quarter 1999 to $699,000 in the third quarter and $335,000 in the fourth quarter
at December 31, 1999. The Company's cash and cash equivalents improved from $2.9
million at September 30, 1999 to $3.2 million at December 31, 1999, representing
the improvements made in cash flow management and our continued efforts to
achieve a positive cash flow during 2000.

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

      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 1997, 1998 and 1999,
international product sales represented approximately 15%, 20% and 18%,
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, consigns or provides free of charge to
hospitals 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. 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. However,
due to increased competitive activity in the hospital setting, the Company began
expensing instruments during the fourth quarter 1999 as they are placed in
hospitals for use by the surgeon. In the case of consigned product to
distributors and dealers, the Company amortizes the cost of the instrumentation
over a three to four year period as cost of goods sold. 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."

      The Company sells its products through managed networks of direct sales
agents, independent sales agents, distributors and dealers. In the U.S., the
Company handles all invoicing functions directly and pays commissions to its
sales agents or representatives. Outside the U.S., the Company sells its
products directly to distributors and dealers at discounts that vary by product
and by market. Accordingly, the Company's U.S. sales result in higher gross
margins than international sales.

      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. No assurance can be given that the Company will be
able to enter into license arrangements on satisfactory terms.

      The Company has entered into agreements pursuant to which the Company is
obligated to pay royalties based on net sales of certain of the Company's
products, including the Meniscus


                                      -29-
<PAGE>   30
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 invoices more than 85% of its consolidated revenues in US
Dollars. Approximately 72% 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.

      In April, 1999 the Company entered into a distribution agreement with
Mentor Corporation. Under the terms of the agreement, Mentor has exclusive
distribution rights for all of the Company's current and future bioabsorbable
stent products for urology applications in all areas of the world other than the
U.S. and Japan. In exchange for exclusive distribution rights, Mentor must
achieve certain minimum market penetration objectives, and pay the Company a
pre-agreed percentage of the customer sales price on all stent products sold.
During December 1999, the Company renegotiated the agreement with Mentor to
include the exclusive distribution rights for the U.S. In exchange for the U.S.
distribution rights, Mentor will pay all costs and expenses associated with
development, clinical and registration costs of current and future stents for
urology applications on a global basis, excluding Japan. The Company also
entered into an agreement with Toray, a Japanese company, for the exclusive
distribution rights for stent products in Japan. Toray will pay all costs and
expenses associated with development, clinical and registration costs of current
and future stents for urology applications in Japan.

      While the Company's operating losses have resulted in net operating loss
carryforwards of approximately $ 8.5 million for Federal, foreign and state
income tax reporting purposes as of December 31, 1999, the extent to which such
carryforwards are available to offset future U.S. and Finnish taxable income may
be limited as a result of various ownership changes that have occurred in recent
years. Additionally, because tax laws limit the time during which these
carryforwards may be applied against future taxes, the Company may not be able
to take full advantage of these carryforwards for income tax purposes.
Furthermore, income earned by a foreign subsidiary may not be offset against
operating losses of U.S. entities. The statutory tax rates applicable to the
Company and its foreign subsidiaries vary substantially. Tax rates have
fluctuated in the past and may do so in the future. See Note 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, 1997, 1998 AND 1999

      Product Sales

      The Company's product sales increased by 31% from $15.8 million in 1997 to
$20.7 million in 1998, and decreased by 1% to $20.5 million in 1999. 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. The decrease in


                                      -30-
<PAGE>   31
product sales in 1999 reflected a reduction in sales of Sports Medicine
products, including the Meniscus Arrow, offset to a large degree by the increase
in sales of Orthopedic Trauma and Craniofacial products. Meniscus Arrow sales
were negatively impacted by a reduction in the number of arrows used per surgery
and the increase in non-Arrow sales reflects new products and market
opportunities. Revenues generated from the sale of instrumentation systems and
related loaner fees represented 11%, 8% and 4% of total sales in 1997, 1998 and
1999, amounting to $1.8 million in 1997, $1.7 million in 1998 and $0.9 million
in 1999. The decline from 1998 to 1999 in both percentage and dollar terms was
primarily due to the increasingly competitive environment and a trend toward
giving the instruments to healthcare institutions. Instrumentation revenues
relating to the Meniscus Arrow during 1997, 1998 and 1999 were approximately
$850,000, $624,000 and $322,000 respectively.

      License and grant revenues. License and grant revenues increased by 73%
from $242,000 in 1997 to $418,000 in 1998 and by 48% to $618,000 in 1999. The
increase in revenues from 1997 to 1998 resulted from an increase in the level of
research activity during 1998. The increase in revenues from 1998 to 1999
resulted from increased government and university funding.

      Gross profit; gross profit margins. The Company's gross profit increased
by 34% from $12.3 million in 1997 to $16.6 million in 1998 and decreased by 46%
to $9.0 million in 1999. The increase in the Company's gross profit during 1998
primarily reflected the increased sales of Meniscus Arrow products after their
introduction in the U.S. in the second quarter of 1996. The decrease in 1999
includes $6.2 million of special charges related to instrument and obsolete
inventory; the gross profit excluding these adjustments would have been $15.2
million. Overall, the Company's gross profit margin increased from 77% in 1997
to 79% in 1998 and decreased to 43% in 1999. Excluding the special charges the
gross profit margin would have decreased to 72% in 1999, which includes an
increased amortization of instruments placed with distributors and a change in
mix towards products with lower gross margins.

      The Company amortizes the cost of instrumentation inventory consigned to
distributors and dealers, and classifies this as an inventory reserve. The
Company's total amortization charge for these items increased from $800,000 at
December 31, 1998 to $1,903,000 during 1999. The increase is due to a related
increase in the number of instruments consigned versus the previous practice of
selling the instruments. During the fourth quarter, the Company began expensing
the instruments given to hospitals as their future benefit is unpredictable.
During the fourth quarter 1999 the Company changed its accounting estimate for
instruments consigned to hospitals. Additionally, in the fourth quarter, the
Company identified certain distributor accounts that had been terminated by the
Company and had outstanding inventory balances. The Company wrote off $382,000
of gross implant inventory and $886,000 of gross instrument that had been placed
with these distributors, used as samples and or it is cost prohibitive to pursue
such accounts and retrieve the products.

