UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                                   FORM 10-K
(Mark One)
                 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    X            EXCHANGE ACT OF 1934

For the fiscal year ended    December 31, 1997
                                     OR
               TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
               SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

For the transition period from             to

                   Commission file number      33-69286

                       WRIGHT MEDICAL TECHNOLOGY, INC.
          (Exact name of registrant as specified in its charter)

                Delaware                               62-1532765
    (State or other jurisdiction                   (I.R.S. employer
     of incorporation or organization)              identification no.)

 5677 Airline Road, Arlington, Tennessee              38002
(Address of principal executive offices)           (Zip Code)

Registrant's telephone number, including area code       (901) 867-9971
Securities registered pursuant to Section 12(b) of the Securities Exchange Act
of 1934:  None

Securities registered pursuant to Section 12(g) of the Securities Exchange Act
of 1934:  None

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes X No

     The  registrant  has  no  publicly  traded  equity  securities,  no  market
quotations  are  available  and  accordingly,  information  is not provided with
respect to the aggregate market value of voting stock held by  non-affiliates of
the registrant.

     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 registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

     As of March 13, 1998 the  registrant  had 9,721,075  shares  outstanding of
Class A Common Stock, $0.001 par value per share.

                     DOCUMENTS INCORPORATED BY REFERENCE.  None

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                               TABLE OF CONTENTS


PART I
  Item 1.   Business
              Overview.........................................................3
              Principal Products...............................................5
              Marketing and Distribution......................................15
              Competition.....................................................16
              Manufacturing and Quality Control...............................17
              Government Regulations..........................................18
              Research and Product Development................................19
              Principal Customers.............................................20
              Raw Materials...................................................20
              Environmental...................................................21
              Insurance.......................................................21
              Patents and Trademarks..........................................22
              Royalty and Other Payments......................................22
              Seasonality.....................................................22
              Employees.......................................................23
  Item 2.   Properties........................................................23
  Item 3.   Legal Proceedings.................................................24
  Item 4.   Submission of Matters to a Vote of
            Security Holders..................................................25

PART II
  Item 5.   Market for Registrant's Common Equity and Related
            Stockholder Matters...............................................26
  Item 6.   Selected Financial Data...........................................27
  Item 7.   Management's Discussion and Analysis of Financial
            Condition and Results of Operations...............................28
  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 and Executive Officers of the Registrant................37
  Item 11.  Executive Compensation............................................41
  Item 12.  Security Ownership of Certain Beneficial Owners
            and Management ...................................................47
  Item 13.  Certain Relationships and Related Transactions....................50

PART IV
  Item 14.  Exhibits, Financial Statement Schedules and
            Reports on Form 8-K...............................................54


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                                   PART I.

ITEM 1.           BUSINESS.

Overview

     Wright Medical Technology,  Inc., a Delaware corporation (collectively with
its  subsidiaries,  the  "Company")  is a designer,  manufacturer  and worldwide
distributor   of   orthopaedic   implant   devices   and   instrumentation   for
reconstruction and fixation.  Dedicated to bringing solutions to the orthopaedic
industry,  Wright Medical  Technology,  Inc.  provides  innovative  products and
services that address the critical issues in the changing orthopaedic healthcare
arena.  Reconstructive  devices  are for joint  arthroplasty  that  involve  the
replacement  with  mechanical  substitutes of impaired  skeletal  joints such as
knees, hips,  shoulders,  and the small joints of the extremities (elbow,  hands
and feet).  The Company also currently  offers devices for 1) fracture  fixation
due to trauma,  2) arthroscopic  surgery of the knee,  shoulder and extremities,
and 3) the spine to aid in correction of deformity and instability.

     In  addition,  the  Company is  developing  a wide range of new  biological
products  that are  designed to solve  orthopaedic  problems  by, in some cases,
delaying  or  obviating  the  need  for   traditional   orthopaedic   solutions.
OSTEOSET(R)  Bone Graft Substitute is a patented  bio-orthopaedic  product that,
compared  to  current  bone  graft  alternatives,  is ideal  for  bone  grafting
procedures because it is both  biocompatible and  bioresorbable.  It can also be
used in the  presence of  infection.  The Company  received  FDA  clearance  for
OSTEOSET(R)  Bone Graft  Substitute in June 1996 and  introduced  the product in
August 1996 for the treatment of bony voids and gaps of the extremities.  On May
9,  1997,  the  Company  announced  that the U.S.  Food and Drug  Administration
cleared  OSTEOSET(R)  Bone  Graft  Substitute  for use in the spine and  pelvis.
Currently  OSTEOSET(R)  is the only  bone  graft  substitute  cleared  for these
indications.

     Also,  the  Company is engaged in a joint  venture  agreement  with  Tissue
Engineering, Inc. ("TEI") a Boston, Massachusetts company that develops and owns
technology to produce  collagen-based  scaffolds which can be used for durameter
replacement, ligament and tendon reconstruction, for cartilage regeneration, and
for use with calcium  phosphate/sulfate  as a bone graft  substitute.  The joint
venture will further  develop and  commercialize  those  products for use in the
treatment of musculoskeletal problems based on TEI technology.

     The  Company's  business  strategy  is to design  and  develop  unique  and
innovative products to solve clinical orthopaedic problems. In

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order to better  achieve  that goal,  in early 1998 the  Company  determined  to
narrow its product focus and to concentrate its resources and working capital on
products in its hip, knee and extremity  product lines and to expand its already
strong portfolio of biologic  products.  The Company plans to expand its product
and technology base in these areas through  investment in internal  research and
development and through the acquisition of new products and  technologies.  As a
result, the Company will seek to divest its assets related to its spinal, trauma
and arthroscopy products.

     The Company's  headquarters,  manufacturing and distribution facilities are
located in Arlington,  Tennessee.  Products are distributed throughout the world
through a combination of distributors and wholly owned  subsidiaries.  Principal
markets include the United States, Canada, Japan, France, Spain, Australia,  and
Taiwan.

     In July 1993,  the  Company was  founded to acquire  substantially  all the
assets of the large joint  orthopaedic  implant  business of Dow Corning  Wright
Corporation,  a subsidiary of Dow Corning Corporation  (collectively  "DCW")(the
"Acquisition").  Unless the context  otherwise  requires,  the term "Company" as
used herein refers to Wright Medical Technology, Inc. and its subsidiaries.

     Throughout  this document,  products are discussed that are currently under
development or, for which clearance by the FDA (or applicable foreign regulatory
clearance) has not been received.  The Company can give no assurance that any of
these products will in fact be successfully developed, that the necessary FDA or
foreign approvals will be received or that, if developed and approved,  a market
for these products will exist.

     This document  includes  forecasts and projections that are forward looking
statements based on management's current expectations of the Company's near term
results,  based on currently  available  information  pertaining to the Company.
Actual future results and trends may differ materially depending on a variety of
factors,  including competition in the marketplace,  changing market conditions,
demographic  trends,  product  research and development,  government  approvals,
government  reimbursement schedules and other factors.  Results of operations in
the industry  generally show a seasonal  pattern,  as customers reduce shipments
during the warm weather  months.  The Company assumes no obligation for updating
any such forward looking statements.




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Principal Products

     The Company's  revenues are derived  primarily from the sale of orthopaedic
implant devices for  reconstruction  and fixation.  The United States population
over 60 years of age continues to grow as a percentage of the total  population.
The aging of the  population is  significant  in that  approximately  70% of all
joint   implants  are  for  patients  over  60  years  of  age.   Osteoarthritis
(degenerative joint disease) affects over 15 million people in the United States
and is the primary indication for orthopaedic implants. Management believes that
as the population ages, the incidence of osteoarthritis  and other ailments will
increase  and, as a  consequence,  the demand for  orthopaedic  implants and new
solutions for medical problems requiring  orthopaedic  applications should rise.
Management  believes that another factor  affecting growth of implant use is the
increasingly  active lifestyle of many older Americans.  A more active lifestyle
not only  accelerates  the joint  degeneration  process,  but also increases the
expectations that people have of their bodies.  Joint degeneration leads to pain
and  decreased  mobility,  while  active  lifestyles  also  may  result  in more
sports-related  traumatic injuries necessitating total joint procedures later in
life. As a result,  the Company  believes  that the need for new and  innovative
orthopaedic solutions will continue to grow.

Reconstructive Knee Products

     The Company currently markets several reconstructive knee systems including
the AXIOM(R) Total Knee System (the "AXIOM(R) Knee"), the ADVANTIM(R) Total Knee
System  (the  "ADVANTIM(R)  Knee"),  and the  ADVANCE(R)  Total Knee System (the
"ADVANCE(R)  Knee").  Each  of  these  systems  is  designed  to  duplicate  the
anatomical function of the patient's knee, thereby improving its range of motion
and  stability.  In a typical  knee  replacement,  the  surgeon  may replace the
articulating surfaces of the knee: the knee cap (patella),  top of the shin bone
(tibia)  and bottom of the thigh bone  (femur).  In the  majority  of total knee
replacement  surgeries,  the surgeon can choose to leave the posterior  cruciate
ligament  ("PCL") intact  (necessitating a PCL sparing knee component) or remove
that ligament (necessitating a posterior stabilized knee component).

     The  ADVANCE(R)  Posterior  Stabilized  Knee  represents a new standard for
primary posterior stabilized total knee arthroplasty developed by the Company in
conjunction  with the  surgeons and  engineers  of Hospital for Special  Surgery
("HSS"). With over 20 years experience in designing total knee replacements, the
HSS team  worked  with the  Company  to  create a product  with many key  design
advantages. It provides enhanced patellofemoral tracking, improved resistance to

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subluxation and increased  tibiofemoral contact area.  Increased range of motion
is achieved through the improved overall kinematics of the ADVANCE(R) knee.

     In 1997, the Company  continued to expand the indications of the ADVANCE(R)
Knee System by developing the Posterior Cruciate Ligament sparing components and
a very unique  medial-pivot  articulation  product  which will be  available  in
limited release in early 1998. The patented  medial-pivot  articular  surface is
designed to decrease  surface  wear and  reproduce  normal knee  function.  Five
styles of  instrumentation  provide an easy transition  from other systems.  The
Company  believes  that the  ADVANCE(R)  Knee is one of the most  advanced  knee
systems on the market and will play a critical role in its future  growth.  Full
commercial launch of the PCL sparing and medial pivot products is expected later
this year.

     All polyethylene components are manufactured from the Company's proprietary
DURAMER(R) polyethylene.  Since its formation, the Company has been committed to
polyethylene  research  and  development.  As a result,  the  Company  developed
DURAMER(R)  EtO  Sterilized  polyethylene  which  eliminates  the  incidence of
gamma-induced oxidation and associated poly wear in the joint.

     The Company's  leading knee product  continues to be the ADVANTIM(R)  Knee,
designed to address the needs of the high demand patient.  The ADVANTIM(R) Total
Knee  System  was first  introduced  in 1982.  The  durability  of the system is
enhanced through optimized  femorotibial  contact areas and reduced roughness of
all articulating surfaces.  Developed to meet the needs of patients with special
stability   requirements,   the  ADVANTIM(R)   Posterior   Stabilized   implants
incorporate  a  unique   combination  of  design  features   including   precise
restoration of the patellar  tracking  mechanism,  wide femoral  condyles,  cast
femoral housing,  optimal tibial fixation, and modular femoral and tibial stems.
The  ADVANTIM(R)  Total Knee  System  also  offers a variety  of tibial  implant
choices,  utilizes simple and precise  instrumentation  with a single  reference
point to ensure  accurate bone cuts, and allows the advantages of patient demand
matching with one set of instruments.

     With the addition of the ADVANCE(R)  Knee and AXIOM(R) Knee, the Company is
well positioned to achieve growth in its total knee arthroplasty business.

Reconstructive Hip Products

     The Company currently markets a wide choice of hip products including those
with brand names of PERFECTA(R),  EXTEND(TM),  INFINITY(R), NEXUS(R), BRIDGE(R),
CONSERVE(R), S.O.S.(R), INTERSEAL(R), and TRANSCEND(R).

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These systems are designed to replace all or a portion of the natural hip joint.
The Company's  hip implants  consist of the same basic parts as the natural hip,
including a femoral stem  inserted  into the femur (thigh bone) with a spherical
femoral  head (ball) and an  acetabular  cup  (socket) on which the femoral head
articulates.  The Company's hip systems include several  different  femoral stem
and  acetabular  cup  designs.  Each  product is  designed to address a specific
segment of the total hip market. Surgeons have the option of interchanging stem,
head and  acetabular  cup designs to meet their own  preferences  and individual
patient  requirements.  The femoral stems currently  marketed by the Company are
made of a titanium or cobalt  chrome  alloy.  Acetabular  cups are  comprised of
ultra  high  molecular  weight  polyethylene  available  with or without a metal
backed shell with different surfaces to enhance fixation to the pelvis.

     The  INTERSEAL(R)  Acetabular  Cup is a system of titanium  porous-  coated
metal  shells  and  modular   liners   providing  the  surgeon  with   extensive
intraoperative flexibility.  This product was introduced in 1995 and remains the
Company's  primary  acetabular  component.  The  modified  hemispherical  design
provides  rigid  fixation  at the rim  with a  secure  lock  at the  shell/liner
interface.  An apical hole in the shell  allows the surgeon to confirm  that the
shell is bottomed out in the pelvis, and a plug seals the hole from the invasion
of  particulate.  The system  also  features a quadrant  style  shell  featuring
optional  screw  fixation  and  lateralized  liners for  revision  cases,  and a
multiple  hole cup for  difficult  revision  cases and  liners  with  additional
inner-diameter  choices. The Company believes that the superior  characteristics
of the INTERSEAL(R) System will also benefit the sales of its existing and newly
released hip stems.

     The S.O.S.(R),  or Segmented  Orthopaedic System, was created to offer limb
salvage to the  patient who  suffers  bone loss due to cancer,  trauma or failed
implants.  The present  system  consists of the  Proximal  Femur  System and the
Distal Femur  System.  The Company is in the process of reviewing its options to
expand this system.

     In  1997,  the  Company  after  years  of  research,   commercialized   the
TRANSCEND(R) metal-on-metal and ceramic-on-ceramic articulating surface systems.
The Company has commenced  clinical studies in the United States and markets the
products in Australia and Canada where they have been  favorably  received.  The
Company  believes that these systems,  which eliminate the use of a polyethylene
bearing  surface in the hip,  will  provide  advantages  over  conventional  hip
systems by reducing long term wear debris.

     The CONSERVE(R)  System provides a solution for patients who have avascular
necrosis of the femoral head. This disease cuts off the

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blood  supply to the femoral  head,  killing  the bone and causing  pain for the
patient.  People who suffer from avascular necrosis are usually younger than the
typical hip  replacement  patient and therefore need a solution less  aggressive
than a total hip replacement.  With the CONSERVE(R)  Femoral Resurfacing System,
only the femoral head is resurfaced  and the rest of the hip remains  untouched.
This allows the patient to live without pain and avoid  extensive hip surgery at
a young age.

     The  PERFECTA(R)  RS  Hip  Stem  is  the  most  recent  addition  into  the
PERFECTA(R) Total Hip System family of implants. The PERFECTA(R) RS utilizes the
proven proximal  tri-planer  wedge geometry,  as well as medial flare options of
standard and reduced flare for optimal fit in various bone geometries.  Proximal
plasma spray coatings  compliment this geometry for stable  interface  fixation.
The distal portion of the stem is  cylindrical in nature and is highly  polished
with  a  coronal  slot.  A  series  of  raised  splines  coincide  with  precise
instrumentation  to provide  intimate implant bone fit for initial and long term
stability.

     The Company's femoral stems are offered generally in smooth,  porous-coated
and textured  surfaces  including  hydroxylapalite  allowing for bone on-growth,
bone in-growth, press-fit or cemented applications.

     The Company also offers  ORTHOSET(R)  radiopaque Bone Cement.  Two types of
ORTHOSET(R)  Bone Cement are  available.  ORTHOSET(R)  HV is high  viscosity  in
nature  and  ORTHOSET(R)  LV is low  viscosity  in  nature.  Both  versions  are
radiopaque,  have minimal monomer release, and incorporate  excellent exothermic
and strength characteristics.

     These  product  lines  should  place the  Company in a position  to sustain
continued  growth in primary and revision  hip surgery,  as well as limb salvage
cases.  The products allow the orthopaedic  surgeon a wide range of material and
design choices to solve the varied medical problems of individual patients.

Extremity Products

     The  Company's  extremity  products,   and  particularly  its  small  joint
orthopaedic implants,  have a long clinical history and over one million devices
have been implanted  during their 25-year  history.  Many of the Company's small
joint   orthopaedic   implants   were   developed   initially  and  patented  by
surgeon-inventor Dr. Alfred Swanson. The Company has the exclusive rights to use
the surgeon's name and patents.


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     Most of the small  joint  orthopaedic  implants  being  distributed  by the
Company  are  manufactured  using  solid  silicone  elastomers  (known for their
fatigue strength,  tear-resistance and  biocompatibility),  and titanium that is
used to manufacture  protective  sleeves  (grommets) for some of these implants.
The balance of such small joint orthopaedic implants are manufactured  primarily
from  titanium  and are commonly  used in more active  patients.  Key  extremity
products include:

         Hand Implants.  Flexible one-piece hand implants are designed to help
         restore function to damaged or diseased small joints within the hand.
         Key hand implants include the Swanson Flexible Hinge Finger Joint with
         grommets, the Swanson Titanium Basal Thumb Implant and the Swanson
         Trapezium Implant.

         Wrist Implants.  Wrist implants are designed to restore the anatomical
         relationship of the joint connecting the wrist and the hand.  Wrist
         implants include the Swanson Wrist Joint Implant with grommets, the
         Titanium Lunate Implant and the Titanium Scaphoid Implant.

         Foot  Implants.  Foot  implants  are  designed  to  replace  damaged or
         diseased small joints found within the foot. Principal products include
         the Swanson  Titanium  Great Toe Implant,  the Hammertoe  Implant,  the
         Swanson Flexible Hinge Toe Implant with grommets and the Smith STA-Peg.

         Elbow Implants.  The Company recently introduced the Sorbie- Questor(R)
         Total  Elbow  System.   The  elbow's  design  promotes  accurate  joint
         tracking,   proportionate  distribution  of  load  forces  between  the
         humerus,  ulna and radius and the  replication  of the elbow's  natural
         anatomic structure.  The unique instrumentation  enhances results. This
         device was  developed  in  cooperation  with  Charles  Sorbie,  M.D., a
         well-known Canadian orthopaedic surgeon and inventor.

     The Company also manufactures the Swanson Titanium Radial Head implant,  an
alternative  to its  silicone  elastomer  radial  head  implant.  The implant is
manufactured   from  commercially  pure  titanium  that  features  nitrogen  ion
implantation for increased surface hardness.  The overall profile of the implant
head is unchanged from the silicone radial head implant design.

Shoulder Implants

     Shoulder implants are designed to replace the articulating  surfaces of the
shoulder joint damaged principally as a result of

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osteoarthritis  and  trauma.  The  Company  distributes  the Neer II and Modular
shoulder prostheses manufactured by the 3M Corporation.

     As part of its newly focussed  product  strategy,  the Company will seek to
expand its entire line of extremity products.

Biologic Product Opportunities

     As a primary  strategic  focus of the  business,  the Company  continues to
commit  substantial  resources and working capital to the development  expansion
and commercialization of its portfolio of biologic products.

     OSTEOSET(R)  bone graft  substitute is the  Company's  first entry into the
bone graft market,  which market is approaching  one-half billion dollars in the
U.S. annually. OSTEOSET(R) is currently offered in sterile pellet form.

     Bone is the second most  frequently  implanted  material in the human body,
being second only to blood transfusions. More than 300,000 bone graft procedures
are completed annually in the United States. Bone grafts are used to repair bone
defects  caused  by  surgery,   tumors,  trauma,  implant  revisions,  and  bone
infections.  Another  common use of large  quantities  of this product is in the
fusion of the spine after instrumentation has been completed.

     The preferred  method of treating bone voids involves the use of autologous
graft,  in which bone is taken  directly  from the patient.  This graft  usually
achieves good results,  yet often requires that a second (harvesting)  procedure
be performed in order to obtain enough bone to fill the defect.  The iliac crest
of the pelvis is one of the most common  sites that is used to harvest  bone and
this requires  another  surgical  procedure which leads to added infection risk,
morbidity, and increased recovery time.

     Currently  the second most common bone graft  alternative  is an  allograft
from human bone banks.  This is human bone which is  frequently  recovered  from
deceased  persons who have had their bone harvested and saved either by hospital
bone banks or by commercial corporations which provide this bone as a commercial
product.  Because this is human bone it has the same typical  problems  that are
encountered  with the use of any foreign  substance  within the body. This bone,
even though it is  sterilized,  may transmit  viral  diseases and create foreign
body  reactions in the host.  Because of the  extensive  processing  and testing
required  to provide  this bone,  it tends to be more costly than other forms of
bone  void  filler.  This  type of  graft  can also be hard to  obtain  at times
depending upon the

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availability  of human donors or the ability of hospitals  and  commercial  bone
banks to obtain the tissues.

     The third alternative for bone grafting procedures is the use of artificial
materials.   The  types  of  artificial   materials  currently  in  use  include
coral-based  products,  bovine  collagen-based  products and OSTEOSET(R).  These
artificial  materials are called  osteoconductive  substitutes  since they allow
bone to grow into and upon them which can form a lattice-like  structure similar
to bone for defect repair.

     Compared to the two other current  alternatives to human bone,  OSTEOSET(R)
products  provide an ideal bone void  filler for many bone  grafting  procedures
because they are biocompatible, bioresorbable and provided in a sterile form. As
a bioresorbable  material, the body will resorb this natural substance at a rate
that closely  mimics that of human bone.  Usually within several weeks time, the
OSTEOSET(R)  material  gradually  is  replaced  by human  bone,  leaving  little
evidence of it's presence.  OSTEOSET(R)  encourages bone cells to regenerate new
bone  tissue  within  and upon its  surfaces  which is a further  benefit to the
patient. Another benefit of this material is that during the healing process the
material  is visible on x-ray so it can easily be seen by the  surgeon to verify
graft placement and healing rates.

     The  properties  of  OSTEOSET(R)   Bone  Graft   Substitute  also  make  it
particularly  attractive  for use in children.  Because  children do not have as
much  available  bone stock as adults,  the  surgeon  may not be able to harvest
enough  bone from the child and may need to add a bone  substitute.  OSTEOSET(R)
pellets are ideal for this purpose.

     Patients  who have bone  infections  will also  benefit  from  OSTEOSET(R).
Because  OSTEOSET(R) is resorbed by the body, it does not remain in the body for
extended  periods of time and  therefore  cannot serve as a host for  infectious
organisms.  Since  OSTEOSET(R)  is resorbed in several weeks and because it does
not support  infectious agent growth,  it is the only synthetic bone void filler
approved for use in infected areas of the body.

     The Company is also developing additional  applications for its OSTEOSET(R)
products.  Pending  longer  term  FDA  approval  and  approval  in some  foreign
countries,  the  Company  is  developing  OSTEOSET(R)  products  mixed  prior to
implantation with appropriate drugs that could be used to treat bone infections.
OSTEOSET(R) T, a product  medicated with Tobramycin  (antibiotic),  was released
this year for sale in Australia and Canada.  Early clinical results indicate the
product has been very  successful.  The Company expects to receive  clearance to
market this new product in Europe in 1998.


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     The  advantages  of having a bone void  filler  which can be mixed  with an
antibiotic will help  revolutionize the treatment of several bone problems which
exist today.  Currently,  orthopaedic surgeons create small beads of bone cement
and soak these with  antibiotic  agents.  They then implant this string of beads
within  the  infected  site and  hope to get  some  reduction  in  infection  by
releasing the  antibiotics  close to the site of infection.  Unfortunately,  the
infection must be treated for several days. This method results in only about 72
hours of antibiotic  therapy to the infected site whereas the  antibiotic is not
released in a controlled  manner.  You can  therefore  have a lot of  antibiotic
released  quickly but because the amount is not  controlled  or  prolonged,  the
infectious organisms are not controlled.  The second problem with this method is
that the surgeon must go back into the  surgical  site to remove the bone cement
beads since they are not bioresorbable.

     The intent of the surgeon is to try and provide a slow,  controlled release
of antibiotics at the site of the infection because the blood supply to the bone
is poor and thus systemic antibiotics  frequently do not reach the infected site
in large  enough  quantities  to be  therapeutic.  This is one  reason  why bone
infection (osteomyelitis) is a serious condition in the orthopaedic community.