In the second quarter, the Company recorded a charge of $929,000 for excess
implant and instrument inventory due to changes in technology and the
introduction of new and competing instruments. This charge was increased by
$1,594,000 in the fourth quarter as these continued changes in technology
created excess inventory.



      In aggregate, the foregoing charges resulted in a Special Charge of $6.241
million during 1999. The net fourth quarter impact of the change in estimate for
the hospital instruments was $2.45 million.

      Selling, general and administrative expenses. Selling, general and
administrative expenses increased by 30% from $9.7 million in 1997 to $12.6
million in 1998, and by 26% to $15.9 million in 1999. Such expenses were 62% of
product sales in 1997, 63% of product sales in 1998, and 78% of product sales in
1999. The increases in the dollar amount of selling, general and administrative
expenses during these periods is partially attributable to salaries paid to
newly employed sales persons (including the costs incurred in the launch of the
craniofacial products), the increase in commission payment obligations
reflecting the Company's increased product sales in the U.S., and the increase
in expenses associated with establishing and supporting a managed network of
independent sales agents in the U.S. Also contributing to this increase were
costs incurred in connection with the Company's implementation of new business
initiatives related to the restructuring of the Company's operations and
organization to a system of managed sales agents and distributors from the
aforementioned new sales employee structure, and the anticipation of new product
launches.


                                      -31-
<PAGE>   32
      Research and development. Research and development expenses increased by
171% from $871,000 in 1997 to $2,360,000 in 1998 and by 59.1% to $3,758,000 in
1999. Research and development as a percentage of sales increased during this
period from 9% in 1997 to 11% in 1998 to 18% in 1999. These increases reflected
an increased volume of product development work being performed by the Company
and increased staffing levels.


      Severance charges. During the second quarter of 1999, the Company incurred
a one-time severance charge of $275,000 and incurred further charges of $21,000
during the remainder of the year related to additional employee severances.
These severance charges relate to the organizational restructuring of the
Company, including severance payments to the Company's former chief executive
officer, chief financial officer and vice president of sales. The majority of
the severance charges were paid prior to December 31, 1999.


      Patent litigation. The Company has incurred $2.1 million in legal fees to
prosecute (and in one instance settle) three patent infringements suits during
1999. The patent litigation legal fees incurred during 1999 are part of the
Company's efforts to protect and strengthen its proprietary intellectual
property position. There were no material comparable charges in 1997. The
comparable charge in 1998 was $350,000.

      Other income and expense. Other income and expense consists of interest
income and expense and miscellaneous expense and income items. The Company
generated net interest income of $752,000 in 1997, $986,000 in 1998 and $248,000
in 1999. A foreign currency transaction gain of $408,000 was recorded in "other
income" in 1997, compared to a foreign currency transaction loss of $263,000
during 1998 and a gain of $466,0000 in 1999.

      Income taxes. In 1997, the Company recorded an income tax provision of
$758,000, or 26 % of pretax income, 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 pretax income. 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. During 1999 both the US and Finnish
operations had net losses with no benefit recorded. The tax charge of $63,000
was under 1% and represented an adjustment to the net deferred tax asset.

      Net income(Loss). The Company reported net income of $2,158,000 and
$1,261,000 in 1997 and 1998, respectively and a loss of $12.5 million in 1999.

RECENT ACCOUNTING PRONOUNCEMENTS

      In December 1999, the staff of the SEC issued Staff Accounting Bulletin
No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101
summarizes certain of the staff's views in applying Generally accepted
Accounting Principles to revenue recognition in financial statements, including
recognition of non-refundable fees received upon entering into agreements. The
Company is in the process of evaluating SAB 101 and the effect it will have on
our Consolidated Financial Statements and current revenue recognition policy.


      In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133). SFAS133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires companies
to recognize all derivatives as either assets or liabilities on the balance
sheet and measure those instruments at fair value. Gains or losses resulting
from changes in the value


                                      -32-
<PAGE>   33
of those derivatives would be accounted for, depending on the use of the
derivative and whether it qualifies for hedge accounting under SFAS 133.
Prospective application of SFAS 133, as amended, is required commencing with the
first quarter of the fiscal year beginning after December 31, 2000, however,
earlier application is permitted. We do not expect the impact of SFAS 133 to be
material to our financial position and results of operations.


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)
<S>                                                       <C>
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

1999
Quarter ended March 31..........................              $  5,107
Quarter ended June 30...........................                 4,907
Quarter ended September 30......................                 4,802
Quarter ended December 31.......................                 5,634
</TABLE>

      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, 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). 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 a subsidiary.
During 1999 this credit line was increased to $4.0 million. 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, 1998 and 1999, cash and cash equivalents totaled $14.2
million and $3.2 million, respectively.


                                      -33-
<PAGE>   34
      The Company's liquidity has been weakened substantially during 1999. The
Company's liquidity is dependent primarily upon its ability to improve operating
results and thereby generate adequate cash flow from operations. Management has
taken several steps designed to improve future financial results and reduce the
amount of cash used by operations, including (i) developing a management
restructuring plan to add critical resources to areas having the greatest impact
in sales growth, (ii) consolidating sales efforts to improve sales efficiencies,
increase market coverage and reduce selling costs, (iii) refocusing research and
development investments on new product introductions, (iv) consolidating and
reducing inventory levels, (v) increasing sales and marketing efforts outside
the U.S., and (vi) where possible, reducing other operating expenses. However,
there can be no assurance that these steps will be successful. The Company's
operations may not provide sufficient internally generated cash flows to meet
the Company's projected requirements. The Company's ability to continue to
finance its operations will depend on its ability to achieve profitability by
improving sales and margins, its ability to reduce cash outflows and, if
necessary, its ability to obtain other sources of funding sufficient to support
the Company's operations. No assurances can be given that such funding will be
available on satisfactory terms or at all.

       On March 3, 2000, the Company completed a shareholder rights offering,
pursuant to which it raised $4,046,485 (before deducting expenses of
approximately $100,000) and issued 1,586,857 shares of Common Stock. The Company
distributed 0.173 of a subscription right for each share of Common Stock
outstanding on the January 10, 2000 record date for a total of 1,586,857 shares
offered in the rights offering. The subscription price of $2.55 per share was
established by the Board of Directors based on a 15% discount from the market
price on January 14, 2000, at the time the offering was priced. The Company
plans to use the proceeds of the rights offering for additional working capital
to fund operations, for continuing research and development and for surgeon
education programs.