     OSTEOSET(R)  has  proven  to be an  ideal  material  for  the  delivery  of
antibiotics to an infected area of bone.  When  OSTEOSET(R) is impregnated  with
Tobramycin,  and placed in the infected  wound,  it releases the antibiotic in a
controlled  and  prolonged  rate which is effective in reducing the infection at
the site.  Because the material is  bioresorbable,  the surgeon does not have to
reopen the site to remove the OSTEOSET(R).  These properties of OSTEOSET(R) make
it an exciting potential carrier for other types of chemical agents which can be
placed within the wound to effect treatment of other conditions.

OsteoBiologics Implants

     OsteoBiologics,  Inc.,  a San  Antonio,  Texas  based  company in which the
Company has an ownership  interest,  is  developing  a series of  bioabsorbable,
polylactate and polyglycolic acid implants that,  pending FDA approvals,  may be
effective in a variety of uses including: a bone void filler; a method to induce
the  repair  of  articular   cartilage  defects  (both  focal  defects  and  for
resurfacing)  by growing  articular  cartilage in vivo; a treatment  for delayed
unions and non-unions in fractures;  and the repair of bone voids resulting from
tumor and cyst removal and from thinning  bone.  OsteoBiologics  intends to seek
regulatory approval for its first commercial products, the bone void fillers, in
1998. OsteoBiologics also has a unique

                                                 Page 12 of 119
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patented  electronic  instrument for measuring the physical  characteristics  of
soft tissue such as cartilage which employs a reusable,  sterilizable electronic
hand piece and disposable  probes.  This product is still in its prototype stage
and the Company expects it to be available for commercial  distribution  pending
approval in 1998.

Collagen based Tissue Engineering

     The Company entered into a joint venture  agreement in mid 1996 with TEI, a
Boston, Massachusetts company that develops collagen-based technology. The joint
venture  company,  Orthopaedic  Tissue  Technology,  L.L.C.("OTT"),  a  Delaware
limited liability company,  will develop and distribute  biological products for
musculoskeletal  applications.  OTT products under development  include collagen
based  scaffolds used for ligament and tendon  reconstruction  and for cartilage
regeneration,  and a calcium  phosphate  based bone cement  which  offers  great
strength for fracture  fixation and anchoring  certain  implants.  In 1998,  OTT
began pre-clinical trials of its first products, a biologically engineered patch
ligament and a resorbable bone cement.  The periosteal  patch is a thin collagen
membrane that is cross linked and functions as a patch on the periosteum. It can
be used to assist in sites where OSTEOSET(R) pellets are not self contained. The
dura patch is also a thin collagen  membrane that is bi-phasic  which means that
one side  adheres to tissue  and the other  side does not adhere to tissue.  The
dura patch protects the dura from adhesion to surrounding tissue.

Trauma

     Trauma implants  encompass a wide variety of screws,  plates,  rods, wires,
cables and pins all utilized to fix or support bone that has been  fractured due
to accidental or surgically  induced  trauma.  These devices serve to orient and
stabilize bone until healing can occur.  The  CONCISE(TM)  Compression Hip Screw
System and the companion Medoff Sliding Plate enable the orthopaedic  surgeon to
treat most types of proximal and supracondylar femoral fractures.  The TYLOK(TM)
High Tension Cerclage  Cabling System is used for fixation and  stabilization of
long bone fractures and offers distinct advantages over the competitive devices.
The stainless steel CANNULATED  PLUS(TM) Screw System is used for  stabilization
of  fracture  fragments.   The  Company  has  also  developed  its  MAGELLAN(TM)
Intramedullary  Nailing System, a unique modular nailing system which allows for
significant   inventory  reduction  compared  to  other  nailing  systems.   The
MAGELLAN(TM)  system also  includes a unique  targeting  device for placement of
distal  screws  which  obviates the need for  extended  x-ray  exposure for both
physician and patient in locating the distal screw holes in the nail.

                                                  Page 13 of 119

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     On March 11, 1998, the Company signed a Letter of Intent to sell its trauma
assets,  patents,  and  agreements  for  approximately  $4  million,  a  Royalty
Agreement,  and 5% of the voting common capital stock of the purchasing  entity.
Closing is expected to be on or before June 15, 1998.

Arthroscopy

     The Company currently offers for sale the ANCHORLOK(TM) Soft Tissue Anchors
which are used in a variety of joints for reattaching  ligaments and tendons (or
other soft  tissue)  to bone  where  tearing or  separation  has  occurred.  The
Company's  anchors  have a  patented  self-  tapping  thread,  superior  holding
strength and can be removed easily giving the surgeon more surgical options.  In
1997, the Company  introduced the  ANCHORLOK(TM)  RL Soft Tissue Anchor, a lower
cost version of the device which is not  prethreaded  with sutures.  The Company
has offered this product line and its portfolio of uncommercialized arthroscopic
products for sale.

Spine

     The  Company  currently  offers a number  of  innovative  products  for the
fixation of the spine.

     In the thoracic and lumbar spinal  fixation  areas,  the Company offers the
WRIGHTLOCK(R) and VERSALOK(R) Spinal Fixation Systems. Additionally, the Company
intends to commercialize in 1998 the  MILLENNIUM(TM)  anterior  cervical plating
system developed by Gary K. Michelson, M.D.

     The   MILLENNIUM(TM)   anterior   cervical   plating  system  is  used  for
stabilization  during  fusion  of  the  cervical  spine.  This  system's  unique
qualities include  preassembled  locking screws, no "fiddle factor" "watchmaker"
parts,  an innovative  self-tapping  screw that  maximizes  bone purchase  while
minimizing the incidence of stripping,  and a low profile  anatomically  correct
plate. This fusion procedure is performed for degenerative disease,  trauma, and
tumors.  The  MILLENNIUM(TM)  system has  received  FDA  approval  and a limited
clinical release is expected in the second quarter of 1998.

     For  scoliosis  and other  spinal  instabilities  the  Company  offers  the
WRIGHTLOCK(R) posterior fixation system. The patented system, under license from
Zimmer,  Inc., is based on a high strength,  stainless steel rod technology with
Morse-taper  locking  mechanisms that provide a low-profile  system. The profile
(i.e.,  the height of the  implant) is important  in the  scoliosis  market that
principally  affects  teenaged  and  pre-teenaged  girls.  The  system  offers a
comprehensive  selection  of  instruments  that are  designed to adapt to a wide
range of surgical strategies including a standard derotation set and an outboard


                                                  Page 14 of 119

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correction  set (OCS(R)) for  distraction.  The OCS(R) was  developed by Dr. Ben
Allen, Chief of Surgeries,  Hospital for Crippled Children in Greenville,  South
Carolina.  WRIGHTLOCK(R)'s  patented  tapered  locking  mechanism  significantly
reduces operating time and eliminates the need for complex set screw fixation.

     The Company  received FDA clearance for its  VERSALOK(R)  low back fixation
system and began  marketing the product in 1997.  Working with a select group of
spine surgeons,  including John R. Johnson, M.D. and the late David Selby, M.D.,
the  Company   developed   this  low  back  fixation   system  that  features  a
revolutionary  polyaxial screw with a tapered  locking design,  requiring no set
screws or locking  nuts.  The advanced  design  features of its  components  and
instrument set ensure the maximum in  intraoperative  flexibility,  ease of use,
and the quickest  assembly.  In clinical  use, the system is very easy to set up
and lock in place  and,  if  required,  easy to remove,  and offers  significant
savings in operative time over competing systems. The Company plans to offer the
VERSALOK(R) system in a titanium alloy.

     The Company also has under development a posterior cervical plating system,
an anterior  interbody  fusion cage,  and a Generation II Rod to Rod Coupler for
use with both WRIGHTLOCK(R) and VERSALOK(R).

     The company has offered its spinal  assets  related to these  products  for
sale.


Marketing and Distribution

     Overview  and U.S.  Marketing  and  Distribution.  The Company  markets its
products  in the  United  States  through  a  network  of 213  sales  personnel,
including  45  distributors  (the  "Distributors")  and 168  commissioned  sales
representatives (collectively, the "Sales Organization"), serving every state in
the country. The Distributors,  who are mostly independent contractors,  and the
sales  representatives  sell the  Company's  orthopaedic  implants at commission
rates  that the  Company  believes  are  competitive  with  those  paid by other
orthopaedic manufacturers.

     Management  believes that the Distributors and their surgeon  relationships
are a critical  component of the Company's success.  For distribution  purposes,
the Company divides the domestic market geographically into 46 territories, each
of which is controlled by a Distributor or  Distributors  authorized to sell the
Company's products.



                                                  Page 15 of 119

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     The  success  of  these  sales   professionals   depends   primarily   upon
high-quality   service   levels,   technical   proficiency  and  strong  surgeon
relationships.  As such, the Company's sales organization  undergoes significant
product and sales  training  with courses  conducted  throughout  the year.  The
Company  historically  has focused its marketing  efforts in the United  States,
with  approximately  73% of the Company's  revenue derived  domestically  during
1997.

     In early 1997, the Company purchased the assets of one of its distributors,
Outcome  Medical,  Inc., and its related  companies  ("OMI").  In late 1997, the
Company  decided  to enter into an  agreement  with OMI to  terminate  the Asset
Purchase Agreement and to return those organizations to independent commissioned
sales agents. This agreement was executed January 22, 1998.

     International Marketing and Distribution. The Company's international sales
revenue  represented  approximately 27% of the Company's overall sales for 1997.
Management  intends to continue  to expand its  international  distribution  and
marketing  capabilities.  The Company's international marketing and distribution
is  accomplished   primarily  through   independent   distributors   engaged  in
distribution in Japan,  South and Central America,  Australia,  Europe and Asia,
with the Company distributing products in France and Canada through wholly owned
subsidiaries.   Depending  on  the  market  size  and  conditions,  the  foreign
independent distributors are granted either exclusive or non-exclusive rights to
distribute the Company's products, with a majority being exclusive distributors.

Competition

     The orthopaedic  implant industry is highly  competitive and dominated by a
number of large  companies  with more  resources  than the Company.  Competitive
factors include service,  product design,  depth of product offering,  physician
recognition and price.  The Company believes its future success will depend upon
its ability to be  responsive  to the needs of its  customers  and on  continued
improvement  and  development  of novel  products  designed to solve  previously
unaddressed  orthopaedic  problems.  The Company  believes  the  majority of the
market share for the Company's products are held by Biomet,  Inc., Zimmer,  Inc.
(a subsidiary of Bristol-Myers Squibb Company),  Johnson & Johnson Professional,
Inc. (a  subsidiary  of Johnson & Johnson),  Howmedica,  Inc. (a  subsidiary  of
Pfizer Inc.), DePuy (a subsidiary of Corange), Smith & Nephew Orthopaedics, Inc.
(a subsidiary of Smith & Nephew Ltd.), Osteonics,  Inc. (a subsidiary of Stryker
Corporation),  Sofamor  Danek  Group,  Inc.  and Sulzer  Orthopaedics,  Inc.  (a
subsidiary of Sulzermedica).



                                                  Page 16 of 119

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     With  respect to large  joint  implants  (hips and  knees) the  competitors
listed above  represent  approximately  94% of the hip implant market and 92% of
the knee implant  market.  In  addition,  there are several  manufacturers  that
compete only in the global small joint orthopaedic implant market. The Company's
most significant competitor in this market has less than a 10% market share.


Manufacturing and Quality Control

     Almost  all of the  Company's  orthopaedic  implants  and  instruments  are
manufactured at its headquarters in Arlington,  Tennessee,  and through a select
group  of  qualified  contract   manufacturers.   The  Company's   manufacturing
operations  are  subject  to Good  Manufacturing  Practices  ("GMP")  and  other
regulations  stipulated by the FDA and other relevant regulatory  organizations,
such as the Environmental  Protection Agency ("EPA") and Occupational Safety and
Health Agency ("OSHA"),  and similar state and foreign agencies and authorities.
In early 1997,  the  Company's  facilities  were  inspected  and cleared for GMP
compliance by the FDA.

     In December of 1995, the Company's research and development, manufacturing,
and distribution operations became certified to the standards established by the
International  Standards Organization ("ISO"). This "ISO 9000" certification and
process  assures a level of  product  quality by  regulating  the  processes  of
product development and manufacturing. Approximately 80 countries have currently
adopted ISO 9000 for medical  products,  thereby  enabling  ISO 9000  registered
companies  to sell their  products in these  countries  without  the  additional
burden  of  individual  country  regulation.   Manufacturers  so  certified  are
recognized by the European Economic Community ("EEC") as maintaining high levels
of quality in products  and service and their  products  are granted the CE mark
which  permits  their  importation  into and sale within the  European  Economic
Community.  The  renewal of ISO  certification  occurs  annually  via an on-site
inspection.  The Company retained ISO certification after the 1997 audit and has
applied CE marks to many key products.

     The Company utilizes  comprehensive,  integrated systems for manufacturing,
planning,  scheduling,  in-process  testing,  inspection  and  measuring  of all
implants and  components.  The  Company's  current  facilities  have  sufficient
capacity to meet its projected,  near-term growth of its orthopaedic implant and
instrument business.





                                                  Page 17 of 119

<PAGE>



Government Regulations

     The  Company  and  substantially  all of its  products  are  subject to the
provisions of the Federal Food, Drug and Cosmetic Act of 1976, as amended by the
Medical  Device  Amendments of 1976 and the Safe Medical  Device Act of 1990, as
amended in 1992 (the "Safe Medical Device Act").  The Company also is subject to
various foreign laws governing  medical  devices.  All of these  regulations are
designed to ensure the safety and effectiveness of medical devices. In addition,
certain of these  regulations  require the Company to maintain certain standards
and procedures with respect to the manufacturing  and labeling of products.  All
of the Company's records and manufacturing  facilities are subject to inspection
on a regular basis by the FDA. The Company's  facilities  were  inspected by the
FDA in early 1997.  The different  levels of FDA  compliance  include:  Official
Action  Indicated  (OAI),  Voluntary  Action  Indicated  (VAI),  and  No  Action
Indicated  (NAI).  Companies that receive an OAI may have official  action taken
against them including  product approval delays,  products taken off the market,
seizing of their products,  heavy fines or imprisonment.  Companies that receive
VAI have  voluntarily  agreed to correct  any  problems  the FDA has found.  The
result of the FDA inspection  determined that the Company was in compliance with
all FDA rules and  regulations and was therefore  considered NAI.  Additionally,
the Company's 1997 audit by the ISO, the governing  body for medical  devices in
the EEC,  determined that the Company was in compliance with all EEC regulations
preserving the Company's ISO status.

     The FDA classifies  medical  devices as Class I, II or III. Class I devices
generally do not require pre-marketing  approval.  In general,  Class II and III
devices   require   pre-market  FDA  approval   unless  they  are  found  to  be
"substantially equivalent" to products already in the market. For "substantially
equivalent" products, the provisions of Section 510(k) of the Federal Food, Drug
and Cosmetic Act provide for an exemption to the  pre-market  approval  process.
The Company's  orthopaedic  implants are generally Class II devices.  All of the
Company's  Class II devices being  marketed are cleared for marketing  under the
provisions of Section  510(k).  The Company  currently  manufactures no approved
Class III devices,  which require more extensive FDA approvals.  However, as the
Company  designs and develops more novel medical  devices,  the Company may have
difficulty in  establishing  that such device is  "substantially  equivalent" to
another  legally  marketed  device and  thereby  may be unable to obtain  510(k)
clearance to market a new product. The Company intends to pursue the manufacture
of Class III devices,  which would  require  extensive FDA  pre-market  approval
before commercial distribution. There can be no assurance that the Company would
be successful in obtaining regulatory approval of such Class III devices.

                                                  Page 18 of 119

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     At any given time, the Company has a number of medical  devices that are in
various  stages  of  development,   and  therefore,  subject  to  FDA  clearance
procedures that may cause delays in the  commercialization of these devices. Any
future  devices  developed  by the  Company  are  likely  to be  subject  to FDA
registration,  notification, pre-market approval, performance standards or other
FDA controls that could have an adverse effect on the  commercialization of such
products.  Additionally, any changes in FDA or foreign medical device laws could
impose new regulatory burdens on medical device sales.

     During 1997 the Company  received 510(k)  clearance on 18 new products.  In
1996, the Company received  regulatory approval (SHONINS) in Japan to distribute
key  products.  The  Company  also  enhanced  its  quality  control  process  by
establishing  a  pre-production  quality  assurance  program.  The  Company  has
converted  to the new FDA  Quality  Systems  Regulations  and to the new Medical
Device Reporting regulations.

     The Safe  Medical  Device  Act  grants  the FDA the  authority  to  require
manufacturers to conduct post-market surveillance on most permanent implants and
devices that potentially present a serious risk to human health. The FDA is also
given the authority to require  manufacturers of certain devices to adopt device
tracking methods to enable patients to receive  required  notices  pertaining to
the devices they receive.  Such tracking requirements may increase the Company's
administrative procedures relating to the sale of many of the Company's implants
should the FDA  require  post-market  surveillance  of the  Company's  products.
Despite  the fact that the FDA has not yet  promulgated  all of the  regulations
needed to fully  implement  the Safe  Medical  Device Act,  the Company does not
believe  compliance  with that act will have a  material  adverse  affect on the
Company or its operations.

Research and Product Development

     The Company's  research and  development  activities and  capabilities  are
located primarily in Arlington, Tennessee. There is a small development activity
for  arthroscopy   products  at  Questus   Technologies,   Inc.  in  Marblehead,
Massachusetts  and a small  development  activity for the medical  grade calcium
sulfate products in Libertyville,  Illinois.  Both are in leased space.  Over 44
employees   are  active  in  the  areas  of  Applied   Research,   Biomechanical
Engineering,  Materials Testing and Analysis, Advanced Manufacturing Technology,
Implants and Instrument Development  Techniques,  Research,  Product Development
and New Technology Exploration. The Company's applied technology group maintains
laboratories capable of performing
                                                  Page 19 of 119

<PAGE>



materials characterization, product testing and evaluation in simulated clinical
use  environments,   including  fatigue  testing,  wear  testing  and  materials
analysis.

     In addition to classic  laboratory  testing and  evaluation of new products
and  technologies,  the  Company  conducts  pre-clinical  studies at a number of
university  and  medical  center  locations,  as well as  clinical  research  to
evaluate the success and outcome of new products and technologies.

     The Company  believes that custom  implants  built to  prescription  from a
surgeon,  serve as a specific treatment for a patient,  but also help to explore
new and innovative products for general use. For example,  initially designed as
a  custom  implant  for  limb  salvage,   the  Company's  S.O.S.(R)   (Segmented
Orthopaedic  System) now has wide spread  application for oncology  patients and
severe  revision  cases.  During  1997 the  Company  shipped  approximately  230
individual patient devices,  with an average time of manufacture of less than 15
days. In addition to custom implants,  the Company  provided  surgeons with many
options for custom instrumentation to facilitate their surgical techniques.

     The Company's  commitment to research and  development  is evidenced by the
expenditures  it  makes  each  year.  Research  and  development  expenses  were
approximately  $12.7 million in 1995,  approximately  $13.2 million in 1996, and
approximately  $11.6  million in 1997.  The Company  believes  the  research and
development  expenses represent a commitment which is significantly  higher as a
percentage of sales than all of its major competitors.

Principal Customers

     The Company currently markets its products to health care professionals and
hospitals in the United States and in many major countries outside of the United
States. Key customers include orthopaedic  surgeons  specializing in total joint
replacement,  sports medicine, spinal surgery and traumatology.  The Company has
approximately  4,000 active  hospital and  physician  customers,  with no single
customer representing more than ten percent of the Company's consolidated sales.
The Company  currently  does not  conduct any  business  directly  with  foreign
governments,  with such  sales  being made  through  the  Company's  established
distribution network of independent contractors.

Raw Materials

     The majority of the Company's raw material  purchases are comprised of four
principal materials that are generally available, in

                                                  Page 20 of 119

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implant grade, from a variety of sources with various lead times.  Cobalt chrome
is purchased in ingot form and cast into  implants  and trials.  Titanium,  both
commercially  pure and alloy grade,  is purchased in bar stock form and machined
into implants and instruments.  Ultra high molecular weight  polyethylene,  also
purchased in bar stock form, is machined  into  implants for weight  bearing and
articulating surfaces.  Stainless Steel 17-4 precipitation hardened is purchased
in both  ingot  and bar  form  and is cast or  machined  into  instruments,  and
stainless  steel  22-13-5,  22-13-10,  and 316L is purchased in wrought bar form
that is machined into implants. In addition,  the Company's small joint implants
require silicone that is purchased as processed extruded elastomer blocks.

     The Company has not  experienced  a shortage of raw  materials and does not
anticipate a shortage in the future. In light of certain  businesses  increasing
reluctance  to offer raw  materials  intended  for  medical  devices  because of
product  liability  concerns,  there can be no assurance of continued  supply or
that  finding an  alternative  source  would not cause a delay in the  Company's
manufacturing process.

Environmental

     The Company believes it is operating in material compliance with applicable
regulations  required  by the  State of  Tennessee  and the EPA.  The  Company's
objective is to operate in a clean and safe environment, minimize the generation
of  hazardous  and  non-hazardous  waste  and  promote   environmentally   sound
recycling,  reuse and reclamation of waste. As part of the Company's recognition
of resource protection,  its level of recycling has been increased.  The Company
does not expect to incur a material  amount of capital  expenditures in order to
maintain its environmental  compliance.  Furthermore,  the Company believes that
compliance  with  these  regulations  will  not  materially  impact  either  the
Company's earnings or competitive position.

Insurance

     The  Company  maintains  comprehensive  and  general  liability  insurance,
including product liability,  with coverage up to $100,000,000 in the aggregate.
The Company  maintains a $250,000  per  incident  and  $750,000  aggregate  self
insured  retention.  Although the Company has not  experienced  any  significant
claims to date,  there can be no assurance that the Company's  insurance will be
adequate to cover any claims that may be  asserted in the future.  Although  Dow
Corning  Corporation has  contractually  agreed to indemnify the Company for all
products  manufactured  by Dow  Corning  prior to the  Acquisition  (other  than
certain  small  joint  implants  purchased  by the  Company  and sold  after the
Acquisition), there can be no guarantee that such indemnity

                                                  Page 21 of 119

<PAGE>



will continue in light of Dow Corning's  bankruptcy filing; the Company does not
maintain insurance for those claims.

     The Company also  maintains  liability  insurance  covering  directors  and
officers with coverage up to  $5,000,000.  There is no deductible per officer or
director  per event and a $100,000  deductible  for the Company  per event.  The
Company also  carries  insurance  coverage  for all real and  personal  property
including business interruption,  and coverage for workers' compensation,  crime
and fiduciary liability in amounts that management believes to be adequate.

Patents and Trademarks

     As of January 19, 1998,  the Company owned 81 patents and had  applications
pending  in the  United  States  and major  countries  throughout  the world for
seventeen  additional  inventions.  The Company has  purchased,  licensed or has
distribution  rights for the design,  manufacture  and  distribution  of certain
products.  See  "Business--  Principal  Products." The Company  currently has 36
registered  trademarks and applications  pending on 11 other marks in the United
States and major  countries  throughout the world.  The Company uses its patents
and trademarks  throughout the world in connection with its business operations.
As necessary,  the Company  vigorously  protects its patents and trademarks both
domestically and internationally.

Royalty and Other Payments

     The Company has various  agreements with unaffiliated  entities and persons
that provide the Company with certain rights to  manufacture  and market certain
orthopaedic  products  developed  independently  by such  entities or persons or
jointly with the Company.  The agreements  provide for royalty  payments ranging
from  less  than  1% to 10%  of the  net  selling  price  (as  defined  in  such
agreements) of those certain orthopaedic products. In addition,  the Company has
a number of  consulting  agreements  pursuant  to which  distinguished  surgeons
evaluate the  Company's  new and existing  products in exchange for a consulting
fee.

Seasonality

     The Company's revenues are subject to some seasonality.  Since the majority
of implant  surgery is elective,  the warm weather  months  traditionally  yield
lower sales volumes than do the late fall and winter months.




                                                  Page 22 of 119

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Employees

     As part of an overall plan to increase profitability and improve cash flow,
the Company has effected a plan to  significantly  reduce its workforce.  From a
high of 671 in August of 1997 the  Company  has  reduced  its  workforce  to 559
full-time  employees  as of  March  13,  1998,  including  524  at it  Arlington
operations,  6 in  regional  operations  and 29 outside the United  States.  The
Company's  employees are not covered by any  collective  bargaining  agreements.
Overall, the Company believes that its relationship with its employees is good.



ITEM 2.           PROPERTIES.

     The Company's  headquarters  and  manufacturing  operations  are located in
leased facilities in Arlington,  Tennessee,  which is located near Memphis.  The
Company's  facilities  consist of an aggregate of  approximately  168,000 square
feet,   approximately  53,000  of  which  are  utilized  for  manufacturing  and
approximately  45,000 of which are  utilized as a  distribution  center with the
balance being utilized for office space.

     The   acquisition   and   construction  by  the  lessor  of  the  Company's
manufacturing  facilities  were  financed  through the issuance by the lessor of
industrial  development  bonds,  which  have  been  paid in full.  The base rent
payable under the lease for the initial term was the amount required to meet the
debt service  requirements  of the bonds.  Accordingly,  no further base rent is
payable  during the initial  term of the lease.  The  initial  term of the lease
expires  in 1999.  The  Company  has the  option  to renew  the  lease  for five
additional ten year terms at a base rental of $6,000 per year. In addition,  the
Company has the option to purchase the facilities at a price of $100 at any time
prior to the expiration of the lease in 1999.

     The lease for the Company's office  facilities  provides for the payment of
annual rent of $5,000, plus the lessor's expenses. The term of the lease expires
in 2005.  The Company has the option to purchase  the  facilities  at a price of
$101,000 at any time prior to the expiration of the lease in 2005.

     The   acquisition   and   construction  by  the  lessor  of  the  Company's
distribution  center was also  financed  through  the  issuance by the lessor of
industrial development bonds, which have also been paid in full. The base rental
under the lease was the amount required to meet the debt service requirements on
the bond.  Accordingly,  no further base rent is payable  during the term of the
lease. The term of the

                                                  Page 23 of 119

<PAGE>



lease expired on the original  maturity  date of the bonds.  The Company has the
option to purchase the  facilities at a price of $1,000 at any time. The Company
added 5,000  square feet as an extension  to the  original  distribution  center
structure during 1995.

     The  Company  leases   approximately   4,000  square  feet  in  Marblehead,
Massachusetts  for its  Questus  facility  that  provides  for  monthly  rent of
$10,860. The facility is used for research and development and office space.



ITEM 3.           LEGAL PROCEEDINGS

     Mitek  Surgical  Products,  Inc.  ("Mitek"),  has  alleged  in the  Federal
District  Court for the  Northern  District  of  California  that the  Company's
ANCHORLOK(R)  soft  tissue  anchor  infringes  its patent.  That court  recently
rendered an opinion of non-infringement  in favor of the Company,  which opinion
was reversed on November 3, 1997,  after  reconsideration  by the Court. On July
18, 1997, Howmedica, Inc. alleged in the Federal District Court for the District
of New Jersey that certain of the Company's products infringe its patent related
to a type of porous coating and seeks unspecified money damages.  The Company is
defending that claim. On August 22, 1997, Osteonics, Inc. alleged in the Federal
District  Court for the District of New Jersey that the Company's  BRIDGE(R) Hip
System infringes its patent and seeks money damages and injunctive  relief.  The
Company is defending that claim.

     On April 3, 1995,  the  Company  (and  ORTHOMET(R),  Inc.,  a wholly  owned
subsidiary  at the time  that has  subsequently  been  merged  with and into the
Company)  was  notified  that  it  had  been  sued  by  Joint  Medical  Products
Corporation (which was purchased by Johnson & Johnson Professional, Inc.) in the
United States District Court of the District of Connecticut  seeking damages for
the alleged  infringement  of its patent  (U.S.  Pat.  No.  4,678,472,  the "472
Patent") by certain of the  Company's  acetabular  cups and liners.  Pending the
resolution of an interference proceeding in the U.S. Patent and Trademark Office
regarding  the '472  Patent by  British  Technology  Group  Ltd.  ("BTG"),  such
complaint was dismissed without  prejudice.  In early November 1996, the Company
was notified  that the  interference  proceeding  was  resolved.  Joint  Medical
Products  Corporation filed another complaint against the Company on January 28,
1997. A Stipulation of Dismissal  without  prejudice was filed in this case with
the court on December  22,  1997.  A tolling  agreement  between  Joint  Medical
Products  Corporation  and the Company dated as of April 3, 1995 regarding these
claims of infringement remains in effect. BTG has offered the Company

                                                  Page 24 of 119

<PAGE>



a license of the '472 Patent and a  corresponding  reissue  patent.  The Company
believes that it has valid defenses to claims of infringement of the '472 Patent
and to the reissue patent.

     Management does not believe the outcome of any of these matters will have a
material  adverse  effect on the  Company's  financial  position  or  results of
operations.

     DCW, pursuant to the Acquisition agreements,  retains liability for matters
arising from certain  conduct of DCW prior to the Company's  acquisition on June
30, 1993, of substantially all the assets of the large joint orthopaedic implant
business of DCW. As such,  DCW has agreed to indemnify  the Company  against all
liability  for all products  manufactured  prior to the  Acquisition  except for
products  provided under the Company's 1993 agreement with DCW pursuant to which
the Company  purchased  certain small joint  orthopaedic  implants for worldwide
distribution.  However,  the  Company was  notified in May 1995 that DCW,  which
filed for reorganization  under Chapter 11 of the U.S. Bankruptcy Code, would no
longer  defend the Company in such matters until it received  further  direction
from the bankruptcy  court.  Since then DCW has filed various  proposed plans of
reorganization that provided that all commercial creditors be paid 100% of their
claims,  plus  interest.  The plans did not however  indicate  whether DCW would
affirm or reject the Acquisition  agreements.  No plan of reorganization has yet
been  approved.  Accordingly,  there can be no  assurance  that Dow Corning will
indemnify the Company on any claims in the future. Although the Company does not
maintain  insurance for claims arising on products sold by DCW,  management does
not  believe the outcome of any of these  matters  will have a material  adverse
effect on the Company's financial position or results of operations.

     The Company is not involved in any other  pending  litigation of a material
nature  that would have a material  adverse  effect on the  Company's  financial
position or results of operations.



ITEM 4.           SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.

     As of August 11,  1997,  the Company  received  the written  consent of the
Board of Directors  and a majority of the holders of both the Series A Preferred
Stock and the Class A Common  Stock to  increase  the  reserve  for shares to be
issued under the 1994  Distributor  Stock Option Plan by 70,000 shares and under
the 1993 Stock Option Plan by 370,000 shares.

                                                  Page 25 of 119

<PAGE>



                                      PART II.


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

     The Company's Class A Common Stock currently is not publicly  traded,  and,
as such,  market value  quotations  are  unavailable.  There were 361 registered
holders of Class A Common Stock as of March 13, 1998. The Company has never paid
dividends  on its  Class A Common  Stock  and does  not  expect  to pay any cash
dividends in the foreseeable future. The Company currently intends to retain its
earnings,  if any, for future  operations  and  expansion of its  business.  Any
decisions  as to the  payments  of  dividends  in the future  will depend on the
earnings  and  financial  position of the Company and such other  factors as the
Board of Directors deems  relevant.  In addition,  the Company's  indenture with
State Street Bank and Trust  Company,  as successor  to First  National  Bank of
Boston,  on providing  for the issuance of the Company's 11 3/4% Series D Senior
Secured  Notes,  due  July  2000  (the  "Indenture"),   the  Company's  Restated
Certificate of  Incorporation,  the Company's  Series B Preferred Stock Purchase
Agreement and Class A Common Stock Warrant  Agreement  dated as of July 29, 1994
with the California Public Employees Retirement System ("CalPERS"),  as amended,
and the Class A Common Stock  Warrant  Agreement  dated as of September 25, 1995
with CalPERS  (collectively,  the "CalPERS  Agreement") and its Credit Agreement
dated  September 13, 1996, by and between the Company and Sanwa Business  Credit
Corporation (the "Credit  Agreement"),  substantially  limit the payment of cash
dividends on the Company's capital stock.

                                                  Page 26 of 119

<PAGE>
<TABLE>


ITEM 6.           SELECTED FINANCIAL DATA.

     The following  selected  financial data of the Company and its subsidiaries
(the  "Successor")  and of the DCW medical device  business (the  "Predecessor")
should  be read in  conjunction  with the  financial  statements  and the  notes
thereto included in Item 8.


                                   (in thousands, except per share data and ratio)
<CAPTION>
                                     Predecessor                                     Successor
                                     ===========    ======================================================================

                                        JAN 1,        JUN 30,          Year          Year          Year          Year
                                       through        through         Ended         Ended         Ended         Ended
                                       JUN 30,        DEC 31,         DEC 31,       DEC 31,       DEC 31,       DEC 31,
                                         1993          1993            1994          1995          1996          1997
<S>                                    <C>          <C>           <C>          <C>            <C>          <C>
Operating Data:
  Net sales                            $35,033      $  43,027     $  95,763    $  123,196     $ 121,868    $  122,397
  Net income (loss)                        437         (2,572)      (49,380)       (6,492)      (14,589)      (22,572)
  Loss per common share                     --           (.41)        (6.10)        (2.24)        (3.90)        (4.38)

Balance Sheet Data:
  Total assets                         $72,691      $ 113,497     $ 154,551    $   174,371    $ 166,326    $  153,083
  Long term debt                           108         84,605        84,983         84,462       84,668        85,104
  Mandatorily redeemable
    Series B Preferred                      --             --        47,658         46,757       59,959        70,511

  Redeemable Convertible
    Series C Preferred                      --             --            --         20,548       24,995        29,442
  Parent company
    investment                          68,029             --            --             --           --            --
  Stockholders' equity                      --         11,602       (25,502)       (25,177)     (58,506)      (97,010)
Ratio of earnings to
 fixed charges and
 preferred dividends                        --           (A)           (A)             (A)         (A)           (A)


<FN>
(A)      Earnings were  inadequate to cover fixed charges,  preferred  dividends
         and accretion of preferred stock by $3.6 million,  $61.7 million, $26.3
         million, $35.3 million and $41.2 million,  respectively, for the period
         from June 30, 1993  through  December  31, 1993 and for the years ended
         December 31, 1994,  December 31, 1995,  December 31, 1996, and December
         31, 1997.
</FN>
</TABLE>
                                                  Page 27 of 119


<PAGE>



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

Overview

     The Company's 1997 performance  failed to meet  management's  expectations.
The net sales of its knee product lines were down and although its sales of hips
and extremity  products  were up, the expected  growth in those lines and in the
Company's spine, trauma and arthroscopy lines was not realized. However, in late
1997 and early 1998 the Company effected various initiatives which should result
in positive trends in the reduction of general and administrative  expenses, the
reduction of selling  expenses,  an increase in gross  margins and improved cash
flow.  While the Company's 1997 sales were  relatively flat over the prior year,
the Company expects  renewed sales growth in late 1998 as its biologic  products
gain wider exposure and ADVANCE(R) knee product line additions become available.

     Beginning in August of 1997 the Company  commenced a plan to  significantly
streamline its operations and reduce its operating  expenses.  For example,  the
Company  sought to  significantly  reduce its  workforce.  Accordingly,  through
terminations and attrition,  the Company's  workforce has dropped  approximately
20% from a high of 671 employees in August 1997 to 559 as of March 13, 1998. The
Company also reversed,  as of December 31, 1997, the transaction  whereby it had
purchased the assets and employment  contracts of two of its distributors.  That
initial purchase increased  significantly the Company's selling expenses and its
reversal should have a favorable impact in 1998. Other  initiatives  should have
similar results.

     In early 1998, with the  introduction  of new management,  the Company also
embarked on a new strategy of concentrating its resources and working capital in
its business segments with the greatest  potential for return including its knee
and hip (large joint) business  segments,  its extremity  business (products for
the  shoulder,  arms,  hand and feet) and its  growing  business  related to its
biological  portfolio.  Toward that goal and in the first  quarter of 1998,  the
Company  established a separate  biologics division for the purpose of expanding
the  development,  marketing,  and sales of its biologic  portfolio of products.
Also, the Company has decided to seek to divest its assets related to its spine,
trauma and  arthroscopy  businesses.  In March 1998, the Company  entered into a
letter of intent to sell its trauma assets.

     Also in 1997 the Company,  through an exchange offer of its Series B Senior
Secured Notes, (see Note 7 of the Financial Statements) eliminated those sinking
fund payment obligations which

                                                  Page 28 of 119

<PAGE>



otherwise  would  have  been due on July 1, 1998 and 1999.  The  Exchange  Offer
provides the Company  with  additional  flexibility  in  addressing  its capital
structure.  Of course, the Company is, and will continue to be, highly leveraged
with  attendant  risks.   The  Company's   ability  to  meet  its  debt  service
obligations,  to achieve its  financial  covenants  and to reduce its total debt
will be dependent upon the Company's future  performance,  which will be subject
to general  economic  conditions  and to  financial,  business and other factors
affecting the  operations of the Company,  many of which are beyond its control.
There can be no assurance  that the  Company's  future  performance  will not be
adversely affected by such economic conditions and financial, business and other
factors.


RESULTS OF OPERATIONS

Year Ended December 31, 1997 Compared With Year Ended December 31, 1996

     Sales.  In 1997 sales  remained  relatively  flat for the Company at $122.4
million  compared to $121.9  million in 1996.  Sales of knees were lower in 1997
than the  previous  year by $4.5  million  or 6%,  attributable  to a decline in
ADVANTIM(R)  Knee sales  offset by an increase in sales of the  ADVANCE(R)  Knee
products.

     Hip sales were were up 2.0% from 1996 to $28.9 million,  extremity products
increased 3.4% to $11.0 million.  Biologics sales increased  significantly  from
$0.3 in 1996 to $2.6 million in 1997.  Spine,  trauma and arthroscopy sales were
$4.4 million.

     The Company's international sales were strong in 1997 with overall sales of
$33.1 million compared to $30.4 million for 1996. Every product line experienced
growth  in 1997  internationally.  Sales of knees  were  $20.8  million  or $1.1
million (5.3%) higher than in 1996.  ADVANTIM(R) knee sales  contributed to this
growth  with a sales  increase  of $0.2  million  compared to the same period in
1996.

     Domestic  sales  decreased  by $2.1  million in 1997 when  compared to 1996
principally due to the net decline in knee sales.

     Cost of Goods Sold. Cost of goods sold increased from $44.4 million in 1996
to $46.7  million in 1997 or 5%. This  increase  was due  primarily  to a higher
percentage of  international  sales and instrument  sales when compared to 1996.
These have a higher cost of sales as a percentage of sales.

     Selling.  Selling expenses increased by $3.6 million or 7% in 1997 to $51.0
million. This increase primarily resulted from the on-

                                                  Page 29 of 119
<PAGE>

going expenses related to the previously independent distributorships which were
purchased by the Company earlier in 1997, the expenses due to the reorganization
of operations in the New England  territories which also occurred earlier in the
year and the  reclass to selling  of  guaranteed  royalties  from  Research  and
Development where they were included during 1996.

     General and  Administrative.  General and Administrative  expenses of $20.1
million were higher in 1997 by $0.8 million from the previous year. However, net
of expenses  related to the third quarter  Exchange Offer ($2.8 million) and the
reduction in force ($0.2 million), general and administrative expenses decreased
when compared to the prior period.  This decrease was primarily  attributable to
cost reduction measures  instituted during the third quarter of 1997 which began
having a favorable effect during the fourth quarter of the year.

     Research and Development.  Research and development  expenses  decreased in
1997 to $11.6  million  which was $1.6  million  (12.0%)  below  1996  spending.
Approximately  half  of  this  decrease  was  due  to  the  reclassification  of
guaranteed  royalties from research and  development in 1996 to selling in 1997.
The  additional  reduction  was  primarily  attributable  to  decreased  outside
research studies and clinical costs.

     Other. Equity in loss of investment of $1.2 million represented a full year
of the Company's 50% share of the expenses incurred related to the joint venture
with TEI.  During 1996 the joint  venture was only in  existence  for the second
half of the year which was the primary  reason for the  increase of $0.7 million
in 1997.

     Interest  expense net of interest income increased by $1.1 million to $13.1
million in 1997.  This increase was  primarily  due to the higher  interest rate
paid on the new bonds due to the Exchange  Offer and increased  interest paid on
the Company's line of credit because of higher usage of these funds.

     Other income/expense increased to $1.3 million in expense in 1997 from $0.4
million of income in 1996. This unfavorable  swing of $1.7 million was primarily
due to unfavorable currency exchange rates, non recurring income due to the sale
of the Company jet in 1996,  a  non-recurring  tax refund in 1996 and expense in
1997 due to the OMI asset purchase settlement.

     For the years ended December 31, 1997 and December 31, 1996 earnings before
interest, taxes,  depreciation,  and amortization ("EBITDA") are detailed in the
table below.  The EBITDA  totals both before and after certain  adjustments  are
shown:

                                                  Page 30 of 119

<PAGE>
<TABLE>


<CAPTION>
                                                         December 31,
                                           -------------------------------------
                                               1997                    1996
                                           -------------           -------------
<S>                                        <C>                     <C>
Operating Loss                             $     (8,233)           $     (3,055)
Depreciation and Instrument Amortization         12,926                  11,272
Amortization of Intangibles                       3,364                   3,266
Amortization of Other Assets                        533                     266
                                           ------------            -------------
EBITDA before Certain Adjustments          $      8,590            $     11,749
Inventory Reserves and Other Related
   Inventory Adjustments                          8,450                   4,852
Orthomet Inventory Step-Up*                           0                     992
Stock Contribution                                1,093                     934
                                           -------------           -------------
EBITDA after Certain Adjustments           $     18,133            $     18,527
                                           =============           =============
<FN>
     * Amount represents the flow through of the purchase accounting  adjustment
in 1996 as it related to acquired Orthomet inventory.
</FN>
</TABLE>

Year Ended December 31, 1996 Compared With Year Ended December 31, 1995

     Sales.  In 1996, the Company posted sales of $121.9 million  representing a
net sales decrease of approximately 1.1%, or $1.3 million,  compared to its 1995
sales of $123.2 million.

     Domestic sales for the year were $3.7 million or  approximately  3.9% below
1995 while the Company's  international sales grew by approximately 8.6% or $2.4
million over prior year. Sales in Europe,  Latin America,  Canada, and Asia grew
by $1.6 million  (approximately  13.0%),$1.0 million (approximately 56.3%), $0.5
million   (approximately   17.2%),  and  $0.2  million   (approximately   10.1%)
respectively,  offset  primarily by lower than prior years' sales in Japan which
were due to prolonged transition in the change of distribution channels that was
initiated  by the  Company in order to better  serve this  market  over the long
term.

     Although  total sales for 1996  decreased as compared to 1995,  new product
line sales  increased  compared to prior year sales for the period in ADVANCE(R)
Knee ($2.6 million),  trauma ($0.7) million), spine ($0.5 million),  arthroscopy
products ($1.0 million) and biologics ($0.3 million). Those gains were offset by
decreased sales for the period in knees,  other than ADVANCE(R)  ($4.7 million),
hips ($0.9

                                                  Page 31 of 119

<PAGE>




million), and small joint products ($0.9 million). Despite the decrease in sales
dollars during 1996, unit sales of the Company's large joint products  increased
during 1996 when compared to 1995. In large joints, particularly hips and knees,
the  Company  (and  management   believes  the  entire   orthopaedic   industry)
experienced a shift from higher  priced  porous coated  products to lower priced
cemented products.  While selling prices increased slightly in both cemented and
porous  products,  the mix of sales towards cemented designs resulted in a lower
average selling price per procedure.

     Cost of Goods Sold. Cost of goods sold increased from $33.7 million in 1995
to $44.4 million in 1996, or  approximately  32%. The $10.7 million net increase
was  due to  additional  instrument  reserving  ($3.6  million)  because  of the
reclassification  of surgical  instruments to inventory as part of the Company's
revised   instrument   program  designed  to  give  the  Company's   independent
distributors better access to these instruments,  increased variances charged to
cost of goods sold ($2.8 million), a reduction of the sales return reserve ($0.8
million),  a higher level of sales of fully reserved  products in 1995 resulting
in  the  reversal  of  inventory  reserves  during  that  year  ($1.1  million),
additional product reserving in 1996 ($0.4 million) and increased  manufacturing
costs ($1.8 million).

     Selling.  Selling expenses  increased slightly in 1996 by $0.3 million when
compared  to 1995.  Although  sales in 1996 were  lower  than  1995,  commission
expenses,  primarily  guarantees,  increased  by $0.7  million  in 1996 to $21.7
million.  Royalties increased in 1996 to $2.0 million compared to 1995 royalties
of $1.4  million  due  largely to an  increase  on  royalties  being paid on the
Company's  small  joint  orthopaedic   products.   Domestic  marketing  expenses
decreased in 1996 ($0.2 million) due primarily to lower literature, supplies and
advertising  ($0.6  million)  because of fewer new product  launches in 1996 and
lower  travel and  entertainment  expense  ($0.7  million)  offset by  increased
payments  ($0.6  million)  due  to   distributor   replacements   and  territory
realignments and increased salaries and benefits ($0.8 million) due to headcount
adds.  International  marketing  expenses decreased by $1.7 million in 1996 when
compared to the same  period in 1995.  The  reduced  spending  in 1996  resulted
primarily from  shutdowns in Brazil ($0.5 million) and Australia  ($0.2 million)
along with lower  salaries  and  benefits in France due to the  transition  to a
non-employee  sales force ($0.5  million),  and  decreases in the  headquarters'
expenses in salaries,  benefits,  and travel ($0.3 million) which contributed to
this favorable variance year over year.

     The Managed Care  division of the Company  spent $1.3 million in 1996 which
was $1.0 million more than was spent in 1995. This

                                                  Page 32 of 119

<PAGE>



spending was non-recurring as this division was closed in December, 1996.

     General and Administrative. General and administrative costs decreased from
$23.4  million in 1995 to $19.4  million in 1996,  or a decrease of $4.0 million
(approximately  17%).  This  decrease  was  attributable  in large part to lower
intangible  amortization  ($1.2  million),   reduced  travel  and  entertainment
expenses due to the sale of the corporate jet and reduced  overall  travel ($2.1
million),  lower  insurance  costs ($0.4  million),  decreased  legal fees ($0.4
million) and lower outside services ($0.4 million) offset by higher salaries and
benefits  due  to  payment  of  the  1996   management   bonus  ($1.0  million).
Additionally  lower  professional  fees in 1996 ($0.2 million) and international
favorable  variances  for the  period  due to lower  spending  in  France  ($0.2
million) contributed to the favorable year- over-year variance.

     Research & Development.  Research and development  expenses  increased $0.5
million from $12.7  million in 1995 to $13.2  million in 1996, or an increase of
approximately 4.0%.

     Other. Equity in loss of investment ($0.5 million) represents the Company's
50%  share of the  expenses  incurred  related  to the joint  venture  with TEI.
Amortization of a certain license  arrangement  obtained from TEI($0.3  million)
was the primary contributor to the joint venture loss.

     Other income for the year ended December 31, 1996 increased $0.3 million as
compared  to the  same  period  in 1995  due  primarily  to  favorable  currency
conversion.  Interest  expense,  net of interest  income,  increased  from $11.3
million in 1995 to $11.9  million  in 1996,  an  increase  of $0.6  million,  or
approximately  5%.  This  increase  in interest  expense  was  primarily  due to
financing costs associated with the private  placement of the Company's Series C
Preferred Stock late in 1995.

Liquidity and Capital Resources

     Since the DCW  Acquisition,  the  Company's  strategy  has been to position
itself for growth  through new product  development  and the  acquisition of new
technologies  through license agreements,  joint ventures and purchases of other
companies in the orthopaedic  field. As anticipated,  the Company's  substantial
needs for working  capital  have been funded  through the sale of $85 million of
senior  debt  securities  and  $15  million  of  equity  at the  time of the DCW
Acquisition,  through the  issuance  of Series B Preferred  Stock in 1994 to the
California Public Employees' Retirement System ($60 million),

                                                  Page 33 of 119

<PAGE>



through the issuance of Series C Preferred  Stock to the Princes Gate purchasers
in  September  1995 ($35  million),  and  through  borrowings  on the  Company's
revolving line of credit.

     The Company has  available  to it a $30  million  revolving  line of credit
under the Sanwa  Agreement  (the "Sanwa  Agreement")  which provided an eligible
borrowing  base at December  31, 1997 of $29.1  million.  The maximum  allowable
borrowing  base  increased  from $25  million to $30  million as a result of the
Exchange  Offer.  As of December 31, 1997,  the Company had drawn $18.5  million
against  this  line  of  credit.   The  Company's  strategy  and  it's  interest
obligations to its  noteholders  have resulted in a continued  dependence on the
Sanwa Agreement and other funding sources to meet working capital needs.  During
1997,  borrowing under the Sanwa Agreement reached $22.6 million compared to the
same period in 1996 when borrowings (under the former Heller Agreement)  reached
$16.1 million.

     The  Company  has  incurred  losses  since its  inception  and  anticipates
incurring a loss during 1998.  Additionally,  the  Company's  projected  working
capital  requirements  for 1998  indicate a continued  reliance on its revolving
credit  facility.  Accordingly,  management  continues  to closely  monitor  the
Company's  working  capital  needs and  believes the current  revolving  line of
credit will be sufficient to meet its requirements through 1998.