      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 further equity financing may be dilutive to
stockholders and the terms of any debt financing may contain restrictive
covenants, which limit the Company's ability to pursue certain courses of
action. The Company does not have any committed sources of 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.
Principal stockholders of the Company who previously provided funding to the
Company and provided guarantees to sources of credit have indicated that they do
not intend to continue furnishing such assistance. If adequate funds are not
available, the Company may be required to delay, scale-back or eliminate certain
aspects of its operations or attempt to obtain funds through arrangements with
strategic partners or others that may require the Company to relinquish rights
to certain of its technologies, product candidates, products or potential
markets. If adequate funds are not available, the Company's business, financial
condition and results of operations could be materially and adversely affected.
The Company's future capital requirements and the adequacy of available capital
resources will depend on numerous factors, including the Company's ability to
successfully perform management initiatives initiated in 1999, 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
2000 will depend primarily upon the Company's operating results and the extent
to which such results are capable of funding anticipated growth.


                                      -34-
<PAGE>   35
      The Company believes that existing capital resources from its $4.0 million
discretionary credit line and its $4.0 million rights offering completed in
2000, together with cash flow from operations (if, and to the extent,
generated), will be sufficient to fund its operations during 2000. 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 funds will depend on numerous factors, including
management's ability to reverse recent trends, market acceptance of the
Company's existing and future products, the successful commercialization of
products in development, progress in its product development efforts, the
magnitude and scope of such efforts, progress with preclinical studies, clinical
trials and product clearances by the FDA and other agencies, the cost and timing
of 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 its
products. The Company's operations did not produce positive cash flows during
1994, 1995, 1996, 1998 or 1999. To the extent that funds generated from the
Company's operations, together with its existing capital resources (including
its credit facility), and the net interest earned thereon, are insufficient to
meet current or planned operating requirements, the Company will be required to
obtain additional funds through equity or debt financing, strategic alliances
with corporate partners and others, or through other sources. No assurances can
be given that such funds will be made available to the company on acceptable
terms or otherwise.




ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


The Company conducts operations in countries other than the United States,
primarily its manufacturing facility in Finland. The Company's consolidated
financial statements are denominated in U.S. dollars, and accordingly, changes
in exchange rates between foreign currencies and the U.S. dollar will affect the
translation of financial results of foreign subsidiaries into U.S. dollars for
purposes of recording the Company's consolidated financial results. As of
December 31, 1999, the Company had 2 foreign currency contracts outstanding,
with a face value of $54,344.


                                      -35-
<PAGE>   36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

<TABLE>
<CAPTION>
                                                                         Page
<S>                                                                      <C>
Independent Auditors' Report                                             F-1

Consolidated Balance Sheets as of
    December 31, 1998 and 1999                                           F-2

Consolidated Statements of Operations
  for the Years Ended December 31,
  1997, 1998 and 1999                                                    F-3

Consolidated Statement of Stockholders'
  Equity (Deficit) and Comprehensive Income for the Years
  Ended December 31, 1997, 1998 and 1999                                 F-4

Consolidated Statements of Cash Flows
  for the Years Ended December 31,
  1997, 1998 and 1999                                                    F-5

Notes to Consolidated Financial Statements                               F-7

Schedule II - Valuation and Qualifying Accounts                          F-20
</TABLE>


                                      -36-
<PAGE>   37
                          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, 1998 and 1999, and the
related consolidated statements of operations, stockholders' equity and
comprehensive income (loss), and cash flows for each of the years in the
three-year period ended December 31, 1999. In connection with our audits of the
consolidated financial statements, we also have audited the accompanying
financial statement schedule. These consolidated financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.

      We conducted our audits in accordance with 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, 1998 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, 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
April  7, 2000


                                      F-1
<PAGE>   38
                      BIONX IMPLANTS, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1998 AND 1999

<TABLE>
<CAPTION>
                                                                               DECEMBER 31,
                                                                    ---------------------------------
                                                                        1998                 1999
                                                                    ------------         ------------
<S>                                                                 <C>                  <C>
ASSETS
Current assets:
   Cash and cash equivalents ...............................        $ 14,213,368         $  3,186,487
   Inventory, net (note 3) .................................           9,777,988            7,773,882
   Trade accounts receivable, net of allowance of
      $142,883 and $440,698 as of December 31, 1998
      and 1999, respectively ...............................           4,643,280            3,540,071

   Grants receivable .......................................             188,888              136,523
   Related party receivable(note 5) ........................             275,129              320,549
   Prepaid expenses and other current assets, net of
       allowance of $223,325 ...............................             689,975              913,746
   Deferred tax asset ......................................             828,784              797,908
                                                                    ------------         ------------
Total current assets .......................................          30,617,412           16,669,166

Investments ................................................              87,115               87,115
Plant and equipment, net (note 4) ..........................           2,560,440            2,723,058
Goodwill and intangibles, net ..............................           3,684,081            3,941,836
                                                                    ------------         ------------
Total assets ...............................................        $ 36,949,048         $ 23,421,175
                                                                    ============         ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Trade accounts payable ..................................        $  4,176,406         $  2,940,217
   Long-term debt, current portion (note 7) ................              40,842                   --
   Current income tax liability ............................             577,673                   --
   Accrued and other current liabilities (note 6) ..........           1,590,589            2,172,888
                                                                    ------------         ------------
Total current liabilities ..................................           6,385,510            5,113,105
                                                                    ------------         ------------
Long-term debt (note 7) ....................................              74,527               33,370
Deferred tax liability .....................................             248,395              280,694
                                                                    ------------         ------------
Total Liabilities ..........................................           6,708,432            5,427,169

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, 8,922,076 and
          9,199,085 shares issued as of
          December 31, 1998 and 1999, respectively .........              16,952               17,478


     Treasury stock, 20,500 and 26,500 shares as of December
      31, 1998 and 1999, respectively ......................            (128,198)            (161,695)
     Additional paid-in capital ............................          35,642,502           35,891,976
     Accumulated deficit ...................................          (4,266,009)         (16,729,122)
     Accumulated other comprehensive income ................          (1,024,631)          (1,024,631)
                                                                    ------------         ------------

Total stockholders' equity .................................          30,240,616           17,994,006
                                                                    ------------         ------------

Total liabilities and stockholders' equity .................        $ 36,949,048         $ 23,421,175
                                                                    ============         ============
</TABLE>


         See accompanying notes to consolidated financial statements.