     The  Company's  capitalization  includes  senior debt  securities  of $84.6
million and various  series of  preferred  stock with an  aggregate  liquidation
value of $152.8 million  including accrued but unpaid dividends of $21.3 million
at December 31, 1997. These securities currently bear interest or dividend rates
ranging from 10.0% to 18.88%.  The Series D Notes eliminated  provisions related
to the  Company's  obligation  to make the  sinking  fund  payments  and certain
restrictive covenants of the Old Indenture.

     At  year-end  1997,  the Company had spent  approximately  $6.0  million in
capital  expenditures,  and has budgeted  expenditures for 1998 of approximately
$4.5 million for the purchase of machinery and related capital equipment.

     In  assessing  the impact of the "Year 2000" on the  Company's  information
systems,  as well as other  information  system needs,  Management  has signed a
software license and services agreement with PeopleSoft,  Inc. First, management
will  upgrade  its  current  system.  This will  mitigate  any year 2000  issues
allowing  time for a proper  transition  to  PeopleSoft.  Currently,  Management
estimates  the cost of new  information  system  software to  approximate  $1.75
million, the majority of which will be incurred in 1999.

                                                  Page 34 of 119

<PAGE>



     As of December  31,  1997,  the Company  had net working  capital  (current
assets less current  liabilities) of $40.4 million,  compared with $50.5 million
as of December 31, 1996. This $10.1 million  decline was  attributable to growth
in short term borrowings against the Company's line of credit.

                                                  Page 35 of 119

<PAGE>



ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     Information  called  for by  this  item  is  set  forth  in  the  financial
statements  contained in this report on Form 10-K and is incorporated  herein by
this reference.  An index to the financial statements is set forth on page 61 of
this Form 10-K.


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

     None.

                                                  Page 36 of 119

<PAGE>



                                                     PART III

ITEM 10.          DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Executive Officers and Directors

     Directors  of the Company are elected  annually  and hold office  until the
next annual meeting of stockholders  or until their  successors are duly elected
and  qualified.  All  officers of the Company are  appointed by and serve at the
discretion  of the Board of Directors  of the Company.  Election of directors is
governed in part by a Letter  Agreement  dated June 30, 1993, as amended on July
29, 1994 and as amended on November 21, 1995 between Mr.  Korthoff and Kidd Kamm
Equity Partners,  L.P. (the "Letter Agreement").  The following table sets forth
the  executive  officers  and  directors  of the  Company as of March 31,  1998.
Richard  H.  Mazza and Judy  Lindstrom-Foster  were  executive  officers  of the
Company during 1997 but are no longer with the Company.


     NAME                   AGE          POSITION WITH COMPANY

Thomas M. Patton             34          President and
                                         Chief Executive Officer
Jack E. Parr, Ph.D.          58          Vice Chairman and Chief Scientific
                                         Officer and President Wright
                                         Bio-Orthopaedics Division
Gregory K. Butler            46          Executive Vice President and
                                         Chief Financial Officer
Robert L. Conta              52          Vice President,
                                         Research & Development
Kurt L. Kamm                 55          Chairman of the Board of Directors
Richard D. Nikolaev          59          Director
Lewis H. Ferguson, III       53          Director
William J. Kidd              56          Director
Walter S. Hennig             55          Director
Herbert W. Korthoff          54          Director
Stephen R. Munger            40          Director
Richard H. Mazza             51          None Currently
Judy Lindstrom-Foster        53          None Currently

                                                  Page 37 of 119
<PAGE>
     Thomas M. Patton was appointed  President and CEO of the Company in January
1998.  Prior to that Mr.  Patton  was  Executive  Vice  President  of  Corporate
Development  and  General  Counsel.   Along  with  his  legal  duties,  he  also
participated in key strategic company and complimentary product acquisitions for
the  Company.  Mr.  Patton  joined the  Company in 1993 as General  Counsel.  He
graduated from  Georgetown  University and was previously a litigation  attorney
for Williams & Connolly in Washington, D.C.

     Jack E. Parr,  Ph.D.  was  appointed  Vice  Chairman  and Chief  Scientific
Officer of Wright  Medical  Technology  in March 1998 and was also  appointed as
President of the Wright Bio-Orthopaedic  Division established to concentrate the
Company's resources on its biologics  initiatives.  Dr. Parr is a world renowned
leader in the field of orthopaedic research. Dr. Parr joined the Company in 1993
with 15 years of  experience,  which  included  Vice  President  of Research for
Zimmer,  Inc., a Division of Bristol-Myers  Squibb. He is the President-elect of
the Society for  Biomaterial  and is an active member of the American  Standards
for Testing and  Materials.  Dr. Parr was inducted into the American  Academy of
Orthopaedic  Surgeons  in March 1998 and has been a recipient  of many  industry
achievement awards, most recently he received a Director's Special Citation from
the FDA's Center for Devices and  Radiological  Health for his  participation in
the American Academy of Orthopaedic Surgeons Forum.

     Gregory K. Butler brings 21 years of accounting  experience to his position
with 19 years in the  orthopaedic  industry.  He is a graduate of Memphis  State
University  with a Bachelor's  degree in Accounting  and a Bachelor's of Science
degree. Mr. Butler joined Dow Corning Wright in 1987 as Manager of Manufacturing
Accounting.  He was the acting CFO from July 1992  through  July 1993 during the
divestiture of Dow Corning Wright to Wright  Medical  Technology,  Inc. Prior to
joining Dow Corning Wright he was Plant Controller at Richards Medical Company.

     Robert L. Conta has been Vice President of Research and  Development  since
February  1994.  Prior to joining the Company and since 1989, Mr. Conta was Vice
President of Engineering and  Development  for Joint Medical  Products Corp., an
orthopaedic  joint  company.  Prior to 1989,  Mr.  Conta was Vice  President  of
Research and  Development  for the Operating Room Division of Baxter Health Care
Corporation.  He has a Bachelors degree in Bioengineering  from Brown University
and a Masters degree in Mechanical and Aerospace Sciences from the University of
Rochester.


                                                 Page 38 of 119

<PAGE>

     Kurt L. Kamm has been a Director of the Company since July 1993, serving as
Chairman  since  August  1997.  Mr.  Kamm  has  been an  officer  and  principal
shareholder of Kidd, Kamm & Company, a privately owned investment firm (formerly
a  partnership),  from 1987 when he  co-founded  the firm until  present.  As of
January 1, 1997,  Mr. Kamm became an officer,  director and  co-founder  of Kamm
Theodore and is a director of a number of other companies.

     Richard D. Nikolaev has been a Director of the Company since July, 1995 and
was the President and Chief Executive  Officer of the Company from November 1995
to  November  1997.  Prior to joining  the  Company,  Mr.  Nikolaev  served as a
consultant to various medical device companies since December 1994. From January
1992 until  December  1994,  Mr.  Nikolaev  was  Chairman,  President  and Chief
Executive Officer of Orthomet,  Inc.,  acquired by the Company in December 1994.
Prior to joining Orthomet, Inc., Mr. Nikolaev served as President of Orthopaedic
Synergy,  an  orthopaedic  consulting  company  and as an  executive  officer of
various orthopaedic companies.

     Lewis H. Ferguson III has been a Director of the Company since August 1993.
Mr.  Ferguson  was Senior Vice  President  and  Secretary  from  January 1994 to
December 1997. Prior to joining the Company,  Mr. Ferguson had been a partner in
the  Washington,  D.C. law firm of Williams & Connolly since 1979. Mr.  Ferguson
was on an  extended  leave of  absence  from  Williams  &  Connolly  but has now
returned to the private  practice of law. Mr.  Ferguson is elected to serve as a
Director  pursuant to the Letter  Agreement.  Mr. Ferguson is also a director of
OsteoBiologics, Inc., OTT and TEI.

     William J. Kidd has been a Director  of the  Company  since July 1993.  Mr.
Kidd has been an officer and principal  shareholder of Kidd,  Kamm & Company,  a
privately  owned  investment  firm (formerly a  partnership),  from 1987 when he
co-founded  the firm until  present.  As of January 1, 1997,  Mr. Kidd became an
officer,  controlling  shareholder  and founder of Kidd & Company,  LLC and is a
director of a number of other companies.

     Walter S. Hennig has been a Director of the Company  since April 1994.  Mr.
Hennig had been Vice  President of Quality  Functions at United States  Surgical
Corporation since 1976 prior to his retirement in March 1992.

     Herbert W.  Korthoff  has been a Director of the Company  since May,  1993,
serving as Chairman from July 1, 1993 to August 1997. Mr. Korthoff served as the
Chief Executive Officer of the Company from July 1993 to November 1995. Prior to
joining  the  Company,   Mr.  Korthoff  was  the  Executive  Vice  President  of
Operations,  a member of


                                                  Page 39 of 119


<PAGE>


the  Executive  Management  Committee and a  Director of  United States Surgical
Corporation.

     Stephen R. Munger is a Managing  Director in the Mergers,  Acquisition  and
Restructuring Department of Morgan Stanley & Co. Incorporated and is Head of the
Private  Investment  Department.  Mr. Munger joined Morgan  Stanley in 1988 as a
Vice President in the Corporate Finance Department,  became a Principal in 1990,
and a Managing  Director in 1993. In 1993 and 1994,  Mr.  Munger was  investment
Banking Division Operations Officer and Administrative Director of the Corporate
Finance Department,  respectively. Prior to joining Morgan Stanley, Munger was a
Vice President of the Mergers and Acquisitions Department of Merrill Lynch & Co.

     Richard H. Mazza was Vice President of Manufacturing  from April 1994 until
March 1996 when he was elected to Executive  Vice  President of  Operations.  In
November 1997 he was appointed Chief Operating  Officer.  Mr. Mazza resigned his
position on January 22, 1998.

     Judy Lindstrom-Foster  joined Wright Medical Technology,  Inc. in September
of 1996 as Vice President of International  Sales & Marketing.  Prior to joining
the Company, Ms. Lindstrom served as president of Neovision and prior to that as
the  president of MicroAire  Surgical  Instruments,  Inc. In September  1997 Ms.
Lindstrom  was  promoted  to  Executive  Vice  President  of  Global  Sales  and
Marketing. Ms. Lindstrom resigned her position with the Company in January 1998.

                                                  Page 40 of 119

<PAGE>



ITEM 11.          EXECUTIVE COMPENSATION

     The  following  table  sets  forth  certain  information  with  respect  to
compensation  paid by the Company during the period from January 1, 1995 through
December 31, 1997, to the Company's Chief Operating Officer and to the four most
highly compensated  executive  officers whose compensation  exceeded $100,000 in
1997 (the "Named Executive Officers").
<TABLE>
<CAPTION>

                                              SUMMARY COMPENSATION TABLE
                                                                                    Long Term Compensation
                                                                                    ----------------------
                                             Annual Compensation                            Awards
                                ------------------------------------------------------------------------------------------------
              (a)                 (b)      (c)              (d)          (e)                 (g)                    (i)

           Name and                                                  Other Annual   Securities Underlying        All Other
       Principal Position        Year    Salary           Bonus      Compensation         Options (1)           Compensation
---------------------------      ----   -----------   -------------  ------------   ---------------------   --------------------
<S>                              <C>     <C>            <C>          <C>            <C>                             <C>
Richard D. Nikolaev              1995    $ 51,754(2)          -            -        a. 110,000 common               $ 1,891(3)
President and                    1996    $525,500             -      $ 44,091(4)                                    $ 9,270(5)
Chief Executive Officer          1997    $487,370             -      $ 59,428(6)                                    $33,563(7)

Lewis H. Ferguson, III           1995    $525,773             -      $ 23,388(8)                                    $ 7,936(9)
Senior Vice President            1996    $525,498             -      $ 65,681(10)                                   $ 9,038(11)
                                 1997    $503,622             -      $ 79,762(12)                                   $ 7,927(13)

Richard H. Mazza (14)            1995    $150,700             -             -(18)   a.  10,000 common               $21,057(15)
Chief Operating Officer          1996    $173,317       $43,329(16)         -(18)   a.  30,000 common               $ 8,322(17)
                                 1997    $194,067             -             -(18)   a.  25,000 common               $10,038(19)

Jack E. Parr, Ph.D.              1995    $171,783             -             -(18)                                   $ 8,458(20)
Vice Chairman and Chief          1996    $176,200       $44,050(16)         -(18)                                   $10,122(21)
Scientific Officer and           1997    $183,600             -             -(18)   a.  25,000 common               $ 8,650(22)
President Wright Bio-
Orthopaedics Division

Robert L. Conta                  1995         N/A           N/A           N/A                                           N/A
VP Research & Development        1996         N/A           N/A           N/A                                           N/A
                                 1997    $164,544             -             -(18)   a.  15,000 common               $ 6,149(23)

Judy Lindstrom-Foster            1995         N/A           N/A           N/A                                           N/A
Executive Vice President,        1996         N/A           N/A           N/A                                           N/A
Global Sales & Marketing         1997    $175,000             -             -(18)   a.  25,000 common               $ 6,376(24)



                                                  Page 41 of 119

<PAGE>



<FN>

(1)       Indicates  the  number of shares  that may be  purchased  pursuant  to
          options  granted.  Options were granted under three separate plans and
          are  identified  as "a" for options to purchase  Class A Common  Stock
          granted  pursuant to the 1993 Stock  Option  Plan;  "b" for options to
          purchase  Class A Common  Stock and Series A Preferred  Stock  granted
          pursuant to the 1993 Special  Stock  Option  Plan;  "c" for options to
          purchase   Class  A  Common  Stock   granted   pursuant  to  the  1994
          Non-Employee Stock Option Plan.
(2)       Mr. Nikolaev joined the Company on November 28, 1995 as Chief
          Executive Officer and President.  His annualized salary in 1995 was
          $525,000.
(3)       Represents $338 premium for group term life insurance, $1,553 of
          401(k) employer matching contributions.
(4)       Represents a housing stipend in the amount of $10,186, personal travel
          expenses of $14,384,  personal use of Company  vehicle of $6,536,  and
          $12,985  to  cover   expected   tax   payments  on  all  other  annual
          compensation.
(5)       Represents  $664 of club  dues,  $4,106 of group term life  insurance,
          and $4,500 of 401(k)  employer  matching  contributions.
(6)       Represents  a housing stipend of $8,163,  personal  travel expenses of
          $26,187,  the use of a Company vehicle valued at $7,189, and $17,889
          to cover expected tax payments on all other annual compensation.
(7)       Represents $3,763 of group term life insurance, $4,800 of 401(k)
          employer matching contributions and $25,000 for consulting services
          pursuant to a consulting contract entered into November 1997.
(8)       Mr. Ferguson received a housing stipend of $23,388 in 1995.
(9)       Includes $844 for club dues,  $2,592 for group  term life  insurance,
          and $4,500  of 401(k)  employer  matching  contributions.
(10)      Includes a housing stipend of $18,000,  personal  travel  expenses of
          $16,202,  personal  use of a company vehicle of $12,000, and $19,479
          to cover expected tax payments on all other annual compensation.
(11)      Includes $1,238 for club dues, $672 for the installation of a car
          alarm on company vehicle, $2,628 for group term life insurance, and
          $4,500 for 401(k) employer matching contributions.
(12)      Includes a housing stipend of $25,924, personal travel expenses of
          $26,831, personal use of a company vehicle of $11,000, and $16,007 to
          cover expected tax payments on all other annual compensation.
(13)      Includes $516 for the installation of a home alarm system, $2,611 for
          group term life insurance, and $4,800 for 401(k) employer matching
          contributions.
(14)      Mr. Mazza was appointed Chief Operations Officer in November 1997.
(15)      Represents  relocation  expenses of $16,207, group term life insurance
          of $350 and $4,500 of 401(k) employer matching contributions.
(16)      Represents 1996 Bonus paid in 1997.
(17)      Represents $3,112 of club dues, $710 for group term life insurance,
          and $4,500 of 401(k) employer matching contributions.
(18)      Other perquisites and personal benefits were less than the lesser of
          $50,000 or 10% of the total of annual salary and bonus.
(19)      Represents $4,469 of club dues, $769 for group  term  life  insurance,
          and $4,800 of 401(k) employer matching contributions.


                                                  Page 42 of 119

<PAGE>




(20)      Includes $2,556 for club dues, $1,096 for group term life insurance,
          $306 for travel, and $4,500 of 401(k) employer matching contributions.
(21)      Represents  $4,486 of club dues,  $1,136 of group term life insurance,
          and $4,500 of 401(k) employer matching contributions.
(22)      Includes $2,648 for club dues, $1,202 for group term life insurance,
          and $4,800 of 401(k) employer matching contributions.
(23)      Includes $660 for group term life insurance, $4,800 of 401(k) employer
          matching contributions, and $689 of personal travel expenses.
(24)      Includes $856 for club dues, $720 for group term life insurance, and
          $4,800 of 401(k) employer matching contributions.
</FN>
</TABLE>


                                                  Page 43 of 119

<PAGE>
<TABLE>


     The following  table sets forth certain  information  with respect to stock
options granted to the Named Executive Officers during 1997.

                                                 Option Grants in Last Fiscal Year

<CAPTION>
                                                                                                          Potential Realizable Value
                                                                                                          at Assumed Annual rates of
                                                                                                           Stock Price Appreciation
                                                     Individual Grants                                         for Option Term

                (a)                (b)                (c)               (d)              (e)               (f)                (g)
                                Number of         % of Total
                               Securities          Options           Exercise
                                Underlying        Granted to          or Base
                                 Options         Employees in          Price         Expiration
               Name            Granted (#)       Fiscal Year*         ($/Sh)            Date                5%                10%

<S>                               <C>                <C>               <C>           <C>                <C>               <C>

Richard D. Nikolaev               35,000             8.49%             $5.00         8/11/07 (2)        110,056.56        278,904.93
Lewis H. Ferguson, III              -                 N/A               N/A              N/A               N/A                N/A
Richard H. Mazza                  25,000             6.06%             $5.00         8/11/07 (1)        78,611.83         199,217.81
Jack E. Parr, Ph.D.               25,000             6.06%             $5.00         8/11/07 (1)        78,611.83         199,217.81
Robert L. Conta                   15,000             3.64%             $5.00         8/11/07 (1)        47,167.10         119,530.68
Judy Lindstrom-Foster             25,000             6.06%             $5.00         8/11/07 (1)        78,611.83         199,217.81
<FN>

*  412,215 options were granted in 1997 under the 1993 Management and
   Supplemental Management Plans; 85,500 were cancelled.

(1) Options were granted  under the  Company's  1993 Stock Option Plan.  Options
under that Plan entitle  holders to purchase  shares of Class A Common Stock and
are  unconditional  on employment.  These options become fully vested on July 1,
1998.

(2) Mr.  Nikolaev's  options vest equally on March 15, 1999 and March 15,
2000 and are subject to a Consulting Agreement.
</FN>
</TABLE>


                                                               Page 44 of 119

<PAGE>


<TABLE>
         The  following  table sets forth  certain  information  with respect to
stock options held at December 31, 1997 by the Named Executive Officers.


                         Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values
<CAPTION>
           (a)                         (b)              (c)                        (d)                               (e)
                                                                                                            Value of Unexercised
                                                                                                               In-the-Money(1)
                                                                          Number of Securities                   Options at
                                     Shares                              Underlying Unexercised                   FY-end ($)
                                   Acquired on         Value              Options at FY-end (#)                 Exercisable/
               Name                Exercise(2)       Realized         Exercisable/ Unexercisable(3)           Unexercisable(3)
<S>                                  <C>             <C>          <C>                                         <C>
Richard D. Nikolaev (4)                 -                -        c. 20,000 /   -   common                          - / -
Richard D. Nikolaev (5)                 -                -        a. 44,000 /66,000 common                          - / -
Richard D. Nikolaev (6)                                  -        a.    -   /35,000 common                          - / -

Lewis H. Ferguson (7)                   -                -        a.    -   /96,500 common                          - /468,797

Richard H. Mazza (8)                    -                -        a. 25,000 /   -   common                    121,450 / -
Richard H. Mazza (5)                    -                -        a.  4,000 / 6,000 common                          - / -
Richard H. Mazza (5)                    -                -        a. 12,000 /18,000 common                          - / -
Richard H. Mazza (6)                    -                -        a.    -   /25,000 common                          - / -

Jack E. Parr, Ph.D. (8)              17,500           365,015     a.    -   /   -   common                          - / -
Jack E. Parr, Ph.D. (8)                 -                -        b.  1,500 /   -   preferred                       - / -
Jack E. Parr, Ph.D. (6)                 -                -        a.    -   /25,000 common                          - / -

Robert L. Conta (8)                  17,500           365,015     a.    -   /   -   common                          - / -
Robert L. Conta (8)                     -                -        b.  1,500 /   -   preferred                       - / -
Robert L. Conta (6)                     -                -        a.    -   /15,000 preferred                       - / -

Judy Lindstrom-Foster (6)               -                -        a.    -   /25,000 common                          - / -

<FN>
(1)      Given the lack of a  public trading market for the Company's equity securities at December 31, 1997, the fair market value
         of the unexercised  options  for the  purpose  of this table is $5.00 per share of Class A Common Stock based upon the
         Company's internal risk  adjusted  valuation  model.  Shares of preferred stock were valued at their cost and, accordingly,
         were not in-the-money  at December  31, 1997.
(2)      Their shares were acquired prior to 8/11/97;  the fair market value of these shares at acquisition was  $21.00/share.
(3)      Options under Plan "a" are granted pursuant to the 1993 Stock  Option  Plan.  Options  under Plan "b" are  granted pursuant
         to the 1993  Special  Stock Option Plan.  Options under Plan "c" are granted pursuant to the 1994 Non-Employee Stock Option
         Plan.
(4)      These  options are  subject to a 4-year  vesting  schedule  and vest in equal parts. The original  exercise price for these
         options was $13.77; however, it was amended 8/11/97 to $5.00.
(5)      These options are subject to a 4-year vesting schedule and vest 20%, 20%, 25%, and 35% in succession. The original exercise
         price for these options was $21.00, however, it was amended 8/11/97 to $5.00.
(6)      These options vest 7/31/98 and carry an exercise price of $5.00
(7)      These options are subject to vesting criteria set forth in the June Letter Agreement and carry an exercise price of $.142.
(8)      These options are subject  to a  4-year  vesting  schedule  and  vest  20%,  20%,  25%  and 35% in succession. The exercise
         price of these shares is $.142.
</FN>
</TABLE>



                                                  Page 45 of 119

<PAGE>



Director Compensation

     Directors  of the  Company  are  not  compensated  for  their  services  as
directors with the exception of Mr. Walter Hennig,  who receives  $1,000 per day
of service as a director  and, in  consideration  of his role as a consultant to
the  Company,  has been  granted  options to 5,000 shares of common stock of the
Company.  Mr. Hennig's  options vest over a four year period at the rate of 20%,
20%, 25% and 35% on the first through fourth anniversary of January 1, 1994. All
non-employee  directors of the Company are reimbursed for ordinary and necessary
expenses incurred in attending board or committee meetings.

Employment Contracts

     The Letter  Agreement  provides that the Company's  Board of Directors will
consist of seven directors or as otherwise provided under the Company's Restated
Certificate of  Incorporation.  KKEP has the right to nominate three  directors,
Mr.  Korthoff has the right to nominate three  directors (one of whom is subject
to KKEP's  approval) and the holders of the Notes have the right to nominate one
director to the Company's Board.

Board Compensation Committee Interlocks and Insider Participation

     The directors  functionally acting as the Company's  compensation committee
are Mr. Kamm and Mr. Hennig.  Also, Mr. Kamm and Mr. Hennig  comprise the Option
Committee.  Mr. Kamm,  Mr. Hennig and Mr. Munger  comprise the Audit  Committee.
There are no other committees of the Board of Directors.


                                                  Page 46 of 119

<PAGE>



ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following  tables set forth, as of December 31, 1997,  information with
respect to the  beneficial  ownership of shares of the Company's  Class A Common
Stock and Series A Preferred Stock by (i) each stockholder  known by the Company
to be the beneficial owner of more than 5% of either class of such shares,  (ii)
each director of the Company,  the Company's Chief Executive Officer and each of
the  other  Named  Executive   Officers  (as  defined  in  Item  11,   Executive
Compensation),  and (iii) all directors and executive officers of the Company as
a group. Unless otherwise  indicated,  the persons named in this table have sole
voting power and investment power with respect to all shares  beneficially owned
by them.