                                      F-2
<PAGE>   39
                          BIONX IMPLANTS, INC. AND SUBSIDIARIES
                    CONSOLIDATED STATEMENTS OF OPERATIONS
                 YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999

<TABLE>
<CAPTION>
                                                               YEARS ENDED DECEMBER 31,
                                                 ------------------------------------------------------
                                                     1997                 1998                 1999
                                                 ------------         ------------         ------------
<S>                                              <C>                  <C>                  <C>
Revenues:
   Product sales ........................        $ 15,772,674         $ 20,682,965         $ 20,450,448
   License and grant revenues (note 13) .             241,685              417,507              617,716
                                                 ------------         ------------         ------------
         Total revenues .................          16,014,359           21,100,472           21,068,164
                                                 ------------         ------------         ------------

Cost of goods sold ......................           3,678,112            4,527,301            5,857,189
Special charge related to instrument
    and  implant inventory ..............                  --                   --            6,241,000
                                                 ------------         ------------         ------------

Gross profit ............................          12,336,247           16,573,171            8,969,975
                                                 ------------         ------------         ------------

Selling, general and administrative .....           9,708,389           12,609,532           15,887,518
Research and development ................             871,101            2,360,485            3,758,680
Severance charges .......................                  --                   --              296,082
Patent litigation expense ...............                  --              350,000            2,141,332
                                                 ------------         ------------         ------------

Total operating expenses ................          10,579,490           15,320,017           22,083,612
                                                 ------------         ------------         ------------

Operating income (loss) .................           1,756,757            1,253,154          (13,113,637)
                                                 ------------         ------------         ------------

Other income and (expenses):
   Interest income net ..................             751,694              985,609              247,502
   Other, net ...........................             408,256             (236,002)             466,197
                                                 ------------         ------------         ------------

         Total other income, net ........           1,159,950              749,607              713,699
                                                 ------------         ------------         ------------

Income (loss) before provision for income
  taxes .................................           2,916,707            2,002,761          (12,399,938)
Provision for income taxes (note 12) ....            (758,344)            (741,416)             (63,175)
                                                 ------------         ------------         ------------

Net income (loss) .......................        $  2,158,363         $  1,261,345         $(12,463,113)
                                                 ============         ============         ============

Earnings (loss) per share (note 2):
     Basic ..............................        $       0.28         $       0.14         $      (1.39)
     Diluted ............................                0.25                 0.14                (1.39)
Shares used in computing
     earnings (loss) per share (note 2):
     Basic ..............................           7,786,937            8,918,391            8,942,866
     Diluted ............................           8,526,081            9,243,369            8,942,866
</TABLE>


          See accompanying notes to consolidated financial statements.


                                      F-3
<PAGE>   40
                      BIONX IMPLANTS, INC. AND SUBSIDIARIES

       CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE
                                  INCOME (LOSS)
                  YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999


<TABLE>
<CAPTION>
                                               COMMON
                                               STOCK                                                      FOREIGN
                                             PAR VALUE                    ADDITIONAL                      CURRENCY         TOTAL
                                             OR STATED     TREASURY        PAID-IN        ACCUMULATED    TRANSLATION   STOCKHOLDERS'
                                               VALUE         STOCK         CAPITAL          DEFICIT      ADJUSTMENT        EQUITY
                                             ----------   -----------    ------------    ------------    -----------    -----------
<S>                                         <C>           <C>            <C>             <C>             <C>           <C>
Balance, December 31, 1996 ...............   $   10,105            --    $  8,967,993    $ (7,685,717)   $  (269,577)   $ 1,022,804

Proceeds from initial public offering, net        4,370            --      21,095,441              --             --     21,099,811
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
Treasury stock purchased .................           --       (33,497)             --              --             --        (33,497)
Proceeds from the exercise
    of incentive stock options ...........          526            --         249,474                             --        250,000
Comprehensive  (loss) ....................           --            --                     (12,463,113)                  (12,463,113)
                                             ----------   -----------    ------------    ------------    -----------    -----------

Balance, December 31, 1999 ...............   $   17,478   $  (161,695)   $ 35,891,976    $(16,729,122)   $(1,024,631)   $17,994,006
                                             ==========   ===========    ============    ============    ===========    ===========
</TABLE>


          See accompanying notes to consolidated financial statements.


                                      F-4
<PAGE>   41
                      BIONX IMPLANTS, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999


<TABLE>
<CAPTION>
                                                                          YEARS ENDED DECEMBER 31,
                                                             ---------------------------------------------------
                                                                 1997               1998                1999
                                                             ------------         ----------         -----------
<S>                                                          <C>                   <C>               <C>
Cash flows from operating activities:
  Net income (loss) .................................        $  2,158,363          1,261,345         (12,463,113)
                                                             ------------         ----------         -----------
  Adjustments to reconcile net income (loss) to
   net cash (used in) provided by operating
   activities:
   Depreciation and amortization ....................             268,366            815,781           1,391,646
   Deferred tax provision ...........................            (355,000)          (225,389)             63,175
    Provision for bad debt ..........................                                                    297,815
    Special charge related to inventory .............                                                  6,241,000
   Change in assets and liabilities:
     (Increase) in inventory ........................          (1,367,006)        (1,803,177)         (4,236,894)
     (Increase) decrease in accounts receivable, net           (1,529,053)        (7,228,460)            805,394
     (Increase) decrease in grant receivable ........              (6,140)           (59,935)             52,365
     Decrease in deferred
       Issuance costs ...............................             194,981                 --                  --
     (Increase) in prepaid expense, related
       party and other assets .......................              (3,910)          (576,878)           (269,191)
     Decrease in deposits ...........................              43,964                 --                  --
     Increase (decrease) in accounts payable ........             922,805          2,401,446          (1,236,189)
     (Decrease) in related party ....................             (88,826)           (74,358)                 --
     Increase (decrease) in current tax liability ...             769,093           (664,951)           (577,673)
     Increase  in accrued and other
        liabilities .................................             148,722            381,445             582,299
                                                             ------------         ----------         -----------



Net cash provided by (used in) operating
   activities .......................................        $  1,156,359         (5,773,131)         (9,349,366)
                                                             ------------         ----------         -----------

Cash flows from investing activities:
   Purchases of plant and equipment .................            (412,263)        (2,044,271)         (1,192,436)
   Purchases of computer software and intangibles ...                  --           (455,627)           (619,583)
   Proceeds from sale of investments ................              15,165                 --                  --
                                                             ------------         ----------         -----------


Net cash used in investing activities ...............        $   (397,098)        (2,499,898)         (1,812,019)
                                                             ------------         ----------         -----------

Cash flows from financing activities:
   Repayment of long-term debt ......................            (646,259)           (43,315)            (81,999)
   Proceeds from initial public offering, net .......          21,099,811                 --
   Purchase of treasury shares ......................                  --           (128,198)            (33,497)
   Exercise of warrants .............................             552,034                 --                  --
   Proceeds from exercise of employee
     stock options ..................................               3,253             26,258             250,000
                                                             ------------         ----------         -----------

Net cash provided by (used in) financing activities          $ 21,008,839           (145,255)            134,504

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

                                                                                                       Continued
</TABLE>


                                      F-5
<PAGE>   42
                      BIONX IMPLANTS, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999


<TABLE>
<S>                                                         <C>                  <C>                 <C>
Net effects of foreign exchange rate differences ....        $   (729,579)                 --                  --
                                                             ------------         -----------         -----------

Net increase (decrease) in cash and
   cash equivalents .................................          21,038,521          (8,418,284)        (11,026,881)

Cash and cash equivalents at beginning of year ......        $  1,593,131          22,631,652          14,213,368
                                                             ------------         -----------         -----------

Cash and cash equivalents at end of year ............        $ 22,631,652          14,213,368           3,186,487
                                                             ============         ===========         ===========

Supplemental disclosure of cash flow information:
Cash paid for interest ..............................        $     26,398               1,423               3,258
Cash paid for taxes .................................        $    190,578           1,631,756             275,321
                                                             ============         ===========         ===========


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


           See accompanying notes to consolidated financial statements


                                      F-6
<PAGE>   43
                      BIONX IMPLANTS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1999

(1) ORGANIZATION

      Basis of Presentation


      On August 27, 1999, the Company reincorporated, changing its state of
incorporation from Delaware to Pennsylvania. The reincorporation was approved by
the Company's stockholders at the Company's annual meeting of stockholders on
August 13, 1999. There was no change in the name, business, management, benefit
plans, location, assets, liabilities or net worth of the Company as a result of
the reincorporation.

      Bionx Implants, Inc. (the Company) was originally incorporated in October
1995 as a Delaware corporation. In 1996, the Company completed a reorganization,
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, the
accompanying financial statements include the four predecessor corporations'
financial statements consolidated as of December 31, 1998 and 1999, and for the
years ended December 31, 1997, 1998 and 1999.


      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 underwriter's over-allotment option 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
sixteen product lines through managed networks of independent agents,
distributors and dealers.


(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      Principles of Consolidation

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



                                      F-7
<PAGE>   44
      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 to dealers and
distributors in the US and dealers, distributors and hospitals in the rest of
the world, is amortized over its estimated useful life of three years.


      Plant and Equipment

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

      Intangibles

      Patents and rights are stated at cost. Amortization of patents is recorded
using the straight-line method over the remaining legal lives of the patents,
generally for periods ranging up to 12 years. 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 $415,484 and $616,398 at December 31,
1998 and 1999, 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 intangible assets, such impairment would be
recognized by a write-down of the applicable assets. The Company continues to
evaluate the continuing value of patents and patent applications, particularly
as expenses to prosecute or maintain these patents come due. Through this
evaluation, the Company may elect to continue to maintain these patents, seek to
out-license them or abandon them.

      Goodwill

      Goodwill, representing costs in excess of the fair value of assets
acquired, is amortized on a straight-line basis over 20 years. On a periodic
basis, the Company evaluates the carrying value of intangible assets based upon
expectations of undiscounted cash flows. Accumulated amortization related to
goodwill was $375,550 and $536,473 at December 31, 1998 and 1999, respectively.


                                      F-8
<PAGE>   45
      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 was denied
such approvals or clearances, or such approvals or clearances were delayed, it
would have a material adverse impact on the results of operations and financial
position of the Company.

      Fair Value of Financial Instruments

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

      Stock Option Plan

      Effective January 1, 1996, the Company adopted SFAS No. 123, Accounting
for Stock-Based Compensation, which permits entities to recognize as expense
over the vesting period the fair value of all stock-based awards on the date
of grant. Alternatively, SFAS No. 123 also allows entities to continue to
apply the provisions of APB Opinion No. 25 and provide pro forma net income
and pro forma earnings per share disclosures for employee stock option grants
as if the fair-value-based method defined in SFAS No. 123 had been applied.
The Company has elected to continue to apply the provisions of APB Opinion
No. 25 and provide the pro forma disclosures required by SFAS No. 123.

      Revenue Recognition

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

      Research and Development

      All research and development costs are expensed as incurred.

      Foreign Exchange Risk Management

      The Company hedges its estimated net economic exposure through foreign
exchange options and forward contracts 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. Net foreign currency exchange transaction losses of $236,002
were recorded in "other income" in


                                      F-9
<PAGE>   46
1998 and net foreign currency exchange transaction gains of $466,197 were
recorded in "other income" in 1999.


      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.

      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 translation 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 consolidated 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>
                                                         1997               1998                1999
                                                     -----------         ----------        ------------
<S>                                                  <C>                 <C>               <C>
      Net income (loss)                              $ 2,158,363         $1,261,345        $(12,463,113)
      Foreign currency translation adjustment           (755,054)                --                  --
                                                     -----------         ----------        ------------
      Total comprehensive income (loss)              $ 1,403,309         $1,261,345        $(12,463,113)
                                                     ===========         ==========        ============
</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. Diluted earnings (loss) per share are 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, 1997, 1998 and 1999:


                                      F-10
<PAGE>   47
<TABLE>
<CAPTION>
                                                                1997             1998             1999
                                                             ---------        ---------        ---------
<S>                                                          <C>              <C>              <C>
      Shares used in computing basic
               earnings (loss) per share                     7,786,937        8,918,391        8,942,866

      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                     8,526,081        9,243,369        8,942,866
                                                             =========        =========        =========
</TABLE>

      During the year ended December 31, 1999 there were approximately 700,000
stock options and warrants that were considered antidilutive and, accordingly,
excluded in the calculation of earnings (loss) per share.

      Reclassifications

      Certain amounts in the 1998 financial statements have been reclassified to
conform to the current year presentation.