<TABLE>
<CAPTION>
                                                                                   Amount and Nature of         Percentage
    Title of Class                  Name and Address of Beneficial Owners          Beneficial Ownership         of Class

<S>                           <C>                                                       <C>                       <C>
Class A Common Stock          Kidd Kamm Equity Partners, L.P.                           5,353,820                 41.34%
                              Three Pickwick Plaza
                              Greenwich, Connecticut  06830
                              Herbert W. Korthoff                                       1,797,150(1)              13.88%
                              444 August Drive
                              Riverton, Wyoming 82501
                              Barbara Korthoff                                          1,797,150(2)              13.88%
                              444 August Drive
                              Riverton, Wyoming 82501
                              California Public Employee Retirement System              1,201,224(3)               9.28%
                              1200 Prospect Street
                              La Jolla, California  92037
                              Princes Gate Investors, L.P.                                741,110(3)               5.72%
                              1585 Broadway
                              New York, New York 10036
                              Williams J. Kidd                                          5,353,820(4)              41.34%
                              c/o Kidd, Kamm & Company
                              Three Pickwick Plaza
                              Greenwich, Connecticut 06830
                              Kurt L. Kamm                                              5,353,820(4)              41.34%
                              c/o Kidd, Kamm & Company
                              9454 Wilshire Boulevard, Suite 920
                              Beverly Hills, California 90212
                              Richard D. Nikolaev                                          64,000(5)               0.49%(7)
                              Lewis H. Ferguson, III                                      479,920(6)               3.71%
                              Jack E. Parr, Ph.D.                                          65,000                  0.50%(7)
                              Robert L. Conta                                              65,000                  0.50%(7)
                              Richard H. Mazza                                             41,000                  0.32%(7)
                              Walter S. Hennig                                              5,000                  0.04%(7)
                              Judy Lindstrom-Foster                                             -                  0.00%(7)
                              All directors and officers as a group (11 persons)         7,870,890                60.78%



                                                               Page 47 of 119

<PAGE>



<FN>
(1)      Includes 96,500 shares of  Class  A  Common Stock  held by  Mr. Korthoff's wife,  Barbara Korthoff,  of which  Mr. Korthoff
         disclaims beneficial ownership.

(2)      Includes 1,700,650 shares of Class A Common Stock held by Mrs. Korthoff's husband, Herbert Korthoff, of which Mrs. Korthoff
         disclaims beneficial ownership.

(3)      Shares subject to warrants currently exercisable.

(4)      Deemed to be the beneficial owners of the  Class A Common Stock  beneficially owned by  KKEP, since  Mr. Kidd and  Mr. Kamm
         control KKEP.

(5)      Represents shares subject to options that are exercisable currently.

(6)      Includes  96,500  shares  subject to  repurchase  by  KKEP under certain  conditions pursuant to the  Letter Agreement, and
         includes 96,500 shares of Class A Common  Stock  issuable  pursuant to options  granted to Mr. Ferguson,  which options may
         be exercisable  within the next 60 days as determined by formula contained in the Letter Agreement.

(7)      Less than one percent (1%).
</FN>
</TABLE>


                                                  Page 48 of 119

<PAGE>




<TABLE>
<CAPTION>
                                                                                             Amount and Nature of        Percentage
     Title of Class                  Name and Address of 5% Beneficial Owner                 Beneficial Ownership         of Class

<S>                               <C>                                                             <C>                      <C>
Series A Preferred Stock          Kidd Kamm Equity Partners, L.P.                                 535,382                  63.49%
                                  Three Pickwick Plaza
                                  Greenwich, Connecticut   06830
                                  Herbert W. Korthoff                                             179,715(1)               21.31%
                                  444 August Drive
                                  Riverton, Wyoming 82501
                                  Barbara W. Korthoff                                             179,715(2)               21.31%
                                  444 Augusta Drive
                                  Riverton, Wyoming 82501
                                  William J. Kidd                                                 535,382(3)               63.49%
                                  c/o Kidd, Kamm & Company
                                  Three Pickwick Plaza
                                  Greenwich, Connecticut   06830
                                  Kurt L. Kamm                                                    535,382(3)               63.49%
                                  c/o Kidd, Kamm & Company
                                  9454 Wilshire Boulevard; Suite 920
                                  Beverly Hills, California  90212
                                  Richard D. Nikolaev                                                   -                     -
                                  Lewis H. Ferguson, III                                           38,342(4)               4.55%
                                  Robert L. Conta                                                   1,500(5)                .18%(6)
                                  Jack E. Parr, Ph.D.                                               1,500(5)                .18%(6)
                                  Richard H. Mazza                                                      -                     -
                                  Walter S. Hennig                                                      -                     -
                                  Judy Lindstom-Foster                                                  -                     -
                                  All directors and officers as a group (11 persons)              756,439                  89.70%


<FN>
(1)      Includes 9,650 shares of  Series A Preferred Stock  held by  Mr. Korthoff's wife  Barbara Korthoff,  of which  Mr. Korthoff
         disclaims beneficial ownership.
(2)      Includes 170,065 shares of  Series A Preferred  Stock held by  Mrs. Korthoff's  husband,  Herbert Korthoff,  of which  Mrs.
         Korthoff disclaims beneficial ownership.
(3)      Deemed to be the beneficial owners of the Series A Preferred Stock  beneficially owned by KKEP, since Mr. Kidd and Mr. Kamm
         control KKEP.
(4)      Includes 9,650 shares subject to repurchase by KKEP under certain conditions pursuant to the Letter Agreement.
(5)      Represents shares subject to options which are currently exercisable.
(6)      Less than one percent (1%).
</FN>
</TABLE>

                                                  Page 49 of 119

<PAGE>



ITEM 13.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


Management Agreement with Kidd Kamm & Company and its Affiliates

     Kidd Kamm &  Company,  an  affiliate  of KKEP,  has a  management  services
agreement with the Company pursuant to which it renders  management,  consulting
and related  services to the  Company for an annual  management  fee of $360,000
(modified to $260,000 as of August 1, 1997),  subject to increases as determined
by the Board of Directors of the Company, plus out-of-pocket expenses.

Tissue Engineering, Inc.

     In  February  1997,  William J. Kidd and the other  principals  of Kidd and
Company,  LLC purchased common stock and warrants to acquire  additional  common
stock  options in TEI (a company  with which the  Company  entered  into a joint
venture  agreement  in  1996).  Kidd and  Company,  LLC is  providing  financial
advisory services to TEI.

Transactions with Investors

     Stock  Transactions.  At the Acquisition closing date, Herbert W. Korthoff,
the Company's  Chairman,  purchased 1,254,500 shares of Class A Common Stock and
125,450 shares of Series A Preferred  Stock plus 96,500 shares of Class A Common
Stock and 9,650 shares of Series A Preferred Stock purchased in his wife's name,
by delivering to the Company two recourse  promissory  notes in his name, the H.
Korthoff Group 1 Note in the principal  amount of $1,232,877 with respect to the
purchase of the H.  Korthoff  Group 1 Shares,  consisting  of 579,000  shares of
Class A Common Stock and 57,900 shares of Series A Preferred  Stock,  and the H.
Korthoff Group 2 Note in the principal  amount of $1,438,356 with respect to the
purchase of the H.  Korthoff  Group 2 Shares,  consisting  of 675,500  shares of
Class A Common  Stock  and  67,550  shares of  Series A  Preferred  Stock and by
delivering  to the Company two  promissory  notes in his wife's  name,  the Mrs.
Korthoff  Group 1 Note in the  principal  amount of $102,739 with respect to the
purchase of the Mrs.  Korthoff  Group 1 Shares,  consisting  of 48,250 shares of
Class A Common Stock and 4,825 shares of Series A Preferred  Stock, and the Mrs.
Korthoff  Group 2 Note in the  principal  amount of $102,739 with respect to the
purchase of the Mrs.  Korthoff  Group 2 Shares,  consisting  of 48,250 shares of
Class A Common Stock and 4,825 shares of Series A Preferred Stock.

     On June 1, 1994, the Company  requested that the holders of the Notes waive
certain  provisions of the Indenture to allow the Company to repurchase from Mr.
Korthoff 798,380 shares of Class A Common Stock

                                                  Page 50 of 119

<PAGE>



and 79,838  shares of Series A  Preferred  Stock for use in  employee  incentive
programs.  The  Company was  notified  on July 22,  1994 of the  approval of the
holders of the Notes for such a transaction  and  accordingly  repurchased  such
shares  for  $1,700,549  through  a pro  rata  credit  of that sum  against  the
principal  balance of the H. Korthoff  Group 1 Note and the H. Korthoff  Group 2
Note. On December 27, 1995,  Herbert W.  Korthoff and Barbara  Korthoff paid the
Company  $1,176,162  representing  the entire  principal of the Korthoff Group 1
Note and  Korthoff  Group 2 Notes.  The balance of the Group 1 Notes and Group 2
Notes,  representing the accrued but unpaid interest on such notes, is evidenced
by the Amended Note.

     Lewis H. Ferguson III, a director and officer of the Company,  purchased at
the  Acquisition  closing date 289,500 shares of Class A Common Stock and 28,950
shares of Series A Preferred  Stock by  delivering  to the Company two  recourse
promissory  notes, the Ferguson Group 1 Note in the principal amount of $410,959
with  respect to the  purchase  of the  Ferguson  Group 1 Shares  consisting  of
193,000  shares of Class A Common Stock and 19,300  shares of Series A Preferred
Stock and the Ferguson  Group 2 Note  (together  with the Ferguson Group 1 Note,
the "Ferguson  Notes") in the  principal  amount of $205,480 with respect to the
purchase of the Ferguson  Group 2 Shares  consisting of 96,500 shares of Class A
Common Stock and 9,650 shares of Series A Preferred Stock.

     The Amended  Note is full  recourse  and (i) will mature on June 30,  1998,
subject to acceleration upon a sale of all or substantially all of the business,
assets or issued and outstanding  capital stock of the Company or the successful
completion  of an initial  public  offering  by the Company of any of its equity
securities  pursuant to the Securities  Act, and (ii) is secured by a pledge of,
and the  Company is entitled to offset,  all  dividends  payable on the Series A
Preferred Stock held by Herbert W. Korthoff and Barbara  Korthoff.  The Ferguson
Notes are full recourse and (i) bear interest,  payable semi-annually (but which
interest  may be, and to date has been,  deferred  and added to principal at the
option of the maker), at the rate of 10% per annum, (ii) will mature on June 30,
1998,  subject to acceleration  upon a sale of all or  substantially  all of the
business,  assets or issued and outstanding  capital stock of the Company or the
successful completion of an initial public offering by the Company of any of its
equity securities pursuant to a registration statement under the Securities Act,
and (iii) are secured by the pledge of the Ferguson Group 1 and Ferguson Group 2
Shares to the Company.

     Pursuant to the Letter  Agreement  among KKEP,  the Company and each of Mr.
Korthoff,  his  wife and Mr.  Ferguson,  each  dated  June  30,  1993,  upon the
occurrence of an Event of Default (defined as including (a)

                                                  Page 51 of 119

<PAGE>



any default in the payment of principal or interest  which has continued for ten
(10) business days, or (b) certain bankruptcy, insolvency or similar proceedings
not  dismissed,  vacated or stayed  within  sixty (60) days) under the  Ferguson
Notes, the Company has the right to foreclose upon the Ferguson Shares, and KKEP
has the right to elect to succeed to all the  rights of the  Company  under said
Ferguson Notes and related stock pledge agreements.  In the event KKEP elects to
succeed to all rights of the Company under said Ferguson  Notes,  KKEP must make
full payment to the Company of the outstanding balance of the Ferguson Notes, as
the case may be, and allow each of the other  initial  cash equity  investors in
the Company  (except the defaulting  noteholder) to participate in such purchase
in proportion to their respective ownership of the capital stock of the Company.

     Mr.  Ferguson also owns 9,650 shares of Series A Preferred Stock and 96,500
shares of Class A Common Stock of the Company which are subject to repurchase by
KKEP or the  Company  in the event that KKEP has not  achieved a certain  target
rate of return on its equity  investment  in the  Company in  accordance  with a
formula that is set forth in an attachment to the Letter Agreement. In addition,
Mr.  Ferguson holds options to purchase  96,500 shares of the Company's  Class A
Common Stock that vest only in the event that KKEP  achieves the target rates of
return described in the attachment to the Letter Agreement.

     Payments  to Outside  Counsel.  Mr.  Ferguson  is a partner (on an extended
leave of  absence)  in the law firm of  Williams &  Connolly,  which the Company
retained during fiscal years 1994, 1995, 1996 and 1997.

     Officer and Director  Arrangements.  The Letter Agreement provides that the
Company's  Board of Directors  will  consist of seven  directors or as otherwise
provided under the Company's Restated Certificate of Incorporation. KKEP has the
right to nominate three directors,  Mr. Korthoff has the right to nominate three
directors  (one of which is subject to KKEP's  approval)  and the holders of the
Notes have the right to nominate one director to the  Company's  Board.  Messrs.
Kidd, Kamm and Nikolaev are KKEP's nominees and Messrs. Korthoff,  Ferguson, and
Hennig  are  Mr.   Korthoff's   nominees.   Steve  Munger  was  elected  by  the
stockholders. Neither KKEP nor the noteholders has nominated any other directors
as of the date hereof.

     Principal Stockholders'  Agreement.  Pursuant to the terms of the Principal
Stockholders'  Agreement,  except for certain permitted  transfers including the
repurchase  by  KKEP  and  such  of the  other  parties  to the  agreement  of a
defaulting  person's shares subject to pledge to the Company,  no person subject
thereto may sell any of his,

                                                  Page 52 of 119

<PAGE>



her or its shares of capital stock of the Company.

     The Principal  Stockholders'  Agreement  also provides that if, at any time
prior to the third  anniversary  of the  Principal  Stockholders'  Agreement and
provided no Event of Default (as defined in the  Indenture)  has occurred and is
continuing under the terms of the Indenture,  the holders of more than 662/3% of
the issued and outstanding shares (the "Requisite Percentage") determine to sell
all of their shares in an  arm's-length  transaction  to an  unaffiliated  third
person,  then all holders  will sell all of their  shares under the terms of the
sale, subject to certain conditions, but not to any restrictions as to price. At
any time after the third anniversary of the Principal  Stockholders'  Agreement,
or at any time an Event of Default under the terms of the Indenture has occurred
and is continuing at the time a contract of sale is entered into,  the Requisite
Percentage  necessary to cause the other  stockholders to sell their shares in a
qualified  transaction  will  be  a  majority-in-interest   of  the  issued  and
outstanding shares of capital stock.

     The Principal Stockholders' Agreement also grants holders tag- along rights
making any  transfers  subject to the right of other holders to  participate  in
such  transfer  in  proportion  to their  ownership  of shares of the  Company's
capital  stock at the same price per share  being  offered  to the  transferring
holder. The Principal  Stockholders'  Agreement  terminates on the closing of an
underwritten  public  offering of the  Company's  shares of Common and Preferred
Stock  pursuant to a  registration  statement  under the Securities Act declared
effective by the Securities and Exchange Commission.

     Other  Related  Party  Transactions.  In  1995,  Mr.  Nikolaev  was  paid a
consulting  fee of $135,000 for consulting  services  performed for the Company.
Also,  in  1997,  a  consulting  fee of  $25,000  was paid to Mr.  Nikolaev  for
consulting services. At the election of Mr. Nikolaev,  such amounts were paid to
the company  through  which the services were rendered and which is owned by one
of the members of his family.

     On June 30,  1994 Mr.  Ferguson  received  a loan from the  Company  in the
amount of $75,000 for the purchase of a residence.  That loan bears  interest at
7.25%,  the prime rate as of June 30, 1994. The original note was due January 1,
1996 and then extended and was secured by Mr.  Ferguson's  stock in the Company.
On December 19, 1997 the Company purchased the home of Mr. Ferguson for $423,000
and sold it for  $341,000  in an  auction on  December  21,  1997.  The note was
effectively repaid as a result of this transaction.

                                                  Page 53 of 119

<PAGE>



                                                      PART IV


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

                  (a)      The following  documents are filed or incorporated by
                           reference as part of this Form 10-K:

                  1.       Financial Statements and Financial Statement
                           Schedules:

                           The "Index to Financial Statements" set forth on page
                           61 of  this  Form  10-K  is  incorporated  herein  by
                           reference.

                           Schedules  have been omitted  because either they are
                           not required or the information is included elsewhere
                           in the financial statements and notes thereto.

                  2.       Exhibits  (Exhibits listed below without  parenthesis
                           are filed herewith.)


                           EXHIBIT       DESCRIPTION OF EXHIBIT
                           2.1 (1)       Purchase and Sale Agreement, dated May
                                         14, 1993, among the Company, Dow
                                         Corning and Dow Corning Wright
                                         Corporation.

                           3.1 (6)       Restated Certificate of Incorporation
                                         of the Company dated September 25,
                                         1995.

                           3.2 (1)       By-Laws of the Company.

                           4.1 (1)       Indenture dated as of June 30, 1993,
                                         between the Company and the First
                                         National Bank of Boston, as trustee.

                           4.1a (1)      First Supplemental Indenture, dated as
                                         of November 1, 1993, between the
                                         Company and The First National Bank of
                                         Boston.


                                                  Page 54 of 119

<PAGE>




                           4.2 (1)       Security Agreement dated as of June 30,
                                         1993, between the Company and
                                         BancBoston Trust Company of New York,
                                         as collateral agent acting on behalf of
                                         the First National Bank of Boston.

                           4.3 (1)       Pledge Agreement, dated as of June 30,
                                         1993, between the Company and
                                         BancBoston Trust Company of New York,
                                         as collateral agent acting on behalf of
                                         The First National Bank of Boston.

                           4.4 (1)       Form of Purchase Agreement, dated June
                                         30, 1993, between the Company and the
                                         purchasers of the Notes.

                           4.5 (1)       Registration Rights Agreement, dated as
                                         of June 30, 1993, between the Company
                                         and the purchasers of the Notes.

                           4.6 (5)       Series B Preferred Stock Purchase and
                                         Class A Common Stock Warrant Agreement,
                                         dated July 29, 1994, between the
                                         Company and CalPERS.

                           4.6a (7)      Amendment No. 1 dated September 25,
                                         1995 to Series B Preferred Stock
                                         Purchase and Class A Common Stock
                                         Warrant Agreement, dated July 29, 1994
                                         between the Company and CalPERS.

                           4.7 (10)      Indenture dated as of August 7, 1997
                                         between the Company and State Street
                                         Bank and Trust Company, as Trustee.

                           4.8 (10)      Form of Note for the Company's Series D
                                         11 3/4% Senior Secured Step-up Note.

                           4.9 (10)      Registration Rights Agreement dated as
                                         of August 7, 1997 between the Company
                                         and Holders of the Registrant's Series
                                         C 11 3/4% Senior Secured Step-up Notes.

                           10.1 (1)      Product Manufacturing Agreement, dated
                                         June 30, 1993, between the Company and
                                         Dow Corning Corporation.

                           10.2 (1)      Revolving Credit Agreement, dated
                                         September 30, 1993, between the Company
                                         and Heller Financial, Inc.


                                                  Page 55 of 119

<PAGE>




                           10.3 (1)      Principal Stockholders' Agreement,
                                         dated June 30, 1993, among the Company
                                         and certain of its stockholders.

                           10.4 (1)      Omnibus Stockholders' Agreement, among
                                         the Company and certain of its
                                         stockholders.

                           10.5 (1)      License Agreement, dated June 25, 1993,
                                         between the Company and Dr. Alfred B.
                                         Swanson.

                           10.6 (4)      1993 Stock Option Plan

                           10.7 (4)      1993 Special Stock Option Plan

                           10.8 (4)      Employee Common Stock Grant Plan

                           10.9 (4)      Distributor Stock Purchase Plan

                           10.10 (1)     Industrial Development Lease Agreement
                                         date as of July 9, 1985 between The
                                         Industrial Development Board of The
                                         City of Arlington, Tennessee (the
                                         "Arlington IDB") and Dow Corning
                                         Wright, Inc.

                           10.11 (1)     Lease and Security Agreement dated as
                                         of April 1, 1974 between the Arlington
                                         IDB and Wright Manufacturing Company
                                         together with First Supplement to Lease
                                         dated as of December 1, 1981.

                           10.12 (1)     Industrial Development Lease Agreement
                                         dated as of June 29, 1984 between
                                         Langston Associates and the Arlington
                                         IDB.

                           10.13 (1)     Letter Agreements dated June 30, 1993
                                         among the Company and certain of its
                                         Stockholders with Promissory Notes and
                                         Stock Pledge and Security Agreements
                                         attached.

                           10.14 (3)     Letter Agreement dated June 30, 1993
                                         between KKEP and Herbert W. Korthoff,
                                         Lewis Ferguson, and Barbara Korthoff.


                                                  Page 56 of 119

<PAGE>




                           10.14a (5)    Amendment dated July 29, 1994 to Letter
                                         Agreement dated June 30, 1993 between
                                         KKEP and Herbert W. Korthoff, Lewis
                                         Ferguson, and Barbara Korthoff.

                           10.15 (1)     Agreement dated January 24, 1983,
                                         between Leo A.  Whiteside, M.D. and the
                                         Company.

                           10.16 (2)     Acquisition Agreement dated February 5,
                                         1994, between the Company and
                                         OrthoTechnique.

                           10.17 (5)     Distribution Agreement dated December
                                         20, 1993, between the Company and
                                         Kaneka Medix Corporation.

                           10.18 (5)     Research and Development Agreement
                                         dated October 7, 1994, between the
                                         Company and OsteoBiologics, Inc.

                           10.19 (3)     Acquisition Agreement dated December 8,
                                         1994, between the Company and Orthomet.

                           10.20 (5)     1994 Distributor Stock Option Plan.

                           10.21 (5)     Non-qualified Stock Option Agreement
                                         for Non-Employees.

                           10.22 (7)     Securityholders Agreement, dated
                                         September 25, 1995, between the
                                         Company, the purchasers named therein
                                         and PG Investors, Inc., as agent.
                                         Distribution Agreement dated February
                                         22, 1996, between the Company and
                                         Century Medical, Inc.

                           10.24 (8)     Revolving Credit Agreement, dated
                                         September 13, 1996 between the Company
                                         and Sanwa Business Credit Corporation.

                           10.25 (9)     Joint Venture Agreement, dated July 12,
                                         1996 between the Company and Tissue
                                         Engineering, Inc.

                           10.26         Amended and Restated Joint Venture
                                         Agreement, dated August 1997 between
                                         the Company and Tissue Engineering,
                                         Inc.


                                                  Page 57 of 119

<PAGE>




                           11.1          Statement re: Computation of earnings
                                         per share.
                           12.1          Statement re: Computation of ratios of
                                         earnings to fixed charges and preferred
                                         dividends.
                           21.1          Subsidiaries of the Company.
                           23.2          Consent of Arthur Andersen LLP
                           (1)           Document incorporated by reference from
                                         Registration Statement on Form S-4 No.
                                         33-69286 filed by the Company on
                                         November 10, 1993.
                           (2)           Document incorporated by reference to
                                         Current Report on Form 8-K dated as of
                                         February 5, 1994.
                           (3)           Document incorporated by reference to
                                         Current Report on Form 8-K dates as of
                                         December 8, 1994.
                           (4)           Document incorporated by reference to
                                         Annual Report on Form 10-K filed March
                                         25, 1994.
                           (5)           Document incorporated by reference to
                                         Annual Report on Form 10-K filed March
                                         31, 1995.
                           (6)           Document incorporated by reference to
                                         Quarterly Report on Form 10-Q filed
                                         November 14, 1995.
                           (7)           Document incorporated by reference to
                                         Annual Report on Form 10-K filed March
                                         31, 1996.
                           (8)           Document incorporated by reference to
                                         current report on Form 8-K dated as of
                                         September 13, 1996.

                           (9)           Document incorporated by reference to
                                         Annual Report on Form 10-K filed March
                                         31, 1997.


                                                  Page 58 of 119

<PAGE>




                           (10)          Document incorporated by reference from
                                         Registration Statement on Form S-4 No.
                                         333-34853 filed by the Company on
                                         November 3, 1997.

                  (b)      Reports on Form 8-K

                                    None



                                                  Page 59 of 119

<PAGE>



                                                    SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
                                   WRIGHT MEDICAL TECHNOLOGY, INC.  (Registrant)

                                   BY:     /s/Thomas M. Patton
                                           Thomas M. Patton
                                           President and Chief Executive Officer

                                   DATE: March 30, 1998

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
registrant and in the capacities and on the dates indicated.


      SIGNATURE                   TITLE (CAPACITY)                          DATE
                              President, Chief Executive
/s/Thomas M. Patton           Officer, and Director
Thomas M. Patton              (Principal Executive Officer)       March 30, 1998
                              Executive Vice President and
/s/Greg K. Butler             Chief Financial Officer
Greg K. Butler                (Principal Financial Officer)       March 30, 1998
/s/Joyce B. Jones
Joyce B. Jones                Vice President, Controller          March 30, 1998
/s/Kurt L. Kamm               Chairman of the Board of
Kurt L. Kamm                  Directors                           March 30, 1998
/s/Lewis H. Ferguson,III
Lewis H. Ferguson, III        Director                            March 30, 1998
/s/William J. Kidd
William J. Kidd               Director                            March 30, 1998
/s/Herbert W. Korthoff
Herbert W. Korthoff           Director                            March 30, 1998
/s/Walter S. Hennig
Walter S. Hennig              Director                            March 30, 1998
/s/Richard D. Nikolaev
Richard D. Nikolaev           Director                            March 30, 1998
/s/Stephen R. Munger
Stephen R. Munger             Director                            March 30, 1998


                                                        Page 60 of 119

<PAGE>



                                           INDEX TO FINANCIAL STATEMENTS


Wright Medical Technology, Inc.