(3) INVENTORY

      Inventory consists of the following components as of December 31, 1998 and
1999:

<TABLE>
<CAPTION>
                                                                  1998                 1999
                                                              ------------         ------------
<S>                                                           <C>                  <C>
Raw materials                                                 $  1,781,661         $  1,121,084
Finished goods - Implants                                        2,570,416            2,844,216
Instruments                                                      2,457,156            4,504,934
Instruments on consignment                                       3,944,080            3,099,711
                                                              ------------         ------------
                                                                10,753,313           11,569,945

       Less:
             Inventory reserve for obsolete and excess
                  instruments and implants                        (175,565)          (2,700,972)
             Accumulated amortization
              - consigned instruments                             (799,760)          (1,095,091)
                                                              ------------         ------------
                                                              $  9,777,988         $  7,773,882
                                                              ============         ============
</TABLE>

The Company amortizes the cost of instrumentation inventory consigned to dealers
and distributors.

In the fourth quarter of 1999, the Company changed its accounting estimate for
instruments consigned to hospitals. Since the Company can not control future
purchases from such hospitals and it is cost prohibitive to return the
instruments, the Company began expensing the instruments on the initial sale to
the hospital. In accordance with APB Opinion 20, the Company wrote off $ 4.0
million of hospital gross inventory and added back an associated $1.6 million of
accumulated amortization, for a net $2.45 million write off.


                                      F-11
<PAGE>   48
Additionally, in the fourth quarter, the Company identified certain distributor
accounts that had been terminated by the Company and had outstanding inventory
balances. The Company wrote off $382,000 of gross implant inventory and $886,000
of gross instrument that had been placed with these distributors, used as
samples and or it is cost prohibitive to pursue such accounts and retrieve the
products.

In the second quarter, the Company recorded a charge of $929,000 for excess
implant and instrument inventory due to changes in technology and the
introduction of new and competing instruments. This charge was increased by
$1,594,000 in the fourth quarter as these continued changes in technology
created excess inventory.

In aggregate, the foregoing charges resulted in a Special Charge of $6.241
million during 1999.

(4) PLANT AND EQUIPMENT

      Plant and equipment consist of the following components as of December 31,
1998 and 1999:

<TABLE>
<CAPTION>
                                              1998                1999
                                          -----------         -----------
<S>                                       <C>                 <C>
Machinery and production equipment        $ 1,998,820         $ 2,631,163
Construction in progress                       97,835              98,773
Furniture and fixtures                        775,979             983,744
Capitalized software costs                    302,613             566,056
Computer equipment                            173,041             260,986
                                          -----------         -----------
                                            3,348,288           4,540,722
Less accumulated depreciation                (787,848)         (1,817,664)
                                          -----------         -----------
                                          $ 2,560,440         $ 2,723,058
                                          ===========         ===========
</TABLE>

(5) RELATED PARTY TRANSACTIONS


      The Company's product development efforts are dependent upon Dr. Tormala,
who is a founder, director, and executive officer of the Company and is
currently an Academy Professor at the Technical University in Tampere, Finland
and as such is permitted by the University to devote his efforts to developing
new products for the Company. This executive utilizes a group of senior
researchers, graduate students, and faculty at the Technical University to
perform research and development projects involving resorbable polymers and
other topics impacting the Company's technology and processes. This arrangement,
partially funded by the Company and permitted in Finland as a means of
encouraging the commercialization of technological development, has resulted in
substantial cost savings to the Company while substantially expanding its
product development effort. The Company's funding obligation, which amounted to
$271,000, $328,000 and $417,000 during the years ended December 31, 1997, 1998
and 1999 respectively, consists of providing the University with reasonable
compensation for University resources (including graduate students) utilized by
the Company.

During 1998 the Company made advances of $9,158 (50,000 Finnish Markka) on
behalf of a related party, Bioabsorbable Concepts, Inc. This amount was
outstanding as of December 31, 1998 and 1999.

The Company has paid certain administrative expenses on behalf of Bionix B.V., a
related party. The loan amounts outstanding were $229,791 and $259,311 as of
December 31, 1998 and 1999.

An executive in Finland has a non-interest bearing loan with the Company. As of
December 31, 1998 and 1999, this executive owed $36,180 for expenses paid on his
behalf.

The Company leases office space in Blue Bell, Pennsylvania to a company which is
partially owned by several board members of the Company. Bionx was owed $15,900
as of December 31, 1999, which was paid in February of 2000.

(6) ACCRUED AND OTHER CURRENT LIABILITIES

      Accrued and other current liabilities consist of the following components
as of December 31, 1998 and 1999:



                                      F-12
<PAGE>   49
<TABLE>
<CAPTION>
                                   1998                  1999
                               ----------            ----------
<S>                            <C>                   <C>
Commissions .......            $  370,846            $   85,727
Royalties .........               264,544               290,345
Wages and Benefits                270,718             1,065,976
Taxes withheld ....               225,995               281,810
Inventory purchases               128,780                    --
Professional fees .               197,809                15,000
Research ..........                74,200                18,750
Severance .........                    --                94,203
Other .............                57,697               321,077
                               ----------            ----------
                               $1,590,589            $2,172,888
                               ==========            ==========
</TABLE>

During the second quarter of 1999, the Company incurred a one-time severance
charge of $275,000 and incurred further charges of $21,000 during the remainder
of the year related to additional employee severances. These severance charges
relate to the organizational restructuring of the Company, including severance
payments to the Company's former chief executive officer, chief financial
officer and vice president of sales. The majority of the severance charges were
paid prior to December 31, 1999.


(7) LONG-TERM DEBT

      Long-term debt consists of the following components as of December 31,
1998 and 1999:


<TABLE>
<CAPTION>
                                            1998                 1999
                                         ---------             --------
<S>                                      <C>                   <C>
Loans from Finnish government            $ 101,447                   --
Other debt ..................               13,922             $ 33,370
                                         ---------             --------
                                           115,369               33,370
Less current portion ........              (40,842)                 (--)
                                         ---------             --------
                                         $  74,527             $ 33,370
                                         =========             ========
</TABLE>

The debt is from the Finnish government, made in order to support technology
development and is 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, 1999 are as follows: 2000, $ 0, 2001, $8,342, 2002,
$8,342, 2003, $8,342 and 2004, $8,344.

(8) LINE OF CREDIT


      The Company has a $4 million credit line with a lending institution
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

      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


                                      F-13
<PAGE>   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.