     Report of Independent Public Accountants.................................62

     Consolidated Financial Statements:
          Consolidated Balance Sheets as of
            December 31, 1997 and 1996 .......................................63
          Consolidated Statements of Operations for
            the Year Ended December 31, 1997, 1996 and 1995...................64
          Consolidated Statements of Cash Flows for
            the Year Ended December 31, 1997, 1996 and 1995...................65
          Consolidated Statements of Changes in Stockholders'
            Investment for the Year Ended December 31, 1997, 1996
            and 1995..........................................................66
          Notes to Consolidated Financial Statements..........................67

                                                  Page 61 of 119

<PAGE>



           REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



     To the Stockholders of Wright Medical Technology, Inc.:

     We have  audited the  accompanying  consolidated  balance  sheets of Wright
Medical  Technology,  Inc.  (a  Delaware  corporation)  and  subsidiaries  as of
December  31,  1997  and  1996,  and  the  related  consolidated  statements  of
operations,  changes in  stockholders'  investment  and cash flows for the years
ended  December 31, 1997,  1996 and 1995.  These  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

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

     In our opinion,  the financial statements referred to above present fairly,
in all material respects,  the financial position of Wright Medical  Technology,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for the years ended December 31, 1997,  1996 and
1995, in conformity with generally accepted accounting principles.




                                                        ARTHUR ANDERSEN LLP



Memphis, Tennessee,
March 25, 1998.

                                                  Page 62 of 119


<PAGE>
<TABLE>
                                   WRIGHT MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
                                              CONSOLIDATED BALANCE SHEETS

<CAPTION>
                                                                               December 31,       December 31,
                                                                                  1997               1996
                                                                                ------------       ------------
                                                                              (in thousands)     (in thousands)
ASSETS
Current Assets:
<S>                                                                             <C>                <C>
  Cash and cash equivalents                                                     $       466        $       910
  Trade receivables, net                                                             19,040             18,289
  Inventories, net                                                                   58,890             59,107
  Prepaid expenses                                                                    1,716              1,692
  Deferred income taxes                                                                 143                978
  Other                                                                               1,890              2,540
                                                                                ------------       ------------
    Total Current Assets                                                             82,145             83,516
                                                                                ------------       ------------
Property, Plant and Equipment, net                                                   26,732             33,659
Investment in Joint Venture                                                           2,380              3,597
Other Assets                                                                         41,826             45,554
                                                                                ------------       ------------
                                                                                $   153,083        $   166,326
                                                                                ============       ============
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
  Current portion of long-term debt                                             $       322        $       138
  Short-term borrowing                                                               18,500              8,390
  Accounts payable                                                                    6,212              6,063
  Accrued expenses and other current liabilities                                     16,745             18,453
                                                                                ------------       ------------
    Total Current Liabilities                                                        41,779             33,044
                                                                                ------------       ------------
Long-Term Debt                                                                       85,104             84,668
Preferred Stock Dividends                                                            21,309             17,999
Other Liabilities                                                                     1,805              3,189
Deferred Income Taxes                                                                   143                978
                                                                                ------------       ------------
    Total Liabilities                                                               150,140            139,878
                                                                                ------------       ------------
Commitments and Contingencies
Mandatorily  Redeemable  Series B Preferred  Stock,  $.01 par value,  (aggregate
  liquidation value of $83.0 million,  including accrued and unpaid dividends of
  $3.0 million, 800,000 shares authorized, 800,000 and 711,910 shares
  issued and outstanding)                                                            70,511             59,959
Redeemable Convertible Series C Preferred Stock, $.01 par value,  (aggregate
  liquidation value of $44.5 million, including accrued and unpaid dividends of
  $9.5 million, 350,000 shares authorized, issued and outstanding)                   29,442             24,995

Stockholders' Investment:
  Series A preferred  stock,  $.01 par value,  (aggregate  liquidation  value of
    $25.2 million, including accrued and unpaid dividends of $8.7 million),
    1,200,000 shares authorized, 915,325 shares issued                                    9                  9
  Undesignated preferred stock, $.01 par value, 650,000 shares authorized,
    no shares issued                                                                      -                  -
  Class A common stock, $.001 par value, 46,000,000 shares authorized,
    10,585,000 and 10,023,421 shares issued                                              11                 10
  Class B common stock, $.01 par value, 1,000,000 shares authorized,
    no shares issued                                                                      -                  -
  Additional capital                                                                 57,545             53,853
  Accumulated deficit                                                              (153,025)          (111,855)
  Other                                                                                (509)               516
                                                                                ------------       ------------
                                                                                    (95,969)           (57,467)
  Less - Notes receivable from stockholders                                          (1,039)            (1,037)
    Series A preferred treasury stock, 86,688 shares                                     (1)                (1)
    Class A common treasury stock, 887,130 shares                                        (1)                (1)
                                                                                ------------       ------------
    Total Stockholders' Investment                                                  (97,010)           (58,506)
                                                                                ------------       ------------
                                                                                $   153,083        $   166,326
                                                                                ============       ============

                     The  accompanying  notes  are an  integral  part  of  these consolidated balance sheets.

                                                  Page 63 of 119
</TABLE>
<PAGE>
<TABLE>
                               WRIGHT MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES

                                     CONSOLIDATED STATEMENTS OF OPERATIONS

                                   (in thousands, except earnings per share)
<CAPTION>
                                                                         Year Ended December 31,
                                                          ------------------------------------------------------
                                                                1997               1996               1995
                                                          ----------------   ----------------   ----------------
<S>                                                       <C>                <C>                <C>
Net sales                                                 $       122,397    $       121,868    $       123,196

Cost of goods sold                                                 46,687             44,433             33,722
                                                          ----------------   ----------------   ----------------

Gross profit                                                       75,710             77,435             89,474
                                                          ----------------   ----------------   ----------------

Operating expenses:
      Selling                                                      50,988             47,437             47,085
      General and administrative                                   20,129             19,357             23,358
      Research and development                                     11,609             13,196             12,728
      Equity in loss of joint venture                               1,217                500                -
                                                          ----------------   ----------------   ----------------
                                                                   83,943             80,490             83,171
                                                          ----------------   ----------------   ----------------

Operating income (loss)                                            (8,233)            (3,055)             6,303
Interest,  net                                                     13,062             11,947             11,322
Other (income) expense, net                                         1,277               (413)              (146)
                                                          ----------------   ----------------   ----------------

Loss before income taxes                                          (22,572)           (14,589)            (4,873)

Income tax provision                                                    -                  -              1,619
                                                          ----------------   ----------------   ----------------


Net loss                                                  $       (22,572)   $       (14,589)   $        (6,492)
                                                          ================   ================   ================

Loss applicable to common stock                           $       (41,170)   $       (35,298)   $       (19,783)
                                                          ================   ================   ================

Basic loss per share of common stock                      $         (4.38)   $         (3.90)   $         (2.24)
                                                          ================   ================   ================

Basic weighted average common shares outstanding                    9,397              9,059              8,825
                                                          ================   ================   ================


                       The accompanying notes are an integral part of these statements.
                                                  Page 64 of 119

</TABLE>

<PAGE>
<TABLE>
                                       WRIGHT MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
                                            CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                        (in thousands)


<CAPTION>
                                                                                      Year Ended December 31,
                                                                         ------------------------------------------------
                                                                              1997             1996             1995
                                                                         --------------   --------------   --------------
Cash Flows From Operating Activities:
<S>                                                                       <C>             <C>              <C>
    Net loss                                                              $    (22,572)   $     (14,589)   $      (6,492)
    Adjustments to reconcile net loss to
      net cash used in operating activities:
        Depreciation                                                             6,879            7,007            7,272
        Instrument amortization                                                  6,047            4,265            4,337
        Provision for instrument reserves                                        3,565            3,647                -
        Provision for excess/obsolete inventory                                  4,231             (453)          (2,369)
        Provision for sales returns                                                 59             (247)             290
        Deferred income tax provision                                                -                -            1,270
        Deferred income                                                              -            1,502                -
        Amortization of intangible assets                                        3,364            3,266            3,747
        Amortization of deferred financing costs                                 1,387            1,361            1,036
        Loss on disposal of equipment                                               95              485               97
        Equity in loss of joint venture                                          1,217              500                -
        Other                                                                    1,928              614             (178)
        Changes in assets and liabilities, net of effect of
         purchases of businesses
         (Increase) decrease in accounts receivables                              (861)             442             (522)
          Increase in inventories                                               (7,792)          (3,335)         (18,101)
         (Increase) decrease in other current assets                               626           (1,104)             (77)
          Increase (decrease) in accounts payable                                  149           (1,706)           2,741
          Increase (decrease) in accrued expenses and other liabilities            822           (1,380)         (16,848)
          Increase in other assets                                                (683)            (840)          (1,869)
                                                                         --------------   --------------   --------------
    Net cash used in operating activities                                       (1,539)            (565)         (25,666)
                                                                         --------------   --------------   --------------
Cash Flows From Investing Activities:
    Capital expenditures                                                        (6,015)          (3,778)         (12,525)
    Proceeds from Sale-Leaseback Transactions                                      607                -                -
    Other                                                                         (120)            (884)          (1,139)
                                                                         --------------   --------------   --------------
    Net cash used in investing activities                                       (5,528)          (4,662)         (13,664)
                                                                         --------------   --------------   --------------

Cash Flows From Financing Activities:
    Net proceeds from short-term borrowings                                     10,110            4,490            3,900
    Proceeds from issuance of stock and stock warrants                               -            1,278           33,409
    Payments of debt issuance costs                                                (56)            (387)               -
    Payments of debt                                                            (3,431)            (446)            (641)
    Proceeds from stockholders on notes receivable                                   -                -            1,225
    Other                                                                            -               76             (509)
                                                                         --------------   --------------   --------------
    Net cash provided by financing activities                                    6,623            5,011           37,384
                                                                         --------------   --------------   --------------


    Net decrease in cash and cash equivalents                                     (444)            (216)          (1,946)
    Cash and cash equivalents, beginning of period                                 910            1,126            3,072
                                                                         --------------   --------------   --------------
    Cash and cash equivalents, end of period                             $         466    $         910    $       1,126
                                                                         ==============   ==============   ==============

    Supplemental Disclosure of Cash Flow Information:
      Cash paid for interest                                             $      11,020    $      10,474    $      11,885
                                                                         ==============   ==============   ==============
      Cash paid for income taxes                                         $          22    $          33    $         234
                                                                         ==============   ==============   ==============

                              The accompanying notes are an integral part of these statements.
                                                 Page 65 of 119
</TABLE>




<PAGE>
<TABLE>



                                                WRIGHT MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
                                        CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' INVESTMENT
                                                               (in thousands)

<CAPTION>
                            Number of Shares                                                             Notes
                           Series A   Class A    Series A   Class A                                    Receivable
                          Preferred    Common    Preferred   Common   Additional  Accumulated            From       Treasury
                            Stock       Stock      Stock      Stock    Capital     Deficit     Other  Stockholders    Stock   Total
<S>                            <C>      <C>           <C>        <C>    <C>        <C>         <C>      <C>           <C>  <C>
  BALANCE, 12/31/94            916      9,441         $9         $9     $ 32,786   $ (56,774)  $ 439    $(1,969)      $(2) $(25,502)
Issuance of common stock         -        350          -          1          497           -       -          -         -       498
Issuance of common stock
 warrants                        -          -          -          -       18,187           -       -          -         -    18,187
Preferred stock dividend         -          -          -          -            -     (10,455)      -          -         -   (10,455)
Payments on stockholder
  notes receivable               -          -          -          -            -           -       -      1,225         -     1,225
Accretion of preferred
 stock discount                  -          -          -          -            -      (2,836)      -          -         -    (2,836)
Net loss                         -          -          -          -            -      (6,492)      -          -         -    (6,492)
Other                           (1)         -          -          -            -           -     491       (293)        -       198
                            --------------------------------------------------------------------------------------------------------
  BALANCE, 12/31/95            915      9,791          9         10       51,470     (76,557)    930     (1,037)       (2)  (25,177)

Issuance of common stock         -        232          -          -        2,383           -       -          -         -     2,383
Preferred stock dividend         -          -          -          -            -     (14,251)      -          -         -   (14,251)
Accretion of preferred
  stock discount                 -          -          -          -            -      (6,458)      -          -         -    (6,458)
Net loss                         -          -          -          -            -     (14,589)      -          -         -   (14,589)
Other                            -          -          -          -            -           -    (414)         -         -      (414)
                            --------------------------------------------------------------------------------------------------------
  BALANCE, 12/31/96            915     10,023          9         10       53,853    (111,855)    516     (1,037)       (2)  (58,506)
Issuance of common stock
 warrants                        -          -          -          -          287           -       -          -         -       287
Issuance of common stock         -        562          -          1        3,405           -       -          -         -     3,406
Preferred stock dividend         -          -          -          -            -     (12,121)      -          -         -   (12,121)
Accretion of preferred
  stock discount                 -          -          -          -            -      (6,477)      -          -         -    (6,477)
Net loss                         -          -          -          -            -     (22,572)      -          -         -   (22,572)
Other                            -          -          -          -            -           -  (1,025)        (2)        -    (1,027)
                            --------------------------------------------------------------------------------------------------------
  BALANCE, 12/31/97            915     10,585         $9        $11     $ 57,545   $(153,025)  $(509)   $(1,039)      $(2) $(97,010)
                            ========================================================================================================

                         The  accompanying  notes are an integral  part of these statements.

                                                  Page 66 of 119
</TABLE>

<PAGE>



              WRIGHT MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.       DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES


Description of Business -

     Wright Medical Technology, Inc. and its subsidiaries (the "Company") engage
in the business of developing,  manufacturing and selling orthopaedic  products,
principally  knee and hip  implants.  The  Company's  products  are  designed to
restore mobility and relieve pain through the replacement of damaged or diseased
joints. The Company  distributes its products through various  distributors with
approximately  73% of its  products  sold  in the  United  States.  The  Company
purchased  substantially  all of the assets of Dow  Corning  Wright  Corporation
("DCW") on June 30, 1993 (the "DCW Acquisition").


Liquidity and Capital Resources -

     Since the DCW  Acquisition,  the  Company's  strategy  has been to position
itself for aggressive growth through new product development and the acquisition
of new technologies  through license agreements,  joint venture arrangements and
the purchase of other  companies in the  orthopaedic  industry (see Note 2). The
Company has funded this strategy  through the sale of $85 million of senior debt
securities and the  contribution of  approximately  $15 million of equity at the
time of the DCW  Acquisition.  Further,  the  Company  has  obtained  additional
capital  through the issuance of $60,000,000 of Series B Preferred Stock in 1994
and  $35,000,000  of Series C Preferred  Stock in 1995 (see Note 8). The Company
has also funded its growth and working capital  requirements  through the use of
revolving lines of credit (see Note 7).

     The  Company  has  incurred  significant  losses  since its  inception  and
anticipates incurring a loss during 1998. Additionally,  the Company's projected
working  capital  requirements  for 1998  indicate a  continued  reliance on its
revolving  credit  facility.  The  Company  has  available  to it a $30  million
revolving  line of credit  under the Sanwa  Agreement.  Accordingly,  management
continues to closely  monitor the Company's  working  capital needs and believes
the  current  revolving  line of credit will be  sufficient  to meet its working
capital requirements through 1998.


                                                  Page 67 of 119

<PAGE>



     During August 1997, the Company completed an exchange of its 10 3/4% Series
B Senior  Secured Notes for the 11 3/4% Series C Senior  Secured  Step-Up Notes.
(See Note 7).


Significant Risks and Uncertainties -

     Inherent in the  accompanying  financial  statements  are certain risks and
uncertainties which include, but are not limited to, the following:

Significant Leverage

     The Company is, and will continue to be, highly leveraged.  The Company has
incurred substantial  indebtedness as a result of its acquisitions,  new product
research and development and operating losses. Earnings were inadequate to cover
fixed  charges,   preferred  dividends  and  accretion  of  preferred  stock  by
approximately  $41.2 million for the year ended December 31, 1997. The Company's
high level of debt may have several important affects on its future  operations,
including the  following:  (i) a substantial  portion of the Company's cash flow
from   operations   must  be  dedicated  to  the  payment  of  interest  on  its
indebtedness; (ii) the financial covenants contained in its debt facilities will
require the Company to meet certain financial tests and other restrictions which
limit its ability to borrow additional funds or to dispose of assets;  and (iii)
the Company's ability to obtain  additional  financing in the future for working
capital, capital expenditures, acquisitions, general corporate purposes or other
purposes may be impaired.  In addition,  the Company's  ability to meet its debt
service  obligations  and to reduce  its total debt will be  dependent  upon the
Company's  future  performance,  which  will  be  subject  to  general  economic
conditions and to financial, business and other factors affecting the operations
of the Company, many of which are beyond its control.  There can be no assurance
that the Company's  future  performance  will not be adversely  affected by such
economic conditions and financial, business and other factors.

Ability to Develop, Manufacture and Market New Products

     Some of the Company's  products are currently under development or have not
yet  been  approved  by the  Food  and Drug  Administration  ("FDA")  (or  other
applicable  foreign  regulatory  bodies).  Although  management  believes  these
products  will be  successfully  developed,  that the  necessary  FDA or foreign
approvals  will be received and, if developed  and approved,  a market for these
products will exist;  there can be no assurance that such events will happen. In
order for the Company to

                                                  Page 68 of 119

<PAGE>



remain  competitive and to retain market share, it must continually  develop new
products as well as improve its  existing  ones.  Accordingly,  the Company must
devote substantial  resources to research and development.  Although the Company
intends to devote such  resources,  there can be no  assurance  that the Company
will be able  to  enhance  its  existing  products,  introduce  or  acquire  new
products, and maintain or expand its market share.

Patent Protection and Related Litigation

     Management  considers  certain  of its  patents  to be  significant  to its
business.  In the medical device industry,  patent  litigation among competitors
occurs regularly. Additionally, the process of obtaining and protecting patents,
including  defending  allegations  of patent  infringement,  can be  costly  and
time-consuming.

Ability to Forecast and Manage Working Capital Requirements

     The  Company  remains  significantly  dependent  on  its  revolving  credit
facility.  Various  factors,  including  delays in new product  development  and
introductions,  new product  introduction by  competitors,  delays in regulatory
approvals  and delays in the  expansion of sales and  distribution  channels can
significantly  affect management's ability to accurately forecast and manage its
working capital requirements.


Significant Accounting Policies -

Principles of Consolidation

     The accompanying  consolidated financial statements include the accounts of
the  Company  and  its  wholly-owned  domestic  and  foreign  subsidiaries.  All
significant  intercompany  accounts and transactions  have been eliminated.  The
Company accounts for its investment in the Orthopaedic Tissue Technology, L.L.C.
("OTT") joint venture under the equity method of accounting.

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
disclose  contingent  assets  and  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.

                                                  Page 69 of 119

<PAGE>



Cash and Cash Equivalents

     Cash  and  cash  equivalents  include  all  cash  balances  and  short-term
investments with original maturities of three months or less.

Allowance for Returns

     An allowance is maintained for anticipated  future returns of products sold
by the Company.  An allowance for returns of approximately $0.7 million and $0.6
million is included as a reduction of trade receivables at December 31, 1997 and
December 31, 1996, respectively.

Inventories

     Inventories  are  stated at the lower of cost or  market,  with cost  being
determined using the first-in, first-out ("FIFO") method. Inventory reserves are
established  to reduce the carrying  amount of obsolete and excess  inventory to
its net realizable value. The Company  principally  follows an inventory reserve
formula that reserves  inventory  balances  based on historical  and  forecasted
sales.

     Management has made its best estimate in determining  the required level of
the inventory  reserves discussed above and does not expect any material changes
thereto;  however,  given the subjective  nature of the reserves,  the Company's
estimate of the required reserves could change in the future.

Property and Depreciation

     Property, plant and equipment are carried at cost. Depreciation is provided
on a straight-line  basis over estimated useful lives of 15 to 20 years for land
improvements,  10 to 40 years for  buildings,  3 to 11 years for  machinery  and
equipment, and 4 to 14 years for furniture, fixtures and equipment. Expenditures
for major renewals and betterments that extend the useful life of the assets are
capitalized.  Maintenance  and repair  costs are charged to expense as incurred.
Upon sale or retirement, the asset cost and related accumulated depreciation are
eliminated  from the  respective  accounts,  and any  resulting  gain or loss is
included in income.

     Instruments used by surgeons in the implantation of the Company's  products
that are  permanently  held by  distributors  and  subsidiaries  are included in
property,  plant and equipment and  depreciated  on a  straight-line  basis over
periods  not to  exceed  five  years  with  adjustments  made as  necessary  for
identified impairments in carrying value.

                                                  Page 70 of 119

<PAGE>



Goodwill and Other Intangible Assets

     The cost of  intangible  assets is  amortized  over the  estimated  periods
benefited,  but not exceeding 40 years. The  realizability of goodwill and other
intangibles  is evaluated  periodically  as events or  circumstances  indicate a
possible inability to recover their carrying amount. Such evaluation is based on
various  analyses,  including  cash flow and  profitability  projections.  These
analyses necessarily involve significant  management judgement.  At December 31,
1997,  management  believes  that the  carrying  value of its goodwill and other
intangibles is realizable.

Income Taxes

     Income taxes are accounted  for pursuant to the  provisions of Statement of
Financial  Accounting  Standards No. 109,  "Accounting  for Income  Taxes." This
statement  requires the use of the liability  method of accounting  for deferred
income taxes.  The provision for income taxes  includes  federal,  foreign,  and
state income taxes  currently  payable and those  deferred  because of temporary
differences  between  the  financial  statement  and tax  bases  of  assets  and
liabilities.   Provisions   for  federal  income  taxes  are  not  made  on  the
undistributed  earnings of foreign  subsidiaries  where the  subsidiaries do not
have the  capability  to  remit  earnings  in the  foreseeable  future  and when
earnings are considered permanently invested.  Undistributed earnings of foreign
subsidiaries at December 31, 1997 are insignificant.

Research and Development Costs

     Research and  development  costs are charged to expense as incurred or when
expenditures  for such  costs  are  contractually  obligated  and the  amount is
determinable.

Foreign Currency Translation

     Revenues and  expenses for foreign  activities  are  translated  at average
exchange rates during the period. Assets (primarily inventories and receivables)
located  outside the U.S. are translated into U.S.  dollars using  end-of-period
exchange  rates.  The  cumulative  foreign  currency  translation  adjustment at
December 31, 1997 and 1996 is not significant.

Earnings Per Share

     During  1997,  the  Company  adopted  Statement  of  Financial   Accounting
Standards No. 128, "Earnings per Share". Basic loss per

                                                  Page 71 of 119

<PAGE>



share of common stock is computed by dividing  net loss,  plus  preferred  stock
dividends and  accretion,  by the weighted  average  common  shares  outstanding
during the period.  Because of the net loss applicable to common stock,  diluted
loss per  share of  common  stock  has not been  computed  as the  effect of the
assumed exercise of common stock equivalents would be anti-dilutive.

Fair Value of Financial Instruments

     The following  methods and assumptions were used to estimate the fair value
of each class of financial  instruments  for which it is practicable to estimate
that value:

     -    Cash and  cash  equivalents - The  carrying  amount  approximates fair
          value because of the short maturities of the cash equivalents.

     -    Long-term debt - The fair value of the 11 3/4% Senior Secured  Step-Up
          Notes was approximately  $85.9  million  at December  31, 1997 and the
          fair  value of the 10 3/4%  Senior  Secured  Notes  was  approximately
          $85.9 at December 31, 1996,  based  upon market quotes  provided by an
          investment   banker.  The   carrying   amount   of   these  notes  was
          approximately  $84.6  million  and $84.4  million at December 31, 1997
          and 1996, respectively.

     -    Series  B  and C  preferred stock  - These are specialized instruments
          with   various   terms  and  preferential  treatment  which  render it
          impracticable to determine their current fair value.

     -    Noncurrent  distributor  receivables - The  fair  value  is based upon
          the anticipated  cash flows discounted at rates  currently established
          by management. The fair value of these receivable balances at December
          31, 1997 and 1996  approximates  book value.

Reclassifications

     Certain  prior year amounts have been  reclassified  to conform to the 1997
presentation.







                                                  Page 72 of 119

<PAGE>



2.       ACQUISITIONS OF BUSINESSES

R&B Orthopaedics, Incorporated / Rock Surgical, Incorporated

     During  1997,  the Company  entered  into an Asset  Purchase  Agreement  to
purchase all assets related to the sale,  marketing and  distribution of medical
devices with R&B Orthopaedics,  Incorporated,  a West Virginia corporation,  and
Rock Surgical,  Incorporated,  a Delaware corporation (collectively,  "OMI"). In
late 1997, the Company decided to enter into a settlement  agreement with OMI to
terminate the Asset Purchase  Agreement which was executed January 22, 1998. The
settlement agreement created a Distributor Agreement between the Company and OMI
effective January 1, 1998.

Orthopaedic Tissue Technology, L.L.C.

     On July 12, 1996 the Company and Tissue  Engineering,  Inc. ("TEI") entered
into a joint venture  agreement to create OTT. The Company executed $1.5 million
promissory  notes on July 12, 1997 and July 12,  1996.  Pursuant to these notes,
the Company  provided funding of $1.7 million and $0.6 million in 1997 and 1996,
respectively.  The Company will execute another $1.5 million promissory note and
provide  funding  of  approximately   $1.6  million  to  OTT  during  1998.  TEI
contributed to OTT its license to certain  proprietary  technology.  The Company
has a 49%  equity  interest  in OTT and  receives  50% of OTT's  annual  profit/
losses.  OTT  is  developing  and  will  distribute   biological   products  for
musculoskeletal  applications.  Products are designed to reproduce the events of
tissue  formation  including  the  treatment  of  medical  conditions  involving
disease,  injury or deterioration of ligaments,  tendons,  cartilage or bone and
sports related  injuries.  The Company  accounts for its investment in OTT under
the equity  method of  accounting  and has  reflected  the present  value of its
future  funding  commitments  as a liability  in the  accompanying  consolidated
financial statements.

U.S. Gypsum

     On September 30, 1996, the Company entered into an Asset Purchase Agreement
to purchase  the  biomaterials  business of the  Industrial  Gypsum  Division of
United  States  Gypsum  Company  ("USG").  The Company  paid  $750,000  for this
business in four  quarterly  installments.  The purchase  price was  principally
allocated to existing  patents and is being amortized over 4 years.  The Company
pays USG a royalty of 6% of sales, net of commissions, on this product.





                                                  Page 73 of 119

<PAGE>



3.       INVENTORIES
<TABLE>

         The  components  of  inventories,  net of reserves,  are as follows (in
thousands):
<CAPTION>
                                                              December 31,
                                                      --------------------------
                                                         1997            1996
                                                      --------------------------
<S>                                                   <C>             <C>
     Raw materials                                    $    2,520      $    2,214
     Work in process                                      10,716          10,186
     Finished goods                                       33,312          36,388
     Surgical instruments                                 12,342          10,319
                                                      --------------------------
                                                      $   58,890      $   59,107
                                                      ==========================
</TABLE>

     In April 1996,  the Company  instituted a new surgical  instrument  program
with its domestic  distributor  network. The program makes more of the Company's
surgical  instruments  available for sale to its distributors and, thus, reduces
the demand for loaner instruments.

     Generally,  the  Company's  products are subject to  regulation by the FDA.
Currently,   management   believes  that  the  Company's  products  comply  with
applicable FDA  regulations  and that the Company has no  significant  inventory
levels of products  awaiting FDA approval  that, if such  approvals were denied,
would have a material effect on the consolidated financial position or operating
results of the Company.


4.       PROPERTY, PLANT AND EQUIPMENT
<TABLE>

     Property, plant and equipment consists of the following (in thousands):
<CAPTION>
                                                                December 31,
                                                         -----------------------
                                                            1997         1996
                                                         -----------------------
<S>                                                      <C>           <C>
     Land and land improvements                          $    844      $    844
     Buildings                                              5,961         5,696
     Machinery and equipment                               28,255        25,036
     Furniture, fixtures and equipment                     13,351        13,033
     Loaner instruments                                    14,761        14,174
                                                         -----------------------
                                                           63,172        58,783
     Less:  Accumulated depreciation                      (36,440)      (25,124)
                                                         -----------------------
                                                         $ 26,732      $ 33,659
                                                         =======================
</TABLE>


                                                  Page 74 of 119


<PAGE>



5.       INTANGIBLE ASSETS
<TABLE>
     Other assets include certain intangible assets as follows (in thousands):
<CAPTION>
                                                                December 31,
                                                          ----------------------
                                                              1997       1996
                                                          ----------------------
<S>                                                      <C>          <C>
     Excess of cost over net assets acquired             $   35,032   $  35,461
     Distribution network                                     4,800       4,800
     Patents, licenses and trademarks                         3,350       3,137
     Other                                                    2,987       3,004
                                                          ----------------------
                                                             46,169      46,402
     Less:  Accumulated amortization                        (11,269)     (8,528)
                                                          ----------------------
                                                          $  34,900    $ 37,874
                                                          ======================
</TABLE>

     Excess of cost over net assets  acquired is being  amortized  over  periods
ranging from 10 to 40 years on a  straight-line  basis.  Other  intangibles  are
being   amortized  over  periods  ranging  from  2  to  25  years  on  either  a
straight-line or double declining balance basis.



6.       ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
<TABLE>

     A detail of accrued  expenses and other current  liabilities  is as follows
(in thousands):
<CAPTION>
                                                              December 31,
                                                          ----------------------
                                                             1997         1996
                                                          ----------------------
<S>                                                       <C>          <C>
     Interest                                             $  5,205     $  4,668
     Employee benefits                                       1,123        3,489
     Joint venture                                           1,500        2,105
     Commissions                                             1,278        1,358
     Taxes                                                     988          761
     Distributor product reserve                                 -          161
     Professional fees                                       2,731        1,088
     Other                                                   3,920        4,823
                                                          ----------------------
                                                          $ 16,745     $ 18,453
                                                          ======================

</TABLE>


                                                  Page 75 of 119

<PAGE>



7.       LONG-TERM DEBT AND SHORT-TERM BORROWINGS
<TABLE>

     Long-term debt consists of the following (in thousands):

<CAPTION>
                                                              December 31,
                                                        ------------------------
                                                           1997           1996
                                                        ------------------------
<S>                                                     <C>            <C>
     11 3/4% Series D Senior Secured
       Step-Up Notes, net of
       unamortized discount of $409                     $ 84,591       $      -

     10 3/4% Series B Senior Secured
       Notes, net of unamortized
       discount of $572                                        -         84,428

     Capital lease obligations                               835            378
                                                        ------------------------
                                                          85,426         84,806
     Less current portion                                   (322)          (138)
                                                        ------------------------
                                                        $ 85,104       $ 84,668
                                                        ========================
</TABLE>

     Through  August,  1997, the Company had outstanding 10 3/4% Series B Senior
Secured  Notes  (Series  B Notes)  with an  original  principal  balance  of $85
million.  The Series B Notes had 350,000 of common stock purchase warrants which
had been sold for $.02 per warrant.

     On August 7, 1997, the Company  completed an exchange of its Series B Notes
for the 11 3/4% Series C Senior  Secured  Step-Up  Notes (the "Series C Notes").
The  terms of those  Series C Notes are  governed  by a new  indenture  which is
similar  to the  indenture  for the Series B Notes  except  that i) the Series B
Notes bear  interest at 10 3/4% and the Series C Notes bear  interest at 11 3/4%
which may increase to 12 1/4% on the first  anniversary of the effective date of
the exchange offer under certain  circumstances,  ii) the new indenture does not
contain any sinking fund  requirements,  and iii)  certain  covenants in the new
indenture  are  less   restrictive   than  those  in  the  previous   indenture,
specifically  (1)  consolidated  net  worth,  as  defined,  does not  require  a
deduction for accrued dividends on the Company's Series B and Series C Preferred
Stock,  and (2) the limit on  purchase  money  indebtedness  is $10  million  as
opposed to $5 million in the previous indenture.

     The Series C Notes were issued pursuant to a Registration  Rights Agreement
whereby  the  Company  agreed to use its best  efforts to effect a  registration
statement  for a new issue of the senior  secured  notes of the Company that are
identical in all respects to the Series C Notes. On November 3, 1997 the Company
completed  an  exchange  offer of its  Series C Notes  for the 11 3/4%  Series D
Senior Secured Step-Up

                                                  Page 76 of 119

<PAGE>



Notes (the  "Series D  Notes").  The terms of the Series D Notes are the same as
the Series C Notes except that the Series D Notes are registered securities.

     The Series D Notes mature on July 1, 2000 and are subject to  redemption at
the option of the Company,  in whole or in part,  upon not less than 30 nor more
than 60 days notice,  at the  redemption  prices  (expressed as  percentages  of
principal  amount) set forth below plus accrued and unpaid  interest  thereon to
the applicable redemption date, if redeemed during the following periods:

                       Date                 Percentage

          July 1, 1997 - June 30, 1998          103%
          July 1, 1998 and thereafter           100%

     The indenture  contains  specific  restrictions  that apply to the Series D
Notes which limit,  among other things,  (a) the issuance of additional  debt by
the Company or any of its subsidiaries,  (b) the issuance of disqualified  stock
by the  Company  or any  preferred  stock  by any of its  subsidiaries,  (c) the
payment of cash  dividends on, and  redemption of, capital stock of the Company,
(d)  consolidations,  mergers or  transfers of all or  substantially  all of the
Company's  assets,  and (e)  transactions  with  affiliates.  The indenture also
requires the Company to maintain a minimum  consolidated  net worth, as defined,
of $17.5 million in 1997 and $20 million in 1998 and any year thereafter.

     The  Series D Notes are  secured  by  certain  fixed  assets,  intellectual
property rights and other intangible assets of the Company,  now in existence or
hereafter acquired.

     The Company has  available  to it a $30  million  revolving  line of credit
under an agreement with Sanwa Business Credit  Corporation  ("Sanwa  Agreement")
that will expire in  September,  1999. As of December 31, 1997,  this  agreement
provided  an eligible  borrowing  base of $29.1  million.  The Company had drawn
$18.5 million  against the Sanwa line of credit as of December 31, 1997.  During
1997, borrowings under the Sanwa Agreement averaged $18.1 million with a maximum
amount borrowed of $22.6 million, as compared to 1996 when borrowings (under the
Sanwa  Agreement  and prior  revolving  credit line  agreement)  averaged  $12.5
million with a maximum amount borrowed of $16.1 million.  Borrowings  under this
agreement  are   collateralized  by  the  Company's   accounts   receivable  and
inventories  and bear interest at prime plus 1.5% (10% at December 21, 1997).  A
guaranty  fee of 3% per  annum is  required  on any  related  letter  of  credit
guaranties.

                                                  Page 77 of 119

<PAGE>



     The Sanwa Agreement places various restrictions on the Company which limit,
among  other  things,  (a)  additional  indebtedness,   (b)  acquisitions,   (c)
consolidations,  mergers,  sales of all or  substantially  all of the  Company's
assets and (d) transactions with affiliates. Additionally, the Company must meet
a specified quarterly cash flow coverage ratio.


8.       CAPITAL STOCK

Common Stock

     Two  classes  of  common  stock of the  Company  have been  authorized  for
issuance:  Class A Common Stock and Class B Common Stock. The holders of Class A
Common  Stock are  entitled to one vote for each share of Class A Common  Stock.
There are  currently no shares of Class B Common Stock  outstanding.  Subject to
any preferential  rights of any outstanding series of preferred stock designated
by the Board of  Directors,  the holders of Class A Common Stock are entitled to
receive,  ratably, with the holders of any Class B Common Stock, such dividends,
if any, as may be declared from time to time by the Board of Directors.

     Pursuant to a restated  certificate of  incorporation  dated  September 25,
1995 (the "Restated Certificate"),  the Company has 47,000,000 authorized shares
of common  stock  consisting  of  46,000,000  shares of Class A Common Stock and
1,000,000 shares of Class B Common Stock.

Preferred Stock

     Pursuant to the Restated Certificate,  the Company has 3,000,000 authorized
shares of preferred stock  consisting of 1,200,000  shares of Series A Preferred
Stock,  800,000 shares of Series B Preferred  Stock,  350,000 shares of Series C
Preferred Stock, and 650,000 shares of undesignated  preferred stock. The Series
C Preferred  Stock is senior to the Series A  Preferred  Stock and junior to the
Company's  Series B Preferred  Stock with respect to  dividends  and rights upon
liquidation.

     The Series A  Preferred  Stock is voting  stock and,  upon  liquidation  or
dissolution of the Company, entitles the holders to a preferential distribution,
subordinate  to the  Series B and  Series C  Preferred  Stock,  from the  assets
legally  available for  distribution  to  stockholders  after the payment of all
debts and  liabilities  of the  Company.  At December 31,  1997,  the  aggregate
preferential  distribution would amount to $25.2 million,  including accrued and
unpaid dividends ($8.7 million).

                                                  Page 78 of 119

<PAGE>



     Dividends on the Series A Preferred Stock accumulate at the rate of 12% per
annum  for a  five-year  period  and at the  rate of 15% per  annum  thereafter,
subject  to  escalation  in the  event  of  delinquency  in the  payment  of the
dividends;  as of December 31, 1997,  the dividend  rate had escalated to 18.88%
per  share.  Dividends  can be paid  on the  Series  A  Preferred  Stock  at the
Company's  discretion and the Series A Preferred Stock is redeemable at any time
at the option of the Company;  such dividend and redemption rights are currently
restricted,  however,  by a provision set forth in the indenture relating to the
Series D Notes.

     Certain holders of the Company's Series A Preferred Stock waived all rights
and claims to those  Series A  Preferred  Stock  dividends  that  accrued  since
January 1, 1997 to date or that would accrue during 1998.  Dividends  that would
accrue  in 1999  and  2000  will  also be  waived  to the  extent  necessary  as
determined by the  Company's  independent  auditors.  The amount waived was $3.0
million for 1997.

     On July 29, 1994, the Company and California Public  Employees'  Retirement
System ("CalPERS")  entered into a Series B Preferred Stock Purchase and Class A
Common Stock Warrant Agreement whereby the Company would have the option,  for a
period of 30 months after July 29,  1994,  to sell up to $60 million of Series B
Preferred Stock to CalPERS. On July 29, 1994, the Company sold 150,000 shares of
the Series B  Preferred  Stock and 254,684  warrants to purchase  Class A Common
Stock to CalPERS for $15 million.  On October 31, 1994, the Company sold 450,000
shares of Series B  Preferred  Stock and 764,053  warrants  to purchase  Class A
Common Stock to CalPERS for $45 million.  Each warrant  (exercise price of $.001
per share)  entitles  CalPERS to purchase  from the Company one share of Class A
Common  Stock at any time.  The  Company  may be  required  to issue  additional
warrants  to  CalPERS  to allow  CalPERS  to  achieve  a  certain  return on its
investment in the Company.

     On August 12, 1997,  CalPERS  consented to increase the aggregate number of
Class A  Common  Stock  that is  issuable  pursuant  to the  Company's  Restated
Certificate of Incorporation by 800,000 shares. In exchange,  the Company agreed
to grant  CalPERS  warrants to  purchase  up to 73,935  shares of Class A Common
Stock on the same terms and  conditions  as  CalPERS'  present  warrants.  These
warrants are to be issued on a quarterly basis and in an amount equal to 8.7% of
the quarterly totals (so as not to dilute CalPERS' common stock ownership). As a
result, the Company issued warrants to CalPERS for the purchase of 51,701 shares
and  5,786  shares  of Class A Common  Stock for the  quarterly  periods  ending
September 30, 1997 and December 31, 1997, respectively.




                                                  Page 79 of 119

<PAGE>



     The  Series B  Preferred  Stock is  non-voting  and,  upon  liquidation  or
dissolution  of the  Company,  the holders of the Series B  Preferred  Stock are
entitled to a preferential  distribution  from the assets legally  available for
distribution to  stockholders  after the payment of all debts and liabilities of
the Company. As of December 31, 1997, such aggregate  preferential  distribution
would amount to $83.0  million,  including  accrued and unpaid  dividends  ($3.0
million).

     Dividends on the Series B Preferred Stock are payable on January 2 and July
1 of each year,  subject to the dividend  restrictions in the indenture relating
to the Series B Notes.  The  dividend  rate,  originally  $10.00  per share,  is
subject to  escalation  in the event the Company  elects to defer the payment of
the dividends;  as of December 31, 1997, the dividend rate was $10.00 per share.
The Company has the option to pay dividends in either cash or additional  shares
of Series B Preferred Stock.

     On February 25, 1997, the Company's Board of Directors  declared a dividend
"in-kind"  of $11.2  million to the Series B  Preferred  Stock  shareholders  by
issuing  111,910 shares of Series B Preferred Stock to shareholders of record as
of December 31, 1996. Accordingly, this "in-kind" dividend has been reflected in
the carrying  amount of the Mandatorily  Redeemable  Series B Preferred Stock in
the accompanying consolidated balance sheet. Subsequently,  the Company declared
additional  "in-kind"  dividends  of $5.3  million  and $3.5  million by issuing
53,485  shares and  34,605  shares of Series B  Preferred  Stock to its Series B
Preferred  Stock  shareholders  of record as of February 28, 1997 and October 1,
1997, respectively.

     The Series B Preferred  Stock is subject to an optional  redemption  by the
Company.  The Company must pay a premium of 5% if such redemption  occurs before
July 29, 1999.  Unless  earlier  redeemed,  the Company must redeem all Series B
Preferred  Stock on July 29,  2002.  The  Series B  Preferred  Stock also may be
redeemed at the option of the holder in certain circumstances.  The terms of the
Series B  Preferred  Stock  limit,  among  other  things,  (a) the  issuance  of
additional capital stock, (b) consolidations, mergers, transfers or sales of all
or substantially  all of the Company's  assets,  (c) payment of dividends on and
redemption of the Company's capital stock, and (d) additional indebtedness.

     On September  25, 1995,  the Company and Princes Gate  Investors,  L.P. and
affiliates, investment partnerships managed by Morgan Stanley & Co. Incorporated
(collectively,  the "Princes Gate Investors") entered into a Securities Purchase
Agreement,  pursuant  to which the  Princes  Gate  Investors  purchased,  for an
aggregate sum of $35 million ($33.8 million net of commissions),  350,000 shares
of preferred stock

                                                  Page 80 of 119

<PAGE>



designated  Redeemable  Convertible  Preferred  Stock,  Series C (the  "Series C
Preferred  Stock") and 741,110  warrants to purchase  Class A Common  Stock (the
"Series B Warrants").

     The  Series C  Preferred  Stock is senior to the  Company's  Class A Common
Stock  and  Series A  Preferred  Stock  and  junior  to the  Company's  Series B
Preferred  Stock with  respect to  dividends  and rights upon  liquidation.  The
Series C Preferred Stock is non-voting and, upon liquidation of the Company, the
holders  of  the  Series  C  Preferred  Stock  are  entitled  to a  preferential
distribution  from the assets legally available for distribution to stockholders
after  the  payment  of all  debts  and  liabilities  of  the  Company  and  all
liquidation payments  to the holders of the Series B Preferred Stock,  including
all accrued and unpaid  dividends  (the  "Series C  Redemption  Amount").  As of
December 31, 1997, the Series C Redemption  Amount was $44.5 million,  including
accrued and unpaid dividends ($9.5 million).

     Dividends on the Series C Preferred Stock,  which are payable on January 1,
April 1, July 1 and October 1 of each  calendar  year,  cumulate at the rate of
$12.00 per share per annum through  March 24, 1999.  The dividend rate per share
per annum increases according to the following schedule:

     March 25, 1999 to September 24, 1999             $13.00
     September 25, 1999 to March 24, 2000              14.00
     March 25, 2000 to September 24, 2000              15.00
     September 25, 2000 to March 24, 2001              16.00
     March 25, 2001 and thereafter                     17.00

     Under the terms of the Company's  indenture relating to the Series D Notes,
dividends  on the  Series C  Preferred  Stock may not be paid until the Series D
Notes are paid in full and,  under the  Restated  Certificate,  dividends on the
Series C Preferred  Stock are subject to the prior  payment of dividends on and,
under certain circumstances, redemption of the Series B Preferred Stock.

     At any time after March 24, 1999, the Princes Gate  Investors,  holding not
less than 66-2/3% of all Series C Preferred Stock, have the right to convert the
Series C  Preferred  Stock  into  shares of Class A Common  Stock  having a fair
market  value,  as defined,  equal to 110% of the Series C Redemption  Amount on
that date. After any such conversion,  no new shares of Series C Preferred Stock
may be issued by the  Company.  Additionally,  subject  to  certain  limitations
imposed by the Restated Certificate and the Series D Notes, the Series C

                                                  Page 81 of 119

<PAGE>



Preferred  Stock is  redeemable at the option of the Company for an amount equal
to the Series C Redemption Amount on the date of any such redemption.

     The terms of the Series C Preferred Stock,  contain certain covenants that,
among other things,  limit the Company's  ability to (a) issue additional shares
of preferred stock, (b) incur additional indebtedness and (c) consolidate, merge
or sell substantially all of the Company's assets.

     Each of the Series B Warrants  entitles the holder  thereof to purchase one
share of  Class A  Common  Stock at an  exercise  price of $.01 per  share.  The
Company  will be  required  to  issue  additional  Series  B  Warrants  upon the
occurrence of certain events as follows:  If 1) the Company has not repurchased,
redeemed or  converted  all  outstanding  Series C Preferred  Stock on or before
March 25, 1999,  or 2) prior to March 25, 1999, an initial  public  offering has
occurred  and all of the  proceeds  from  such  offering  are not used to redeem
outstanding  shares of Series C Preferred  Stock,  then on the earlier of (1) or
(2) above,  additional  Series B Warrants shall be issued, if Series C Preferred
Stock is still outstanding;  provided,  however,  that at no time is the Company
required to issue more than an aggregate of 3,989,931 Series B Warrants.

     In September 1995, the Company also issued an additional  125,000  warrants
(exercise  price of $.001 per  share) to  purchase  Class A Common  Stock to the
holders of the Company's Series B Preferred Stock. These warrants were issued in
exchange  for the consent of the holders of the Series B Preferred  Stock to the
issuance of the Series C Preferred Stock.

Warrants

     In addition to the warrants  issued to CalPERS and Princes Gate  Investors,
the Company issued warrants to the purchasers of its senior secured notes at the
purchase price of $.02 per warrant.  In the aggregate,  the warrants entitle the
holders to purchase  350,000  shares of the  Company's  Class A Common  Stock at
$.142 per share.  The exercise  price and the number of warrant  shares are both
subject to adjustment in certain cases. The warrants are exercisable at any time
and, unless exercised, the warrants will automatically expire ten years from the
date of issuance.

     The holders of the warrants have no voting or dividend rights.  The holders
of the  warrants  are not  entitled to share in the assets of the Company in the
event  of  liquidation  or  dissolution  of the  Company.  In  case  of  certain
consolidations or mergers of the Company, or the

                                                  Page 82 of 119

<PAGE>



sale  of all or  substantially  all of the  assets  of the  Company  to  another
corporation,  each warrant  shall  thereafter  be  exercisable  for the right to
receive the kind and amount of shares of stock or other  securities  or property
to which such holder would have been entitled as a result of such consolidation,
merger or sale had the warrants been exercised immediately prior thereto.

Stock Option Plans

     At December  31,  1997,  the Company has two fixed stock  option  plans for
employees, two stock option plans for nonemployees which principally include the
distributors  of the Company's  products and a distributor  stock purchase plan.
Generally,  the  Company's  stock  option  plans grant  options to purchase  the
Company's Class A Common Stock and, in certain instances, the Company's Series A
Preferred Stock.

     Under the 1993 Stock Option Plan, as adopted June 29, 1993, the Company was
authorized  to grant  options to purchase  up to 1.5  million  shares of Class A
Common Stock.  Pursuant to CalPERS' consent (on August 12, 1997) to increase the
aggregate number of Class A Common Stock issuable by 800,000, the Board resolved
to reserve  370,000  shares of this  increase for issuance  under the 1993 Stock
Option Plan. As a result,  the Company may grant options to its employees for up
to 1.87 million shares of Class A Common Stock under the 1993 Stock Option Plan.
Under the 1993 Special  Stock Option Plan,  the Company may grant options to its
employees up to 200,000  shares of common  stock and 20,000  shares of preferred
stock.  Under these two fixed  stock  option  plans,  options  generally  become
exercisable in  installments of 25% annually in each of the first through fourth
anniversaries of the grant date and have a maximum term of ten years. Under both
plans,  the exercise price of each option equals the market price, as internally
determined  based on certain factors,  of the Company's  respective stock on the
date of grant.