      During the fourth quarter of 1998, the Company's board of directors
announced a buy-back program to repurchase its common stock from time to time.
During 1998 and 1999, the Company repurchased 20,500 shares and 6,000 shares,
respectively for a purchase price of $128,198 and $33,497, respectively.

(10) COMMITMENTS AND CONTINGENCIES

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


<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
------------------------
<S>                                               <C>
         2000                                       483,950
         2001                                       451,012
         2002                                       426,248
         2003                                       421,744
</TABLE>

      Rental expense for the years ended December 31, 1997, 1998 and 1999
aggregated $202,624, $454,702, and $421,609, respectively.

      The Company has incurred $2.1 million in legal fees to prosecute (and in
one instance settle) three patent infringements suits during 1999. The patent
litigation legal fees incurred during 1999 are part of the Company's efforts to
protect and strengthen its proprietary intellectual property position. There
were no material comparable charges in 1997. The comparable charge in 1998 was
$350,000.


(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 that 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, 1999, there were 131,957 additional shares available for
grant under the 1996 Option Plan. The per share weighted-average fair value of
stock options granted in 1997, 1998 and 1999 was $16.66, $12.43, and $2.47
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>
                                   1997            1998            1999
                                 -------         -------         -------
<S>                              <C>             <C>             <C>
Risk-free interest rate             6.22%           5.30%           6.25%
Expected dividend yield               --              --              --
Volatility of stock price           43.5%           84.7%          100.0%
Expected life of options              10              10             3.5
</TABLE>


                                      F-14
<PAGE>   51
      The Company applies APB Opinion No. 25 in accounting for its 1996 Option
Plan and, accordingly, no compensation cost has been recognized for its stock
options in the financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under SFAS
No. 123, the Company's net loss would have been increased and net income
decreased as indicated below:

<TABLE>
<CAPTION>
                                                       1997                 1998                1999
                                                  -------------        -------------       -------------
<S>                                               <C>                  <C>                 <C>
Net income (loss):
      As reported ........................        $   2,158,363            1,261,345         (12,463,113)
      Pro forma ..........................            1,704,353              913,106         (12,768,154)

Basic earnings (loss) per common share:
      As reported ........................        $        0.28                 0.14               (1.39)
      Pro forma ..........................                 0.22                 0.10               (1.43)

Dilutive earnings (loss) per common share:
      As reported ........................        $        0.25                 0.14               (1.39)
      Pro forma ..........................                 0.20                 0.10               (1.43)
</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, 1999 is as follows:


<TABLE>
<CAPTION>
                                                     RANGE OF EXERCISE
                                        SHARES        PRICES PER SHARE
                                        ------        ----------------
<S>                                   <C>            <C>
Balance, December 31, 1996......       424,382           0.9025-9.50

  Granted.......................       235,400           16.00-25.00
  Exercised.....................          (685)                 4.75
  Forfeited.....................          (371)            4.75-9.50
                                       -------          ------------
Balance, December 31, 1997......       658,726          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.....        504,602          0.9025-22.00


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

Shares exercisable at December
31, 1999........................       100,381          $ 4.75-22.00
                                       -------          ------------
</TABLE>


      The following table summarizes information about stock options outstanding
under the 1996 Option Plan at December 31, 1999:


                                      F-15
<PAGE>   52
<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>
  $ 2.38-4.13         500,000          9.7           $  3.98                   0           0
    4.75-9.50         160,693          2.6              7.47              88,641       $   7.78
  15.50-16.00          18,850          3.7             15.54               4,040          15.57
  17.63-22.00          38,500          8.4             18.95               7,070          18.95
                      -------                                             ------

  $2.38-22.00         718,043          7.9           $  5.87              99,751       $   8.95
                      =======                                             ======
</TABLE>


(12.) INCOME TAXES

At December 31, 1999, the Company and its subsidiaries had available U.S.
federal net operating loss carryforwards ("NOL") of approximately $5,800,000 and
U.S. state net operating loss carryforwards of approximately $2,100,000 for
income tax reporting purposes, which are available to offset future federal and
state taxable income, if any, through 2019 and 2009, 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 defined
by the Act) that could significantly limit the Company's ability to utilize
certain carryforwards. As defined by the Act the utilization of a corporation's
net operating loss carryforward is limited following a greater than 50% change
in ownership. Due to the Company's prior and current equity transactions, the
Company's net operating loss carryforwards may be subject to an annual
limitation generally determined by multiplying the value of the Company on the
date of the ownership change by the federal long-term tax exempt rate. Any
unused annual limitation may be carried forward to future years for the balance
of the net operating loss carryforward period.

Income tax expense attributable to the income (loss) before provision for taxes
was $758,344, $741,416 and $63,175 for the years ended December 31, 1997, 1998
and 1999, 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                1999
<S>                                                         <C>                 <C>               <C>
Computed "expected" tax (benefit) expense                   $ 1,020,847         $ 700,966         $(4,362,090)
Increase (reduction) in income taxes resulting from:
  Difference in the foreign tax rates                          (245,454)         (303,800)             20,246
  Net change in the valuation allowance for
     deferred tax assets                                       (146,804)          218,936           4,308,076
  Permanent Items                                                70,000           106,831             115,011
  Other, net                                                     59,755            18,483             (18,068)
                                                            -----------         ---------         -----------

Income tax expense                                          $   758,344         $ 741,416         $    63,175
                                                            ===========         =========         ===========
</TABLE>



                                      F-16

<PAGE>   53
The income tax expense for the years ended December 31, 1997, 1998, and 1999
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, 1997, 1998
and 1999 due to the operating losses in such jurisdictions.
Income tax expense consisted of the following:

<TABLE>
<CAPTION>
                                               1997              1998            1999
<S>                                       <C>                 <C>               <C>
Current Provision                         $ 1,113,344         $ 966,805               0
Deferred (benefit) expense                   (355,000)         (225,389)        $63,175
                                          -----------         ---------         -------
Total income tax (benefit) expense            758,344           741,416          63,175
                                          ===========         =========         =======
</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, 1998 and
1999 are presented below:

<TABLE>
<CAPTION>
                                                                  1998                1999
<S>                                                          <C>                 <C>
Deferred tax assets:
  Net operating loss carryforwards                           $   473,624         $ 2,122,125
  Research & development costs                                   109,890             109,890
  Deferred intercompany profits                                1,234,430           1,723,861

  Recognition of accrued expenses or reserves for
   financial statement reporting purposes but not for
   income tax reporting purposes                                 429,501           3,390,245

  Total gross deferred tax assets                            $ 2,247,445         $ 7,346,121

Deferred tax liability:
  Depreciation expense                                          (278,819)           (289,702)

Total net deferred tax assets                                  1,968,626           7,056,419

  Less valuation allowance                                    (1,388,237)         (6,539,205)

Net deferred tax assets                                      $   580,389         $   517,214
</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, 1998 and 1999. The total valuation
allowance increased by $218,936 and $5,150,968 for the years ended December 31,
1998 and 1999, respectively.

The Company's subsidiary in Finland incurred a net operating loss for the year
ended December 31, 1999 which can be carried forward to future years. A net
deferred tax asset of $517,214 has been established for this net operating loss
carryforward since it is the opinion of management that the subsidiary will more
likely than not be able to realize this benefit.



(13) LICENSE AND GRANT REVENUE

      The Company has applied for grants from the Finnish government to conduct
research on resorbable polymers. The revenue from such grants was $241,685,
$417,507 and $617,716 for the years ended December 31, 1997, 1998 and 1999,
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 managed under the medical device industry, with
similar purpose, production processes, markets, and regulatory requirements, and
it currently reports as a single industry segment.


                                      F-17
<PAGE>   54
      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 a 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 85%, 80% and 82%
of the Company's revenue from external customers in 1997, 1998 and 1999,
respectively was generated in the US. The remaining external revenue was
generated in foreign countries concentrated in Europe and Asia. Of the remaining
18% of 1999 external revenue, no one particular country accounted for revenues
greater than approximately 2% of total revenue. Information regarding the
Company's product sales, net income (loss) and identifiable assets by geographic
area is set forth below:

<TABLE>
<CAPTION>
                                                    UNITED
                                                    STATES          INTERNATIONAL      ELIMINATIONS       CONSOLIDATED
                                                 ------------       ------------       ------------       ------------
<S>                                              <C>                <C>                <C>                <C>
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 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 .......................        31,857,113         13,301,995         (8,210,060)        36,949,048

Year ended December 31, 1999
Product sales:
  Customers ...............................      $ 16,798,181       $  3,652,267       $         --       $ 20,450,448
  Intercompany ............................           203,953          5,690,807         (7,863,692)                --
                                                 ------------       ------------       ------------       ------------
Total product sales .......................        17,002,134          9,343,074         (7,863,692)        20,450,448
Net income (loss) .........................        (9,372,785)        (2,320,223)          (770,105)       (12,463,113)
Identifiable assets .......................        19,177,746          7,736,355         (3,492,926)        23,421,175
</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 1997,
1998 and 1999.

(15) SUBSEQUENT EVENT

On March 3, 2000, the Company completed a shareholder rights offering, pursuant
to which it raised $4,046,485 (before deducting expenses of $100,000) and issued
1,586,857 shares of Common Stock. The Company distributed 0.173 of a
subscription right for each share of Common Stock outstanding on the January 10,
2000 record date for a total of 1,586,857 shares offered in the rights offering.
The subscription price of $2.55 per share was established by the Board of
Directors based on a 15% discount from the market price on January 14, 2000, at
the time the offering was priced.


                                      F-18
<PAGE>   55
                          Financial Statement Schedule

                      Bionx Implants Inc. and Subsidiaries
                                                                      Schedule
                                                                         II

                        Valuation and Qualifying Accounts
              For the years Ended December 31, 1997, 1998 and 1999



<TABLE>
<CAPTION>
                                                  INVENTORY RESERVES    ACCOUNTS RECEIVABLE
                                                  ------------------    -------------------
                                                                             RESERVES
                                                                             --------
<S>                                               <C>                   <C>
Balance at
12/31/1996                                          $   280,346             $  97,325

Expenses                                                384,979                31,035

Deductions                                                   --               (17,653)
                                                    -----------             ---------

Balance at
12/31/1997                                              665,325               110,707

Expenses                                                310,000                70,205

Deductions                                                   --               (38,029)
                                                    -----------             ---------

Balance at
12/31/1998                                              975,325               142,883

Expenses                                              8,144,000               471,393

Deductions                                           (5,323,262)             (173,578)
                                                    -----------             ---------

Balance at
12/31/1999                                          $ 3,796,063             $ 440,698
                                                    ===========             =========
</TABLE>



                                      F-19
<PAGE>   56
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE


            Not applicable

                                    PART III

ITEM 10.  DIRECTORS OF THE REGISTRANT

      The registrant incorporates by reference herein information set forth in
its definitive proxy statement for its 2000 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 2000 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 2000 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 2000 annual meeting of shareholders that
is responsive to the information required with respect to this Item.

                                     PART IV

ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

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

      (b) See Item 8 for the financial statement schedule.

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

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

   3.1   Restated Certificate of Incorporation of the Registrant. (A)

   3.2   Bylaws of the Registrant. (A)


                                       37
<PAGE>   57
 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.

 10.11   Amended and reinstated Shareholders' Agreement, dated as of October 1,
         1998 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

 27.1    Financial Data Schedule.

 99.1    Information Regarding Forward-Looking Statements


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

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

(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, 1999, the Company did not file
any Current Reports on Form 8-K.


                                       38
<PAGE>   58
                                   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 14th
day of April, 2000.


                                    BIONX IMPLANTS, INC.


                                    By:___________________
                                       Gerard S. Carlozzi
                                       (President and Chief Executive Officer)

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

<TABLE>
<CAPTION>
         Signature                               Title                               Date
<S>                             <C>                                                  <C>
/S/Gerard S. Carlozzi
Gerard S. Carlozzi              President, Chief Executive Officer and
                                Director (Principal Executive Officer)               April 14, 2000


/S/ David J. Bershad
David J. Bershad                Director                                             April 14, 2000


/S/ Anthony J. Dimun
Anthony J. Dimun                Director                                             April 14, 2000


/S/ David H. MacCallum
David H. MacCallum              Director                                             April 14, 2000


/S/ Pertti Tormala
Pertti Tormala                  Director                                             April 14, 2000


/S/ Terry D. Wall
Terry D. Wall                   Director                                             April 14, 2000


/S/ Drew Karazin
Drew Karazin                    Chief Financial Officer                              April 14, 2000
</TABLE>




                                       39