     The Company's non-employee stock option plans include the 1994 Non-employee
Stock Option Plan ("NSOP") and the 1994 Distributor  Stock Option Plan ("DSOP").
Under the NSOP,  the  Company  may grant up to 125,000  shares of Class A Common
Stock and up to  500,000  shares  of Class A Common  Stock  under  the DSOP,  as
adopted  January 1, 1994.  As the result of  CalPERS'  consent to  increase  the
aggregate number of Class A Common Stock issuable by 800,000, the Board resolved
to reserve 70,000 shares of this increase for issuance  under the DSOP,  thereby
increasing the authorized  shares under the DSOP from 500,000 to 570,000.  Under
both of these plans,  the exercise  price of each option equals the market price
of the Company's Common Stock on the date of grant with the options maximum term
equaling ten years. Under

                                                  Page 83 of 119

<PAGE>



the NSOP,  options generally become  exercisable in installments of 25% annually
in each of the first through fourth  anniversaries  of the grant date. Under the
DSOP,  options generally become  exercisable upon the achievement of a specified
performance target.
<TABLE>
     A summary of the Company's fixed and non-employee  stock option plans as of
December 31, 1995,  1996 and 1997,  and changes during the years ending on those
dates is as follows:

<CAPTION>

                            1995                1996                 1997
                      -----------------   -----------------   ------------------
                               Weighted            Weighted             Weighted
                                Average             Average              Average
Class A                Shares  Exercise   Shares   Exercise    Shares   Exercise
Common Stock           (000's)   Price    (000's)    Price     (000's)   Price

<S>                   <C>        <C>      <C>        <C>      <C>         <C>
Balance,
Beginning of year     1,635.3    $3.09    1,822.2    $8.78     1,672.1    $10.53
Granted                 624.5    19.28      204.7    21.00     1,511.5      6.58
Exercised              (330.5)    0.14     (123.0)    0.14      (157.5)     0.14
Lapsed/ Canceled       (107.1)    9.66     (231.8)   11.57    (1,166.5)    16.53
Balance,
End of year           1,822.2     8.78    1,672.1    10.53     1,859.6      4.47
</TABLE>


<TABLE>
<CAPTION>
                            1995               1996                  1997
                      -----------------   -----------------    -----------------
                               Weighted            Weighted             Weighted
                                Average             Average              Average
Series A               Shares  Exercise   Shares   Exercise    Shares   Exercise
Preferred Stock        (000's)   Price    (000's)    Price     (000's)    Price

<S>                      <C>    <C>        <C>       <C>         <C>      <C>
Balance,
Beginning of year        14.8   $19.88     17.0      $19.88      13.8     $19.88

Granted                   3.3    19.88        -           -       4.7      19.88
Exercised                (0.5)   19.88        -           -         -          -
Lapsed/ Canceled         (0.5)   19.88     (3.3)      19.88      (0.2)     19.88
Balance,
End of year              17.0    19.88     13.8       19.88      18.2      19.88
</TABLE>





                                                  Page 84 of 119

<PAGE>



<TABLE>

     The following table summarizes  information  concerning the Company's stock
option plans at December 31, 1997:

<CAPTION>
                            Weighted
                             Average
                            Remaining    Weighted                 Weighted
   Range of                Contractual    Average                  Average
   Exercise      Number       Life       Exercise     Number      Exercise
    Prices    Outstanding    (years)      Price     Exercisable     Price

<S>           <C>             <C>        <C>         <C>           <C>
   $0.14        405,375       5.84        $0.14      303,375        $0.14
   $5.00      1,347,930       8.06        $5.00      537,276        $5.00
   $7.50         18,880       6.45        $7.50       18,880        $7.50
   $8.48          4,500       6.62        $8.48        4,500        $8.48
  $13.77         14,800       6.93       $13.77       14,800       $13.77
  $16.57         39,000       7.12       $16.57       34,320       $16.57
  $20.13         15,600       7.38       $20.13        8,933       $20.13
  $21.00         13,500       8.16       $21.00        3,967       $21.00
</TABLE>

     As allowed  under SFAS No.  123,  the  company  applies  APB Opinion 25 and
related  Interpretations in accounting for its stock option plans.  Accordingly,
no compensation cost has been recognized for its fixed stock option plans. Also,
no compensation cost has been recognized under the Company's  non-employee stock
option  plans  during  1995,  however,  approximately  $653,000  and $126,000 of
compensation cost was recognized in the accompanying  consolidated  statement of
operations for the years ended December 31, 1997 and 1996,  respectively related
to the non-employee  stock option plans. Had compensation cost for the Company's
stock-based  compensation  plans been determined  based on the fair value at the
grant  dates for awards  under  those plans  consistent  with SFAS No. 123,  the
Company's  net loss and  earnings  per share  would have been  increased  to the
following pro forma amounts (in thousands, except per share amounts):
<TABLE>
<CAPTION>
                                          1997         1996         1995
                                       ----------   ----------   ----------

     <S>                 <C>            <C>          <C>           <C>
     Net loss            As reported    $(22,572)    $(14,589)     $(6,492)
                         Pro forma      $(23,968)    $(15,554)     $(7,356)
     Loss Per Share      As reported      $(4.38)      $(3.90)      $(2.24)
                         Pro forma        $(4.53)      $(4.00)      $(2.35)
</TABLE>

     The fair value of each option is  estimated  on the date of grant using the
minimum value methodology promulgated by SFAS No. 123. The weighted average fair
value of options granted during 1997, 1996 and

                                                  Page 85 of 119

<PAGE>



1995 were $3.97, $9.62 and $9.03, respectively.  This methodology is used as the
Company's  shares  are not  publicly  traded.  In  applying  the  minimum  value
methodology,  the Company utilized a risk free interest rate that varied between
3.38% and 7.50% for 1997,  1996 and 1995 grant dates and  expected  lives of the
options of 10 years for 1997, 1996 and 1995.

Employees' Common Stock Grant Plan

     The  Company has an  Employees'  Common  Stock Grant Plan of which  122,500
shares are  reserved  for  issuance  under this plan.  No grants  have been made
during 1997, 1996 and 1995.

Distributor Stock Purchase Plan

     During  1993,  the  Company  established  a  Stock  Purchase  Plan  for its
distributors  pursuant  to which  shares of Class A Common  Stock  and  Series A
Preferred Stock were offered to the Company's  distributors for a purchase price
of $.142 and $19.88,  respectively,  per share. As of December 31, 1997, 417,000
shares of Class A Common  Stock and 39,450  shares of Series A  Preferred  Stock
purchased  under this plan were  outstanding.  Shares  purchased under this plan
vest on  December  31,  1999,  or  earlier if certain  criteria  are met.  As of
December 31, 1997,  369,510  shares of Class A Common Stock and 34,701 shares of
Series A Preferred Stock were vested.  These shares are subject to repurchase by
the Company in the event that a  distributor's  association  with the Company is
terminated or if the  distributor is no longer  operating as an exclusive  sales
representative for the Company.  The repurchase price shall be the distributor's
cost to purchase the shares until the shares vest;  thereafter,  the  repurchase
price shall be at fair market value.


9.       INCOME TAXES
<TABLE>
     Consolidated  loss  before  income  taxes  consists  of the  following  (in
thousands):
<CAPTION>
                                1997            1996           1995
                             ----------      ----------     ----------
<S>                           <C>             <C>             <C>
     United States            $(21,045)       $(10,525)       $(4,403)
     Foreign                    (1,527)         (4,064)          (470)
                             ----------      ----------     ----------
                              $(22,572)       $(14,589)       $(4,873)
                             ==========      ==========     ==========
</TABLE>





                                                  Page 86 of 119

<PAGE>

<TABLE>


     The provision for income taxes consists of the following (in thousands):

<CAPTION>
                                                1997         1996         1995
                                            ------------------------------------

<S>                                         <C>         <C>           <C>
Current - Foreign                           $   (187)   $  (1,278)    $     351
Deferred                                      (5,472)      (1,603)        2,167
Tax benefit of operating
loss carryforward                             (2,274)      (1,495)       (3,426)
Adjustment to valuation allowance              7,933        4,376         2,527
                                            ------------------------------------
                                            $      -    $       -     $   1,619
                                            ====================================
</TABLE>

<TABLE>
     The income tax provision  differs from the amount  computed by applying the
U.S. statutory federal income tax rate due to the following (in thousands):
<CAPTION>
                                               1997        1996         1995
                                            ------------------------------------
<S>                                         <C>         <C>           <C>
Income tax benefit at statutory rate        $ (7,674)   $  (4,911)    $  (1,657)
Adjustment to valuation allowance              7,933        4,376         2,527
State income taxes                              (842)        (415)         (176)
Foreign income taxes                              35          104           162
Goodwill amortization                            556          560           584
Other, net                                        (8)         286           179
                                            ------------------------------------
                                            $      -    $       -     $   1,619
                                            ====================================
</TABLE>
<TABLE>

         The components of deferred taxes are as follows (in thousands):
<CAPTION>
                                                    1997            1996
                                            --------------------------------
Deferred tax assets:
<S>                                         <C>              <C>
  Operating loss carryforward               $        14,259  $        9,718
  Reserves and allowances                             9,376           9,398
  Depreciation                                          904               -
  Intercompany profit on inventories                    336             319
  Other                                               6,120           4,577
                                            ---------------- ---------------
                                                     30,995          24,012
  Valuation allowance                               (29,267)        (21,334)
                                            ---------------- ---------------
                                            $         1,728  $        2,678
                                            ================ ===============

Deferred tax liabilities:
  Intangible assets                         $         1,567  $        1,700
  Depreciation                                            -             363
  Other                                                 161             615
                                            ---------------- ---------------
                                            $         1,728  $        2,678
                                            ================ ===============
</TABLE>


                                                  Page 87 of 119

<PAGE>



     The Company has provided a valuation allowance against its net deferred tax
assets  because,   given  the  Company's  history  of  operating   losses,   the
realizability of these assets is uncertain.  Management's assessment of the need
for a valuation  allowance  could  change in the future  based on the  Company's
future operating results.

     At December 31, 1997, the Company has a net operating loss carryforward for
U.S. federal income tax purposes of approximately $35.1 million which expires in
2009  through  2012.  Additionally,  the  Company  has credit  carryforwards  of
approximately $1,025,000 which expire through 2010.


10.      EMPLOYEE BENEFIT PLANS

     The Company  sponsors a defined  contribution  plan which covers  employees
that are 21 years of age and over.  The  Company  has the  option to  contribute
annually  to the  plan  shares  of  Company  stock  determined  by the  Board of
Directors and will match employee's voluntary  contributions at rates of 100% of
the first 2% of an employee's annual compensation,  and 50% of the next 2% of an
employee's annual  compensation.  Employees vest in the Company's  contributions
after 5 years.  The Company's cost related to this plan was  approximately  $2.5
million,  $1.7  million  and $1.7  million,  respectively,  for the years  ended
December 31, 1997, 1996 and 1995.

11.      COMMITMENTS AND CONTINGENCIES

Lease Commitments

<TABLE>
     The Company leases certain equipment under capital leases and noncancelable
operating  leases.  The future annual minimum rental payments under these leases
are as follows (in thousands):
<CAPTION>
                                              Capital               Operating
          Year                                Leases                  Leases
          ----                             --------------        ---------------
<S>       <C>                              <C>                   <C>
          1998                             $         339         $          690
          1999                                       315                    400
          2000                                       271                    203
          2001                                        34                     70
          2002                                         8                      -
                                           --------------        ---------------
Total minimum lease payments                         967         $        1,363
                                                                 ===============
Less amount representing interest                   (132)
                                           --------------
Present value of future lease payments     $         835
                                           ==============
</TABLE>
                                                  Page 88 of 119
<PAGE>

     Rental cost under  operating  leases for the years ended December 31, 1997,
1996 and 1995 was approximately  $1.3 million,  $1.2 million,  and $1.3 million,
respectively.

Concentration of Credit Risk

     Substantially  all  of  the  Company's  sales  and  trade  receivables  are
concentrated with hospitals and physicians.  The Company maintains  reserves for
potential  credit  losses  on  trade   receivables,   which  are  generally  not
collateralized.

Legal Proceedings

     DCW,  pursuant to the DCW  Acquisition  agreements,  retains  liability for
matters arising from certain  conduct of DCW prior to the Company's  acquisition
on June 30, 1993, of substantially all the assets of the large joint orthopaedic
implant  business  of DCW.  As such,  DCW has agreed to  indemnify  the  Company
against all liability  for all products  manufactured  prior to the  Acquisition
except  for  products  provided  under the  Company's  1993  agreement  with DCW
pursuant to which the Company purchased certain small joint orthopaedic implants
for worldwide  distribution.  However, the Company was notified in May 1995 that
DCW,  which filed for  reorganization  under  Chapter 11 of the U.S.  Bankruptcy
Code,  would no longer  defend the  Company in such  matters  until it  received
further  direction  from the bankruptcy  court.  On December 2, 1996 DCW filed a
proposed plan of reorganization  that provided that all commercial  creditors be
paid 100% of their  claims,  plus  interest.  The plan did not however  indicate
whether  DCW would  affirm or reject the  Acquisition  agreements.  This plan of
reorganization  was rejected.  Accordingly,  there can be no assurance  that Dow
Corning  will  indemnify  the Company on any claims in the future.  Although the
Company does not maintain  insurance for claims arising on products sold by DCW,
management  does not  believe the  outcome of any of these  matters  will have a
material  adverse  effect on the  Company's  financial  position  or  results of
operations.

     Mitek  Surgical  Products,  Inc.  ("Mitek"),  has  alleged  in the  Federal
District  Court for the  Northern  District  of  California  that the  Company's
ANCHORLOK(R)  soft  tissue  anchor  infringes  its patent.  That court  recently
rendered an opinion of non-infringement  in favor of the Company,  which opinion
was reversed on November 3, 1997,  after  reconsideration  by the Court. On July
18, 1997, Howmedica, Inc. alleged in the Federal District Court for the District
of New Jersey that certain of the Company's products infringe its patent related
to a type of porous coating and seeks unspecified  monetary damages. The Company
is defending that claim. On August 22, 1997, Osteonics, Inc.

                                                  Page 89 of 119

<PAGE>




alleged in the Federal  District  Court for the  District of New Jersey that the
Company's  BRIDGE(R) Hip System infringes its patent and seeks money damages and
injunctive  relief.   The Company is defending  that claim.  Management does not
believe the outcome of any of these matters will have a material  adverse effect
on the Company's financial position or results of operations.

     The Company is not involved in any other  pending  litigation of a material
nature  that would have a material  adverse  effect on the  Company's  financial
position or results of operations.

Other

     On February 22, 1996,  the Company  entered into a  Distribution  Agreement
with a Japanese  corporation whereby the Company received $3 million in exchange
for 60,000 shares of the Company's Class A Common Stock and the exclusive rights
to  distribute  the  Company's  products in Japan for an initial  period of five
years,  with a possible  extension for an  additional  five years subject to the
achievement  of  certain  sales  goals.  In  connection  with this  Distribution
Agreement,  the Company is amortizing $1,740,000 of the proceeds assigned to the
distribution  rights to income  ratably  over 5 years.  At December 31, 1997 and
1996,  deferred income in the  accompanying  consolidated  financial  statements
related to this distribution right was $1,141,000 and $1,502,000, respectively.

     During  1996,  the Company  decided to  discontinue  operations  of certain
subsidiaries  including Wright Medical  Technology of Hong Kong Limited,  Wright
Medical  Technology  de Brasil  Importadora  e Comercial  Ltda,  Wright  Medical
Technology  of  Australia  Pty  Limited  and Wright  Medical  Technology  France
S.A.R.L. Also, during 1997, the Company decided to discontinue operations of its
subsidiary in the Virgin  Islands.  Discontinuance  of those  operations did not
have a  material  effect on the  Company's  consolidated  operating  results  or
financial position.

     On January 3, 1997,  the Company  entered  into an  agreement  with Gary K.
Michelson, M.D., to purchase rights to patents, ideas and designs related to the
"MultiLock"  design for an anterior cervical plating system.  The purchase price
included a payment of  $120,000  due in four  installments  in 1997,  as well as
royalties  equal to 8% of the sales,  net of  commissions,  of the  locking  cam
products. The Company guaranteed minimum royalties as follows:



                                                  Page 90 of 119

<PAGE>




     04/01/98 - 03/31/99         $320,000
     04/01/99 - 03/31/00         $480,000
     04/01/00 - 03/31/01         $700,000
     04/01/01 - 03/31/02       $1,000,000

     For each of the annual periods commencing April 1, 2002 through March 31 of
the  subsequent  year, and continuing for the longer of the period for which the
MultiLock  products are being sold or 10 years from January 3, 1997, the minimum
royalty shall be $1.0 million.

     The Company also entered into an agreement  with Dr.  Michelson to purchase
rights to patents,  ideas and designs related to the "SingleLock"  design for an
anterior  cervical  plating  system.  The purchase  price  included a payment of
$100,000 due in 1997,  as well as royalties  equal to 8% of the net sales of the
SingleLock products. The Company guaranteed minimum royalties as follows:

     10/01/98 - 03/31/99         $80,000
     04/01/99 - 03/31/00         $200,000
     04/01/00 - 03/31/01         $295,000
     04/01/01 - 03/31/02         $425,000
     04/01/02 - 03/31/03         $500,000
     and years thereafter

     Dr.  Michelson  agreed  to  provide  exclusive  continuing  services  as  a
developer,  product  lecturer  and  general  consultant  for  anterior  cervical
plating.


12.      RELATED PARTY TRANSACTIONS

Stockholder Notes Receivable

     As of December  31, 1997 and 1996,  the Company has notes  receivable  from
stockholders  aggregating  approximately  $1.0 and $1.0  million,  respectively,
relating to purchases of the Company's  common and preferred  stock. On December
27, 1995,  Herbert  Korthoff,  the Company's  Chairman and then Chief  Executive
Officer,  and  Barbara  Korthoff  repaid the  outstanding  principal  balance of
$1,176,164 on 552,690 shares of Class A Common Stock and 55,269 shares of Series
A
                                                  Page 91 of 119

<PAGE>



Preferred  Stock purchased  through a note on June 30, 1993. A new  non-interest
bearing note was issued for the unpaid interest on the above note of $420,480.

     The remaining stockholder notes receivable bear interest at the rate of 10%
per annum, payable  semi-annually.  At the option of the maker, the interest may
be deferred and added to principal,  and to date such interest has been added to
principal.  The  entire  principal  amount is due on June 30,  1998,  subject to
acceleration  upon a sale of all or substantially all of the business assets, or
issued and outstanding capital stock of the Company or the successful completion
of an initial  public  offering by the  Company of any of its equity  securities
pursuant to a registration statement under the Securities Act of 1933. The notes
are secured by a pledge of the related preferred and common stock. Approximately
$62,000,  $62,000,  and $178,000  respectively,  of interest  income relating to
stockholder  notes receivable was recorded by the Company during the years ended
December 31, 1997, 1996 and 1995.

Distributor Notes Receivable

     The Company has notes receivable from its distributors  relating  primarily
to the  purchase of  instruments  used by surgeons  in the  implantation  of the
Company's  products.  The  notes are  generally  collateralized  by the  related
instruments.  The  outstanding  balance on these  notes was  approximately  $0.4
million and $0.4 million at December 31, 1997 and 1996,  respectively,  of which
the current portion (included in "other current assets" in accompanying  balance
sheets) was $0.3 million and $0.3 million,  respectively.  Also, the Company has
notes  receivable  from  its  distributors  relating  to  loans  made to  assist
distributors in growing their businesses. The outstanding balance on these notes
was  approximately  $1.1 million and $1.0 million at December 31, 1997 and 1996,
respectively, of which the current portion was $0.3 and $0.2, respectively.

     During 1996, the Company repurchased certain surgical  instruments owned by
distributors at the lower of the  instruments'  fair value or the related unpaid
note  balance.  This  repurchase  was done to implement the  instrument  program
discussed in Note 3 to the consolidated financial statements.

     The accompanying  statements of operations for the years ended December 31,
1997, 1996 and 1995, include  approximately $0.8 million, $0.8 million, and $2.4
million,  respectively, of net sales of instruments to distributors.  Typically,
the Company has not reflected any gross margin on these instrument sales.

                                                  Page 92 of 119

<PAGE>



Management Agreement

     The Company has a  management  agreement  with an  affiliate  of one of its
principal  stockholders  pursuant to which the Company incurs annual  management
fees of $360,000. As of August 1, 1997, the annual fee was modified to $260,000.

13.      SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
         FINANCING ACTIVITIES

     Following is a summary of the  Company's  noncash  investing  and financing
activities for the years ended December 31:

                                                       1995
         -        None

                                                       1996

         -        Issued 111,910 shares of Series B Preferred  Stock in the form
                  of an "in-kind" dividend payment aggregating $11.2 million.

         -        Repurchased  surgical  instruments from distributors  totaling
                  $6.8  million  through the  forgiveness  of  accounts  owed by
                  distributors to the Company on such surgical instruments.

                                                       1997

         -        Issued 53,485  shares of Series B Preferred  Stock in the form
                  of an "in-kind" dividend payment aggregating $5.3 million.

         -        Issued 34,605  shares of Series B Preferred  Stock in the form
                  of an "in-kind" dividend payment aggregating $3.5 million.



                                                  Page 93 of 119

<PAGE>



         14.      INDUSTRY SEGMENT AND FOREIGN OPERATIONS

<TABLE>
     The  Company's  operations  are  classified as a single  industry  segment.
Selected financial information by geographic area is as follows (in thousands):
<CAPTION>

                                              United                           Elimi-
      Year Ended December 31,1995             States         Foreign          nations           Total
   --------------------------------      ---------------  ---------------  --------------- ---------------
     Net sales
<S>                                      <C>              <C>              <C>             <C>
       Unaffiliated customers            $       109,046  $       14,150   $            -  $      123,196
       Intercompany                                3,005               -           (3,005)              -
                                         ---------------- ---------------  --------------- ---------------
           Total                         $       112,051  $       14,150   $       (3,005) $      123,196
                                         ---------------- ---------------  --------------- ---------------

     Operating income (loss)             $         5,308  $        1,171   $         (176) $        6,303
                                         ---------------- ---------------  --------------- ---------------
     Identifiable assets                 $       159,871  $       16,339   $       (1,839) $      174,371
                                         ---------------- ---------------  --------------- ---------------

Year Ended December 31,1996
     Net sales
       Unaffiliated customers            $       108,125  $       13,743   $            -  $      121,868
       Intercompany                                5,375               -           (5,375)              -
                                         ---------------- ---------------  --------------- ---------------
           Total                         $       113,500  $       13,743   $       (5,375) $      121,868
                                         ---------------- ---------------  --------------- ---------------

     Operating income (loss)             $          (774) $       (3,289)  $        1,008  $       (3,055)
                                         ---------------- ---------------  --------------- ---------------
     Identifiable assets                 $       167,458  $        5,761   $       (6,893) $      166,326
                                         ---------------- ---------------  --------------- ---------------

Year Ended December 31,1997
     Net sales
       Unaffiliated customers            $       110,865  $       11,532   $            -  $      122,397
       Intercompany                                5,731               -           (5,731)              -
                                         ---------------- ---------------  --------------- ---------------
           Total                         $       116,596  $       11,532   $       (5,731) $      122,397
                                         ---------------- ---------------  --------------- ---------------

     Operating loss                      $        (7,620) $         (562)  $          (51) $       (8,233)
                                         ---------------- ---------------  --------------- ---------------
     Identifiable assets                 $       156,102  $        3,945   $       (6,964) $      153,083
                                         ---------------- ---------------  --------------- ---------------

     Operating expenses not directly related to a particular  geographic segment
have been allocated between segments in proportion to net sales.
</TABLE>


                                                  Page 94 of 119

<PAGE>



15. SUBSEQUENT EVENT

     The  Company  entered  the  spine  instrumentation  market in 1995 with the
introduction of the WRIGHTLOCK(TM)  posterior fixation system and since then has
introduced  its  VERSALOK(TM)  low back  fixation  system.  On February 7, 1998,
executive  management decided to actively pursue a buyer for the Company's spine
business as a whole  including  inventory,  patents,  trademarks,  contracts and
licenses.  The Company  will  continue  to sell and further  develop its current
products until an acceptable buyer can be found.

     On March 11, 1998, the Company signed a Letter of Intent to sell its trauma
assets,  patents, and agreements for $4 million, a Royalty Agreement,  and 5% of
the voting common capital stock of the purchasing entity. Closing is expected to
be on or before June 15, 1998.
                                                  Page 95 of 119

<PAGE>



                                                   EXHIBIT INDEX

     Does not include the documents  incorporated  by reference as delineated by
Item 14 of this Form 10-K.

     10.26           Amended and Restated Joint Venture Agreement
                     with Tissue Engineering, Inc.
     11.1            Statements re: Computation of Earnings per
                     Share
     12.1            Statement re: Computation of Ratios of
                     Earnings to Fixed Charges and Preferred
                     Dividends
     21.1            Subsidiaries of the Company
     23.2            Consent of Arthur Andersen LLP


                                                  Page 96 of 119